A Brooklyn
appellate court honed in on appropriate remedies when lenders fail to act in
good faith during foreclosure settlement conferences, upholding a lower court's
cancellation of accruing interest and prohibition of collecting legal fees.
The Appellate
Division, Second Department, in US Bank National Association v.
Williams, 2014-00206, authorized the remedies in a
ruling that observers said is the first of its kind for state foreclosure
litigation since rules obliging good faith negotiations were enacted.
Nevertheless,
the unsigned decision Wednesday modified the remedies in the case to correct
remedies that were contingent on the entering of a loan modification. In doing
so, the panel said it was erroneous to direct a lender to submit a proposed
loan modification order because the lower court had no authority to force
agreement.
SEE DECISION BELOW*
_______________________________
Decided on October 29, 2014
SUPREME COURT OF THE STATE OF NEW YORK Appellate Division, Second Judicial
Department
PETER B. SKELOS, J.P.
SHERI S. ROMAN
SYLVIA O. HINDS-RADIX
HECTOR D. LASALLE, JJ.
2014-00206
(Index No. 3685/10)
[*1]US Bank National Association, etc., appellant,
v
Fay Williams, respondent, et al., defendants.
Hogan Lovells US LLP, New York, N.Y. (David
Dunn, Chava Brandriss, and Allison Funk of counsel), for appellant.
Jaime Lathrop, Brooklyn, N.Y. (David Lavery
of counsel), for respondent.
DECISION & ORDER
In an action to foreclose a mortgage, the
plaintiff appeals, as limited by its brief, from so much of an order of the
Supreme Court, Kings County (Velasquez, J.), dated November 18, 2013, as denied
that branch of its motion which was to reject the report of a referee dated May
8, 2012, made after settlement conferences pursuant to CPLR 3408, confirmed
stated portions of the referee's report, and upon, in effect, denying the
defendant Fay Williams's motion to hold it in civil contempt, directed it to review
the defendant Fay Williams for an affordable mortgage loan modification
pursuant to the Home Affordable Modification Program using payoff figures from
June 2010 and to submit a proposed loan modification order to the defendant Fay
Williams and the court, canceled all interest accrued on the subject mortgage
loan between the date of the initial settlement conference in June 2010 and the
date that the parties agree to a loan modification, barred it from charging the
defendant Fay Williams any attorney's fees or costs incurred in this action,
and directed it, within 60 days, to provide the defendant Fay Williams with a
payoff statement which incorporates the cancellation of interest from June 2010
and which does not assess any attorney's fees or costs incurred in this action.
ORDERED that the order dated November 18,
2013, is modified, on the law, on the facts, and in the exercise of discretion,
(1) by deleting the provision thereof directing the plaintiff to submit a
proposed loan modification order to the defendant Fay Williams and the court,
(2) by deleting the provision thereof canceling interest accrued between the
date of the initial settlement conference in June 2010 and the date that the
parties agree to a loan modification, and substituting therefor a provision
canceling interest accrued between the date of the initial settlement
conference in June 2010 and the date on which settlement negotiations
recommence, (3) by deleting the provision thereof barring the plaintiff from
charging the defendant Fay Williams any attorney's fees or costs incurred in
this action, and substituting therefor a provision barring the plaintiff from
charging the defendant Fay Williams any attorney's fees or costs incurred in
this action between the date of the initial settlement conference in June 2010
and the date on which settlement negotiations recommence, (4) by deleting the
provision thereof directing the plaintiff, within 60 days, to provide the
defendant Fay Williams with a payoff statement which incorporates the cancellation
of interest from June 2010 and which does not assess any attorney's fees or
costs incurred in this action, and substituting therefor a provision directing
the plaintiff, within 60 days from service upon it of a copy of this decision
and order, to provide the defendant Fay Williams with a payoff statement which [*2]incorporates the cancellation of interest accrued
between the date of the initial settlement conference in June 2010 and the date
on which settlement negotiations recommence and which does not assess any
attorney's fees or costs between the date of the initial settlement conference
in June 2010 and the date on which settlement negotiations recommence, (5) by
deleting the provision thereof denying that branch of the plaintiff's motion
which was to reject the referee's report and substituting therefor a provision
granting that branch of the plaintiff's motion to the extent indicated
hereinabove, and (6) by deleting the provision thereof confirming stated
portions of the referee's report and substituting therefor a provision
confirming those stated portions to the extent indicated hereinabove; as so
modified, the order dated November 18, 2013, is affirmed insofar as appealed
from, with one bill of costs to the defendant Fay Williams, and the matter is
remitted to the Supreme Court, Kings County, for further proceedings consistent
herewith.
In June 2006, the defendant Fay Williams and
nonparty Credit Suisse Financial Corporation (hereinafter Credit Suisse) agreed
to an adjustable rate mortgage loan in the sum of $516,800 for property located
in Brooklyn (hereinafter the property). The terms of the mortgage note provided
that in the event of default, Williams would pay the mortgagee's attorney's
fees and costs. The defendant Mortgage Electronic Registration Systems
(hereinafter MERS) recorded the mortgage as nominee for Credit Suisse. In July
2009, Williams allegedly defaulted on the mortgage note. In February 2010, MERS
purportedly assigned the mortgage note to the plaintiff, US Bank National
Association, as Trustee for CSMC ARMT 2006-3 (hereinafter US Bank).
In February 2010, US Bank commenced this
action to foreclose on the mortgage. US Bank never appeared for mandatory
conferencing. Instead, nonparty servicer ASC/Wells retained nonparty Steven J.
Baum, P.C. (hereinafter Baum, and hereinafter collectively with ASC/Wells and
US Bank, the foreclosing parties), to prosecute the action and participate in
foreclosure conferencing. Between June 2010 and July 2011, Baum and Williams
participated in 10 settlement conferences, during which Baum represented that
Williams might qualify for loan modification via the federal Home Affordable
Modification Program (hereinafter HAMP) and repeatedly asked her to submit
additional documentation regarding the HAMP application. In July 2011, the
foreclosing parties advised the Supreme Court that, notwithstanding their prior
representations, US Bank had denied review of Williams's HAMP application
because it was contractually prohibited by a 2006 Pooling and Servicing
Agreement (hereinafter PSA) from modifying the interest rate or term of the
mortgage.
In a referee's report dated May 8, 2012, the
referee found, inter alia, that the foreclosing parties failed to negotiate in
good faith for more than a year, prolonged the workout process, and wasted
judicial resources by causing Williams to submit multiple HAMP applications and
to attend numerous settlement conferences, even though they knew the PSA
prohibited US Bank from modifying the applicable interest rate or term.
Accordingly, the referee recommended an order (1) directing ASC/Wells to review
Williams for an affordable loan modification under HAMP using payoff figures
from June 2010 and to submit a proposed modification offer to Williams and the
court; (2) directing the parties to appear for a hearing to determine whether
to impose sanctions against the foreclosing parties for failure to negotiate in
good faith; (3) barring US Bank from recovering an attorney's fee and costs
from Williams; and (4) tolling all interest accrued on the mortgage note
between the initial conference date in June 2010 and the date on which the
parties enter into a loan modification agreement.
By order dated July 2, 2012 (hereinafter the
July 2012 order), the Supreme Court, on its own initiative, in effect,
confirmed the relevant provisions of the referee's report. In September 2012,
the Supreme Court directed the parties to make a further attempt at
modification. The foreclosing parties subsequently refused to offer loan
modification to Williams due to US Bank's refusal to allow reductions in the
interest and term. On or about April 23, 2013, US Bank provided a payoff
statement to Williams which included interest accrued since June 2010 and an
attorney's fee incurred in the action.
On or about July 5, 2013, Williams moved to
hold US Bank in civil contempt based on its failure to comply with the
provisions of the July 2012 order directing it, in effect, to provide a payoff
statement excluding accrued interest since the date of the initial settlement
conference in [*3]June 2010 and charges for an
attorney's fee and costs. US Bank opposed the motion and moved to vacate the
July 2012 order and reject the referee's report. The Supreme Court accepted US
Bank's contention that it had no notice of the referee's report or of the
court's order confirming it, and thus, the court treated US Bank's motion as a
timely motion to reject the referee's report.
In the order appealed from, the Supreme
Court, in effect, denied Williams's motion to hold US Bank in civil contempt
and denied that branch of US Bank's motion which was to reject the referee's
report. The Supreme Court also, in effect, granted that branch of US Bank's
motion which was to vacate the July 2012 order and, thereupon, confirmed the
referee's report to the extent of directing US Bank to review Williams for an
affordable mortgage loan modification pursuant to the HAMP using payoff figures
from June 2010 and to submit a proposed loan modification order to Williams and
the court, canceling all interest accrued on the subject mortgage loan between
the date of the initial settlement conference in June 2010 and the date that
the parties agree to a loan modification, barring US Bank from charging
Williams any attorney's fees or costs incurred in this action, and directing US
Bank, within 60 days, to provide Williams with a payoff statement which
incorporates the cancellation of interest from June 2010 and which does not
assess any attorney's fees or costs incurred in this action. US Bank appeals.
"A foreclosure action is equitable in
nature and triggers the equitable powers of the court" (Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d
835, 836; see Notey v Darien Constr. Corp., 41 NY2d 1055, 1055-1056;
Mortgage Elec. Registration Sys., Inc. v Horkan, 68 AD3d
948, 948). " Once equity is invoked, the court's power is as broad as
equity and justice require'" (Mortgage Elec. Registration Sys., Inc. v
Horkan, 68 AD3d at 948, quoting Norstar Bank v Morabito, 201 AD2d
545, 546).
The record supports the referee's finding
that the foreclosing parties failed to negotiate in good faith. Thus, the
Supreme Court properly directed US Bank to review Williams for HAMP
modification, in light of the referee's findings, in effect, that it had thus
far failed to fulfill its statutory obligation to do so (see Wells Fargo Bank, N.A. v Meyers, 108 AD3d 9,
23).
However, the Supreme Court erred in directing
US Bank to submit a proposed loan modification order to Williams and the court,
as the court was without authority to force parties to reach an agreement (see Flagstar Bank, FSB v Walker, 112 AD3d 885, 886; Wells
Fargo Bank, N.A. v Meyers, 108 AD3d at 20, 22).
Contrary to US Bank's contention, the Supreme
Court providently exercised its discretion canceling certain interest accrued
on the mortgage note after June 2010. "In an action of an equitable
nature, the recovery of interest is within the court's discretion. The exercise
of that discretion will be governed by the particular facts in each case,
including any wrongful conduct by either party" (Dayan v York, 51 AD3d 964, 965 [citations omitted]; see
CPLR 5001[a]; Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d at
837; Danielowich v PBL Dev., 292 AD2d 414, 415). The record demonstrates
that the foreclosing parties repeatedly represented to the referee and to
Williams that they were considering Williams for HAMP loan modification and
repeatedly demanded that Williams submit additional documentation in support of
that application, notwithstanding the prohibition against such a modification
in the PSA, which they did not disclose until approximately 13 months after
negotiations began. Under these circumstances, the Supreme Court providently
exercised its discretion in finding that US Bank was not entitled to collect
interest accrued as a result of its wrongful conduct (see generally US Bank
N.A. v Sarmiento, ____ AD3d ____, 2014 NY Slip Op 05533 [2d Dept 2014]; Norwest
Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d at 836; Dayan v York,
51 AD3d at 965).
However, the Supreme Court improvidently
exercised its discretion in canceling interest accrued between June 2010 and
until such date as the parties agreed to loan modification, as the Supreme
Court lacked authority to force US Bank to agree to modify the mortgage note (see
Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 20; Flagstar Bank, FSB v
Walker, 112 AD3d at 886). Rather, the court should have directed cancellation
of interest accrued between June 2010 and the date on which settlement
negotiations recommence (see Wells Fargo Bank, N.A. v Meyers, 108 [*4]AD3d at 20; Norwest Bank Minn., NA v E.M.V.
Realty Corp., 94 AD3d at 837; Dayan v York, 51 AD3d at 965-966; Preferred Group of Manhattan, Inc. v Fabius Maximus, Inc.,
51 AD3d 889, 890; Danielowich v PLB Dev., 292 AD2d at 415).
Further, the Supreme Court erred in barring
US Bank from charging Williams an attorney's fee and costs incurred as a result
of the action, as that provision of the order constituted an improper attempt
to rewrite the mortgage note. Instead, upon its finding that the Referee's
report was supported by the record, that sanctions were appropriate, and, in
effect, that US Bank still was obligated pursuant to CPLR 3408(f) to negotiate
in good faith, the court should have barred US Bank from charging Williams an
attorney's fee and costs incurred between the date of the initial settlement
conference and the date on which settlement negotiations recommence (see
Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d at 837; Dayan v
York, 51 AD3d at 965-966; Preferred Group of Manhattan, Inc. v Fabius
Maximus, Inc., 51 AD3d at 890; Danielowich v PLB Dev., 292 AD2d at
415).
US Bank's remaining contentions are without
merit.
SKELOS, J.P., ROMAN, HINDS-RADIX and LASALLE,
JJ., concur.
ENTER:
Aprilanne Agostino
Clerk of the Court
