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NY High Court Holds Consolidated Mortgage/CEMA Retains Priority of First Mortgage

The New York State Court of Appeals, the highest court in the state, recently held that a consolidated mortgage — often called a “Consolidation, Extension, & Modification Agreement” or “CEMA” — qualifies as the first mortgage of record under New York Real Property Law where there is no intervening lien.

A copy of the opinion in Plotch v. Citibank, NA is available at:  Link to Opinion.

In 2000, the defendant lender extended a mortgage to a condominium unit owner for $54,000 and recorded the mortgage. The following year, the lender extended another mortgage for $38,000 and entered into a consolidation agreement with the borrower through which the two mortgages were consolidated into one single mortgage lien, which was intended to be treated as a single mortgage totaling $92,000. The second mortgage and consolidation agreement were recorded on the same day.

Approximately seven years later, the condominium owners association (COA) filed a common charges lien against the borrower for unpaid assessments, and later foreclosed.

The plaintiff in this appeal purchased the property in the COA’s foreclosure, subject to the first mortgage of record against the premises.  The plaintiff then filed an action seeking a declaratory judgment that the second mortgage of $38,000 was subordinate to the COA’s subsequently recorded common charges lien under New York Real Property Law §399-z and therefore was extinguished by the COA’s successful foreclosure action.

As you may recall, New York Real Property Law §399-z states that a condominium board’s lien for unpaid common charges has priority over other liens except for certain statutory exceptions, such as the first mortgage of record.  Specifically, New York Real Property Law §339-z states in relevant part that a “board of managers, on behalf of the unit owners, shall have a lien on each unit for the unpaid common charges thereof, together with interest thereon, prior to all other liens except only . . . (ii) all sums unpaid on a first mortgage of record.”

The plaintiff foreclosure buyer argued that the “first mortgage of record” means the mortgage recorded earliest in time, and that the consolidated mortgage should be bifurcated into its component mortgages to determine which portion is the first mortgage of record.

The plaintiff relied heavily on Societe Generale v. Charles & Co. Acquisition, 157 Misc 2d 643 (Sup Ct, NY County 1993), in which the court held that the original first mortgage had priority over the condominium board’s lien.  However, the Court of Appeals noted that numerous other rulings reached the opposite result of Societe Generale and held that a consolidation agreement recorded prior to the condominium board’s lien qualifies as the “first mortgage of record” under New York Real Property Law §399-z.

The Court of Appeals also noted there was no intervening lien at the time the loans were consolidated, and therefore the consolidation did not interfere with any rights of the COA.  Accordingly, the Court of Appeals held that the consolidation agreement should be considered the first mortgage of record.

In addition, the Court noted the undesirable policy implications of giving priority to a common charges lien recorded years after the filing of the consolidation agreement. If the Court were to find the consolidation agreement did not qualify as the first mortgage of record, banks and condominium owners would simply take additional steps to satisfy the original mortgage, take out a new mortgage, and pay the additional fees required to achieve the same result.

The Court of Appeals also justified its ruling with reference to the New York Condominium Act, which was enacted “to stimulate greater building activity throughout the State and to allow private enterprise to supply additional housing units, particularly in the middle income rental range” (Mem of Joint Legis Comm on Hous and Urban Dev, 1964 McKinney’s Session Laws of NY at 1840).  The Court held that treating consolidation agreements as the first mortgage allows condominium unit owners greater flexibility in obtaining a larger mortgage or refinancing, and thus advances the New York Condominium Act’s goals.

Thus, the Court of Appeals held that the consolidation agreement was the first mortgage of record against the premises.

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Tom Dominczyk is based in Maurice Wutscher's New Jersey office and supports the firm's matters in its New York and Pennsylvania offices, practicing in the firm's Commercial Litigation, Consumer Credit Litigation and Bankruptcy groups. Tom has successfully represented financial institutions and law firms throughout the country for claims filed under the Fair Debt Collection Practices Act, Fair Credit Reporting Act and various state consumer protection statutes. In addition to his litigation practice, Tom represents national, regional and local creditors in a variety of bankruptcy matters ranging from the defense of adversary actions to complex non-dischargeability litigation and preference defenses. He served as a Judicial Clerk to the Honorable Graham T. Ross, P.J.F.P., Superior Court of New Jersey, Somerset County. For more information, see