Scott E. Mollen
Scott E. Mollen ()

Foreclosures—Lender Did Not Abandon Foreclosure By Not Moving to Fix Defaults Within One Year—Lender Complied With Mortgage Foreclosure Conference Requirements and the “Stay” of All Motions Imposed By 22 NYCRR 202.12-a (c)(7)—Lack of Knowledge or Understanding of Legal Process, Inability to Read or Write English and Participation in Court Scheduled Settlement Conferences Are Not Reasonable Excuses for Failure to Serve an Answer or Otherwise Appear

A lender commenced a mortgage foreclosure action, alleging that the defendant had defaulted in her payment obligations. The defendant had been served with process. The action had been commenced by the filing of a summons and complaint on Sept. 13, 2010. In November 2011, the defendant was notified that a conference in the “specialized mortgage foreclosure part” was scheduled for Jan. 30, 2012. That conference was adjourned until April 16, 2012, in order to provide an interpreter for the defendant. After several conferences, the last of which occurred on Aug. 29, 2012, “the matter was marked as ‘not settled.’”

Following the transfer of this case from the conference part to the IAS part, the lender moved for an order fixing the default and for an order appointing a referee to compute. The defendant cross-moved to dismiss the complaint or vacate her default and for leave to file a late answer. The court granted the lender’s motion and denied the defendant’s motion.

CPLR 3215(c) requires a plaintiff to move for judgment within one year following a default in answering in order to avoid dismissal due to abandonment, except in cases where “sufficient cause is shown why the complaint should not be dismissed.” A showing of sufficient cause requires the “proffer of a reasonable excuse for the delay in moving and a showing of the meritorious nature of the complaint….” Trial courts have discretion to determine what constitutes “reasonable cause.”

Delays engendered by the newly-enacted mortgage foreclosure conference requirements, “coupled with the ‘stay’ of all motions imposed by the provisions of 22 NYCRR 202.12-a (c)(7), have been held to constitute sufficient cause for not moving to fix defaults within the one year time period imposed by CPLR 3215(c)….” Here, the lender demonstrated that its motion “to fix defaults was made within one year of the release of the action from the ‘conference part.’” Therefore, “the presumption of abandonment that would otherwise arise under CPLR 3215(c), is neutralized, if not negated, entirely.” Thus, the court denied the defendant’s motion to dismiss pursuant to CPLR 3215(c), since there was “sufficient cause for the delay in moving” and the lender had meritorious claims for foreclosure.

With reference to the defendant’s motion to vacate her default and for permission to serve a late answer, the court explained that “[t]he failure to proffer an excuse found reasonable by the court obviates the need for inquiry into the issue of the existence of a meritorious defense….”

The defendant’s excuses were “her inability to read or write English, her lack of knowledge and understanding of legal processes and procedures and her participation in the court scheduled settlement conferences….” Appellate authority has held that “confusion or ignorance of the law, legal processes and/or court procedures do not constitute reasonable excuses for the failure to answer or otherwise appear….” Moreover, people with “disabilities such as blindness or illiteracy are not per se excused from the terms of their contracts as they are obliged to employ reasonable efforts to understand the contents thereof prior to signing….” Thus, “[a] party whose mastery of English is imperfect must make reasonable efforts to have the document made clear to him or her….”

A family member had allegedly read the summons and complaint to the defendant and had “advised that the papers…’had to do with” the “home and mortgage.” The defendant “failed to detail facts tending to show that such a reading satisfied her duty to undertake the requisite reasonable efforts to have the contents of the papers served made clear to her.” Under the circumstances, the court held that any inability by the defendant “to comprehend the words and warnings spread across the summons and warning notices included therein and on a separate paper served does not constitute a reasonable excuse for her default in answering….”

The court noted that “participation in statutorily mandated settlement conferences, which are scheduled…after the time in which an answer is due, may not, in itself, serve as a de facto extension of the time to answer and/or a reasonable excuse for a default….” The court opined that “[t]o hold otherwise would effect an unfounded judicial transformation of the limited scope and objectives of the simple settlement conference procedures legislatively imposed by CPLR 3408 into a revocation of longstanding rules and laws governing defaults which the legislature chose not to alter….”

The court also warned that participation in “pre-action and/or post-action loan modification discussions is alone insufficient to constitute a reasonable excuse for a default in answering, especially where the default in answering remains unchallenged by the party in default for a lengthy period of time….” Here, defense counsel had been retained approximately “three years ago but no application to vacate the default was brought until this cross motion was made some ten months after the original…return date of the plaintiff’s motion in chief.”

The court further stated that “a successful claim that settlement negotiations constitute a reasonable excuse for a default must be premised upon allegations of a good faith belief in potential settlement which finds substantial evidentiary support and a justifiable reliance upon such good faith belief….” Here, there was no such showing.

With respect to the defendant’s claim that she had been misled by the lender representatives and had relied upon such misrepresentations, the court stated that the “bald, conclusory and unsubstantiated claims of defendant…regarding purported utterances and representations made by the plaintiff’s agents that deterred defendant from timely appearing herein by answer or otherwise are insufficient to constitute a reasonable excuse for her default.”

Finally, the court stated that even if a reasonable excuse for the default had been proffered, the defendant failed to demonstrate a “meritorious defense.” Accordingly, the defendant’s motion to dismiss or for leave to vacate her default in answering and for leave to serve a late answer was denied and the lender’s motion to fix the default and the appointment of a referee to compute amounts due was granted.

Onewest Bank v. Navarro, 33644-10, NYLJ 1202634501647, at *1 (Sup., SUF, Decided Nov. 11, 2013), Whelan, J.

Foreclosures—Court Ventured Into “Uncharted Depths of New York Law Involving the Relatively New Obligations of a Creditor When Foreclosing a Marital Property”—Lender Failed to Comply With RPAPL §1304—Presumption of Regularity With Respect to Mailings Is “Alive and Well”—No Legislative or Regulatory Guidance on Penalty for Violations of RPAPL §1304

A husband had obtained a mortgage on his marital residence. He is “the sole obligor on the note and mortgage, and…the sole name on the title to the property.” Thereafter, his wife commenced an action for divorce. The husband permitted the wife to live at the residence during the divorce action provided she paid the mortgage. The wife failed to make such required payments, failed to advise her husband of her default and never forwarded mail from the lender. The lender thereafter commenced a foreclosure action.

The husband asserted that “the lender failed to comply with Real Property Actions and Proceedings Law…§1304″ (§1304). After the husband failed to negotiate a resolution with the lender, he “moved to compel disclosure and preclude proof at trial or, in the alternative, dismiss the action” based on the lender’s failure to comply with §1304. That “new section” requires that a “creditor must send a notice to the borrower indicating the loan is in default, offering the borrower guidance on how to avert foreclosure and seek the assistance of professional counsel.” The notice must be sent “by registered or certified mail and also by first-class mail to the last known address of the borrower, and if different, to the residence that is the subject of the mortgage.”

The husband demanded that the lender produce evidence that the required notice had been sent. The lender’s response included:

(1) a copy of the initial notice required by statute;

(2) a copy of a “proof of filing statement” issued by the New York State Department of Banking, but without any certification of the statement or any affidavit from any officials of the Banking Department;

(3) a copy of a second notice, dated Nov. 1, 2011, addressed to the husband at the marital residence address;

(4) a copy of a tracking report from the U.S. Post Office regarding a letter allegedly sent to the borrower. [Tracking Report]

Thereafter, the husband sought proof that the notice of mailing had been received, information as to whether the notice was returned as “undeliverable” and whether the notice was sent by registered or certified mail. The lender argued that “it did not possess these requested items and had no legal obligation to prepare documents that it did not possess.” The husband then made the subject motion.

The court rejected the lender’s argument that the borrower had not requested summary judgment or judgment dismissing the claims and the court could only compel further disclosure. The notice of motion asked that the court strike the complaint and contained “a ‘general relief’ clause, seeking such ‘other and further relief as is just and proper.’”

The legislative history of §1304, reflected an intent to require “mortgage holders to give borrowers an opportunity to remedy any default.” Specifically, 90 days prior to commencing a foreclosure action, a lender must provide a borrower with notice to consider “recasting or otherwise modifying the mortgage or taking other steps to avoid foreclosure.”

The court noted that §1304 requires both a registered or certified mailing and a first class mailing of the same notice. Here, the husband denied that the notice had ever been received and, in essence, was asking for “the equivalent of an ‘affidavit of mailing,’” i.e., “a sworn statement by someone acting on behalf of the lender in which the affiant attests that the notice required by §1304 was actually mailed on a specific date and time to the address set forth on the envelope.” The lender’s counsel, “by omission,” acknowledged that “the lender does not have any affidavit of mailing and apparently, no witness who could attest, under oath, to the mailings as required by…§1304.” The lender argued that the court should not bar “a witness for the bank appearing at trial and testifying, based on some undisclosed business records, that the mailings were timely sent.” The lender’s counsel had not identified any bank document “which would serve as a foundation for a witnesses verification of the disputed mailings.”

The court explained that §1304 notices “permits—if not requires—dismissal of the action.” The Legislature had been concerned that “a typical lack of communication between distressed homeowners and their lenders prior to the commencement of litigation, [would lead] to needless foreclosure proceedings.” The court also noted that “the common law doctrine of presumption of regularity is still alive—and well—in New York State despite arguments to the contrary.”

Thus, “a letter or notice that is properly stamped, addressed, and mailed is presumed to be received by the addressee” and “a simple denial of receipt” is “insufficient to rebut this presumption.” Furthermore, “[t]he presumption of receipt may be created by either proof of actual mailing or proof of a standard office practice or procedure designed to ensure that items are properly addressed and mailed.” The court then explained:

The burden is on (the party obligated to provide notice) to present an affidavit of an employee who personally mailed the verification and/or denial, or on the other hand, an affidavit of an employee with personal knowledge of the office’s mailing practices and procedures. Such individual must describe those practices or procedures in detail, explicitly denoting the manner in which she/he acquired the knowledge of such procedures or practices, and how a personal review of the file indicates that those procedures or practices were adhered to with respect to the processing of that particular claim.

The lender had failed to establish “regularity in mailing practice or a specific mailing sufficient to shift the burden of proof.” There was no sworn statement by any bank official regarding the mailing or regarding the practices followed by the bank in mailing the notices under RPAPL §1304. There was “no evidence on any aspect of the banks’ mailing compliance with the law. The mere production of a photocopy of the statutory notice, unsigned, generated by a computer, and addressed to the borrower, does not establish its mailing by either first class mail or certified or return receipt mail, as the statute requires.”

The lender attempted to use a “printed ‘tracking confirmation’ for the certified mailing from the Post Office.” The lender’s attorney did not attest that he had “any first-hand knowledge of the process or protocol for the Post Office.” The copy of the print was “uncertified, and there [was] no accompanying attestation to justify describing it as a business record of the Post Office.” Although the notice referred to “a ‘label number,’ which matche[d] a number located on the top of an October 4, 2011 letter to defendant,” there was “no sworn statement linking these two numbers or establishing their correlation.” The court declined to “speculate on what the tracking report means or what conclusions, if any, are to be drawn from the report.” A “copy of a single-page, unverified form does not create a presumption of the mailing of certified or registered notice as required in…§1304.”

The lender also sought “to establish a presumption of receipt by another somewhat unorthodox method.” The lender identified “a single page copy of a report from the…Banking Department” which allegedly “details compliance by the lender with the requirements of RPAPL §1306.” The lender’s counsel was “not qualified to authenticate the document, or even lay its foundation for consideration by the court.” RPAPL §1306 “requires certain filings with the Banking Department.” The document did not indicate what was mailed on the specified dates. There was no indication that the Banking Department document had to be submitted under oath and there was “no certification by the Banking Department regarding the accuracy of the record or any claim that it would otherwise fall within the ambit of CPLR §4518 (c).” The court opined that this “orphan document” “is not evidence of mailing the notices required by…§1304.” It merely showed that “the lender told the Banking Department that it mailed something to the borrower” on the subject dates.

Moreover, even if the tracking report or the banking department records showed the certified mailing of the §1304 notice, there was no evidence of the second mailing required by the statute, i.e., “the first-class mailing.” Although the lender produced a second letter, there was no evidence from the Post Office or an affidavit of mailing from the lender or its agent. Appellate authority requires “an ‘affidavit of service’ to establish ‘proper service’ of the §1304 notices.”

The second letter lacked 14-point type as required and failed to contain the consumer guidance that the statute dictates. The court found that the second letter was not a §1304 notice. Rather, it was a simple default letter. Additionally, the U.S. Postal Service’s tracking email showed “a certified letter having been sent merely to Ridgewood, NY without indicating a specific address” and that would be insufficient proof of service of the 90-day notice.

Although the husband may have been “entitled to dismissal for the failure of the lender to establish a condition precedent to filing the complaint,” the court “in the exercise of its equitable powers,” would not do so. Rather, the court stayed the mortgage foreclosure until the lender complied with the §1304 notice requirements.

Although courts have imposed sanctions “on lenders for violation of their duty to ‘negotiate in good faith’ during mandated conferences under CPLR §3408,” there is “simply no legislative or regulatory guidance on a penalty to be imposed when the violations stem from non-compliance with…§1304.” The court explained, “[i]n 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.”

The court then reasoned that if the foreclosure were dismissed, as some courts have suggested would be appropriate for violations of the notice requirements, lenders could “simply resend the notices,…wait 90 days and then pay a modest filing fee and then commence a second foreclosure action, seeking to recover the interest, unpaid principal, fees and costs (and attorneys’ fees), all of which have accrued since the date of the first missed payment.” At the end of such process, “the borrower will be no better off because he remains liable for the entire unpaid debt under the loan documents.” The court opined that “the borrower is worse off because the amount of the debt has increased during the two-year period in which this foreclosure action has been pending, making a recasting of the mortgage more costly, if not prohibitively so.”

The court decided that it would not permit the bank “to escape the consequences of its failure to follow the dictates of…§1304.” The court reasoned that it was “inconceivable that the legislature…would simply allow the lenders ‘a do over’ without any penalties.” The court therefore held that to effectuate “the intention of the legislature and provide a ‘just and proper’ relief to this homeowner,” it should enjoin the lender “from collecting from the borrower any interest, fees, penalties or attorneys’ fees due and owing on the mortgage or the underlying note from 90 days prior to the date of the filing of the complaint in this matter until the bank follows the requirements of…§1304, provides the 90-day notices as required, engages in the settlement conferences required by CPLR 3408 and moves to vacate the stay imposed by this court.” The court further held that “any claims for any interest, fees or costs due from 90 days prior to the date of the filing of the complaint to the lender’s compliance with…§1304 and CPLR 3408 and submits a motion to vacate the stay…in this case are permanently barred from collection.”

Kearney v. Kearney, 11/6131, NYLJ 1202629913517, at *1 (Sup. MO, Decided Nov. 7, 2013), Dollinger, J.

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