Another house falling to the foreclosure market ()
As the nation’s banking system teetered toward collapse in the fall of 2008, the federal government authorized a program to help homeowners facing foreclosure lower their mortgage payments. New York State followed suit with legislation requiring lenders to negotiate in “good faith” at court supervised settlement conferences before they could move forward with foreclosures.
Five years later, there is mounting evidence that lenders have hobbled New York’s effort through intransigence and incompetence. Since Jan. 1, 2013, 21 New York trial judges in nine counties have issued at least 24 rulings citing banks for failure to negotiate in good faith.1
New York’s appellate courts have yet to develop a coherent response to bank-caused delays. The good-faith law does not specify a remedy to curb lenders’ failure to meet the law’s mandate. Only a handful of cases have been decided, all but one of them by the Appellate Division, Second Department, which covers the five counties with the highest number of foreclosures. Until July 30, those rulings had only informed judges of remedies that were beyond their powers.
On July 30, the Second Department issued U.S. Trust N.A. v. Sarmiento, 2014 NY Slip Op 5533, a case that for the first time presented the court with an opportunity to rule on a remedy toward which many trial judges have been gravitating. In Sarmiento, Justice Leon Ruchelsman ordered the forfeiture of all interest and fees, including attorney fees, which had accrued since Dec. 1, 2009. More than three years ago, the referee who presided over the settlement process, Deborah L. Goldstein, pegged the amount of the forfeiture at “more than $40,000.” In an interview, A. David Fuster, who represented homeowner Jose Sarmiento, estimated that figure has since climbed to $300,000 (NYLJ, Aug. 4).
The Second Department’s ruling was significant in that it did not disturb Ruchelsman’s forfeiture order. But the court did not affirm the use of forfeiture (or tolling), ruling the issue was not before it because the lender did not raise it until submitting its reply brief.
Despite that muddled result, there are signs that Sarmiento represents a turning point for the Second Department, which previously rejected as remedies the cancellation of a mortgage, the dismissal of the foreclosure proceeding, specific performance and punitive damages.
In a unanimous decision in Sarmiento, Justice John M. Leventhal expressed a level of dissatisfaction with the bank’s handling of the negotiations not seen in the court’s prior rulings. Leventhal faulted the lender for creating “an atmosphere of disorder and confusion that rendered it impossible to rely upon the veracity of the grounds for [the lender's] denial of Sarmiento’s” Home Affordable Mortgage Program or HAMP application. HAMP is the federal modification program.
In Sarmiento, the conference process ground through 18 court appearances over 16 months. Initially, the lender had denied Sarmiento’s request to lower his mortgage payments on the erroneous premise that he did not live in his home. The lender denied another application for a loan modification because the homeowner had $25,000 in resources—funds he had put aside at the direction of the referee, Goldstein. Finally, a year into the settlement negotiations, the lender denied another application, taking the position that Sarmiento was “current on his mortgage loan and not at risk of default.”
The 2009 New York law specifically instructed the Judiciary to issue rules to “ensure” that judges have “the necessary authority and power” to see that “conferences not be unduly delayed or subject to willful dilatory tactics.” Other than to parrot that statutory language, the Judiciary has taken no action on the Legislature’s command. The absence of a clear deterrent has left trial judges without the ability to protect the settlement process, and they have been none too happy about it.
Their frustration has been palpable in many of the dozens of opinions. Judges have expressed exasperation over the way lenders’ foot-dragging has wasted judicial resources and pushed homeowners deeper into debt as interest charges and fees mount with each passing month. For example:
• Brooklyn Justice Martin Solomon in Deutsche Bank v. Soriano, Index No. 13873/10, “Any process and procedure that requires repeated submissions and resubmissions and resulted in a 16-month delay in the negotiations because of defects in the processing of the [federal modification] application is well beyond the boundaries of anything resembling good faith and is well into the territory of bad faith.”
• Staten Island Justice Peter Moulton in Bank of America v. Lucic, Index No. 810026/12, “The evidence demonstrates a bureaucratic maze which cannot be navigated by the very individuals for whom [the federal modification program] and other foreclosure alternatives were intended.”
• Niagara County Justice Frank Caruso in Bank of America v. Fusco, Index No. 13972/09 assessed tolling to remedy conduct that had been “disingenuous to the defendant and disrespectful to the court’s involvement and the statute that authorizes it.”
• Brooklyn Justice David I. Schmidt in U.S. Bank N.A. v. Thomas, 40 Misc.3d 1241[A], cited the lender for a long list of blunders and stalling tactics, including losing track of documents; claiming financial information had become stale, thus creating a “pretext” for multiple document requests; and apparently making no effort to evaluate “fundamental financial information the [homeowner] had submitted more than two years earlier.”
“This conduct,” he wrote, “would have gone on ad infinitum if not checked.”
Sarmiento is also significant because of the emphasis it places on guidelines developed by the U.S. Treasury Department to determine under HAMP whether homeowners are entitled to a downward modifications of their mortgage payments and the amount thereof. The opinion stressed the importance of being able to determine the “veracity” of the lender’s denial of a homeowner’s modification request under HAMP guidelines.
HAMP offered financial incentives to banks to join the program. Any bank that signed on was obligated to follow HAMP rules to determine whether the loan could be restructured to bring the payments within the homeowner’s means.
The import of compliance, however, became muddied in May 2013 when the Second Department ruled in Wells Fargo Bank v. Meyers, 108 A.D. 9 that the Contracts Clause of the U.S. Constitution bars judges from ordering banks to issue modifications that are a product of the protocols laid out in HAMP rules.
Post-Meyers, a number of judges have recognized that failure to adhere to HAMP rules and procedures can serve as the basis for a breach of the good-faith requirement even though the courts are barred from imposing a HAMP result. Leventhal, in Sarmiento, said as much when he rejected the common-law definition of bad faith (which requires intentional or gross misconduct) as the touchstone for determining banks’ good-faith, in favor of a test that examines the extent to which banks have complied with HAMP guidelines.
Instead of specific performance, the remedy of choice by trial judges post-Meyers has been the tolling of interest and fees. As Bronx Justice Robert Torres observed in Citibank v. Barclay, Index No. 381649/09, tolling provides for a direct correlation between wrong and remedy. The lender’s “bit by bit requests at each conference only serve to unnecessarily delay the modification application process while racking up interest, fees and penalties to the [lender's] benefit and [the homeowner's] detriment.”
It has now been more that a year since Justice Thomas A. Dickerson, the author of the Meyers opinion, issued a full-throated plea to both the Legislature and Judiciary to plug the remedy gap in the good-faith legislation. So far that plea has fallen on deaf ears. How much longer is the Second Department likely to stay its hand, especially since tolling fits so easily within Dickerson’s prescription for a remedy that is “tailored to the circumstances of each given case?”
1. 2013 Rulings:
American Home Mortgage Servicing v. Bobbitt, Index No. 19093/08, Sherman J., Kings; Bank of America v. Fusco, Index no. 13972/09, Caruso J., Niagara; Citibank v. Barclay, Index No. 381649/09, Torres J., Bronx; Deutsche Bank v. 40 Misc.3d 1238[A], Battaglia, Kings; HSBC v. Gashi, Index No. 2820/12, Pagones, Dutchess; JP Morgan Chase v. Butler, 2013 NY Slip Op 51050, Schack J., Brooklyn; PNC Mortgage v. Ahmed, 26016/10, Strauss J., Queens; U.S. Bank v. Gioia, 42 Misc. 3d 947, McDonald J., Queens; JP Morgan Chase v. Simmons, Index No. 556/10, Teresi J., Greene; Wells Fargo v. Ross 4505/10, Work J., Ulster); Wells Fargo Bank v. Ruggerio, 39 Misc.3d 1233[A], Lewis J., Kings;
US Bank National Association v. Green, Index. No. 9220/09, Kurtz J., Kings; US Bank v. Thomas, 2013 NY Slip Op 51520(U), Schmidt J., Kings; US Bank v. Rodriguez, 2013 NY Slip Op 23298, Torres J., Bronx; U.S. Bank v. Shinaba, NY Slip Op 51484 (U), Torres J., Bronx; US Bank v. Zamor, Index No. 11342/11, Pfau, Kings; U.S. Bank v. Hardat, 16196/10, Culley J., Queens.
Bank of America v. Lucic, Index No. 810026/12, Moulton J., Richmond; Bank of America v. Mason, Index No. K1-2012-1602, Chimes J., Chautauqua; US Bank v. Young, Index No. 28686/09, Jacobson, J., Kings; Deutsche Bank v. Husband, Index No. 24521/08, Silber J., Kings; OneWestBank v. Gardener, Index No. 26652/09), Graham J., Kings; OneWestBank v. Toom, Index No. 25665/09, Jacobson, J., Kings.