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New Developments in NYS Mortgage Foreclosure Law

Justices of the Supreme Court in the 2nd Department have been struggling with the problem of homeowners who are attempting to reinstate or modify their delinquent loans while the lender’s attorney continues to move forward with an action in foreclosure. In three recent cases, the Court has used its equitable power to void judgments and even post-judgment sales in foreclosure where the defaulting homeowner has demonstrated ongoing good-faith negotiations up to the auction date.  Three different cases demonstrate the various grounds where a court has found it to be equitable to void a judgment of foreclosure or a sale beyond the normal right of redemption “prior to the fall of the auction hammer”.

In Deutsche Bank Nat’l Trust Co. v. White, 2008 NY Slip Op. 31906 (Sup. Ct. Richmond Cty.) (J. Maltese), the defendant homeowner’s husband and co-defendant was the victim of the murder subsequent to the commencement of the case. The court permitted numerous adjournments to allow the defendant to cope with her many personal issues. While the defendant continued to negotiate with the lender, the counsel for the attorney continued to move forward with the foreclosure action and submitted an order in directing the sale of the subject premises. In denying the motion, the court referred to the holding in Polish Natl. Alliance of Brooklyn v. White Eagle Hall Co., whereby “[i]n exercising equity powers a court has the discretion to set aside a judicial sale where fraud, collusion, mistake or misconduct casts suspicion on the fairness of the sale.” 98 AD2d 400 (2d Dep’t 1983). The White court found that the servicer’s conduct led the homeowners to believe that the foreclosure action was stayed, and that the actions taken by lender’s counsel “were not maliciously motivated, but were instead careless administrative errors.”  Thus, the judgment submitted was a mistake on the part of lender’s counsel, and therefore the previously signed judgment was set aside.

The same court in White faced similar circumstances in Option One Mortgage Corp. v. Massanet, 2009 NY Slip Op. 30286 (Sup. Ct. Richmond Cty.) (J. Maltese). In Massanet, the homeowners had been engaged in settlement negotiations with the loan servicers since March 2007 which continued through the course of the summer with numerous phone calls and documentation exchanged. During this period of time, the lender’s counsel prepared a Request for Judicial Intervention and a summons and complaint, serving the homeowners in October 2007. In November of 2007, the loan servicers contacted defendant homeowners as to a modification of their mortgage and settlement offers continued. However, lenders counsel moved for an order of reference which was signed by the court of December 18, 2008. The defendant homeowners met with representatives of the loan servicer in person at an event sponsored by their local State Senator in February of 2008 and received verbal assurances from the representatives that the defendant’s loan would be modified and the foreclosure would be put on hold. After Plaintiff lender’s attorney submitted a proposed order of foreclosure and sale on June 17, 2008, which was signed on July 21, 2008, defendant homeowners moved under CPLR § 5015(a)(1) to vacate the default judgment.

CPLR § 5015(a)(1) permits a court to vacate a default judgment where the moving party demonstrates a reasonable excuse for the default and a meritorious defense. The Massanet court first held that “[t]he blatantly contradictory actions taken by both the plaintiff and its counsel justify a finding that moving defendants’ failure to serve an answer is reasonable under the statute.” Secondly, citing Anamdi v. Anugo, 229 AD2d 408 (2d Dep’t 1996) in that where a party moves to vacate a default judgment, the moving party need not prove its proposed meritorious defenses by trial evidentiary standards, but that the movant need only “set forth facts that sufficiently establish that its claims and defenses are meritorious,” the Massanet court held that the homeowner’s allegations as to, inter alia, violations of the federal Truth in Lending Act, the Home Ownership and Equity Protection Act, New York Deceptive Practices Act, constituted a meritorious defense. The court stated that it had recently rendered a decision in Deutsche Bank Nat’l Trust Co. v. Miele, whereby it had vacated a judgment of foreclosure and sale obtained by a plaintiff ex parte during loan modification negotiations with pro se defendants. Thus, the Massanet court vacated the judgment of foreclosure and sale and set a date for defendants to file a proposed verified answer as well as a Preliminary Conference.

While the above cases dealt with defendant homeowners seeking to vacate a default judgment of foreclosure, in Wells Fargo Bank Minn., N.A. v. Ray, 2009 NY Slip Op 29080 (Sup. Ct. Kings Cty.) (J. Hinds-Radix), the court took an unprecedented step in voiding an actual sale in foreclosure when the defendant homeowner had actually entered into a forbearance agreement with the loan servicer and had paid a sum certain in consideration of that agreement. The court began with an analysis of RPAPL §1341, which sets forth the requirements that a defendant seeking to redeem property, subject to a foreclosure sale, must fulfill in order to stay the sale, and to exercise his or her right of redemption. The court, citing to NYCTL 1996-1 Trust v. LFK Realty Corp., 307 A.D.2d 957 (1998), stated that when “a defendant fail[s] to make a payment into court and to make a motion to stay the sale of the property as required by RPAPL §1341, the defendant’s right to redemption expires.” The court went on to cite a litany of cases where the right of redemption ends “as the hammer falls at the auction.” Defendant’s main argument was that the forbearance agreement entered into between the loan servicer and defendant was enough to set aside the sale. Without reference to any portion of the CPLR, or to a specific case other than dicta in a case cited by the purchaser at auction, Guardian Loan Co. Inc. v. Early, 47 N.Y.2d 515 (1979) (“[W]here the judgment debtor can show not merely disparity, but in addition, one of the categories integral to the invocation of equity such as … mistake, or overreaching, a court may grant relief.”), the court invoked its broad powers of equity to set aside the sale. Taken to its most extreme, Ray effectively extends a defendant’s right to redemption post-sale, eviscerating RPAPL §1341, allowing a court to substitute its own judgment as to the equity of the circumstances leading to the sale, as opposed to a long line of established caselaw that an owner’s right to redeem property ends when the subject property is sold at auction.

In defending homeowners facing foreclosures, counsel should be aware that these cases show the importance of documenting good faith efforts to settle or modify loans which have defaulted. In addition, practitioners should take note that many courts are receptive to circumstances where confusion between loan servicers and their counsel lead to inequitable results for homeowners. These cases provide a basic groundwork to encourage attorneys to engage in settlement efforts with loan servicers, to document phone calls and offers in settlements, to obtain written settlement offers and show ongoing efforts to resolve loans in default to defeat lender’s counsel’s ex parte orders and judgments which could result in the foreclosure of the property.

Mr. Lathrop is the Director of Foreclosure Intervention at the Brooklyn Bar Association Volunteer Lawyers Project.  He was assisted in the writing of this article by John Buhta, a third-year student at Brooklyn Law School and recent recipient of the Faculty Public Service Award.

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