Can a Lender Recover Taxes and Interest Paid After a Mortgage is Discharged Under RPAPL 1501(4)?
When a borrower successfully obtains a judgment discharging a mortgage under RPAPL 1501(4) because the statute of limitations for foreclosure has expired, the question often arises: Can the lender recover payments they made for property taxes and other expenses during the life of the mortgage? The answer is nuanced, and any potential claim by the lender is limited by the facts of the case, procedural considerations, and the applicable statute of limitations.
The Basis of the Lender's Claim: Unjust Enrichment
A lender seeking to recover payments made for property taxes, insurance, or other related expenses might argue a claim for unjust enrichment. This legal theory allows recovery when:
- One party is enriched at the expense of another; and
- It would be inequitable for the enriched party to retain the benefit without compensation.
The lender's argument is that payments made to preserve the property—such as property taxes—benefited the borrower by preventing tax foreclosure or penalties, and thus the borrower should be required to reimburse the lender.
Limits on the Lender's Right to Recover
While the theory of unjust enrichment may sound reasonable, there are several legal and practical limitations on the lender's ability to succeed in such a claim:
1. The Facts of the Case Matter
The success of an unjust enrichment claim depends heavily on the specific circumstances of the case. Key factors include:
- Whether the payments were made voluntarily to protect the lender’s interest, as opposed to a contractual obligation.
- Whether the borrower derived a measurable and tangible benefit from those payments.
- Whether the equities of the situation favor reimbursement.
Courts will scrutinize whether the lender's payments were made primarily to protect its own interests, such as preserving its lien on the property. If the payments were made voluntarily and without a clear benefit to the borrower, the claim for unjust enrichment may fail.
2. The Claim is Better Brought in a Separate Proceeding
A lender may be tempted to raise a claim for unjust enrichment within the RPAPL 1501(4) action itself. However, RPAPL 1501(4) actions are narrowly focused on discharging stale mortgages and clearing title. Courts may view an unjust enrichment claim as outside the scope of the RPAPL proceeding and better suited for a separate action.
Filing a separate proceeding allows the court to focus specifically on the equities of the lender’s claim without conflating it with the purpose of the RPAPL 1501(4) action. This approach also ensures that procedural requirements, such as service and pleadings, are fully addressed.
3. The Six-Year Statute of Limitations for Unjust Enrichment
Under CPLR 213(1), unjust enrichment claims in New York are subject to a six-year statute of limitations. This period typically begins to run when the enrichment occurs. For example:
- If the lender paid property taxes five years ago, the claim may still be timely.
- If the payments were made more than six years ago, the claim would likely be time-barred.
The statute of limitations serves as a significant limitation on a lender’s ability to recover older payments, particularly if the foreclosure action or other proceedings have been pending for many years.
Key Takeaways
Lenders may have a theoretical basis to recover taxes and interest paid under an unjust enrichment theory after a mortgage is discharged under RPAPL 1501(4). However, the claim is:
- Highly fact-dependent and requires demonstrating a clear and unjust benefit to the borrower.
- Better suited for a separate proceeding rather than being raised in the RPAPL 1501(4) action.
- Limited by the six-year statute of limitations, which can bar recovery of older payments.
Borrowers facing such claims should be aware of their potential defenses, including the voluntary nature of the lender’s payments, the absence of direct benefit, and the timeliness of the claim. Ultimately, courts will evaluate these disputes on a case-by-case basis, weighing the equities and facts of each situation.
If you have questions about RPAPL 1501(4) actions or lender claims for unjust enrichment, contact our office for guidance tailored to your specific case.
Learn more by calling (516) 246-2449 or reaching out to us online.