Court Must Consider Whether Both Parties, Not Only the Bank, Have Negotiated in Good Faith in the Mandatory Pre-Foreclosure Settlement Conferences (Re: Possible Modification of the Terms of a Mortgage Subject to Foreclosure)—Under the Totality of the Circumstances, Supreme Court’s Finding that the Bank Did Not Negotiate in Good Faith Was Not Supported

The First Department, in a full-fledged opinion by Justice Andrias, determined that Supreme Court should have considered the defendant’s actions in deciding whether the parties had negotiated in good faith during the pre-foreclosure settlement conferences mandated by CPLR 3408 (a) [Subprime Residential Loan and Foreclosure Laws].  The conferences are required to ascertain whether a modification of the terms of a mortgage otherwise subject to foreclosure can be reached in a settlement. Supreme Court’s finding that the plaintiff bank did not negotiate in good faith was not warranted, in large part, because Supreme Court did not take into account the inaccurate and inconsistent information provided by the defendant during the conferences:

CPLR 3408 was enacted in 2008, as part of the omnibus “Subprime Residential Loan and Foreclosure Laws” (L 2008, ch 472, effective August 5, 2008), remedial legislation intended to assist homeowners at risk of losing their homes to foreclosure due to the subprime credit crisis (See Sponsor’s Mem., Bill Jacket (L 2008, ch 472). As part of the protections afforded to homeowners by the legislation, CPLR 3408 requires that conferences be conducted in residential foreclosure actions “for the purpose of holding settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents, including, but not limited to determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to, and for whatever other purposes the court deems appropriate” (CPLR 3408[a]).

These mandatory settlement conferences are intended to “provide an opportunity for borrowers and lenders to try to reach a solution that avoids foreclosure” (see Letter of Sen Farley, Bill Jacket, L 2008, ch 472 at 6).

CPLR 3408(f), added in 2009 as part of legislation designed to provide broader protection for homeowners (L 2009, ch 507 effective February 13, 2010), states that “[b]oth the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.” “The purpose of the good faith requirement is to ensure that both plaintiff and defendant are prepared to participate in a meaningful effort at the settlement conference to reach resolution” (2009 Mem of Governor’s Program Bill, Bill Jacket, L 2009, ch 507 at 11). The language of the statute and legislative history confirm that the obligation to negotiate in good faith is intended to be a two way street, imposing reciprocal obligations on both the lender and the borrower to cooperate with the other to enable achievement of a reasonable resolution … . Towards this end, 22 NYCRR 202.12-a(c)(4) directs the court to “ensure that each party fulfills its obligation to negotiate in good faith.”

The term “good faith” is not defined in the statute. However, this Court has held that compliance with the good faith requirement of CPLR 3408 is not established by merely proving the absence of fraud or malice on the part of the lender and that “[a]ny determination of good faith must be based on the totality of the circumstances,” taking into account that CPLR 3408 is a remedial statute … .

“While the aspirational goal of CPLR 3408 negotiations is that the parties reach a mutually agreeable resolution to help the defendant avoid losing his or her home’ (CPLR 3408[a]), the statute requires only that the parties enter into and conduct negotiations in good faith … . …[T]his Court [has] noted that “there are situations in which the statutory goal is simply not financially feasible for either party” and that “the mere fact that plaintiff refused to consider a reduction in principal or interest rate does not establish that it was not negotiating in good faith. Nothing in CPLR 3408 requires plaintiff to make the exact offer desired by [the] defendant[ ] [mortgagors], and the plaintiff’s failure to make that offer cannot be interpreted as a lack of good faith” … . * * *

…[W]e find that [defendant] has not established that, under the totality of the circumstances, plaintiff failed to engage in a meaningful effort at reaching a solution during the settlement conferences. Although plaintiff presented [defendant] with repeated requests for documentation and, at times, failed to timely comply with deadlines issued by the court, the record establishes that [defendant] created a moving target for plaintiff by repeatedly changing her alleged sources of income in her loan modification applications, and failing to disclose substantial and material liens encumbering the property. Citibank NA v Barclay, 2014 NY Slip Op 08757, 1st Dept 12-11-14