Tardy Foreclosure Answer Should Be Accepted, Panel Says
Saying it was best to decide cases on the merits, a divided Manhattan appellate court ruled that a judge should have compelled a bank to accept a homeowner's late answer in a foreclosure action.
The 3-2 majority of the Appellate Division, First Department, panel said the "relatively short delay" that was mostly connected to ongoing settlement conferences did not harm the bank.
Moreover, with "serious issues" regarding the ownership of the mortgage and note, the unsigned majority in HSBC USA v. Lugo, 13454, said Tuesday "these issues are best resolved on the merits, as opposed to on default."
The majority modified a lower court ruling to grant the borrower's bid to compel acceptance of the untimely answer. The panel otherwise affirmed the lower court, which denied a motion to dismiss the case.
Justice Peter Tom, however, said the outcome resulted "in the exception swallowing the rule. If reaching the merits is the paramount goal, a court need never consider the statutory prerequisites for the grant of relief from a default—namely, a reasonable excuse and the demonstration of the merits of the defense."
Tom added that the majority was inaccurate in saying the delay was linked to settlement talks. And "even on appeal, defendant supplies no excuse for the delay in answering," he said.
The matter arose from a 2006 Bronx mortgage between New Century Corporation and Betty Lugo, which was worth $271,360.
New Century purportedly assigned the mortgage to HSBC Bank. The mortgage was serviced by Bank of America.
The foreclosure was filed in 2009, with Lugo having a default balance of almost $269,000.
Although there is a 30-day clock to submit an answer or motion to the opposing side once service is complete, Lugo's brief said her counsel tried unsuccessfully to ask for extensions with the bank's counsel at Steven J. Baum P.C.
Lugo served an answer in February 2010, approximately five months after getting the summons and complaint, but the Baum firm rejected the answer as improperly served.
In any event, the bank acknowledged that from September 2009 to June 2011, it put the foreclosure matter on hold while the sides tried to negotiate a settlement, including a possible short sale.
In the aftermath of Hurricane Irene, the case was further put on hold from September 2011 to November 2011.
Almost two years after the answer's rejection, Lugo attempted to dismiss the case, or at least force the bank to accept her untimely answer.
The majority said Thompson correctly denied dismissal. Among other things, Lugo waived her right to argue the complaint was abandoned because she did not complain when the bank treated her answer as a notice of appearance and she made document requests to the bank.
Still, "in light of the strong public policy of this state to dispose of cases on their merits, the motion court improvidently exercised its discretion in denying defendant's motion to compel acceptance of her untimely answer," the majority said.
The circumstances of the case showed Lugo's delay was not willful, the majority found. She also had an "arguably meritorious affirmative defense" pertaining to standing, the panel said, noting the absence of a note and mortgage in the record and an undated assignment.
Yet Tom said it was the "rare appellate case" where the majority's reasoning was applied to a motion to compel acceptance of an answer. He said Lugo, who did not use the premises as a principal residence, benefitted to the bank's detriment.
Considering the loss of interest on the debt and the property's carrying costs, Tom said, "it also cannot be said that plaintiff will not continue to sustain prejudice as a result of further delay in recovering the property."
Robert Brill and Anita Jaskot of the Law Offices of Robert M. Brill in Manhattan represented Lugo on appeal.
In an interview, Brill said the majority concluded it was "incumbent on the courts to permit that which our system does best: to allow facts to be turned into evidence, presented to the court either for final judgment or trial."
Geraldine Cheverko, then with Eckert Seamans Cherin & Mellott in White Plains, represented the plaintiffs.