Mortgage Foreclosure Proceedings: Murphy’s Law Meets Hill Street Blues

This article was originally published in the New York law Journal.

by Victor M. Metsch

Anything that can possibly go wrong, does.

-Murphy’s Law

                 Compulsive readers of advance sheets and decisions reported by the Office of Court Administration are exposed, on practically a daily basis, to the truism that, in mortgage foreclosure proceedings, given the opportunity, something will almost always go wrong.

The often  microscopic examination of procedural and substantive claims by the Courts  appears to be a result of the unique and complicated technical requirements of the proceeding; the sometimes suspect papers trails resulting from bank failures, regulatory interventions and bulk assignments; and the inability of mortgagees-by-assignment to parlay the necessary original documents with an acceptable chain of title and an affiant with personal knowledge of the facts.

As a result, the Courts now regularly and routinely deny motions for summary judgment in mortgage foreclosure proceedings in situations that, in the past, would have sailed through the civil courts without particularly close scrutiny.  A few recent examples follow:

In HSBC Bank USA v. Squitieri, 29 Misc.3d 1225(A), 2010 WL 4723444, 2010 N.Y. Slip Op. 52000(U) (Sup. Ct.Kings Co. October 22, 2010), the Court (Rivera, J.) denied the bank’s motion for a judgment of foreclosure and an order of reference and granted the pro se defendant’s cross-motion to dismiss the complaint. The original mortgagee was Delta Funding Corporation. The recorded mortgage referred to the Mortgage Electronic Registration System (“MERS”) as the nominee of the mortgagee. MERS assigned the mortgage to HSBC.

Upon the bank’s motion for summary judgment in Squitieri, “no resolution or other proof of authority was submitted to the court” to prove that Delta Funding authorized MERS to assign the mortgage to the bank : “HSBC has submitted no evidence to demonstrate that the original lender, the mortgagee Delta Funding Corporation authorized MERS to assign the secured debt to [HSBC]”; so that “[t]o allow a purported assignee to foreclosure in the absence of some proof that the original lender authorized the assignment would throw into doubt the validity of title of subsequent purchasers, should the original lender challenge the assignment at some future date [;]” and, accordingly, “[HSBC] has not made out a prima facie case that it is entitled  to foreclose the mortgage in question.” *

In LNV Corp. v. Madison Real Estate, LLC, 2010 WL 5126043, 2010 N.Y. Slip Op. 33376 (U) (Sup. Ct. New York Co. December 6, 2010), the plaintiff sought to foreclose a mortgage originated in the name of Wall Street Mortgage Bankers LTD that, at the time the transaction took place, was assigned to MERS for the purpose of being recorded. MERS subsequently assigned the mortgage to LNV.  The defendant moved to dismiss the complaint on the ground, among others, that LNV did not have standing to sue.

In LNV Corp. the Court (York, J.) noted that “[i]n an action for foreclosure Plaintiff must show that it is the owner of the note as well as the mortgage at the time the action is commenced . . . .  Absent an effective transfer of the debt as well as the note, the assignment of the mortgage is void.”  The Court granted the motion to dismiss because “[i]n this case, Plaintiff has not provided any evidence which shows that when MERS assigned the mortgage to Plaintiff, it also transferred the interest in the underlying note . . . .  Without a transfer of title to the underlying note, Plaintiff cannot foreclose on the property based on default in payment and lacks standing [to sue].”

To the same effect:  LPP Mortgage Ltd. V. Sabine Properties, LLC, 2010 WL 3483923, 2010 N.Y. Slip Op. 32367 (Sup. Ct. N.Y. Co. August 27, 2010) in which the Court (Madden, J.) granted the defendant’s motion to dismiss a mortgage foreclosure action on the ground of lack of standing where MERS, as nominee, assigned the mortgage from Wall Street Bankers LPP to LPP Mortgage Ltd.:  “Sabine’s argument that MERS has not ownership rights in the note is dispositive here . . . .  [T]here are no allegations or evidence that MERS was the owner of the note such that it could assign [the note to the plaintiff.”

In HSBC Bank USA v. Baksh, 29 Misc.3d 1238(A), 2010 WL 5173185, 2010 N.Y. Slip Op. 52149(U) (Sup. Ct. Queens Co. December 20, 2010), a suit filed on June 12, 2009, the bank claimed that it was the holder of the note and the underlying mortgage by assignment; and, in turn, the defendant in his answer asserted several affirmative defense, including lack of standing.  The defendant made a CPLR 3211(a)(3) motion to dismiss several of the causes of the action in the bank’s complaint on the ground of failure to state a cause of action. In opposition to the motion the bank produced a copy of the note endorsed in blank on March 4, 2010.  The defendant “improperly asserted, for the first time, in his reply papers that plaintiff had failed to submit an affidavit from any witness, indicating when the endorsement of the note was made.” The Court (Markey, J.) denied the CPLR 3211 motion to dismiss “without prejudice to a motion for summary judgment [by defendant] dismissing the complaint asserted against him”– presumably on the ground that the bank lacked standing to sue at the time the proceeding was commenced.

In Aurora Loan Services, LLC v. Terence Thomas, 2010 N.Y. Slip Op. 33023(U) (Sup. Ct. Suffolk Co. October 14, 2010), the Court (Mayer, J.) denied a motion for a judgment of foreclosure because the plaintiff relied upon an unsigned transcript of an examination before trial and two out-of-state affidavits that the Court found were not in admissible form and lacked the certificate of conformity required by RPL Section 299-a(1).  Accordingly, “the motion for summary judgment fail[ed] to comport with the requirements of CPLR 3212 which requires affidavits by a person with knowledge [of the facts] in admissible form.” **

The Court in Aurora also granted the defendant’s motion to dismiss on the ground that the plaintiff lacked standing to sue. The action was commenced on July 14, 2006 based upon an assignment of mortgage dated July 28, 2006 and recorded on August 16, 2006. The assignment indicated that the effective date thereof was “on or before June 1, 2006.”  The Court held that “there [was] no evidence  to demonstrate [that  the plaintiff] owned the mortgage on July 14, 2006 when the action was commenced”; ‘[i]f an assignment is in writing, the execution date is generally controlling and a written assignment claiming an earlier effective date is deficient unless it is accompanied by proof that the physical delivery of the note and mortgage was, in fact, previously effectuated [;]”  and “[w]hile recognizing that in some circumstances parties to an agreement may bind themselves retroactively, the fiction of retroactivity should not be applied to affect adversely the rights of third persons, and a retroactive assignment cannot be used to confer standing upon the assignee in a foreclosure action commenced prior to the execution of the assignment [.]”

In Wells Fargo Bank, N.A. v. Meyers, 913 N.Y.S.2d 500, 2010 WL 5140352, 2010 N.Y. Slip Op. 20510 (Sup. Ct. Suffolk Co. November 10, 2010), the bank commenced a residential mortgage foreclosure proceeding and the defendants sought specific performance of a mortgage modification agreement. The borrowers had made three monthly payments in accordance with an accepted proposal under the New York State Home Affordable Modification Program (“HAMP”).   However, the bank subsequently withdrew a second proposal because “defendants’ current monthly housing expense was less than or equal to 31% of their gross monthly income.”

In Wells Fargo Bank the Court  (Sweeney, J.) held a settlement conference pursuant to CPLR 3408  “which was enacted in 2008 as part of New York’s comprehensive subprime lending reform legislation” and “requires a mandatory settlement conference in any residential foreclosure action involving a home loan in which the defendant is a resident of the property subject to foreclosure.”  The  Court noted that “[t]he purpose of the conference is to determine whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home[;]” and “[t]he statute [3408(f)] requires that both parties ‘negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible’.”

The Wells Fargo Court held several settlement conferences and heard testimony from both sides. “Tarlisha Nelson, a loss mitigation manager, testified for the plaintiff.  Nelson did not have any personal knowledge of the defendants’ case [and] reviewed the file for the first time the week of the hearing.” The Court found that “the defendants accepted the trial modification and made all the required monthly payments. The plaintiff then modified the payments and required a new trial period [and] [i]t is undisputed that the defendants again made all the monthly payments.”  The Court also found that, “[n]evertheless, the plaintiff denied the defendants’ request for a permanent modification based on their debt to income ratio. However, the record contains no evidence to support this determination. The letter sent to the defendants is conclusory and does not establish how the plaintiff made this determination.  The witness produced by the plaintiff had no personal knowledge of the decision and merely recited the figures in the plaintiff’s files. No evidence was submitted to demonstrate the actual calculation made by the plaintiff and whether the information used was correct.”

Based upon the record, “[u]nder the circumstances” the Court in Wells Fargo found that “the plaintiff has acted in bad faith” and “[i]n view of the Court’s broad equitable powers [found] that the appropriate remedy [was] to compel specific performance of the original modification agreement proposed by plaintiff and accepted by the defendants[.]”

In Sternr-Obstfeld v. Bank of America, 2011 WL 71476, 2011 N.Y. Slip Op. 21007 (Sup. Ct. N.Y. Co. January 4, 2011), the plaintiffs sought to prevent the bank from selling the cooperative apartment in which the plaintiffs resided, based on a default in paying the note secured by the apartment’s shares. The plaintiffs alleged that the notice of sale was defective and that the sale violated UCC 9-610 because it was not a commercially reasonable disposition of the collateral in that the value of the shares greatly exceeded the amount necessary to cure the default.

In Bank of America, the Court  (Gische, J.) found that the notice of sale was defective and could not serve as a predicate for the sale: “In late 2009, Governor Patterson signed a bill into law requiring certain notice to residential homeowners of cooperative apartments, intended for the homeowner’s protection, prior to disposition of collateral shares…The notice requirement, codified in section 611 of UCC article 9, is similar to the [Home Equity Theft Prevention Act] notice requirements associated with judicial foreclosure proceedings. Under UCC 9-611(f), a secured party must send a specific type of notice to a homeowner 90 days prior to the sale or other disposition of cooperative shares held as collateral. The lender must also send the homeowner a notice 10 days prior to the disposition.”

The Court in Bank of America found that the notices sent by the bank “[did] not comply with UCC 9-611(f)’s requirements in terms of timing, the type-size or the information to be provided[;]” and, accordingly, “granted [plaintiffs’ motion] only to the extent that the sale is stayed until such time that defendant otherwise serves new notices that otherwise comply with the requirements of UCC article 9[.]”

          In CWCapital Asset Management LLC v. Great Neck Towers LLC, 2010 WL 4567829, 2010 N.Y. Slip Op. 33143(U) (Sup. Ct. Nassau Co. October 29, 2010), the plaintiff in a mortgage foreclosure action moved to dismiss the affirmative defenses and counterclaims in the defendants’ answer on the ground of failure to state a defense or claim.   The defendants alleged, in part, that the day before the closing of a $46.5  million commercial  loan, the  plaintiff’s predecessor refused to distribute $2.5 million of the loan proceeds as a “holdback reserve” on which  the defendants were nevertheless required to pay interest.  The bank allegedly refused to release funds to remedy an unsafe condition in the garage, as a result of which a major tenant was lost.  The defendants also alleged that the plaintiff delayed the required approval of the renewal of another tenant’s lease, creating uncertainty among prospective tenants and thereby impeding the marketability of other vacant space.  The defendants further alleged that they were fraudulently induced to continue managing the building after assigning the right to collect rent to the plaintiff.

The Court (Warshawsky, J.)  in CWCapital noted that “[w]hen determining a motion to dismiss for failure to state a cause of action under [CPLR] 3211 (a) (7), the pleadings must be afforded a liberal construction, facts as alleged in the complaint are accepted as true, and the plaintiff is accorded the benefit of every favorable inference, and the court must determine only whether the facts alleged fit within any cognizable legal theory.”  Upon the foregoing analysis the Court permitted the challenged affirmative defenses and counterclaims to stand:  “The Court’s role in deciding this motion is simply to determine whether or not the foregoing allegations can reasonably be interpreted to constitute a claim under any valid legal theory. At the very least, defendants have asserted a breach of the obligation of good faith and fair dealing inherent in every contract. The last minute withholding [of] $2,500,000, allegedly not provided for in any commitment or other agreement, the refusal to make such funds available for the performance of emergency repairs, or essential maintenance, the obtaining of further services of defendants upon a false promise to utilize rental income for maintenance, and the poisoning of the  relationship between landlord and tenants, resulting in breaches of the obligation of tenants to make rental payments constitute allegations of actionable conduct on the part of plaintiffs.”

In Emigrant Mortgage Company, Inc. v. Eugene R. Daniels III, 2010 WL 3940886, 2010 N.Y. Slip Op. 32720(U) (Sup. Ct. New York Co. October 1, 2010) the plaintiff sought an order confirming the report of the referee who computed the amount due and for a judgment of foreclosure and sale.

Although the motion was unopposed, and the “the referee’s report seem[ed] to be in order,” in Emigrant Mortgage  the Court (Feinman, J.) nevertheless denied the motion “without prejudice” because “[t]here [was] insufficient proof of the non-military status of the defaulting individual defendants, who [were] necessary parties” in the proceeding.  The Court further stated that “although the two mortgagors of the premises interposed an answer, none of the other individual defendants, presumably tenants in the building, answered, appeared, or waived an appearance, and it is unclear whether, in this time of war, their defaults were due to their military status.”

In Onewest Bank, F.S.B. v. Drayton, 29 Misc.3d 1021, 910 N.Y.S.2d 857, 2010 N.Y. Slip Op. 20429 (Sup. Ct. Kings Co. October 21, 2010), the Court (Schack, J.) was called upon to decide an application for an order of reference “in the midst of the present national media attention about ‘robo-signers’.”

After a detailed discussion of the facts, in Onewest Bank the Court dismissed the action without prejudice, finding that the individual who signed assignment documents on behalf of MERS “[was] not an officer of MERS,” “ha[d] no idea how MERS is organized and [did]not know why she sign[ed] assignments as a MERS officer.”  The witness also “admitted that the MERS assignments she execut[ed] [were] prepared by an outside vendor… which shipped the documents to her Austin, Texas office from Minnesota.”  And “she admitted executing  MERS assignments without a notary public present” and that “after the MERS assignments [were] notarized they [were] shipped back [to the vendor] in Minnesota.” [In any event, the Court also found that MERS did not have authority to assign the mortgage.]

Lessons learned:

When representing the mortgagee in a foreclosure suit– confirm that:

* the material documents were properly notarized and, if required, certified.

* all assignments were properly authorized and implemented.

* any affiants or deponents have personal knowledge of the facts.

* compliance with all pre-foreclosure statutes.

* the mortgagee has possession of all original documents.

Hey, let’s be careful out there.

-Sgt. Phil Esterhaus, Hill Street Blues

              * Cf. Mortgage Electronic Registration System v. Coakley, 41 A.D.3d 674, 838 N.Y.S.2d 622 (2d Dept. 2007).

** Cf. Hall v. Elrac, Inc., 79 A.D.3d 427, 913 N.Y.S.2d 37 (1st Dept. December 2, 2010) in which the Appellate Division held that an imperfection in the notarization and certification of an affidavit may, under certain circumstances, be cured nunc pro tunc.

Victor M Metsch is a Senior Litigation/ADR Partner at Hartman & Craven LLP.

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