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THE FIRST DEPARTMENT PERMITS AN ACCOUNTING OF THE PAYOFF AMOUNT DELIVERED TO THE LENDER AT CLOSING WHEN THE PROPERTY SUBJECT TO A MORTGAGE FORECLOSURE ACTION IS SOLD BY BORROWER PRIOR TO A REFEREE BEING APPOINTED TO COMPUTE

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  • Posted on: Feb 12 2021

his BLOG has addressed too may issues regarding residential mortgages to mention.  [Type “mortgage foreclosure” in the search engine box on our BLOG page to find related articles.]

A mortgage foreclosure action “is equitable in nature and triggers the equitable powers of the court … [and o]nce equity is invoked, the court’s power is as broad as equity and justice require.”  U.S. Bank Nat. Assoc. Losner, 145 A.D.3d 935, 937-38 (2nd Dep’t 2016) (numerous citations and internal quotation marks omitted).  For example, due to the equitable nature of mortgage foreclosure actions, “the recovery of interest is within the court’s discretion[,which] will be governed by the particular facts in each case, including wrongful conduct by either party such as where the plaintiff’s conduct has prejudiced the defendant.”  People’s United Bank v. Patio Gardens III, LLC, 189 A.D.3d 1622 (2nd Dep’t 2020) (numerous citations and internal quotation marks omitted).  Using its equitable powers, the Court in Citicorp Trust Bank, FSB v. Vidaurre, 155 A.D.3d 934 (2nd Dep’t 2017), “toll[ed] and cancel[ed] interest that accrued” because “plaintiff failed to explain its lengthy delay in prosecuting this foreclosure action.”  Citicorp, 155 A.D.3d at 935 (citations omitted).

On February 9, 2021, the Appellate Division, First Department, decided U.S. Bank, N.A. v. Cordero, a residential mortgage foreclosure action in which it used its equitable powers to prevent a lender from collecting excessive fees, charges and interest from a borrower.  Lender, in Cordero, commenced a foreclosure action, but the borrower sold the property before a referee was appointed to compute the amounts due.  In order to facilitate the July 26, 2019 closing of the sale, “defendant paid the amount sought by plaintiff in accordance with a third payoff statement dated July 25, 2019.”  Within a week of the closing, borrower filed a motion for an accounting in which he alleged “that he paid excessive legal fees, penalty interest, deferred interest, fees for a temporary modification that he never executed, and made certain payments that were never credited to the loan.”  The motion was granted, and supreme court referred the matter to a referee to compute the amounts actually due.  Lender appealed and the First Department held that supreme court “providently exercised its discretion in granting defendant’s motion for an accounting.”

The Court rejected lender’s argument that equity is inapplicable because borrower defaulted and sold the premises for “$60,000 more than the payoff amount,” finding that the argument “is without merit because it ignores defendant’s argument that plaintiff received more than it was entitled to receive under the mortgage.”

Further, the Court addressed and rejected lender’s arguments that the voluntary payment doctrine, equitable estoppel and waiver barred the accounting even though those arguments were “improperly raised for the first time on appeal.”

This BLOG has analyzed the voluntary payment doctrine [HERE], [HERE] and [HERE], which “bars the recovery of payments that are voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law”.  (Citation and internal quotation marks omitted.)  The application of the voluntary payment doctrine was rejected because borrower made several “written protests” to lender.  The Court also found that it was not demonstrated that borrower had “full knowledge of the facts necessary to invoke the voluntary payment doctrine,” because “the bare bones July 25, 2019 payoff statement does not reflect any itemization for legal fees.”

Equitable estoppel is “’imposed by law in the interest of fairness to prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought and who, in justifiable reliance upon the opposing party’s words or conduct, has been misled into acting upon the belief that such enforcement would not be sought.’”  (Quoting Nassau Trust Co. v Montrose Concrete Prods.Corp., 56 N.Y.2d 175, 184 (1982).)  Lender argued that “in reliance on defendant’s multiple requests for payoff statements it abstained from prosecuting the action, accepted the full payoff amount, and discharged the mortgage” and that it “suffered prejudice because it incurred ongoing litigation costs and fees.”  In rejecting the estoppel argument, the Court stated:

Plaintiff’s estoppel argument is without merit because plaintiff’s purported reliance is not justifiable in light of defendant’s written protests. In addition, plaintiff’s reliance argument fails because plaintiff was required by law to produce a payoff statement after defendant demanded one under Real Property Law § 274-a. Moreover, plaintiff has not established that in the interest of fairness, equitable estoppel should bar a legal determination of whether the amount defendant paid was in fact due under the mortgage merely because defendant defaulted in making mortgage payments and was able to sell the property to avoid foreclosure.

Waiver is “the voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable.”  (Quoting Nassau Trust, 56 N.Y.2d at 184.)  Because borrower made numerous written protests, “it cannot be said that defendant voluntarily and intentionally abandoned his right to challenge the payoff amount.”

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