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Bank Properly Sanctioned for Not Negotiating in Good Faith in Mandatory Foreclosure Settlement Conferences

The Second Department determined plaintiff bank had not negotiated in good faith in the mandatory foreclosure settlement conferences (required by CPLR 3408(f)).  The bank was sanctioned by precluding it from collecting interest on the mortgage for a period of several months:

Pursuant to CPLR 3408(f), the parties at a mandatory foreclosure settlement conference are required to negotiate in good faith to reach a mutually agreeable resolution (see CPLR 3408[f]; Wells Fargo Bank, N.A. v Meyers, 108 AD3d 9, 11). ” The purpose of the good faith requirement in [CPLR 3408] is to ensure that both plaintiff and defendant are prepared to participate in a meaningful effort at the settlement conference to reach resolution'” (US Bank N.A. v Sarmiento, 121 AD3d 187, 200, quoting 2009 Mem of Governor’s Program Bill, Bill Jacket, L 2009, ch 507, at 11). To conclude that a party failed to negotiate in good faith pursuant to CPLR 3408(f), a court must determine that “the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution” … .

Here, the totality of the circumstances supports the referee’s finding that the plaintiff failed to negotiate in good faith. The referee’s finding was based, in part, upon the plaintiff’s failure to follow guidelines pursuant to the federal Home Affordable Mortgage Program (hereinafter HAMP). The applicable guidelines required the plaintiff, as a lender participating in HAMP, to attempt to obtain a waiver of an investor prohibition or restriction in lowering the interest rate and to keep such evidence in the loan file (see Making Home Affordable Program, Handbook for Servicers of Non-GSE Mortgages, version 4.0, ch 2, § 6.5 at 99 [August 17, 2012]). However, despite repeated requests by the referee to produce evidence that the plaintiff attempted to obtain a waiver of the investor’s restrictions in the PSA, the plaintiff failed to do so for more than one year. Therefore, the plaintiff failed to demonstrate that it followed HAMP regulations and guidelines, which, as several trial courts have concluded, constitutes a failure to negotiate in good faith pursuant to CPLR 3408(f)… . US Bank NA v Smith, 2014 NY Slip Op 08832, 2nd Dept 12-17-14

 

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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

 

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Appellant, Who Was Only Mentioned in the Complaint As the Holder of a Second Mortgage, Properly Appeared in the Action by Serving a Notice of Appearance Which Entitled Appellant to Be Kept Informed of the Progress of the Proceeding—There Is No Filing Requirement for a Notice of Appearance

The Second Department explained that appellant properly appeared in the foreclosure action by the service of a notice of appearance because the complaint did not allege anything that appellant, who held a second mortgage, would be required to defend against.  Service of the notice of appearance, which did not need to be filed, entitled appellant to be kept informed of the progress of the action:

…[T]he appellant was not required to serve an answer where the complaint did not set forth any allegations that the appellant was required to defend against (see Vincent C. Alexander, Practice Commentaries, McKinney's Cons. Laws of NY, Book 7B, CPLR C320:1 at 130; 2—R320 Weinstein-Korn Miller, N.Y. Civ. Prac. ¶ 320.03). “A defendant who has no defense, and therefore serves no pleading, might nevertheless serve a notice of appearance so as to be kept apprised of the progress of the proceeding” (Vincent C. Alexander, Practice Commentaries, McKinney's Cons. Laws of NY, Book 7B, CPLR C320:1 at 130). Such was the situation here. The complaint contained no allegations about the appellant, except to state that he had a second mortgage on the property. Thus, the appellant properly proceeded by serving a notice of appearance only and was entitled to be kept apprised of the proceedings.

Contrary to the plaintiffs' further contention, the appellant was not required to file his notice of appearance with the Supreme Court. There is no statutory or other requirement that a notice of appearance, timely served upon a plaintiff, must also be filed with the clerk of the relevant court in order for a defendant to appear in the action … . Tsionis v Eriora Corp, 2014 NY Slip Op 08421, 2nd Dept 12-3-14

 

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How to Handle a Motion to Dismiss for Failure to State a Claim When Documentary Evidence Is Considered Explained/Dismissal of Foreclosure Action Based on Lack of Standing Is Not a Dismissal on the Merits/Striking of a Foreclosure Complaint for Failure to Comply with a Discovery Order Is Not a Dismissal on the Merits

The Second Department determined plaintiff did not have a cause of action to discharge his mortgage.  The court explained how a motion to dismiss pursuant to CPLR 3211(a)(7) for failure to state a claim is handled when documentary evidence is submitted and considered on the motion.  [With respect to the plaintiff’s allegations that the defendant could not institute new foreclosure proceedings against him, the court noted that the dismissal of a foreclosure complaint premised on a lack of standing is not a dismissal on the merits for res judicata purposes, and the striking of a complaint for noncompliance with a discovery order is also not a dismissal on the merits:]

On a motion to dismiss pursuant to CPLR 3211(a)(7) for failure to state a cause of action, the court must accept the facts alleged in the complaint as true, accord the plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory … . Where, as here, evidentiary material is submitted and considered on a motion pursuant to CPLR 3211(a)(7), and the motion is not converted into one for summary judgment, the question becomes whether the plaintiff has a cause of action, not whether the plaintiff has stated one, and unless it has been shown that a material fact claimed by the plaintiff to be one is not a fact at all, and unless it can be said that no significant dispute exists regarding it, dismissal should not eventuate … . Caliguri v JPMorgan Chase Bank NA, 2014 NY Slip Op 07319, 2nd Dept 10-29-14

 

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Bank’s Failure to Strictly Comply With the Filing Deadline in RPAPL 1306 Required Dismissal of the Complaint Seeking Foreclosure

In this mortgage foreclosure action, the Third Department determined that the bank’s failure to submit admissible proof of compliance with the service requirements of RPAPL 1304 precluded summary judgment, and the bank’s unexplained failure to comply with the filing deadline in RPAPL 1306 required dismissal of the complaint seeking foreclosure:

Defendant was entitled to summary judgment dismissing the complaint based on plaintiff’s failure to comply with RPAPL 1306. That statute provides that lenders “shall file with the superintendent of financial services (superintendent) within three business days of the mailing of the notice required by [RPAPL 1304]” a form containing certain information regarding the borrower and mortgage (RPAPL 1306 [1]; see RPAPL 1306 [2]). The statute further states that “[a]ny complaint served in [an action] initiated pursuant to [RPAPL article 13] shall contain, as a condition precedent to such [action], an affirmative allegation that at the time the [action] is commenced, the plaintiff has complied with the provisions of this section” (RPAPL 1306 [1]). * * *

RPAPL 1306’s condition precedent to commencing a foreclosure action is strict compliance with the first sentence of the statute. In other words, a lender has only complied with the condition precedent if the lender has filed the appropriate form with the superintendent within three days of mailing the RPAPL 1304 notice to the borrower. TD Bank NA v Leroy, 2014 NY Slip Op 07047, 3rd Dept 10-16-14

 

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Motion to Vacate Default Judgment in Foreclosure Action Properly Granted—Criteria Explained

The Second Department determined Supreme Court properly vacated a default judgment in a foreclosure action:

” A foreclosure action is equitable in nature and triggers the equitable powers of the court'” … . “Under CPLR 5015(a), a court is empowered to vacate a default judgment for several reasons, including excusable neglect; newly-discovered evidence; fraud, misrepresentation or other misconduct by an adverse party; lack of jurisdiction; or upon the reversal, modification or vacatur of a prior order” … .

“In addition to the grounds set forth in section 5015(a), a court may vacate its own judgment for sufficient reason and in the interests of substantial justice” … . Indeed, the drafters of CPLR 5015(a) “intended that courts retain and exercise their inherent discretionary power in situations that warranted vacatur but [*2]which the drafters could not easily foresee” … .

“The decision as to the setting aside of a default in answering is generally left to the sound discretion of the Supreme Court, the exercise of which will generally not be disturbed if there is support in the record therefor” … .

Under the unique circumstances of this case, the Supreme Court providently exercised its discretion in vacating the judgment of foreclosure and sale entered on the default of the Cohen defendants “in the interests of substantial justice” … . The documentary evidence submitted in support of the motion raises issues including, among others, whether the plaintiff had “knowledge of facts that would lead a reasonable, prudent lender to make inquiries of the circumstances of the transaction at issue” … . Hudson City Sav Bank v Cohen, 2014 NY Slip Op 06177, 2nd Dept 9-17-14

 

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“Sua Sponte” Dismissal of Complaint Based on Lack of Standing Reversed

The Second Department, in a foreclosure action, determined Supreme Court abused its discretion in dismissing, sua sponte, the complaint on the ground the plaintiff lacked standing.  The court explained that sua sponte dismissal is warranted only in extraordinary circumstances, the defendants had not raised the “lack of standing” defense, and lack of standing is not a jurisdictional defect:

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 sua sponte dismissal of the complaint and 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 … . Furthermore, 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 … . Bank of NY v Cepeda, 2014 NY Slip Op 05614, 2nd Dept 8-6-14

 

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Bank Did Not Negotiate a Mortgage Modification in Good Faith as Required by CPLR 3408—Applicable “Good Faith” Standard Determined and Explained

The Second Department, in a full-fledged opinion by Justice Leventhal, determined that Supreme Court had properly found that plaintiff bank did not negotiate in good faith a mortgage modification pursuant to the Home Affordable Mortgage Program (HAMP) (CPLR 3408).  In the course of the opinion, the court described the applicable “good faith” standard:

…[W]e hold that the issue of whether a party failed to negotiate in “good faith” within the meaning of CPLR 3408(f) should be determined by considering whether the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution. We reject the plaintiff’s contention that, in order to establish a party’s lack of good faith pursuant to CPLR 3408(f), there must be a showing of gross disregard of, or conscious or knowing indifference to, another’s rights. Such a determination would permit a party to obfuscate, delay, and prevent CPLR 3408 settlement negotiations by acting negligently, but just short of deliberately, e.g., by carelessly providing misinformation and contradictory responses to inquiries, and by losing documentation. Our determination is consistent with the purpose of the statute, which provides that parties must negotiate in “good faith” in an effort to resolve the action, and that such resolution could include, “if possible,” a loan modification (CPLR 3408[f]…).

Where a plaintiff fails to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds, or, conversely, where a defendant fails to provide requested financial information or provides incomplete or misleading financial information, such conduct could constitute the failure to negotiate in good faith to reach a mutually agreeable resolution.

In this case, the totality of the circumstances supports the Supreme Court’s determination that the plaintiff failed to act in good faith, as the plaintiff thwarted any reasonable opportunities to settle the action, thus contravening the purpose and intent of CPLR 3408. US Bank NA v Sarmiento, 2014 NY Slip Op 05533, 2nd Dept 7-30-14

 

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Property Should Not Have Been Restored to Petitioner—Time for Redemption Had Passed—Default Judgment in Tax Foreclosure Action Extinguished Petitioner’s Rights in the Property

The Fourth Department determined Supreme Court should not have restored title to property to the petitioner after the a default judgment had been entered in a tax foreclosure action.  The time for redemption had passed and had not been extended:

The Treasurer’s posting of the tax enforcement notification at petitioner’s residence on April 25, 2012 extended the right of redemption until May 25, 2012 (see RPTL 1125 [1] [b] [iii]). Only a local law could extend the cut-off date for redemption (see RPTL 1111 [2]) and, thus, contrary to petitioner’s contention, the published notice of the tax auction could not extend that date of redemption. Where a valid tax lien exists, and the taxing authority followed all proper procedures in foreclosing the lien, the taxpayer’s property interests are “lawfully extinguished as of the expiration of the[ ] right to redemption and the entry of the judgment of foreclosure” … . Thus, all of petitioner’s right, title and interest in the parcels, in her individual and representative capacities, was extinguished when the default judgment was entered in the tax foreclosure action on June 18, 2012 (see RPTL 1123 [8]).  Matter of Johnstone v Treasurer of Wayne County, 2014 NY Slip Op 04590, 4th Dept 6-20-14

 

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Statutory Notice Requirements for Tax Foreclosure Me

The Third Department determined the tax foreclosure proceedings were valid.  The motion to reopen the default judgment was untimely and the statutory notice requirements were met:

A motion to reopen a default judgment of tax foreclosure ‘may not be brought later than one month after entry of the judgment'” … . Significantly, “‘the statute of limitations set forth in RPTL 1131 applies even where, as here, the property owner asserts that he or she was not notified of the foreclosure proceeding'”… .

…[W]e reject respondent’s contention that the statute of limitations period for its motion to vacate never commenced running because petitioner failed to comply with the notice requirements of RPTL 1125. Pursuant to RPTL 1125 (1) (b) (i), notice of a foreclosure proceeding shall be sent to a party entitled to notice by certified mail and first class mail and “notice shall be deemed received unless both the certified mailing and the ordinary first class mailing are returned by the United States postal service within [45] days after being mailed” … . Further, where one of the notices is not returned within the requisite period, a petitioner is “‘not obligated to take additional steps to notify [the] respondent of the foreclosure proceeding'” … . Here, the first class mailing sent to respondent in October 2011 was never returned to petitioner. Additionally, although the November 2011 first class and certified mailings were both returned, that did not occur within 45 days; they were returned more than 100 days after being mailed. As a result, the mailings were deemed received and petitioner’s obligation to provide notice under the statute was satisfied … . Matter of County of Clinton, 2014 NY Slip Op 02486, 3rd Dept 4-10-14

 

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