Wells Fargo Bank, N.A. v Meyers, Appellate Division Second Department 34632/2009

The courts continue to wrestle with the scope of the appropriate remedies for lenders that fail to negotiate residential mortgage modifications in good faith.  Now the Appellate Division, Second Department has weighed in.  In Wells Fargo Bank N.A. v. Meyers, the Second Department upheld the trial court’s determination that the lender failed to negotiate in good faith as required by CPLR 3408(f), but rejected the remedy the trial court formulated.

In this case, the lender offered the borrower a trial modification and the borrower made all of the required payments under the trial modification, but the lender commenced foreclosure proceedings nonetheless.  Thereafter, the lender offered a second trial modification which the borrower complied with, but Freddie Mac would not approve the modification.

After determining that the lender had acted in bad faith, the trial court order the lender to execute a final loan modification based on the terms of the original modification proposal and dismissed the complaint.   While the Appellate Division affirmed the trial court’s finding that the lender failed to negotiate in good faith, it could not affirm the trial court’s proposed remedy.

The Appellate Division held that requiring the lender to sign an agreement was not a permissible remedy.  The court wrote that imposing such a remedy would undermine the stability of contracts and violate the contracts clause of the United States Constitution (Art. I Sec. 10).  In essence, the Second Department determined that even if lenders act in bad faith, courts do not have the authority to compel lenders to agree to loan modifications.  Thus, the Second Department remanded the matter to the trial court for the selection of an alternative remedy.

The Second Department noted that CPLR 3408 does not specify any particular sanctions a court can impose for bad faith.   Thus, the court wrote that “in the absence of further guidance from the Legislature or the Chief Administrator of the Courts, the courts must prudently and carefully select among available and authorized remedies, tailoring their application to the circumstances of the case.”

The lesson of Wells Fargo v. Meyers is that the courts will demand that lenders negotiate fairly with distressed residential borrowers, but they cannot force the lenders to accept loan modifications on terms imposed by the courts.