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THE JUDGE SHOULD NOT HAVE, SUA SPONTE, DISMISSED THE COMPLAINT IN THIS FORECLOSURE ACTION AFTER PLAINTIFF FAILED TO MEET A DEADLINE SET IN A STATUS CONFERENCE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the judge in this foreclosure proceeding should not have, sua sponte, dismissed the complaint when plaintiff did not move for a judgment of foreclosure and sale by the deadline set in a status conference order:

On March 22, 2017, the Supreme Court issued a status conference order … directing the plaintiff to “file an application for a [j]udgment of [f]oreclosure [and] sale” by June 7, 2017. The plaintiff failed to do so. In an order entered June 15, 2017 (hereinafter the dismissal order), the court, sua sponte, directed dismissal of the complaint and cancellation of the notice of pendency.

A court’s power to dismiss an action, sua sponte, is to be used sparingly and only when extraordinary circumstances exist to warrant dismissal … . Here, the plaintiff’s failure to move for a judgment of foreclosure and sale as directed by the … status conference order was not a sufficient ground upon which to sua sponte direct dismissal of the complaint and cancellation of the notice of pendency … . Deutsche Bank Trust Co. Ams. v Martinez, 2023 NY Slip Op 01179, Second Dept 3-8-23

Practice Point: Sua sponte dismissals of complaints are disfavored. Here the failure to meet a deadline set in a status conference did not justify a sua sponte dismissal of the complaint.

 

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IN A FORECLOSURE ACTION THE BANK MUST PROVE COMPLIANCE WITH RPAPL 1306 WHICH REQUIRES PROOF PAPERS WERE FILED WITHIN THREE BUSINESS DAYS OF MAILING THE RPAPL 1304 NOTICE OF DEFAULT; HERE THERE WAS NO PROOF WHEN THE RPAPL 1304 NOTICE WAS MAILED, SO THE PROOF OF COMPLIANCE WITH RPAPL 1306 WAS INSUFFICIENT (SECOND DEPT).

The Second Department, reversing Supreme Court, determined summary judgment dismissing an affirmative defense (alleging failure to comply with RPAPL 1306) should not have been granted to the plaintiff in this foreclosure action. Because there was no proof of when the notice of default required by RPAPL 1304 was mailed, proof that plaintiff had filed papers with the superintendent of financial services pursuant to RPAPL 1306 was insufficient. RPAPL 1306 requires filing within three business days of mailing the RPAPL 1304 notice. But the date of mailing was not proven:

… [I]n the absence of evidence establishing when the plaintiff mailed the notices required by RPAPL 1304, the plaintiff could not establish, as a matter of law, that it complied with the requirement of RPAPL 1306 to file with the superintendent of financial services within three business days of the mailing of the notice required by RPAPL 1304. Thus, the court should have denied that branch of the plaintiff’s motion which was, in effect, for summary judgment dismissing so much of the defendant’s fifth affirmative defense as alleged a failure to comply with RPAPL 1306…. . PROF-2013-S3 Legal Title Trust V v Johnson, 2023 NY Slip Op 01204, Second Dept 3-8-23

Practice Point: In a foreclosure action, if there is no proof when the RPAPL 1304 notice of default was mailed, the bank can’t prove the papers filed pursuant to RPAPL 1306 were filed within three business days of mailing the RPAPL 1304 notice (which is a requirement of strict compliance with RPAPL 1306).

 

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THE PROCEEDS OF THE SALE OF COLLATERAL TO THE MAJORITY LENDERS WERE NOT DISTRIBUTED TO THE MINORITY LENDERS IN THE MANNER REQUIRED BY THE CREDIT AND SECURITY AGREEMENTS IN THIS PRIVATE FORECLOSURE; THE MINORITY LENDERS’ BREACH OF CONTRACT CAUSES OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-fledged opinion by Justice Renwick, determined the breach of contract claims by the minority lenders against the majority lenders and a collateral agent should not have been dismissed. Collateral was sold to the majority lenders but the proceeds were not distributed to the minority lenders in the manner required by the credit and security agreements. The opinion is fact-specific and far too complex to fairly summarize here:

… [T]he pro rata sharing provisions required that all minority lenders receive pro rata treatment of their debt obligations, which meant that the proceeds of the sale of the collateral (notes and equity) should have been distributed to all secured lenders pro rata in accordance with the terms of the credit agreement. … While the Collateral Agent, as directed by the majority lenders, was authorized to define the terms, conditions, and limitations of how the restructuring sale should be carried out, the reorganization had to be for the pro rata benefit of all those holders of secured debt, including minority lenders. Thus, the minority lenders have the right to object to the restructure sale conducted through credit bidding based upon the failure to provide them adequate protection of their pro rata interest on the foreclosed collateral. AEA Middle Mkt. Debt Funding LLC v Marblegate Asset Mgt., LLC, 2023 NY Slip Op 01157, First Dept 3-7-23

Practice Point: This comprehensive opinion concerns a private foreclosure of collateral and the distribution of the proceeds to the majority and minority lenders pursuant to complex credit and security agreements.

 

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WHERE ONE OF TWO RELATED FORECLOSURE ACTIONS IS SUBJECT TO A MERITORIOUS MOTION TO DISMISS AS TIME-BARRED, IT IS AN ABUSE OF DISCRETION TO GRANT A MOTION TO CONSOLIDATE THE TIME-BARRED ACTION WITH THE TIMELY ACTION (SECOND DEPT).

The Second Department, in a full-fledged opinion by Justice Dillon, reversing Supreme Court, determined that where one action is subject to a meritorious motion to dismiss as time-barred, it is an abuse of discretion for a judge to grant a motion to consolidate that action with another which is timely:

… [B]oth actions are to foreclose on the same mortgage securing the same debt owed by the same defendant. However, in our view, a precondition for merging two or more actions is that each action should itself be viable, meaning that neither is confronted with a pending—and apparently meritorious—motion to dismiss. Once the defendant here met her burden of establishing, prima facie, that the time in which to commence the 2017 action had expired, it became the plaintiff’s burden to raise a question of fact as to whether the statute of limitations was tolled or otherwise inapplicable, or whether the plaintiff actually commenced the action within the applicable limitations period. The plaintiff could not meet that shifted burden by merely asserting that the 2017 action will become timely once it is merged with the timely 2008 action. The purpose of consolidation under CPLR 602(a) is not to provide a party with a procedural end run around a legal defense applicable to one of the actions. In our opinion, in such instances, judicial discretion should not be used to cure the untimeliness of one action by tethering it to a related timely action. We hold, as an issue of apparent first impression that, in this case, the Supreme Court improvidently exercised its discretion in granting consolidation and that, in general, consolidation should be denied where one of the cases to be consolidated is subject to a meritorious motion to dismiss…. . HSBC Bank USA, N.A. v Francis, 2023 NY Slip Op 00992, Second Dept 2-22-23

Practice Point: Here there were two related foreclosure actions. One was subject to dismissal as time-barred and the other was time-barred. The two should not be consolidated as an end-run around the statute of limitations.

 

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AN “INTEREST OF JUSTICE” EXTENSION OF TIME TO SERVE A DEFENDANT HAS DIFFERENT CRITERIA THAN A “GOOD CAUSE” EXTENSION; CRITERIA EXPLAINED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiff’s request for more time to serve the defendant in this foreclosure action should have been granted. The different criteria for an “interest of justice” versus a “good cause” request for an extension is explained:

Pursuant to CPLR 306-b, a court may, in the exercise of its discretion, grant a motion for an extension of time within which to effect service for good cause shown or in the interest of justice … . “Good cause requires a showing of reasonable diligence in attempting to effect service” … . “[I]n deciding whether to grant a motion to extend the time for service in the interest of justice, the court must carefully analyze the factual setting of the case and a balancing of the competing interests presented by the parties. Unlike an extension request premised on good cause, a plaintiff need not establish reasonably diligent efforts at service as a threshold matter” … . Under the interest of justice standard, “the court may consider diligence, or lack thereof, along with any other relevant factor in making its determination, including expiration of the Statute of Limitations, the meritorious nature of the cause of action, the length of delay in service, the promptness of a plaintiff’s request for the extension of time, and prejudice to [the] defendant” … .

… The plaintiff demonstrated that the action was timely commenced, that service was timely attempted and was believed by the plaintiff to have been made within 120 days after the commencement of the action but was subsequently found to be defective, that the statute of limitations had expired, and that the extension of time would not prejudice the defendant as the defendant had actual notice of the action … . Wells Fargo Bank, N.A. v Boakye-Yiadom, 2023 NY Slip Op 01026, Second Dept 2-22-23

Practice Point: An “interest of justice” extension of time to serve a defendant has different criteria than a “good cause” extension. The criteria are explained.

 

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DEFENDANT IN THIS FORECLOSURE ACTION SHOULD HAVE BEEN ALLOWED TO AMEND THE ANSWER DESPITE THE FAILURE TO MAKE A PRE-ANSWER MOTION TO DISMISS; THE DEFENDANT GETS A SECOND CHANCE TO ADD AN AFFIRMATIVE DEFENSE IF THE COURT GRANT’S LEAVE TO AMEND (SECOND DEPT). ​

The Second Department, reversing Supreme Court, determined defendant in this foreclosure action should have been allowed to amend the answer:

… Supreme Court … should not have denied that branch of the defendant’s cross-motion which was for leave to amend his answer to assert an affirmative defense alleging lack of compliance with the condition precedent in the mortgage agreement requiring a notice of default. In the absence of prejudice or surprise to the opposing party, leave to amend a pleading should be freely granted unless the proposed amendment is palpably insufficient or patently devoid of merit (see CPLR 3025[b] …). Lateness alone is not a barrier to the amendment … . “‘It must be lateness coupled with significant prejudice to the other side, the very elements of the laches doctrine'” … . Moreover, although a defense is generally waived under CPLR 3211(e) where not raised in an answer or made the subject of a motion to dismiss, it can be interposed in an answer amended by leave of court pursuant to CPLR 3025(b) … . Wall St. Mtge. Bankers, Ltd. v Berquin, 2023 NY Slip Op 01025, Second Dept 2-22-23

Practice Point: The court can grant a defendant leave to amend a complaint where the defendant did not make a pre-answer motion to dismiss on the ground which is the subject of the amendment. In other words, if the defendant fails to make a pre-answer motion to dismiss and the initial answer does not include the affirmative defense which could have been the basis of a motion to dismiss, the defendant gets another chance in an amendment of the answer by leave of court.

 

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THE BUSINESS RECORDS REFERRED TO IN THE PLAINTIFF’S AFFIDAVIT DEMONSTRATING DEFENDANT’S DEFAULT IN THIS FORECLOSURE ACTION WERE NOT ATTACHED, RENDERING THE AFFIDAVIT HEARSAY (SECOND DEPT). ​

The Second Department, reversing Supreme Court in this foreclosure action, determined the failure to submit the business records referred to in plaintiff’s affidavit rendered the affidavit hearsay. Therefore plaintiff bank did not present prima facie proof of defendant’s default:

… [T]he plaintiff submitted an affidavit of an employee of its loan servicer, who averred that he reviewed certain business records maintained by the loan servicer and the defendant defaulted in making payments on the mortgage debt. However, the affiant failed to submit any business record substantiating the alleged default … . “Conclusory affidavits lacking a factual basis are without evidentiary value” … . Even assuming that the subject affidavit established a sufficient foundation for the records relied upon, “it is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted” … . Accordingly, the affiant’s assertions regarding the defendant’s alleged default, without the business records upon which he relied in making those assertions, constituted inadmissible hearsay … . MTGLQ Invs., L.P. v Rashid, 2023 NY Slip Op 00859, Second Dept 2-15-23

Practice Point: An affidavit based upon business records which are not attached is hearsay.

 

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THE INCLUSION OF ADDITIONAL INFORMATION IN THE ENVELOPE CONTAINING THE RPAPL 1304 90-DAY FORECLOSURE NOTICE DOES NOT VIOLATE RPAPL 1304 AND IS NOT A PROPER BASIS FOR AWARDING SUMMARY JUDGMENT TO DEFENDANT IN A FORECLOSURE ACTION (CT APP) ​

The Court of Appeals, in a full-fledged opinion by Judge Wilson, reversing the appellate division, determined the inclusion of additional information in the envelope with the 90-day foreclosure notice required by RPAPL 1304 does not violate the statute and therefore is not a basis for summary judgment in favor of a defendant in a foreclosure action:

The operative statutory language here contains two requirements: (1) the notice “shall include” the specified language and information; and (2) the notice must be sent “in a separate envelope from any other mailing or notice” … . As to the first requirement, subdivision (1) does not say that the notice must state only the cautionary language set forth in the statute, but rather that the notice “shall include” that language. Where the “natural signification of the words employed” “ha[s] a definite meaning, which involves no absurdity or contradiction, there is no room for construction and courts have no right to add or take away from that meaning” Here, the notice indisputably contains all of the mandatory language set forth in the version of section 1304 (1) in effect at the time Bank of America commenced this action. The statute says that the notice “shall include” certain information; the notice here does so.

The question then is the constraint imposed by the requirement that the envelope not contain “any other mailing or notice.” The bright line rule adopted by the lower courts effectively defines “any other mailing or notice” as “any additional material or information whatsoever.” Although it might be possible to read “other notice” as the lower courts did—such that any deviation from the statutory language, however minor, would void the notice—that interpretation would stand in great tension with “shall include,” a phrase that contemplates the addition of something else. The statute must be given “a sensible and practical over-all construction, which . . . harmonizes all its interlocking provisions” … . Application of a bright line rule here would require the use of a highly constrained definition of “other,” where it is more appropriately read to mean mailings or notices “of a different kind.” Here, “other mailing or notice” more aptly refers other kinds of notices, such as pre-acceleration default notices, notices disclosing interest rate changes to borrowers with adjustable-rate mortgages … . Bank of Am., N.A. v Kessler, 2023 NY Slip Op 00804, CtApp 2-14-23

Practice Point: The inclusion of additional information in the same envelope with the RPAPL 1304 90-day foreclosure notice does not violate RPAPL 1304 and is no longer a basis for awarding summary judgment to a defendant in a foreclosure action.

 

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THE COUNTY HAD IN REM JURISDICTION IN THIS TAX FORECLOSURE PROCEEDING AND MADE ADEQUATE ATTEMPTS TO NOTIFY THE NECESSARY PARTIES (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Rivera, affirming the appellate division, determined the county had in rem jurisdiction in this tax foreclosure proceeding and the county’s attempts to notify all parties of the tax foreclosure proceedings were sufficient:

Two fundamental legal principles govern our decision in this appeal. First, a tax foreclosure proceeding is in rem against the “res”—the taxable real property—and not an action in personam commenced against an individual to establish personal liability. Second, New York statutory law and state and federal constitutional guarantees of due process require that the petitioner in a foreclosure proceeding must attempt notice that is reasonably calculated to alert all parties with an interest in the property.

Here, defendants commenced an in rem tax foreclosure proceeding and mailed the statutorily-required notice to the publicly-listed owners of the property, posted and filed the notice, and publicized the notice in the press. Upon learning that a person listed as an owner died before the notices were issued, defendant County Treasurer also personally contacted the sole business located on the property in an effort to identify and personally inform a manager, owner, or any person in charge of the pending foreclosure proceeding. Under these circumstances, defendants provided legally adequate notice of a validly commenced tax foreclosure action. Hetelekides v County of Ontario, 2023 NY Slip Op 00803, CtApp 2-14-23

Practice Point: A tax foreclosure proceeding is an in rem proceeding against the taxable real property, not an in personam action against an individual.

 

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DEFENDANT WAS IMPROPERLY SUBSTITUTED AS A JOHN DOE IN THIS FORECLOSURE ACTION AND BECAUSE HE WAS SUED AS AN HEIR TO THE MORTGAGEE, AND NOT AS A REPRESENTATIVE OF THE MORTGAGEE’S ESTATE, THE ACTION WAS TIME BARRED (FOURTH DEPT).

The Fourth Department, reversing Supreme Court in this foreclosure action, determined defendant was not properly substituted in the amended complaint for a John Doe in the original complaint and, because defendant was sued in his capacity as the heir of the decedent, and not as a representative of the decedent’s estate, the action was time-barred:

Plaintiff commenced this mortgage foreclosure action … against … the mortgagee, David B. Bailey (decedent), and certain “John Does” and “Jane Does” defined in the complaint as “the tenants, occupants, persons or corporations, if any, having or claiming an interest in or lien upon the premises, described in the complaint.” Plaintiff subsequently discovered that decedent had died in 2018 and made an ex parte application seeking … to substitute Arthur Bailey, in his capacity as heir to decedent’s estate (defendant), as a John Doe defendant and for leave to file an amended complaint. …

We agree with defendant that his motion should be granted insofar as it seeks dismissal of the amended complaint against him. Defendant correctly contends that he was improperly substituted as John Doe #1 pursuant to CPLR 1024. Inasmuch as the original complaint “fail[ed] to mention decedent’s death” and defendant is being sued in the amended complaint in his capacity as an heir to decedent’s estate, defendant does not fit within the categories of John and Jane Does set forth in the original complaint and thus cannot be substituted therefor … . Further, although here plaintiff also filed and served an amended complaint on defendant solely in his capacity as heir to decedent’s estate and not as a representative thereof (… see generally EPTL 3-3.6 [a], [b] …), … the relevant statute of limitations expired prior to the order granting plaintiff’s ex parte application for leave to file the amended complaint (see generally CPLR 213 [4]). Citibank, N.A. v Bailey, 2023 NY Slip Op 00777, Fourth Dept 2-10-23

Practice Point: If a defendant does not fit any of the “John Doe” categories described in the original complaint, he cannot be added as a John Doe in an amended complaint.

 

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