Even though a bank pressing a residential foreclosure action failed to negotiate in good faith during mandatory settlement conferences, a judge’s remedy of compelling a loan modification was "unauthorized and inappropriate," according to a Brooklyn appellate court.
"The courts may not rewrite the contract that the parties freely entered into—the loan and mortgage agreements—upon a finding that one of those parties failed to satisfy its obligation to negotiate in good faith," Justice Thomas Dickerson (See Profile) of the Appellate Division, Second Department, wrote for a unanimous panel. The ruling in Wells Fargo Bank v. Meyers, 2011-00482, held that the lower court’s order that Wells Fargo Bank abide by the original loan modification agreement violated the U.S. Constitution’s contract clause and the bank’s due process rights. The lower court also directed that the foreclosure action be dismissed.
The ruling reversed a decision by then-Suffolk County Supreme Court Justice Patrick Sweeney and remitted the case for further proceedings. But Dickerson acknowledged that provisions mandating good-faith negotiations in settlement conferences were "silent" on sanctions and remedies.
"In the absence of a specifically authorized sanction or remedy in the statutory scheme, the courts must employ appropriate, permissible, and authorized remedies, tailored to the circumstances of each given case. What may prove appropriate recourse in one case may be inappropriate or unauthorized under the circumstances presented in another. Accordingly, in the absence of further guidance from the Legislature or the Chief Administrator of the Courts, the courts must prudently and carefully select among available and authorized remedies, tailoring their application to the circumstances of the case," Dickerson wrote.
Paul Meyers, a New York City police officer and his wife, Michela, sought a loan modification from Wells Fargo in November 2008 after Meyers had his overtime hours cut and lost a second job.
On instructions from bank representatives in January 2009, the couple stopped sending their mortgage payments though they had never defaulted on their mortgage before. At the time of default, the principal was more than $300,000.
In August 2009, the couple received a three-month trial modification offer pursuant to the federal Home Affordable Modification Program. They signed forms accepting the offer on Sept. 1, 2009. A day later, the bank began the foreclosure action, though representatives would later say they "had no idea" why the couple had been served with a summons and complaint.
The couple entered a second trial period with monthly payments that were slightly lower than in the first trial period. Nevertheless, the bank denied the couple’s modification request, finding they did not qualify because their monthly housing expense was less than 31 percent of their gross monthly income.
At a settlement conference, the bank told the couple it would send another modification offer within days. But it followed up with another letter saying it could not modify the mortgage because Freddie Mac, the owner of the note and mortgage, declined modification. Still, Wells Fargo sent the couple another letter directing them to apply again to the federal modification program.
The bank made another modification offer, which the couple rejected because they could not afford the monthly payments.
With settlements at a standstill, Sweeney held a three-day hearing to determine if the bank had negotiated in good faith. The facts surrounding the negotiating efforts went undisputed.
Faulting the bank for its conduct, Sweeney wrote, "The defendant Paul Meyers is gainfully employed and the defendants are trying to avoid losing their home. Under these circumstances, the court finds that [Wells Fargo] has acted in bad faith." The judge continued that the "appropriate remedy" was "to compel specific performance of the original modification agreement proposed by the plaintiff and accepted by the defendants."
In the appellate ruling, Dickerson observed that in 2008 the state Legislature enacted laws mandating settlement conferences for foreclosures involving subprime mortgage loans. A year later, lawmakers amended the statute, codified in CPLR 3408, to expand mandatory settlement conferences for all residential foreclosure actions.
The 2009 amendments included a provision, CPLR 3408(f), stating "both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible." Additionally, procedures and rules for settlement conferences were promulgated in 22 NYCRR 202.12-a, that said courts "shall ensure that each party fulfills its obligation to negotiate in good faith and shall see that conferences not be unduly delayed or subject to willful dilatory tactics so that the rights of both parties may be adjudicated in a timely manner."
Given those provisions, Dickerson said, "it would certainly seem" that courts have the "authority to take some action where a party fails to satisfy its obligation to negotiate in good faith."
But Dickerson said it is "vital to remain mindful of the entirely appropriate limitations" under CPLR 3408.
"It is obvious that the parties cannot be forced to reach an agreement, CPLR 3408 does not purport to require them to, and the courts may not endeavor to force an agreement upon the parties," he wrote.
Without "specific guidance" from the Legislature or the chief administrator of the courts, Dickerson said lower courts employed a variety of methods to enforce the statutory mandate to negotiate in good faith. The remedies ranged from barring the collection of interest and legal fees to sanctions and dismissal of the foreclosure action.
Dickerson said the panel saw "no reason to disturb" Sweeney’s finding that Wells Fargo did not satisfy its obligations under CPLR 3408(f). And while he did "not rule out the possibility of other permissible remedies," Sweeney’s remedy went too far in this case, Dickerson said.
The original modification, said Dickerson, was "merely a trial arrangement, not an agreement for the binding obligations of the parties going forward."
Moreover, Sweeney’s interpretation of CPLR 3408(f) would violate the U.S. Constitution’s contract clause and the bank’s due process rights. The bank, Dickerson observed, was "not on notice" that Sweeney was considering such a remedy.
Wells Fargo was represented by David Dunn, Victoria McKenney, and Jessica Ellsworth of Hogan Lovells.
Diana Lozada Ruiz of Mineola represented the Meyers.
In an interview, Ruiz said she and her clients were weighing whether to appeal, but said the appellate decision overlooked the fact that the bank approved a final modification, though it never followed through on ministerial paperwork finishing the modification.
"The court may be right in what it’s saying generally what the legislature has to do, but it should have carved exception" for the Meyers, said Ruiz.
A Wells Fargo spokesman said in a statement, "We support the foreclosure mediation programs established by the state of New York and negotiate in the process in good faith. We work with all borrowers to identify an option that will help them remain in their home. This decision is an important one. We agree with the Appellate Division’s ruling that courts may not rewrite mortgage contracts that the parties freely entered."
@|Andrew Keshner can be contacted at email@example.com.