A Consolidation, Extension and Modification Agreement (“CEMA”) is an often-employed vehicle to essentially refinance a mortgage without having to pay the mortgage tax for the full amount of the refinance, as you are only paying mortgage taxes on the “new money”. Adam Leitman Bailey, P.C. represented the insurer of the initial mortgage for $1,995,000. That mortgage and a gap mortgage for $1,005,000 was then consolidated into a CEMA for $3,000,000. A second title company insured the CEMA for the full amount of $3,000,000. When the Lender, who had been assigned the CEMA, commenced a foreclosure action, it was met with the claim that the CEMA was made without the requisite authority and, accordingly, it should be declared null and void. Notwithstanding that the Lender had full coverage under the second title policy, it claimed that it was entitled to coverage under the first policy. Before the lower court, Adam Leitman Bailey, P.C. successfully argued, among other things, that its client’s policy was extinguished when the CEMA mortgages were entered into, and it had no further obligation under its policy as the insurer no longer retained an estate of interest in the land, a condition required for continued coverage under its policy. On appeal, the Appellate Division affirmed, and in so doing established precedent which now affects the entire title industry.
Adopting Adam Leitman Bailey, P.C.’s argument that the language of the CEMA itself indicated that the CEMA would constitute a single lien on the property and thereby supersede all prior liens, the Appellate Division ruled that once the CEMA was executed, the insurer’s liability under the policy for the initial mortgage was extinguished due to the lack of an estate or interest in land. Stated differently, the first mortgage was subsumed into the CEMA. Further, it found that the Lender is not a successor in ownership to a first mortgage’s title insurance policy when it is assigned a CEMA. In addition, the Appellate Division found that because the Lender was not an assignee under the initial policy, it lacked privity and standing to sue. And for good measure, the Appellate Division concluded that “even if plaintiff could be considered an insured under its policy, plaintiff would first have to exhaust the [second] policy as the primary policy.”
This precedent is quite valuable to title insurers who issue the initial policy on the first mortgage which gets subsumed into the CEMA.
Jeffrey R. Metz and Danny Ramrattan represented the initial insurer before the Supreme Court and the Appellate Division.
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