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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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Denial of Plaintiff’s Motion to Intervene in a Foreclosure Action Did Not Prohibit, Under the Doctrine of Collateral Estoppel, the Plaintiff’s Action to Be Declared the Owner of the Subject Property/A Person With an Interest in Real Property Who Is Not Joined in a Foreclosure Action Is Unaffected by the Judgment of Foreclosure

The Second Department, reversing Supreme Court, determined that plaintiff’s (Jamison’s) action to declare her the owner of property subject to foreclosure should not have been dismissed under the doctrine of collateral estoppel.  Plaintiff’s ownership of the property had not been determined in the foreclosure action in which she unsuccessfully sought to intervene.  In addition, a person with an interest in real property who is not joined in a foreclosure action remains unaffected by the judgment of foreclosure:

The doctrine of collateral estoppel bars relitigation of an issue which has been necessarily decided in a prior action and is determinative of the issues disputed in the present action, provided that there was a full and fair opportunity to contest the decision now alleged to be controlling … . The party seeking the benefit of the doctrine of collateral estoppel must establish that the identical issue was necessarily decided in the prior action, and is determinative in the present action … . Once the party invoking the doctrine discharges his or her burden in that regard, the party to be estopped bears the burden of demonstrating the absence of a full and fair opportunity to contest the prior determination … .

Here, the bank failed to establish that the issue of whether Jamison has an interest in the subject property had already been decided, since the order it relied upon expressly provided that no determination had made by the court with respect to the issue of whether or not Jamison was a necessary or indispensable party, and Jamison’s motion to intervene as of right in the foreclosure action was denied without explanation. In any event, where a person with an interest in real property is not joined as a party to an action to foreclose a mortgage on that property, that person’s rights are left unaffected by the judgment of foreclosure and sale, and the foreclosure sale may be considered void as to the omitted person … . Accordingly, Jamison’s interest, if any, in the subject property was neither litigated nor determined in the foreclosure action, and the order denying her motion to intervene as of right in the foreclosure action was not an adjudication of her rights on the merits. Jamison v Aquai, 2015 NY Slip Op 04097, 2nd Dept 5-13-15

 

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Supreme Court Should Not Have Determined the Mortgage Company Did Not Negotiate a Loan Modification in Good Faith Without a Hearing, and Could Not, Pursuant to the Contract Clause, Order the Mortgage Company to Enter a Loan Modification Agreement

After defendant, Ms Hepburn, failed to answer the summons and complaint in a mortgage foreclosure action, the plaintiff mortgage company moved for an order of reference (the appointment of a referee to compute the amount due).  Supreme Court denied the motion and, sua sponte, determined the mortgage company had not negotiated a loan modification in good faith (CPLR 3408), and directed the mortgage company to offer a loan modification within sixty days.  The Second Department determined Supreme Court should have granted the motion for an order of reference (which was not opposed), should not have made a finding the mortgage company failed to negotiate a loan modification in good faith without conducting a hearing, and could not, pursuant to the Contract Clause, order the mortgage company to enter a loan modification agreement:

The Supreme Court should not have, sua sponte, determined that the plaintiff failed to negotiate in good faith as required by CPLR 3408, and directed it, within sixty days, to offer a loan modification to Ms. Hepburn allowing her to assume the subject mortgage. “It is well-settled that an action to foreclose a mortgage is equitable in nature and triggers the equitable powers of the court” … . “Once equity is invoked, the court’s power is as broad as equity and justice require” … . A court “may impose a sanction sua sponte, but the party to be sanctioned must be afforded a reasonable opportunity to be heard” … .

Here, the only matter before the Supreme Court was the plaintiff’s motion for an order of reference. Without an evidentiary hearing or notice to the parties, the Supreme Court sua sponte determined that the plaintiff had not acted in good faith in its negotiations with Ms. Hepburn at settlement conferences, which were held over a 16-month period, and thereupon denied the plaintiff’s motion. Such procedure did not afford the plaintiff an opportunity to oppose the Supreme Court’s finding that it had not met it obligation to negotiate in good faith as required by CPLR 3408 or to oppose the imposition of sanctions … . Moreover, even if sanctions for failure to negotiate in good faith were appropriate in this matter, the Supreme Court erred in directing the plaintiff to, in effect, enter into a contract with Ms. Hepburn … . Such a sanction violates the Contract Clause of the United States Constitution … . PHH Mtge. Corp. v Hepburn, 2015 NY Slip Op 03817, 2nd Dept 5-6-15

 

Nothing in the Documentation Submitted to the Lender Raised Any Questions About the Applicant’s Authority, as the Sole Member, to Enter the Mortgage on Behalf of Defendant Limited Liability Company—Therefore the Affirmative Defense Alleging the Mortgage Was Invalid Because there Were Undisclosed Members of the Limited Liability Company Was Properly Dismissed

In an action to foreclose a mortgage, the Second Department determined the defendants’ affirmative defense claiming the mortgage was invalid was properly dismissed. The defendants alleged the member of defendant limited liability company who applied for the mortgage, Botticelli, did not have the authority to enter the mortgage on behalf of the limited liability company because he was not the sole member. However, there was nothing in the documents submitted to the lender by Botticelli which raised questions about the existence of undisclosed members. Therefore the mortgagee was not under any obligation to make inquiries to ensure Botticelli had the proper authority and the mortgagee was a bona fide encumbrancer:

The operating agreement of the defendant Jericho Plaza, LLC (hereinafter the LLC), which was formed to build and sell new homes, provided that Silvia Cerrone held a 50% interest, that her son-in-law Giuliano Botticelli held a 25% interest, and that his father, Anthony Botticelli, held a 25% interest in the LLC. The LLC obtained a $600,000 loan, secured by a mortgage on the only property it owned. At the closing, Giuliano Botticelli presented documents indicating that he was the sole member of the LLC, and was authorized to execute the mortgage on its behalf. Thereafter, the plaintiffs commenced this foreclosure action against the LLC and others. Silvia Cerrone successfully moved to intervene. The LLC and Silvia Cerrone (hereinafter together the defendants) moved for summary judgment dismissing the complaint insofar as asserted against them, contending that the mortgage was invalid by reason of Cerrone’s undisclosed interest in the LLC, and the plaintiffs cross-moved for summary judgment dismissing the defendants’ affirmative defenses which were based upon the alleged invalidity of the mortgage.

A mortgagee is not a bona fide encumbrancer where, despite being aware of facts that would lead a reasonable, prudent lender to make inquiries of the circumstances of the transaction at issue, it fails to make such inquiries … . However, mortgagees “do not have a duty of care to ascertain the validity of the documentation presented by an individual who claims to have the authority to act on behalf of a borrower corporation or entity” … .

Here, the plaintiffs established their prima facie entitlement to judgment as a matter of law dismissing the defendants’ affirmative defenses which were based upon the alleged invalidity of the mortgage, by submitting evidence demonstrating that Giuliano Botticelli submitted documents at the closing which indicated that he was the sole member of the LLC, and had the authority to enter into the mortgage on its behalf. Moreover, the plaintiffs established, prima facie, that the circumstances presented would not lead a reasonable, prudent lender to make inquiries of the circumstances of the transaction at issue. 334 Corp. v Jericho Plaza, LLC,2015 NY Slip Op 03827, 2nd Dept 5-6-15

 

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