Crowell & Moring Financial Services Group Client Wins Tax Lien Case in New York State Supreme Court

At a time of great difficulty for lenders in the current financial market, a New York State Supreme Court Appellate Division decision clarifies the rights of assignees of mortgages from the Federal Deposit Insurance Corporation (FDIC) in its capacity as receiver of failed lenders. Lawyers from Crowell & Moring's New York-based Financial Services Group successfully litigated the interests of the tax lien trusts, NYCTL 1998-1, 1998-2 and 1996-1, and the trusts' servicer, JER Revenue Services, LLC (JER), in what is one of the largest consolidated tax lien foreclosure cases ever to be litigated in the state of New York.

    "This case clears up over a decade of differing decisions concerning the rights of assignees of the FDIC as receiver that acquire loans from failed or distressed institutions in receivership. The court's decision was timely as we see more financial institutions having difficulty in the current market, in large part due to mortgage securities, and both trust and superior mortgage holders need to know their rights when working with the FDIC," said partner William M. O'Connor, who leads Crowell & Moring's financial services team.

    The dispute involves the ability of assignees of mortgages from the FDIC to assert the FDIC's ability to withhold consent to a superior lien holder's foreclosure action. In the case, FDIC became the receiver of notes and mortgages upon approximately 300 different parcels of land from an insolvent bank and, in an effort to recover the value of that bank's assets and pay creditors, assigned the notes and mortgages to the North Country Conservancy, Inc. The mortgages were eventually acquired by RPK Realty Group, LLC (RPK). Real estate taxes and other real property related charges were not paid on those parcels and became liens on the real estate. Those liens were assigned to the NYCTL 1998-1, 1998-2 and 1996-1 Trusts (Trusts). Acting as a lien servicing company for the Trusts, JER commenced actions to foreclose the tax liens on the 298 parcels of real estate on behalf of the Trusts.

    Notes and mortgages are subordinate to the interests of the Trusts, and are subject to foreclosure; however, the FDIC as the holder of the notes and mortgages, must provide its consent to the foreclosure by a superior lien holder pursuant to 12 U.S.C. section 1825(b)(2), often known as the "Consent Statute." The FDIC consented to the Trusts foreclosure of the tax liens, but RPK disputed the foreclosure, counterclaiming that, as an assignee of the FDIC, it retained all of the rights of the FDIC, including the ability to withhold consent to the Trusts' foreclosure actions. RPK asserted that its mortgages were superior to the Trusts' interests and RPK had not consented to the foreclosures. RPK sought dismissal of the action. The Trusts moved for summary judgment and sought dismissal of RPK's counterclaim on the ground that only the FDIC's consent and not RPK's consent was necessary to foreclose the tax liens. RPK cross-moved for summary judgment.

    The New York State Supreme Court granted the Trusts' motion for summary judgment, denied RPK's cross-motion for summary judgment and held that the Trusts made out a prima facie showing that they were entitled to foreclose the tax liens. The Supreme Court specifically found that the junior interests of RPK did not preclude the Trusts foreclosure actions since, pursuant to the FDIC Regulations and Policy Statement, the FDIC's right to consent under 12 U.S.C. section 1825(b)(2) could not be assigned or transferred to any assignee of the FDIC. RPK appealed to the New York State Supreme Court, Appellate Division.

    Clarifying more than a decade of differing court decisions concerning the rights of assignees of the FDIC that have acquired failed or distressed loans, the Appellate Division of the New York State Supreme Court unanimously affirmed the lower court's order granting the Trusts summary judgment. The Court specifically found that it is the FDIC's policy not to assign the right to consent to foreclosure to an assignee. The FDIC submitted an amicus curiae brief in support of the Trusts' position. The case is NYCTL 1998-1 Trust et. al., v. Cooper Third Associates def, RPK Realty Group, LLC

"The Appellate Division affirmed that the purchasers of distressed debt do not retain all of the super powers of the FDIC after they acquire the debt, including the requirement of consent before one can foreclose out a position held by the FDIC," said O'Connor.