Judge Leventhal (NYLJ/Rick Kopstein)
A Brooklyn appellate court has ruled that judges must weigh a range of facts when deciding whether parties failed to negotiate in good faith during mandatory foreclosure settlement conferences.
“The issue of whether a party failed to negotiate in ‘good faith’ within the meaning of CPLR 3408(f) should be determined by considering whether the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution,” Justice John Leventhal (See Profile) said, writing for the panel in US Bank N.A. v. Sarmiento, 2012-03513.
The ruling upheld a lower court decision that barred the collection of interest or fees that had been accumulating on a loan since December 2009. Justices Reinaldo Rivera (See Profile), Peter Skelos (See Profile) and Plummer Lott (See Profile) joined in the decision.
Bruce Bergman, a partner at Berkman, Henoch, Peterson, Peddy & Fenchel in Garden City and an expert on foreclosure law who is not involved in the case, said the ruling marked the first time the Second Department honed in on a definition of good faith. “Something substantial and reasonable did emerge here,” Bergman said.
The case involves a $580,000 mortgage held by Jose Sarmiento on a Brooklyn property. In May 2008, Sarmiento lost much of his monthly income. He contacted the mortgage’s servicer, a Wells Fargo subsidiary called America’s Servicing Company, and was told he did not qualify for modification because of insufficient income. Though he defaulted soon after, Sarmiento later found an additional tenant and again asked for a modification. The servicer refused.
In September 2009, the foreclosure was referred to a court attorney referee.
CPLR 3408(a)(f) states that “both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.”
From September 2009 to January 2011, the parties held 18 conferences. The servicer four times denied Sarmiento’s attempts to alter his mortgage under the federal Home Affordable Mortgage Program (HAMP). It did propose two non-HAMP modifications, which Sarmiento turned down.
As the referee recounted in her report, the servicer made missteps such as misplacing documents and not offering more specific information when it concluded Sarmiento was ineligible. One denial was based on the erroneous grounds that no modification was needed because Sarmiento was current and not at risk of default.
Sarmiento moved to ban the collection of interest or fees from December 2009 onward.
Brooklyn Supreme Court Justice Leon Ruchelsman (See Profile) granted the motion in December 2011. “To describe the plaintiff’s attitude succinctly: it was happy to do equity when it brought the underlying action for foreclosure, but stubbornly refused to do equity when as a result of statute (CPLR 3408), it was forced to sit down at the negotiating table with the homeowner and attempt to work out a deal.”
The bank appealed, insisting parties in a foreclosure can only be found to breach the good faith requirement when a party committed “egregious conduct” that would support a determination of “bad faith” under common law—something that had not occurred here.
In the appellate decision, Leventhal said while the “aspirational goal” of settlement conference is a mutually-agreeable outcome that avoids foreclosure, the CPLR statutes only require the sides to enter and conduct negotiations in good faith.
Leventhal said legislative history did not indicate what lawmakers thought would be a good faith standard; likewise, he said, there were no published decisions that defined good faith in the context of settlement conferences.
He surveyed trial-level decisions and found that some had not required demonstrations of intentional misconduct or gross negligence when deciding there was a lack of good faith. Other courts considered lenders’ lost documents, confusing communications, inexcusable delays and baseless HAMP denials as a lack of good faith, he noted.
Leventhal acknowledged the common-law bad faith standard had been used in other contexts, such as an insurance carrier’s refusal to accept a settlement offer.
But if the court adopted the proposed standard on questions of good faith settlement conference negotiations, Leventhal said,”we would undermine the remedial purpose of CPLR 3408.”
He pointed to bill jacket language in the law that said settlement conferences were required to be held in good faith to ensure the sides were ready to participate in a “meaningful effort” for a resolution.
Events such as a lender’s failure to expeditiously review financial information or deny modification without sufficient grounds could constitute a failure to negotiate in good faith, as could a borrower’s failure to turn over requested information, he said.
In this case, Leventhal said the “totality of circumstances” supported Ruchelsman’s conclusions because “the plaintiff thwarted any reasonable opportunities to settle the action.” Leventhal said any one of the “various delays and miscommunications,” by themselves, did not equal a lack of good faith.
Turning to the question of the sanction barring collection of interest, Leventhal said the propriety of the sanction was not before the court.
Nevertheless, he said, “in fashioning a remedy for a violation of the good-faith negotiation requirement set forth in CPLR 3408(f), courts should be mindful not to rewrite the contract at issue or impose contractual terms which were not agreed to by the parties. As the nature of the sanction in this case is unchallenged, our determination herein should not be construed as a deviation from the above-stated principle.”
Sarmiento was represented by A. David Fuster II, principal of Fuster Law in Queens, who said his firm has about 800 open foreclosure defense cases.
Fuster said the ruling gave borrowers “a sword against the lenders and they can use it immediately.”
He said when he takes on new case, “the first thing I’m going to do is review the history of the file as a strategy matter with an eye for setting the bank up on this type of motion.”
All told, the amount of barred interest was about $300,000, Fuster said.
A Wells Fargo spokesman said the company “works hard to help our customers avoid foreclosure and communicate during the modification process.”
In this case, he acknowledged that “we may not have met our own standards,” but noted the conferences occurred several years ago before some “significant changes in the mortgage servicing industry.” Moreover, he said, Wells Fargo did propose two modifications.
The spokesman said the company was reviewing the ruling and considering its options, noting that it managed litigation matters in its role as the servicer.
Bergman said the ruling was “not opening up the floodgates,” but rather highlighting “the need for plaintiffs’ careful attention to the process.” He added that plaintiffs “should be able to save themselves from a bad faith finding with reasonable attention to HAMP applications.”
He noted the panel was “stuck” with the sanction because it was unchallenged and said it was “very important” to note the sanction “not be deemed to be an approval by the appellate division.”
J.A. Sanchez-Dorta, of counsel at Fuster Law, appeared for Sarmiento on appeal.
David Dunn, a partner at Hogan Lovells, and Nathaniel Marmon, then an associate at the firm, appeared for US Bank. Marmon is now an associate at Chaffetz Lindsey.