Sanction for Failure to Negotiate in Good Faith Under Subprime Mortgage Laws Violated Contract Clause

Under CPLR 3408 (one of the Subprime Residential Loan and Foreclosure Laws enacted in response to the “subprime mortgage crisis”) settlement conferences between the bank and the homeowner are made mandatory.  The statute requires that the parties negotiate “in good faith to reach a mutually agreeable resolution, including a loan modification, if possible”… .  In this case, Supreme Court determined the bank had not negotiated in good faith.  As a sanction, Supreme Court compelled “specific performance of the original modification agreement” proposed by the bank at the outset of the settlement conference.  In a full-fledged opinion by Justice Dickerson, the Second Department, after describing the sanctions imposed in other cases, determined that the sanction in this case amounted to the Court’s rewriting the mortgage in violation of the Contract Clause and the bank’s due process rights.  Justice Dickerson wrote:

 …[T]the Supreme Court’s interpretation of CPLR 3408(f) as authorizing it to, in effect, rewrite the mortgage and loan agreement would violate the Contract Clause of the United States Constitution …. * * *In addition, the Supreme Court’s determination violated [the bank’s] due process rights. [The bank] was not on notice that the Supreme Court was considering a remedy such as the imposition of the terms of the modification proposal on a permanent basis… . Wells Fargo Bank, NA v Meyers, 2013 NY Slip Op 03085, 2nd Dept, 5-1-13