Foreclosures—Court Reduced Homeowner’s Debt—Court Would Not Countenance Blatant and Repeated Misrepresentations of Fact—Bank’s Conduct to Have Been “Overreaching, Willful and Unconscionable and Wholly Devoid of Even So Much as a Scintilla of Good Faith”

A bank had commenced a foreclosure action against a homeowner. The mortgage’s original principal amount was $494,000. Thereafter “and through no fault of their own, Defendants defaulted.” Pursuant to CPLR §3408, 18 settlement conferences were held, each one “a component part of a continuing albeit fruitless effort to resolve this matter.” Only upon order of the court, did a bank representative travel from Texas “to appear with a view toward some amicable resolution of this action. However, in derogation of the mandatory provisions of CPLR §3408(c),” no bank representative appeared with any “authority to settle or otherwise compromise the matter. Further delays were occasioned by serious illness having afflicted both of the Defendants as well as the unfortunate passing of [the defendant's wife]….” Additionally, the bank’s former counsel, had been discharged and his law firm had been disbanded.

Throughout the settlement conference process, the defendants had, “on not less than three occasions in the presence of the Court, submitted the…voluminous financial documentation demanded by [the bank], to be used in considering the initial request for a customary modification.” The defendants had been offered “a ‘trial modification,’ with no terms disclosed other than a monthly payment amount to be remitted.” That offer was not accepted by the defendants because of the bank’s “steadfast and continued refusal to disclose any of its terms…, including the interest rate” and “the manner in which their payments would be applied…, a tactic that was strenuously defended by [the bank's] successor counsel as ‘general industry practice.’”

A defendant had advised the court that “the servicing of his loan had been transferred to one of [the bank's] wholly-owned subsidiaries and that [the bank]” in advertising messages, had offered “ principal reductions in an apparent effort to help homeowners bring their delinquent loans current.” Based thereon, the defendant kept asking for a principal reduction and when he was advised by the bank that such would be considered, he obtained an appraisal which reflected a fair market value of $250,000. The defendant then proposed “a principal reduction to $250,000, coupled with the immediate deposit with [the bank]” of approximately $24,000, “ a sum equal to twelve months of principal, interest, taxes and insurance for it to hold in escrow to ensure his performance, a reduction in the interest rate to 4.50 percent (at that time, HAMP modifications were being offered with interest at 2 percent) and the immediate commencement of payments upon the new principal amount at the new interest rate.” The bank had advised the defendant, “that it had received his proposal” and that it was “under consideration.”

At a subsequent conference, bank counsel advised the defendant and the court that the bank “was ‘unwilling’ to reduce the principal and actually misrepresented to the Court that there had been ‘…thirteen conferences and Defendant has never submitted financials.’” Bank counsel had further misrepresented to the court that the bank had not offered “any loan modification programs that included a principal reduction as a component.” The court thereupon had warned bank counsel that “if there was found to be a lack of good faith in the settlement conference proceedings, the Court would consider the imposition of financial sanctions upon [the bank].”

Thereafter, a bank representative advised the court that the defendants now owed $673,959.23 and stated under oath that the defendants’ loan was “part of a pooling of loans” and that the “pooling and servicing agreement does not allow us to reduce the principal balance.” When the court called for the pooling and servicing agreement (PSA) to be produced, bank counsel stated that they had just learned that day of the “claimed restriction.” The bank representative conceded however, that the defendants “had been assiduously trying to work the matter out and that they had, in fact, been submitting financial documentation as requested by [the bank].” A bank representative had also asserted that she had an appraisal on the property for $356,000. When pressed for a copy of such appraisal, the bank representative stated that “it was ‘tentative.’ No such appraisal was ever provided to the Court….” Therefore, the court was left “to accept the market value of $250,000 as advanced by Defendants.”

The matter was again adjourned twice to allow the bank to comply with the court’s direction to produce the PSA. The bank counsel “generously offered” to provide the court only with what “Plaintiff considered to be the ‘salient portions’ of the PSA, despite the Court’s clear…order that the entire agreement be provided.” The court finally received the full PSA approximately 155 days after the court initially ordered its production. The so-called “complete PSA” “excluded the schedules to which it referred as an integral part, which included a description of the mortgage loans which were to be part of the pool.”

Such schedules were never produced to the court even though the bank representative had stated that she had possession of such schedules. The 155-day delay in providing the PSA, coupled with what appeared to be “the intent, by Plaintiff and its…counsel, to deceive this Court by deciding to only provide what it deemed to be the ‘salient’ portions of the PSA,” led the court “toward the conclusion that Plaintiff was not acting in good faith throughout the pendency of this matter.”

Additionally, the bank’s “claimed standing by virtue of an Assignment” was “at issue.” The assignment stated that it became effective 32 days prior to the existence of the PSA. The questions raised with respect thereto were not resolved.

The court had conducted a hearing at which the bank vigorously asserted that the PSA “absolutely prohibited any reduction of the principal.” However, the bank representative ultimately admitted that there were provisions in the PSA that prohibited reduction of principal, but there were also provisions that did allow the servicer to recommend the reduction of principal. Although the bank had previously represented that a principal reduction was “absolutely prohibited” by the PSA, the bank representative thereafter admitted that they had “not found an absolute bar, a prohibition of forgiving or reducing” and that under certain circumstances, a principal reduction was possible.

The bank then discussed a proposal involving “a 43.5 year product at 2 percent without the financials.” When the court inquired about this “abrupt about-face,” the bank’s counsel implied that the court was “in effect, coercing a resolution by having ‘…held the bank’s feet to the fire…’ and further misstating the facts by incorrectly asserting that….” The court explained that it had only attempted to “fulfill its statutory responsibilities and has not, in any manner forced, coerced nor compelled any particular resolution.” Bank counsel then advised the court that it had a new valuation showing a value of $346,000. However, the bank failed to produce this valuation as it had failed to produce the “phantom appraisal” referred to earlier.

Based upon the foregoing, the court had “serious…questions” as to whether the bank and its counsel “have acted in good faith….” Moreover, because of the lengthy delays, interest had grown, together with monies due for property taxes, insurance and legal fees. The court carefully noted that its comments about inappropriate conduct by the bank’s counsel related only to the bank’s prior counsel, not to the current bank counsel. The court praised the bank’s current counsel.

CPLR §3408 requires that “the plaintiff and the defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.” Additionally, “The Uniform Rules for the Trial Courts, 22 NYCRR §202.12-a” “vests the Court with broad powers to assist the parties in reaching a settlement of their differences….” The court opined that for it to do “anything less would be a serious derogation of its statutory responsibilities and would do a great disservice to the public….” Additionally, “[s]ince an action to foreclose a mortgage is…a suit in equity…all of the rules and tenets of equity are…applicable to the proceeding, including the rules governing punitive or exemplary damages….”

The court acknowledged that mortgages are contracts and the “[s]tability of contract obligations must not be undermined by judicial sympathy.” However, the court would not “countenance a lack of good faith” in its proceedings “especially where blatant and repeated misrepresentations of fact are advanced, neither will it permit equitable relief to lie in favor of one who so flagrantly demonstrates such obvious bad faith.” Further, where a party’s conduct is “unconscionable, shocking or egregious, a Court of equity is vested with the power to award exemplary damages.”

The court found that the record “unequivocally demonstrates that [bank], through its deliberate and contumacious conduct, has failed to act in good faith, although required by statute to do so.” The court stated that the bank had “deliberately acted in bad faith over the preceding [34] months.” It had repeatedly failed and refused to comply with the lawful orders of the court relating to production of documentation that was necessary to address critical issues, it had repeatedly advanced material misstatements of fact which appeared to have been calculated to deceive the court and had delayed proceedings without good cause, “thereby needlessly increasing the amount owed upon the mortgage debt,” needlessly wasting the court’s time and resources, as well as those of defendant.

The court explained that the bank’s conduct in this matter had been “over-reaching, willful and unconscionable, is wholly devoid of even so much as a scintilla of good faith and cannot be countenanced by this Court.” Therefore, the court held that it was fair and equitable that the bank be “forever barred…from collecting any of the claimed interest accrued on the loan between the date of default and the date of [the court's] Order; that [the bank] be barred and prohibited from recovering any claimed legal fees and expenses; and further, that the amount due [the bank] under the Note and Mortgage herein be determined at this time to be no more than the principal balance of $493,219.75, exclusive of advances for property taxes and property insurance.”

The court further imposed $200,000 in exemplary damages against the bank based on the bank’s “shocking and deliberate bad faith conduct as well as to serve as an appropriate deterrent to any future outrageous, improper and wrongful conduct.” The court exemplary damages were to be recovered by defendants “from [the bank] in the nature of a principal reduction upon the mortgage sought to be foreclosed by [the bank].”

Comment: This court had previously been reversed by the Appellate Division when it had vacated a judgment of foreclosure and cancelled the mortgage based on a lender’s “unconscionable, vexatious and opprobrious conduct.”Indymac Bank v. Yano-Horoski, 2005-17926. The Appellate Division had found that such severe sanction was not authorized by any statute or rule. Here, the trial court did not cancel the mortgage. Rather, the court reduced the mortgage and awarded exemplary damages in order to address a willful pattern of bad faith conduct. The court believed that such remedy was fair and equitable under all of the circumstances.

Bank of America v. Lucido, 2009-03769, NYLJ 1202549402511, at *1 (Sup., SUF, Decided April 16, 2012), Spinner, J.

Landlord-Tenant—Town Housing Authority Terminated Tenants’ Participation in Section 8 Housing Program—Federal Case Should Have Been Brought as an Article 78 Proceeding Under New York State Law—Tenant’s Request for a Preliminary Injunction Denied—Informal Administrative Hearing Need Not Be Recorded

A tenant had participated in the Federal “Section 8 Housing Choice Voucher Program” (Program). The defendant town housing authority (THA) monitors and administers the Program. The tenant had been involved in a “physical altercation with two other women.” The tenant alleged that the other females “were unknown to her, intoxicated and physically attacked her first” and that she had “only responded in kind by physically defending herself.” When the tenant learned that the police were looking for her, she turned herself into the police. She was charged with felony assault. The tenant could not make “the…bail and was incarcerated” from Aug. 26, 2011 through Oct. 13, 2011.

During such time, her mother cared for the tenant’s three young children, who were aged seven, two, and one. By Oct. 13, 2011, the tenant’s mother could no longer care for her children and the tenant asserted that because of her need to take care of her children, she had pled guilty to the felony assault charge. The tenant was sentenced to “probation for one year, with the understanding that after one year, the charge would be reduced to a misdemeanor.”

The THA had notified the tenant that she was being terminated from the Program because of her arrest. The tenant received notice in accordance with HUD regulations and had “availed herself of the opportunity to have an informal hearing to challenge the termination.” Although the hearing was not on the record, the tenant was afforded the “opportunity to be heard; the right to have an attorney present; the right to present evidence; and the right of cross-examination.” The THA offered the termination notice, proof of the criminal charges and a newspaper story about the incident. The THA presented no other evidence or witnesses.

The tenant testified as to the facts of the incident, the circumstances surrounding “her guilty plea because of her three young children; the fact that she had no criminal history; as well as…that in the absence of a Section 8 voucher, she and her children would be homeless.” The tenant also “submitted six letters from school authorities and community agency workers attesting to her good character.”

Although a hearing officer (HO) determined that the tenant should remain in the Program, the HO cited the incorrect HUD regulation in his decision. He referred to the regulation relating to admission to the Program, not termination from the Program. The parties disputed whether that was a mistake in form or substance. The HO had found that the altercation had not been initiated by the tenant and that the tenant had reacted in self defense, and this was the tenant’s first legal infraction. The HO also found that the tenant was held in “high esteem” within the community, “as exemplified by the numerous letters written…by Principal’s [sic], coaches, and teachers.”

At a subsequent meeting held by the THA and its Board of Commissioners, the defendants asserted that “they were not bound by the HO’s decision and were going to…terminate [the tenant's] Section 8 benefits.” The THA asserted that “the HO applied the wrong federal regulation, …the HO failed to properly apply the standards for review of evidence of criminal activity as stated by 24 C.F.R. §982.553, that the criminal charges ‘are considered violent criminal activity’”; “the HO incorrectly applied the federal, state, and local laws with respect to termination of a participant in the [Program] who engages in violent criminal activity because the HO improperly considered factors and circumstances that were not relevant”; and “the HO wrongly applied certain mitigating circumstances concerning the penalty to be imposed.”

The tenant then commenced the subject lawsuit, asserting violations of the tenant’s due process rights under the Fourteenth Amendment and violations of 42 U.S.C. §1983, “alleging that the Defendants acted under color of state law in depriving her of her rights under the Fourteenth Amendment, 42 U.S.C. §§1437(f) and 1437d(k).” The tenant moved for a temporary restraining order (TRO) and a preliminary injunction. The court had granted the TRO.

Under Federal HUD regulations, the THA may terminate Section 8 assistance for criminal activity by a household member if the THA determines, “based on a preponderance of the evidence, that the household member has engaged in the activity, regardless of whether the household member has been arrested or convicted for such activity.” Such criminal activity “may threaten the healthy, safety, or right to peaceful enjoyment of the premises by other residents…residing in the immediate vicinity.” However, “[i]n determining, in its discretion, whether to deny or terminate assistance, the [THA] may consider all the relevant circumstances such as the seriousness of the case; the extent of participation or culpability; mitigating circumstances related to the disability of a family member; and the effects of denial of assistance on the family members who were not involved. 24 C.F.R §982.552(c)(2).”

The court explained that under the applicable HUD regulations, once a HO issues a determination, the THA is not bound by such determination if it “concerns a matter for which the [THA] is not required to provide an opportunity for an informal hearing under this section, or that otherwise exceeds the authority of the person conducting the hearing under [THA] hearing procedures, neither of which is applicable in the present case,” or “is contrary to HUD regulations or requirements, or otherwise contrary to federal, state, or local law. 24 C.F.R. 982.555(f).”

The plaintiff argued that she was deprived of her due process rights when the THA overturned the HO’s determination, because the HO’s decision “was not contrary to HUD regulations or federal, state, or local law, which is the only permissible and applicable ground upon which the [THA] could decide not to be bound by the HO’s decision”; and that the THA had not adequately stated “the reasons for its decision.” The defendants asserted that the tenant’s “exclusive remedy for any challenges to the [THA's] decision for due process purposes is an Article 78 proceeding in the state court.”

The court explained that “whether brought directly as a due process violation under the Fourteenth Amendment, or through the statutory vehicle of Section 1983, the Plaintiff necessarily must establish that the Defendants’ conduct deprived her of her constitutional due process rights.” The tenant had a “protected interest in the continued occupancy of her rental unit.” The issue was “what process Section 8 recipients are entitled to under the Constitution before those benefits can be terminated.” When the subject government conduct “is random and unauthorized, the state satisfies procedural due process requirements so long as it provides a meaningful post-deprivation remedy.” However, “when the deprivation is pursuant to an established state procedure, the state can predict when it will occur and is in the position to provide a pre-deprivation hearing.” “[T]he distinction between random and unauthorized conduct and established state procedures…is not clear-cut…. However, as a general rule, conduct cannot be considered ‘random and unauthorized,’ regardless of whether the acts are contrary to state law if: (1) ‘the state delegated to those actors’ the power and authority to effect the very deprivation complained of…[and] the concomitant duty to initiate the procedural safeguards set up by state law,’ …or (2) the deprivation resulted from the acts of high-ranking officials who are ‘ultimate decision-maker[s]‘ and have ‘final authority over significant matters.’”

Here, if the tenant’s allegations involved “the state’s established pre-deprivation procedures,” i.e., “that she did not receive the process that she was entitled to, then a federal cause of action may lie because the availability of a post-deprivation remedy in the form of an Article 78 proceeding is irrelevant.” However, if the allegations are “more appropriately interpreted as a random act by a state actor, then the availability of an Article 78 post-deprivation remedy is dispositive.”

The court then explained that it was “irrelevant” whether the court found that the subject claim “is properly characterized as alleging that [the tenant's] property right was lost because of a random and unauthorized act by a government actor or that an established state procedure did not afford her procedural due process.” The court opined that “[i]f it is the former, then the post-deprivation remedy of an Article 78 proceeding provides [tenant] with sufficient process and the Court will not exercise jurisdiction over her claims. On the other hand, even if it is the latter, the Court could nevertheless deny the preliminary injunction and dismiss the Plaintiff’s claims, if she was afforded all of the pre-deprivation process she was due under Supreme Court precedent, as well as applicable federal statutes and regulations.”

The court found that it was reasonable to construe the tenant’s allegations as relating to random and unauthorized conduct because it was alleged that the defendants had “inappropriately inserted their discretion at a stage in the administrative proceedings where such discretion is unauthorized by the HUD regulations.” Moreover, overturning a HO’s “decision as a general matter, even when perfectly permissible under the HUD regulations, is apparently a rare occurrence.” Additionally, the plaintiff did not appear to blame the THA’s “established procedures for her alleged due process violations.” Therefore, the court found that there was no cause of action based upon the Fourteenth Amendment Due Process Clause, “so long as there is an adequate post-deprivation procedure available to address the alleged violation.”

Here, the tenant “may initiate an Article 78 proceeding in New York Supreme Court to challenge the [THA's] determination.” New York law provides “a post-deprivation remedy” and plaintiff did not avail herself of such remedy. Therefore, “[s]he cannot claim that [s]he was deprived of due process.”

The tenant had not asserted any “defects in the regulatory requirements” with respect to the hearing procedures. She did not claim an “inadequate notice” or a lack of “an opportunity to be heard before an impartial decision maker.” The tenant had not complained about the governmental termination process, whether at the HO or the higher level. Moreover, the THA had set forth its reasons for its determination. In essence, the tenant was challenging “the soundness of those reasons and whether they comply with the federal regulations….”

The court acknowledged that “an argument may be made that the overturning of the HO’s decision by the [THA] without adequate justification and not in accordance with the HUD federal regulations had the practical effect of rendering the hearing illusory, so that due process was violated….” However, the court was “not convinced by this logic.” Here, the tenant had received “all of the pre-deprivation process she was due” and based on the applicable law and regulations, the tenant or her attorney “should have been aware that the HO’s decision was in essence advisory, in that the [THA] was the ultimate decision-maker with authority to overturn the HO’s determination if it was contrary to HUD regulations, federal, state, or local law.”

Additionally, the THA’s authority to overturn the HO’s decision was “narrowly drawn” and that the procedures are set up in such a way that “one opportunity to be heard is sufficient.” The court then opined that an “Article 78 proceeding provides adequate post-deprivation process.” The court also noted that precedent holds that “termination of housing benefits does not violate due process when the informal hearing is not recorded.”

The court then held that the tenant had failed to demonstrate “a likelihood of success on the merits” as to the tenant’s ability to state a valid due process claim under the Fourteenth Amendment and denied the tenant’s motion for a preliminary injunction.

The court acknowledged that a Section 1983 claim is not precluded by the existence of a state remedy. However, here, there was no likelihood of success on the merits with respect to the Section 1983 claim. The tenant’s allegations did not sufficiently assert a violation of the requirements embodied in 42 U.S.C §1437d(k). The tenant had not alleged that she had received inadequate notice, did not receive an adequate opportunity to be heard, to examine documents, to be represented by an attorney, or to cross-examine witnesses. Although the tenant claimed that the THA’s written decision was inadequate, the statute “only requires that a written decision be received and does not detail what substance it need contain.” Further, the court found that the THA’s notice had adequately stated “its reasons for its determination, although the reasons may be improper and not in accordance with HUD regulations.”

Although the court declined to express “any opinion regarding the soundness of the [THA's] decision,” it remained “somewhat skeptical about the reasons stated by the [THA] in their determination reversing their HO’s decision.”

With respect to the HO’s citation to the incorrect rule, the court did not believe that such provided a legitimate ground to overturn the HO’s determination. Finally, the court acknowledged that its role was not to “assess the validity of the [THA's] reasoning and ruling.” That determination would be “more properly left to the New York State court in an Article 78 proceeding.”

Rios v. Town of Huntington Housing Authority, 12-cv-1558, NYLJ 1202549556246, at *1 (EDNY, Decided April 10, 2012), Spatt, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.