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Either Possession of the Note or an Assignment of the Note Confers Standing

The Second Department explained that standing to bring a foreclosure action is demonstrated either by possession of the note or an assignment of the note on the date the action is commenced:

In a foreclosure action, a plaintiff has standing if it is either the holder of, or the assignee of, the underlying note at the time that the action is commenced … . Either a written assignment of the underlying note or the physical delivery of the note to the plaintiff, prior to the commencement of the action, is sufficient to transfer the obligation … . Emigrant Bank v Larizza, 2015 NY Slip Op 05151, 2nd Dept 6-17-15

 

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Promise Made or Advice Given by a Municipal Employee Does Not Give Rise to Equitable Estoppel

The Second Department noted that the doctrine of equitable estoppel is applied only rarely against municipalities.  Here plaintiff alleged the four-month statute of limitations for redemption (re: a foreclosure action) passed because of a municipal employee’s promise to hold papers submitted in support of an attempt at redemption.  The court held that a promise made or advice given by a governmental employee will not give rise to equitable estoppel: “… [E]quitable estoppel is applied against a municipality performing governmental functions only in the rarest of cases …, and “erroneous advice by a governmental employee will not give rise to an exception to the general rule”… . Wilson v Neighborhood Restore Hous., 2015 NY Slip Op 05176, 2nd Dept 6-17-15

 

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Court’s Equitable Power to Set Aside a Foreclosure Sale as “An Instrument of Injustice” Explained and Applied

The Fourth Department, over a dissent, exercised its equitable power to set aside a foreclosure sale which, it determined, had been made an “instrument of injustice.” The facts of the case, which include an extensive appellate history, defy adequate summarization here.  The court explained its equitable power to set aside the foreclosure sale:

It is well settled that, even after a judicial sale to a good faith purchaser, “[a] court may exercise its inherent equitable power over a sale made pursuant to its judgment or decree to ensure that it is not made the instrument of injustice . . . Although this power should be exercised sparingly and with great caution, a court of equity may set aside its own judicial sale upon grounds otherwise insufficient to confer an absolute legal right to a resale in order to relieve [a party] of oppressive or unfair conduct” … . Generally, such discretion, “which is separate and distinct from any statutory authority” …, is exercised where fraud, mistake, exploitive overreaching, misconduct, irregularity or collusion “casts suspicion on the fairness of the sale” … . It may also be exercised where “the price is so inadequate as to shock the court’s conscience” … or where the judicial sale has been “made the instrument of injustice” … .

While we agree with defendants that there has been no showing of fraud, mistake, exploitive overreaching, misconduct, irregularity or collusion, and the price is not so inadequate as to shock the conscience, we agree with plaintiff that, under the circumstances of this case, the judicial sale has been made the instrument of injustice. Altshuler Shaham Provident Funds, Ltd. v GML Tower LLC, 2015 NY Slip Op 04952, 4th Dept 6-12-15

 

Possession of the Note, Not the Mortgage, Confers Standing to Foreclose

The Court of Appeals, in a full-fledged opinion by Judge Lippman, determined that possession of the note, not the mortgage, when the foreclosure proceedings are commenced is sufficient to confer standing upon the note-holder. ” ‘[A]ny disparity between the holder of the note and the mortgagee of record does not stand as a bar to a foreclosure action because the mortgage is not the dispositive document of title as to the mortgage loan; the holder of the note is deemed the owner of the underlying mortgage loan with standing to foreclose’… . . Accordingly, the [defendants’] argument that [plaintiff] lacked standing because it did not possess a valid and enforceable mortgage as of the commencement of this action is simply incorrect. The validity of the … assignment of the mortgage is irrelevant to [plaintiff’s]  standing;”

… [T]o have standing, it is not necessary to have possession of the mortgage at the time the action is commenced. This conclusion follows from the fact that the note, and not the mortgage, is the dispositive instrument that conveys standing to foreclose under New York law. In the current case, the note was transferred to [plaintiff] before the commencement of the foreclosure action — that is what matters.

A transfer in full of the obligation automatically transfers the mortgage as well unless the parties agree that the transferor is to retain the mortgage (Restatement [Third] of Property [Mortgages] § 5.4, Reporter’s Note, Comment b). The [defendants] misconstrue the legal principle that “an entity with a mortgage but no note lack[s] standing to foreclose” … to also mean the opposite — that an entity with a note but no mortgage lacks standing. Once a note is transferred, however, “the mortgage passes as an incident to the note” … . Aurora Loan Servs., LLC v Taylor, 2015 NY Slip Op 04872, CtApp 6-11-15

 

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“Lack of Standing” Defense to Foreclosure Action Is Waived If Not Raised in the Answer or a Pre-Answer Motion to Dismiss

The Second Department determined plaintiff was entitled to summary judgment on its foreclosure action, noting that any defense based upon plaintiff’s alleged lack of standing was waived because it was not raised in the answer or in a pre-answer motion to dismiss the complaint:

“A party’s alleged lack of standing to commence [an] action is a defense that is waived if not raised in an answer or in a pre-answer motion to dismiss the complaint” … . “Where, as here, the defendants in a mortgage foreclosure action waive the issue of standing by failing to assert the defense in an answer or pre-answer motion to dismiss the complaint (see CPLR 3211[e]), the plaintiff need not establish its standing in order to demonstrate its prima facie entitlement to judgment as a matter of law” … . In this case, the plaintiff established, prima facie, its entitlement to judgment as a matter of law for the unpaid principal balance of the note … . In this regard, the plaintiff presented the subject mortgage, the unpaid note, evidence of [defendant’s] default, and evidence demonstrating that the unpaid principal balance remaining on the note totaled $434,382.89 … . In opposition, [defendant] failed to raise a triable issue of fact … . JP Morgan Chase Bank, N.A. v Butler, 2015 NY Slip Op 04812, 2nd Dept 6-10-15

 

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Because Prior Mortgage Foreclosure Action Had Been Abandoned Plaintiff Was Not Entitled to Dismissal of the Instant Action Pursuant to Real Property Actions and Proceedings Law (RPAPL) 1301(3) (Which Prohibits More than One Such Action at a Time)

The Second Department determined Real Property Actions and Proceedings Law (RPAPL) 1301(3) did not require dismissal of plaintiff’s foreclosure action.  Although the statute prohibits more than one action to recover a mortgage debt at a time, the pending action had been abandoned (although not formally discontinued). Therefore plaintiff’s action was viable:

RPAPL 1301(3) provides that “[w]hile [an] action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought.” The purpose of this statute is to protect the mortgagor “from the expense and annoyance” of simultaneously defending against two independent actions to recover the same mortgage debt … . Courts have recognized that this statute “should be strictly construed since it is in derogation of a plaintiff’s common-law right to pursue the alternate remedies of foreclosure and recovery of the mortgage debt at the same time” … .

Under the circumstances of this case, the Supreme Court properly determined that the defendant John Conlin was not entitled to dismissal of the complaint pursuant to RPAPL 1301(3). The record supports the conclusion that the plaintiff’s assignor, the former mortgagee, effectively abandoned its prior action to foreclose the mortgage because its status as a junior mortgagee made it improbable that foreclosure would satisfy the underlying debt. Although the foreclosure action was not formally discontinued, the effective abandonment of that action is a “de facto discontinuance” which militates against dismissal of the present action pursuant to RPAPL 1301(3) … . Old Republic Natl. Tit. Ins. Co. v Conlin, 2015 NY Slip Op 04826, 2nd Dept 6-10-15

 

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Where Proof of the Fair Market Value of Foreclosed Property (Offered in Support of a Motion for a Deficiency Judgment) Is Insufficient, Rather than Deny the Motion Outright, the Court Should Direct the Bank to Submit Additional Proof

The Court of Appeals, in a full-fledged opinion by Judge Pigott, determined Supreme Court properly failed to award a post-foreclosure-sale deficiency judgment to the bank because the bank’s proof of the fair market value of the foreclosed property, although uncontested, was insufficient.  However, Supreme Court should have allowed the bank to present additional proof establishing the fair market value:

RPAPL 1371 (2) directs that, when a lender makes a motion for a deficiency judgment,

“the court, whether or not the respondent appears, shall determine, upon affidavit or otherwise as it shall direct, the fair and reasonable market value of the mortgaged premises as of the date such premises were bid in at auction or such nearest earlier date as there shall have been any market value thereof and shall make an order directing the entry of a deficiency judgment” … .

This provision is a directive that a court must determine the mortgaged property’s “fair and reasonable market value” when a motion for a deficiency judgment is made. As such, when the court deems the lender’s proof insufficient in the first instance, it must give the lender an additional opportunity to submit sufficient proof, so as to enable the court to make a proper fair market value determination. * * *

It is, of course, within the court’s discretion to elucidate the type of proof it requires so it can render a proper determination as to fair market value. The court may also order a hearing if it deems one necessary. In proceedings that are governed by section 1371, the court is in the best position to determine the type of proof that will allow it to comply with the directives of that section. Lenders seeking deficiency judgments, however, must always strive to provide the court with all the necessary information in their first application.  Flushing Sav. Bank, FSB v Bitar, 2015 NY Slip Op 04678, CtApp 6-4-15

 

Bank Did Not Demonstrate It Had Possession of the Note Prior to Commencing Foreclosure Action—Bank Did Not Have Standing to Bring the Action

The Second Department determined plaintiff-bank did not demonstrate it had possession of the note at the time the action was commenced, and therefore the bank did not have standing to bring the foreclosure action:

In a mortgage foreclosure action, where, as here, the plaintiff’s standing to commence the action is placed in issue by a defendant, “the plaintiff must prove its standing in order to be entitled to relief” … . “[A] plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced” … . “Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident” … .

Here, the plaintiff failed to establish, prima facie, that it had standing to commence this action. The relevant affidavits the plaintiff submitted contained conclusory statements regarding the plaintiff’s possession of the note, without any factual details of a physical delivery and, thus, failed to establish that the plaintiff had physical possession of the note prior to commencing the action … . The copy of the note the plaintiff submitted in support of its motion included an indorsement to the plaintiff but, because the indorsement was undated, it is not clear whether the indorsement was effectuated prior to the commencement of this action … . Although the written assignment of the mortgage that the plaintiff submitted was dated and recorded prior to the date this action was commenced, that assignment only transferred the mortgage. The plaintiff failed to show that the note also was assigned at that time … . Flagstar Bank, FSB v Anderson, 2015 NY Slip Op 04606, 2nd Dept 6-3-15

Similar issue and result in Bank of Am., N.A. v Kyle, 2015 NY Slip Op 04705, 3rd Dept 6-4-15

 

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Sua Sponte Dismissal for Lack of Standing Improper—Defense Waived by Failure to Answer—Lack of Standing is Not a Jurisdictional Defect

The Second Department, in a mortgage foreclosure proceeding where defendants did not answer, determined the complaint should not have been dismissed sua sponte for lack of standing.  Because the complaint was not answered, the lack-of-standing defense was waived.  In addition, lack-of-standing is not a jurisdictional defect warranting sua sponte dismissal:

A court’s power to dismiss a complaint, sua sponte, is to be used sparingly and only when extraordinary circumstances exist to warrant dismissal'” … . Here, the Supreme Court was not presented with extraordinary circumstances warranting the sua sponte dismissal of the complaint and the cancellation of the notice of pendency. Since the defendants did not answer the complaint and did not make pre-answer motions to dismiss the complaint, they waived the defense of lack of standing … . In any event, a party’s lack of standing does not constitute a jurisdictional defect and does not warrant a sua sponte dismissal of the complaint by the court … . US Bank Natl. Assn. v Flowers, 2015 NY Slip Op 04308, 2nd Dept 5-20-15

 

Criteria for Setting Aside a Foreclosure Sale Explained—Not Met Here

In finding the motion to vacate a foreclosure sale was properly denied, the Second Department explained the circumstances in which a foreclosure sale will be set aside: “In the exercise of its equitable powers, a court has the discretion to set aside a foreclosure sale where there is evidence of fraud, collusion, mistake, or misconduct” … . “Absent such conduct, the mere inadequacy of price is an insufficient reason to set aside a sale unless the price is so inadequate as to shock the court’s conscience”… . Chiao v Poon, 2015 NY Slip Op 04268, 2nd Dept 5-20-15

 

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