Rockross Fund v. Cumberbatch, Kings County Supreme Court, Index No. 1189/08

This case shows that foreclosing lenders must take care that they do not acquire a deed to the property before they really want it.  In Rockross Fund, the plaintiff, the owner of a loan in foreclosure, lost an unopposed motion for summary judgment when it failed to have a party defendant properly substituted.

How could such a result occur? The plaintiff settled with the property owner and took back the deed in one of its affiliates.  Thereafter, the plaintiff continued the foreclosure proceeding.  No doubt, the plaintiff was seeking to foreclose junior secured interests in the property.  (A number of lenders seeking to take possession of property securing defaulted loans have adopted this strategy, which is often used by purchasers of loans for failed development deals to avoid liability on mechanic’s liens.  Here, the Court ruled that because the named defendant, the original borrower, remained in the case’s caption and the new owner of the property had not been substituted, the plaintiff had failed to include a necessary party in the case.

The lesson of Rockross Fund is that as long as a foreclosing lender is going to the trouble to transfer the deed to an affiliated entity, it should be sure that the affiliated entity is substituted as a party defendant.  Foreclosing lenders should consider if it is a better strategy to either take the deed in escrow or take a controlling position in the defendant.