A judge went too far when he nearly halved the amount of principal a bank sought to recover in a foreclosure action to punish the bank’s purported lack of good faith during conferences, a Brooklyn appellate court has ruled.
After mandatory settlement conferences in a residential foreclosure proved fruitless, Acting Suffolk County Justice Jeffrey Spinner (See Profile) forever restrained Bank of America from “demanding, collecting or attempting to collect, directly or indirectly” any sums connected to a $493,219 mortgage that were deemed “interest, attorney’s fees, legal fees, costs, disbursements.” The bank could only collect principal, and any advances on property taxes or insurance, he said.
Spinner then imposed $200,000 in exemplary damages against the bank, cutting the principal to $293,219.
But the Appellate Division, Second Department, on Feb. 13 unanimously reversed Spinner in Bank of America v. Lucido, 2012-05450., saying he didn’t have the authority to impose the penalties he did.
In any case, the panel said the bank’s conduct did not justify any sanctions, and it remitted the case for further proceedings.
In the underlying case, John Lucido, a one-time commercial mortgage broker, took out a $494,000 mortgage for his Rocky Point residence in March 2007. He defaulted with the principal amount remaining at $493,219, and Bank of America commenced a foreclosure action in 2009.
Multiple settlement conferences took place but the case was complicated by Lucido’s illness and his wife’s death. Lucido appeared pro se in the lower court. The conferences were held pursuant to CPLR 3408, which state “both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution” in a residential foreclosure action.
In his April 2012 ruling, Spinner said the bank “deliberately acted in bad faith,” noting a nearly six-month delay in producing a requested pooling and servicing agreement (NYLJ, April 20, 2012).
He said the bank gave “material misstatements of fact” that appeared “to have been calculated to deceive the Court and has delayed these proceedings without good cause.”
Spinner criticized the bank for first insisting that the pooling and servicing agreement controlling Lucido’s mortgage terms forbade principal reduction, then later acknowledging there was no “absolute bar” after producing the agreement.
Bank of America appealed.
While the case was pending, Second Department Justice Thomas Dickerson (See Profile) in an unrelated case, Wells Fargo Bank v. Meyers, 108 AD3d 9, overruled a lower court’s compulsory loan modification after a finding of bad faith negotiations by Wells Fargo.
Dickerson said without specifically authorized sanctions or remedies in CPLR 3408, “the courts must prudently and carefully select among available and authorized remedies, tailoring their application to the circumstances of the case” (NYLJ, May 2, 2013).
In the Bank of America case, the panel pointed to the Wells Fargo court when saying judges have the power to fashion sanctions or remedies after a finding of bad faith negotiations. But here, Spinner “lacked authority to include such a provision in the judgment in the absence of any application for that relief.”
The panel said Spinner invoked exemplary damages and allowed them to reduce the principal balance without notifying the bank. The lack of notice “thereby deprived the plaintiff of its right to due process,” the panel said.
The ruling acknowledged Lucido’s “unfortunate situation” but said the record “reveals that the conduct of the plaintiff in this case was not so egregious as to merit the imposition of sanctions against it.”
Bank of America’s refusal to consider principal reduction and the delay in producing the document did not show it “failed to negotiate in good faith.”
The panel cited case law saying CPLR 3408 did not mandate lenders to give the precise offer that borrowers wanted, nor did it mean bad faith from the lender.
Here, the bank’s attorneys “consistently represented the unlikelihood of the plaintiff’s acceptance of the respondent’s proposed reduction in principal, and any misstatement by the plaintiff’s counsel regarding the import of the provisions of the PSA did nothing to change the plaintiff’s stance with respect to the respondent’s proposal.”
In a separate 2009 foreclosure ruling, Spinner vacated a judgment of foreclosure and canceled a mortgage after blasting IndyMac Bank’s “unconscionable, vexatious and opprobrious” conduct in IndyMac Bank v. Yano-Horoski, 2005-17926. The Second Department later overruled Spinner, saying “the severe sanction … was not authorized by any statute or rule” (NYLJ, Nov. 23, 2009; Nov. 22, 2010).
In the Bank of America case, Peter Kaiteris of Bayport represented Lucido on appeal. Kaiteris said his client did not plan to appeal, but still felt “the bank did not approach the conferences in good faith.”
“The way the remedy was fashioned by the trial court made it extremely difficult to defend in the appellate court,” said Kaiteris, noting, for instance, the sua sponte nature of the damages.
Jacob Inwald, director of foreclosure prevention for Legal Services NYC, who is not involved in the case, acknowledged Spinner’s underlying remedy was “unusual,” saying he knew of about 40 trial-level decisions on the past three years in which the courts tolled interest after finding a failure to negotiate in good faith.
Still, Inwald said the appellate court offered “conclusory statements” about the bank’s actions in comparison to the “detailed statements in Spinner’s opinion” about the cases’ record.
Bank of America was represented by Marshall Beil, Jeffrey Chapman and Meghan Mastrocovi of McGuire Woods, along with Henry DiStefano of Leopold & Associates.
A spokesperson for the bank said, “Bank of America is pleased that the Appellate Division found that the bank negotiated in good faith and reversed the Supreme Court’s decision.”
The foreclosure action is still pending.