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Second Department Remands For Hearing on Whether Lender Negotiated in Bad Faith During Mandatory CPLR 3408 Foreclosure Settlement Conference

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  • Posted on: Dec 23 2022

By Jonathan H. Freiberger

As previously addressed in numerous articles on this Blog, the New York State Legislature has responded to the residential mortgage foreclosure crisis by promulgating a series of rules designed to protect homeowners.  These rules place additional burdens on foreclosing lenders, and courts throughout New York State have demonstrated little sympathy for noncompliance.  For example, we have written frequently about residential mortgage foreclosure practice, in general, as well as the strict interpretation of the pre-foreclosure notice requirements of RPAPL 1304 applied by New York Courts.  See, e.g., [here], [here] and [here] and the hyperlinks therein.

One area that we have not previously addressed, however, is compliance with CPLR 3408, which requires mandatory settlement conferences in residential mortgage foreclosure actions and specifically provides for, among other things: the scheduling of  conferences “for the purpose of holding settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents”; the documents that the parties should bring to the conference to facilitate a resolution; the requirement that the parties negotiate in good faith; and, the ramifications to any party that fails to negotiate in good faith.  Regarding the interplay between the mortgage foreclosure crisis and the promulgation of CPLR 3408, one court has recognized that:

In response to the ongoing foreclosure crisis, the New York State Legislature enacted a number of procedural and substantive protections for homeowners defending a foreclosure action involving their primary residence. Among these new protections was the enactment of CPLR § 3408, which, in its original form, provided for a mandatory foreclosure settlement conference in a residential foreclosure action involving a high-cost home loan or a subprime or nontraditional home loan, as those terms were statutorily defined. The statute was later amended to apply to all residential foreclosure actions involving a primary residence.

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CPLR § 3408 and its implementing regulation, Uniform Rules for the Supreme Court § 202.12–a state that residential mortgage foreclosure actions that meet the definition of a home loan, shall be scheduled for a settlement conference within sixty (60) days of the filing of a Request for Judicial Intervention. With the 2017 amendments, this now also applies to residential foreclosures on reverse mortgages.

Reverse Mortgage Solutions, Inc. v. Curren, 56 Misc.3d 1164, 1165-66 (Sup. Ct. Chemung Co. 2017) (citations omitted) (hyperlink added).

Among the requirements of CPLR 3408 is that the parties act in good faith to reach a resolution.  “The purpose of the good-faith requirement in CPLR 3408 is to ensure that both the plaintiff and the defendant are prepared to participate in a meaningful effort at the settlement conference to reach a resolution.  To conclude that a party failed to negotiate in good faith pursuant to CPLR 3408(f), a court must determine that the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution.”  CitiMortgage, Inc. v. Rose, 209 A.D.3d 623, 625 (2nd Dep’t 2022) (citations and internal quotation marks omitted).

Lender’s good faith participation in a CPLR 3408 conference was at issue in Investors Bank v. Brooks, a case decided by the Appellate Division, Second Department, on December 21, 2022.  The borrower in Investors defaulted on his mortgage loan and lender sent a pre-foreclosure notice, after which borrower applied for a loan modification.  Shortly thereafter, lender advised borrower that his application was incomplete and additional documents were needed by October 29, 2016.  On September 19, 2016, lender advised borrower that it completed its review of borrower’s documents but needed additional information by October 19, 2016, without explaining why the additional documents were needed ten days prior to the previously deadline.  For a one-month period ending on October 24, 2016, the lender and borrower corresponded regarding compliance with lender’s request for documents.  Lender subsequently notified borrower that borrower’s modification application had been closed “due to the length of time it has taken to return the requested documents” and that reapplication would be required for a modification to be considered. 

Borrower retained counsel and submitted a second modification application and the parties, again, disputed the sufficiency and completeness of the documents submitted with the second application.  There was no indication that lender formally denied the second application.  Nonetheless, in June of 2017, lender commenced a foreclosure action.  Thereafter, the parties unsuccessfully participated in four settlement conferences.  During the course of the conferences, borrower submitted a third modification application and the parties again disputed the sufficiency of the documents provided by borrower to lender.  Ultimately, lender denied the application and borrower’s subsequent appeal of that determination was also rejected by lender.

Lender moved for summary judgment and borrower cross-moved for a hearing to determine “whether sanctions should be imposed upon the plaintiff for failing to negotiate in good faith pursuant to CPLR 3408(f).”  Borrower appealed from supreme court’s grant of lender’s motion for summary judgment and the denial of its cross-motion.  The Second Department reversed and remanded the matter “for a hearing to determine whether [lender] met its obligation to negotiate in good faith pursuant to CPLR 3408(f) and, if it did not, to impose an appropriate remedy” pursuant to CPLR 3408(j) and, in so doing, held:

The Supreme Court should have granted [borrower’s] cross motion for a hearing to determine whether [lender] negotiated in good faith pursuant to CPLR 3408(f). CPLR 3408 requires the parties in a residential foreclosure action to attend settlement conferences at an early stage of the litigation, at which they must “negotiate in good faith to reach a mutually agreeable resolution” (id. § 3408[f]). Contrary to [lender’s] contention, the circumstances surrounding its servicer’s handling of the first two loan modification applications are “relevant in the overall context of the parties’ relationship and the negotiations between them,” and thus, are relevant to the good faith inquiry. In support of the[] cross motion, [borrower] submitted evidence that [lender] “engaged in dilatory conduct by making piecemeal document requests, providing contradictory information, and repeatedly requesting documents which had already been provided”. Since [borrower’s] submissions raised a factual issue as to whether [lender] negotiated in good faith and deprived them of a meaningful opportunity to resolve the action through loan modification or other potential workout options (see CPLR 3408[f]), the court should have held a hearing to determine this issue before deciding those branches of [lender’s] motion which were for summary judgment on the complaint insofar as asserted against [borrower], to strike [borrower’s] answer, and for an order of reference.

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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