Tag Archives: good faith

Settling NY Foreclosures

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Three legal services providers issued Stalled Settlement Conferences: A Report on Residential Foreclosure Settlement Conferences in New York City. The report opens,

New York has coped with the foreclosure crisis by implementing a pioneering settlement conference process administered by the court system, designed to promote negotiation of affordable home-saving solutions. These conferences present a remarkable opportunity for lenders and borrowers to meet face-to-face in a court supervised settlement conference at which creative solutions can be forged, and have allowed thousands of New Yorkers to avert foreclosure. But banks routinely flout the law by appearing without required information or settlement authority, causing delays that cost borrowers money and can make home-saving settlements impossible. The process can be far more effective, and less prone to delay, if the courts rigorously enforce the requirements of the settlement conference law, as this report recommends.

Notwithstanding media reports about rebounding real estate markets, New York remains mired in a foreclosure crisis. In fact, in 2013 foreclosure cases represented approximately one third of the judiciary’s civil case load. New York State’s courts experienced a significant increase in foreclosure fi lings during 2013, with the pending inventory increasing more than 16% in 2013, with over 84,000 foreclosure cases pending as of the last report issued by the judiciary, and with 44,035 projected new filings for calendar year 2013 (representing an increase of nearly 20,000 new filings over 2012). (2)

This is clearly an advocacy document, but it is also clear that it is documenting a real problem, one that has cropped up time after time in judicial decisions. It may, however, go too far when it states that “banks and their lawyers themselves are largely responsible for prolonging the process.” (3) In fact, NY’s foreclosure process was longer than most before the mandatory conferences were implemented and remain long even as other jurisdictions adopt similar requirements.

Nonetheless, lenders should comply with the letter and spirit of the law. The report advocates for courts to “vigorously enforce the settlement conference law and deter banks from violating it by penalizing parties who appear in court without the authority and information needed to negotiate in good faith.” (2) Seems like a pretty reasonable recommendation to me.

U.S. District Court for the Eastern District of New York Rules That a Party Perfects its Security Interests in Disputed Loans by Taking Possession of the Notes as Opposed to Recording the Mortgage Assignments, Pursuant to UCC Article 9

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In Provident Bank v. Community Home Mortgage Corp., 498 F.Supp.2d 558, 558 (E.D.N.Y. 2007) the U.S. District Court for the Eastern District of New York ruled in favor of intervenor-plaintiff NetBank, granting its cross motion for summary judgment against intervenor-plaintiff, Southwest Securities Bank (herein described as Southwest) in a dispute regarding conflicting recorded mortgage assignments for nine loans. The court stated that “where parties assert competing interests in mortgage assignments,” under Article 9, “possession of the note perfects the assignee’s security interest regardless of whether any mortgage securing the note has been properly recorded.” It concluded that NetBank perfected its interest in eight of the nine disputed loans and took possession of them before Southwest, giving it a superior interest in those loans.

Confusion over who possessed the loans started when Defendant Community, a mortgage banker, entered into agreements with two banks, Southwest and RBMG (NetBank’s successor in interest), to fund a portion of its mortgage loans. Community entered Mortgage Purchase Agreements with both banks and engaged in a scheme known as “double booking,” where it “obtained duplicate funding for one loan from two different lenders and retained the entire value of the loan.” Essentially, “Community created two original notes and mortgages for each of the disputed loans.” Because of Community’s fraud “only one of the lenders would be paid in full,” and each bank claimed a priority interest in the nine loans that Community sold to it. Southwest recorded its assignments of the mortgages before RBMG for five of the loans, but RBMG received the original notes and assignments for eight of the loans before Southwest.

In determining which of the loans belonged to Southwest or NetBank and which of the mortgages were valid, the court had to decide “whether Article 9 or state real property law governs the security interests in mortgages.”  Under Article 9, a party perfects it security interest in a note by taking possession of it. Alternatively, under “race-notice statutes in state real property law,” a party perfects its security interest in a mortgage by recording the assignment. Southwest argued that the court should follow New York’s race-notice statute, whereas RBMG argued that Article 9 should govern.

Before reaching its decision, the court examined the New York Real Property Law Section 291, which states that a “bona fide purchaser for value, without notice of a junior mortgage, who records his assignment is entitled to priority over a prior unrecorded mortgage of which his assignor has full knowledge.” It explained that previous decisions applying the statute did not address instances where the “first party to record a mortgage assignment [had] a prior interest over another party who first takes possession of the note securing the mortgage.”  The court stated that in this case, the question depended on the “supremacy of perfecting the security interest in the note [as opposed to previous cases which regarded] perfecting the security interest in the mortgage.”

According to the statute’s language and precedent decisions regarding the same issue, Southwest would have a priority interest in five of the loans that it recorded before RMGA. Instead, the court applied Article 3 and Article 9 of the UCC in reaching its conclusions. It stated that “NetBank perfected its security interest in the loans and Southwest,” did not. The court agreed with previous cases in the Circuit which held that, “perfection of a security interest in the note (by taking possession under Article 9) should carry over to the mortgage incidental to it.” It explained that in New York, assignment of a note creates a security interest in the note, but a party perfects its security interest in the note by possessing it. From this reasoning, the court determined Southwest was not the first party to perfect its security interest in the loans, as it merely recorded its mortgage assignments but never possessed them. Therefore, the court denied Southwest’s motion for summary judgment requesting possession over the disputed loans.

Instead, the court granted NetBank’s motion for summary judgment, pursuant to Article 9, as it possessed eight of the disputed loans before Southwest. It also held that under UCC Article 3, NetBank qualified as a holder in due course (defined as a holder of a negotiable instrument who takes it for value, in good faith, and without notice that it is overdue or has been dishonored) in regards to seven of the loans, entitling it to those loans independent of its possession under Article 9.

Bad Faith Remedies for Loan Modification Negotiations

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New York Supreme Court Justice Torres (Bronx) issued a Decision and Order in Citibank, N.A. v. Barclay et al., No. 381649-09 (June 21, 2013), in which he evaluated what the appropriate remedies were for failing to negotiate in “good faith” as required by CPLR section 3408(f). Like other cases, it recites a litany of facts that make the owner of the note look comically (darkly comically) incompetent or even malevolent.

In an earlier decision, the Court “found that the plaintiff had failed to act in good faith.” (3) In particular, the Court found that Citibank “made it impossible for Barclay to comply with its conflicting ever changing, never written requests for documentation.  Moreover, the plaintiff refused to review applications that were complete and it never took a clear position on the defendant’s loan modification application.” (3) The details in the decision add Dickensian color to this summary.

CPLR section 3408(f) requires that both “the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable conclusion, including a loan modification, if possible.” As NY courts have noted, the CPLR does not offer up any remedies for a party’s failure to negotiate in good faith, thereby leaving the appropriate sanction up to “judicial discretion.” (6)

Other cases have granted remedies such as barring “banks and loan servicers from collecting interest, legal fees, and expenses.  Other penalties have included exemplary damages and staying the foreclosure proceeding.” (6, citations omitted) The Court notes that remedies such as dismissal of the foreclosure, cancelling the note and mortgage, or ordering “a specific judicially imposed loan modification agreement.” (6) The court’s remedy in this case “is a bar on the collection of any arrears, including interest, costs and fees” from the date Barclay “received the unsupported HAMP denial.” (6)

On the one hand, this seems like a measured remedy because it punishes Citibank for the time period that it was not acting in good faith. But given how common this behavior seems to be, one wonders if it will deter future bad faith negotiations.

NY Appellate Court Rules Modification Not Enforceable in Foreclosure

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The Appellate Division ruled in Wells Fargo Bank, N.A. v. Meyers, 2013 Slip Op. 03085 (2d Dep’t), that a failure to negotiate a loan modification in good faith, which is required under NY foreclosure law, does not support the unilateral imposition of a mortgage modification.

The uncontested facts in this case read like one of the well-publicized Alice-in-Wonderland tales of homeowners trying to negotiate a modification with a Red-Queen-like loan servicer:

  • Wells Fargo alleges that it is the holder of the note and mortgage but later says that Freddie Mac is
  • Wells Fargo tells the homeowners to default in order to get into the loan modification program and then forecloses, although the Wells Fargo representative states that they “had no idea” why the foreclosure had been initiated. (4)
  • Wells Fargo repeatedly loses documents sent by the homeowners
  • Wells Fargo changes the terms of its modification offer because of a “miscalculation” (4)

The Court upholds the finding that Wells Fargo did not negotiate in good faith.  One can only imagine how homeowners feel dealing with such a bureaucratic counter-party:  is it grossly incompetent or slyly malevolent?

The Appellate Division notes that the statute at issue provides, “Both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible” (8, quoting CPLR 3408[f]).  This provision contains no remedies, however, for the failure to do so.  The Court then identifies a variety of sanctions that have been employed against mortgagees/servicers pursuant to this statute.  These include

  • barring them from “collecting interest, legal fee, and expenses” (10)
  • imposing exemplary damages
  • staying the foreclosure
  • imposing a monetary sanction

The Court also noted that it determined in another case that cancelling the mortgage and note was too severe a sanction, one that was not authorized by law.  The Court found that the remedy in this case, imposing a modification, was also inappropriate.  The court stated that to do so would be to rewrite a contract that had voluntarily been entered into in violation of the Contracts Clause of the United States Constitution.  The court also states that such a unilateral action “is without any source for its authority” and appears inconsistent with CPLR 3408 itself. (12) It is is unclear to me whether the Court is reading the Contracts Clause properly, but I agree that the trial court’s remedy seems extreme on these facts.

 

(Hat tip Wilson Freyermuth)