Patmos Fifth Avenue Real Estate Inc. v. Mazel Building LLC, New York County Supreme Court Index No. 108421/2011.

Real Property Law § 320 restricts a lender’s ability to accept a conveyance of a deed where the conveyance is intended to be a security in the nature of a mortgage. Defaulting borrowers, however, sometimes will deliver a deed in escrow to a lender on the promise that the deed will remain in escrow as long as they make payments under a mortgage modification plan.  This case shows that this strategy can carry risks for the lender. 

In this action, the plaintiff alleged that it was fraudulently induced to make certain investments into a condominium project.  As part of the investment, the plaintiff purchased condominium units with a purchase money mortgage from one of the defendants.  After the plaintiff defaulted on the mortgage, the plaintiff executed an agreement pursuant to which it agreed to deliver an executed deed to the premises to two of the defendants.  The deed was to be held in escrow and only released to the defendants if the plaintiff failed to make certain payments.

 Real Property Law § 320 provides that where a deed “appears to be intended only as a security in the nature of a mortgage, although a conveyance in absolute terms, must be considered a mortgage. . . . .”  On the facts of this case, the court held that plaintiff had stated a claim that the deed in escrow was, in fact, intended only as a security in the nature of a mortgage.  Accordingly, the Court refused to dismiss the plaintiff’s claim under Real Property Law § 320.

The lesson of Patmos Fifth Avenue Real Estate then is that lenders must be extremely careful when taking a deed in escrow and document the transaction in such a manner that it does not appear as if the deed is being held in escrow as a mere substitute for a mortgage.

 

 

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 lender’s 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’s complied with, but Freddie Mac would not approve the modification. 

After determining that the lender had not acted in good faith, the trial court directed that Wells Fargo 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.

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 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 a lender acts in bad faith, the courts do not have the authority to compel lenders to agree to loan modifications that are not acceptable to them.  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.

Federal National Mortgage Association v. Quadrozzi, Supreme Court, Kings County, Index No. 25485/2009

Many times it is the simple things that trip up mortgage foreclosure plaintiffs.  This case is an example.  In this mortgage foreclosure action, the court denied the lender’s motion to renew after first denying the lender’s motion for summary judgment in foreclosure.  The lender alleged that once the loan went into default, it notified the borrower of the need to cure its default and that it would accelerate the loan if the default was not cured within thirty days.  The lender claimed it sent its notice by first class mail.  The trouble was the lender did not have competent proof of the mailing; that is, it was missing a contemporaneous affidavit of service.  Based upon these facts, the court denied the lender’s motion for summary judgment.

After the court denied the lender’s summary judgment motion, the lender moved to renew. On its motion to renew, the lender alleged that the default and acceleration notice mailing was handled by an outside vendor, Arkansas Mailing Services Corp.  The owner of Arkansas Mailing Services Corp. submitted what appeared to be a competent affidavit demonstrating that the default and acceleration notice was properly mailed.

Nevertheless, the Court denied the motion to renew.  The court held that the lender failed to present a reasonable justification for not including the information from Arkansas Mailing Services Corp. as part of its original motion for summary judgment in foreclosure.

The lesson of Federal National Mortgage Association v. Quadrozzi then is that lender’s must take care to properly assemble their proofs when moving for summary judgment in foreclosure.  Courts may not provide them with a second chance.

 JFK International Air Cargocentre LLC v. The Port Authority of New York and New Jersey, New York County Supreme Court, Index No. 650345/2008

As most New York real estate lawyers know, the Statute of Frauds requires that leases for terms of longer than one year be written.  General Obligations Law § 5-703(a)(1).  But what kind of “writing” does the Statute of Frauds require?

In Air Cargocentre, the plaintiff contended that a memorandum of understanding, which expressly stated it was non-binding, a term sheet and a resolution of the Port Authority’s Board of Directors authorizing its Executive Director to enter into a 27 year lease (subject to the approval of the Board’s General Counsel) constituted a sufficient writing to defeat the Port Authority’s Statute of Frauds defense. 

The court rejected this argument.  Instead, the Court held that the writings did not contain “substantially the whole agreement, and all its material terms and conditions.”  The court further wrote that the draft lease agreements that were exchanged, but not signed went “well beyond those terms and conditions that were outlined in the Board resolutions and minutes, even when read in conjunction with the executive term sheet.”

The court further held that a lease could not be found because the Port Authority’s request for proposal, and the draft lease agreements themselves expressly provided that the Port Authority would not be bound until a lease was executed by a Port Authority officer and delivered to the lessee. 

The lesson of Air Cargocentre is that when sophisticated parties negotiate complicated lease agreements and include the correct protections in the drafts, courts will not find binding agreements unless the lease is reduced to a fully executed agreement containing all material terms.

U.S. Bank v Shinaba, Bronx County Supreme Court, Index No. 381917-2009

This case provides another example of New York courts coming down on residential  lenders that fail to participate in the statutorily mandated settlement process in good faith. In this residential mortgage foreclosure case, Judge Robert Torres found that the lender never properly evaluated the borrower for relief under the Home Affordable Modification Program (“HAMP”) even after two years.  The borrower attended seventeen settlement conferences; she timely submitted multiple HAMP applications; and timely complied with ever request for financial information.  She also successfully completed two trial periods.  The Court found that the lender, for the most part, “ignored her application” and failed to accurately compute NPV as to the borrower’s HAMP eligibility.  The Court also found the lender “egregiously failed to comply with the rules regarding timely review and notice.”

The Court directed the lender to provide a “supportable answer” on her HAMP loan modification and to give a “full and detailed explanation” if the application was denied.  Further, the Court directed that in the event the lender denied the HAMP application, it was to consider the borrower for a Principal Reduction Alternative (“PRA”).  The Court also assessed costs against the lender equal to the interest, late fees, and attorneys fees that had accrued on the loan since the date the Court determined that review of the borrower’s HAMP application should have been completed.

The lesson of U.S. Bank v Shinaba is that, at least in Judge Torres’s court, lenders will be required to demonstrate strict compliance with all HAMP deadlines on pain of losing accrued fees and interest.

 

 

 

An Office of Court Administration report shows substantial growth in mortgage foreclosure filings in New York.  The report shows that in 2013, through October, nearly 34,000 new mortgage foreclosure cases were filed.  That is on track to surpass the number of mortgage foreclosure cases in 2011 and 2012 combined.

The mortgage foreclosure crisis was supposed to be easing.  What explains this dramatic rise?  The report contends that mortgage foreclosure filings decreased substantially in 2010 when Chief Judge Jonathan Lippman instituted a regulation requiring counsel representing lenders foreclosing on residential mortgages to file affirmations of merit.

The report argues that lenders’ counsel has now adjusted to this new requirement and is winnowing down the backlog of cases that were not brought during this period of adjustment.  (Effective August 30, 2013, Chief Judge Lippman’s affirmation requirement was replaced with the statutorily mandated certificate of merit.)

The increase in mortgage foreclosure filings has resulted in additional strains on New York’s Court system, which continues to  struggle with tight budgets.  In addition to having judges available to cover the increased volume of cases, the court system must also make personnel available to handle the increase volume of mandatory settlement conferences in residential mortgage foreclosure cases.

How the courts will cope with this increase in mortgage foreclosure filings remains to be seen.

Piller v. Marsam Realty 13th Avenue, LLC, Kings County Supreme Court Index No. 500141/2013

Kings County Commercial Division Justice Carolyn Demarest recently wrestled with a question that continues to confront New York real estate lawyers frequently, namely: when is a Letter of Intent a binding contract?  In this case Justice Demarest held that the parties had not made a contract.

Piller involved the acquisition of real property in Kings County.  On December 3, 2012, the parties signed a seventeen-page letter of intent that contemplated the purchase of the property for $14,250,000.  The sale was to be a contract-close. That is the contract of sale would be signed and the closing would occur on the sale day.  The letter of intent provided that closing was to be not later than December 31, 2012. (Recall that in late 2012, fears of the so-called fiscal cliff created pressure to close transactions before the 2012 year-end.)

On summary judgment, Justice Demarest held the Letter of Intent was not a binding  contract and granted defendants summary judgment dismissing the complaint.  A significant fact influencing Justice Demarest’s opinion was that the plaintiff had not paid a contract deposit.  In fact, at one point during the negotiations, the defendants sought to obtain a contract deposit, which the plaintiff refused to provide.  Indeed the plaintiff’s rationale for refusing to provide a contract deposit was that doing so would create a contract.  Thus, the plaintiff was trapped by his own words and Justice Demarest granted Defendant’s motion to dismiss.

The lesson of Piller is that if it walks like a letter of intent and talks like a letter of intent and is not accompanied by a contract deposit; it isn’t a contract.

Many real estate related disputes in New York City are heard in the Supreme Court’s  Commercial Division  In New York City, New York County, Kings County and Queens County have Commercial Division parts.

Recently, the Commercial Division Advisory Counsel, a task force created by Chief Justice Jonathan Lippman, released a series of recommendations that, if adopted, will affect the manner in which Commercial Division cases are litigated.  The recommendations include a proposed revision to the Preliminary Conference Form used in cases assigned to the Commercial Division, limits on the use of interrogatories in Commercial Division cases, a consensual program of accelerated adjudication procedures and a pilot mandatory mediation program.

The proposed new Preliminary Conference Form greatly increases its length. Its most salient new features include a section where the parties can address issues concerning electronic discovery and a section where the parties can address expert discovery.  Both of these sections appear designed to move the practice in commercial division cases closer to federal court practice.

Similarly, the Advisory Counsel’s recommendations concerning interrogatories also mirror federal practice.  The recommendations propose limiting the number of interrogatories to twenty-five and limiting the topics to the identification of witnesses,  the computation of damages and the location and custodian of relevant documents.  The proposed new rule also permits the service of contention seeking interrogatories after the conclusion of other discovery.

The Advisory Committee’s proposed  Accelerated Adjudication Program is entirely consensual, that is the parties must both opt in.  But the Accelerated Adjudication Program provides  for significant, time saving, revisions to the usual pattern of a New York State court case.  If the Advisory Committee’s program is adopted, parties may, at the outset of their case,  voluntarily waive: objections based upon lack of personal jurisdiction; the right to a jury; punitive damages claims; and the right to take interlocutory appeals.  The proposed accelerated adjudication program also contains provisions designed to significantly limit the scope of discovery.  Here, the Advisory Committee’s proposal seems to have taken its cue from arbitral forums and not the Federal Rules.

Finally, the Advisory Committee’s proposed Pilot Mandatory Mediation Program provides that one in every five cases filed in the Commercial Division would be assigned to mandatory mediation to be completed within 180 days unless all parties opted-out of  the mediation or good cause is shown that mediation would be ineffective or unjust.

The Advisory Committee’s proposals, if adopted, have the potential to significantly alter Commercial Divisions practice.  Counsel with commercial real estate practices should be cognizant of these changes.

NYCHPD v. Deutche Bank National Trust Co., Richmond County Civil Court HP Index # 115/2013

Judge Philip Straniere has ruled that a lender that obtained a judgment of foreclosure and sale, but had not proceeded to auction, is responsible for the costs of repairs ordered by HPD.

Mysteriously, seemingly knowledgable legislators passed statutes permitting government agencies to finance mortgage loans  in amounts for more than the property is worth, to people who could not afford to pay, without the need to document such things as income, and then to allow the chopping up the loans into little pieces to sell to new investors, so that if a borrower defaulted in repayment of the loan, the lender would not have the ability to prove it actually owned the debt. . . .

Real Property Actions and Proceedings Law § 1307, provides that a  lender, upon obtaining a judgment of foreclosure and sale, has a duty to maintain residential premises even before the actual sale occurs, if the owner/borrower has abandoned the property.  In this case, the court held that HPD was entitled to conclude that the owner/borrower had abandoned the property pursuant to Real Property Actions and Proceedings Law § 1971.

Because it was evident that the lender would not effectuate any of the HPD-ordered repairs, the court found that HPD was entitled to a lien on the property for the costs of the repairs that HPD performed. Such a lien would be superior to the lender’s mortgage debt.  Thus, if the property ever was sold at a foreclosure sale, the proceeds would first be used to pay HPD’s repair costs.

The court did not address what would happened if the lender was the successful credit bidder at the auction, but, presumably, the lender would either need to pay HPD’s lien or it would obtain the property subject to HPD’s lien, which, of course, would affect the property’s marketability.

The lesson of NYCHPD v. Deutche Bank is that as long as a lender is going to the trouble of  obtaining a judgment of foreclosure and sale, it should follow through and commence the auction and sell the property as promptly as the statutes allow. (Prior to the sale the referee appointed to sell the property must publish notice of the sale in a newspaper for at least three consecutive weeks.)  Lenders are foolish to undertake all the effort required to get a judgment of foreclosure and sale only to abandon there efforts right before the foreclosure sale.

In NYCHPD v. Deutche Bank, the owner/borrower had defaulted in the mortgage foreclosure action.  Apparently more than five years after the action was commenced, the owner/borrower sought and obtained a stay of the action claiming he was not served with process – a favorite defense of defaulting borrowers everywhere.  This, of course, highlights the value of obtaining the best proof of service possible when bringing a mortgage foreclosure action.

The court’s opinion provides no explanation as to why it took five years for the lender to prosecute an unopposed mortgage foreclosure action.  (Foreclosing, even when unopposed, is time consuming, but five years is inordinately long.)  However, there are indications in the court’s opinion that the lender made several mistakes in the details of its foreclosure prosecution.  Included among these mistakes was failing to correctly name the owner of the loan in the caption of the foreclosure action.

The court’s opinion makes its frustration evident and the court uses portions of its opinion as a platform to criticize just about everyone associated with the 2008 mortgage foreclosure crisis.    In one particularly sarcastic paragraph the court wrote:

Apparently, Maleficient, the evil fairy from “Sleeping Beauty” having realized Briar Rose had beaten her curse, and having been unsuccessful in screwing up the world’s computers when 2000 began, decided to cast a spell over the mortgage industry in the United States.  Mysteriously, seemingly knowledgable legislators passed statutes permitting government agencies to finance mortgage loans  in amounts for more than the property is worth, to people who could not afford to pay, without the need to document such things as income, and then to allow the chopping up the loans into little pieces to sell to new investors, so that if a borrower defaulted in repayment of the loan, the lender would not have the ability to prove it actually owned the debt, let alone plead its name correctly.  The spell cast was so widespread that courts find almost everyone involved in mortgage foreclosure litigation raising the “Sgt. Schultz Defense” of “I know nothing.”

Harsh words.  They are worth keeping in mind when preparing foreclosure papers.  They are worth keeping in mind as policy makers continue to consider how to regulate the mortgage industry.

PVF Inc. v ZCAM LLC, New York County Supreme Court, Index No. 651360/2013

Justice Charles Ramos has ruled that a landlord’s duty to cooperate in obtaining government approvals includes more than merely executing documents.  In this commercial case brought by a tenant against its landlord, the tenant alleged that the landlord breached the lease by failing to cooperate with the tenant in obtaining a certificate of occupancy.

The parties’ lease provided that the premises was to be used as a restaurant and that the tenant accepted the space “as is” with the knowledge that renovations and approvals from the Department of Buildings and the Landmark’s Preservation Commission would be required.  The tenant contended that the landlord did nothing to remove existing violations of record at the building; most especially, the landlord refused to pay open fines at the building.

When the tenant could not complete its build-out and take occupancy, it sued alleging a number of causes of action, including breach of contract.  New York Commercial Part Justice Charles Ramos ruled that the tenant had stated a viable breach of contract claim and denied the landlord’s motion to dismiss (Justice Ramos dismissed all of the tenant’s other causes of action).  Justice Ramos found that the lease contained an express requirement for the landlord to cooperate with the tenant in obtaining approvals, permits, and licenses that was in addition to the landlord obligation to execute necessary documents.

The lesson of PVF v. ZCAM is that a landlord’s contractual obligation to cooperate in “legalizing” the premises for the tenant’s intended use extends beyond signing the papers the tenant asks.  Cooperation means taking steps to insure that it is possible for the tenant to obtain its permits, approvals, and licenses.