Tag Archives: New York

NY Appellate Court Holds Default Letter Stating Lender “Will Proceed to Automatically Accelerate” Did Not Accelerate the Debt and Thus Did Not Trigger the Statute of Limitations

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Diana M. Eng and Alina Levi

In U.S. Bank N.A. v. Gordon, 176 A.D.3d 1006 (2d Dept. 2019), the New York Appellate Division, Second Department, held that a notice of default stating that if the loan was not made current, the lender “will automatically accelerate [the] loan,” was “merely an expression of future intent” and therefore did not accelerate the borrowers’ debt. As such, the Second Department held that the notice of default did not trigger the statute of limitations.

Summary of Facts and Background

On or about November 3, 2005, Steve and Ashia Gordon (“Defendants”) executed a note (“Note”), which was secured by a mortgage (“Mortgage”) against a property in Queens, New York. On or about July 1, 2011, Defendants defaulted on the loan. As a result, America’s Servicing Co. (“ASC”) sent a letter to Defendants, dated September 21, 2008 (“Notice of Default”), advising them that the loan was in default, and that, “[u]nless the payments on your loan can be brought current by October 21, 2008, it will become necessary to accelerate your Mortgage Note and pursue the remedies provided for in your Mortgage or Deed of Trust.” Moreover, the Notice of Default warned that “failure to pay this delinquency, plus additional payments and fees that may become due, will result in the acceleration of your Mortgage Note. Once acceleration has occurred, a foreclosure action . . . may be initiated.” In addition, the Notice of Default stated that “[t]o avoid the possibility of acceleration,” Defendants were required to make certain payments by a specific time, or ASC “will proceed to automatically accelerate your loan.” (Emphasis added).

On June 29, 2017, plaintiff U.S. Bank N.A. (“U.S. Bank”) commenced a foreclosure action to enforce the Defendants’ Mortgage in the Queens County Supreme (the “Lower Court”). Defendants moved to dismiss the action pursuant to CPLR 3211(a)(5) alleging that the statute of limitations to foreclose had expired. Specifically, Defendants argued that the entire debt was accelerated on September 21, 2008, based on the Notice of Default. Continue reading →

New York Appellate Court Rejects Usage of a Mortgage’s Reinstatement Provision as a Defense to the Expiration of the Statute of Limitations

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By: Wayne Streibich, Diana M. Eng, Jonathan M. Robbin, and Diana M. Eng

On March 13, 2019, in a case of first impression, New York’s Appellate Division, Second Department (“Second Department”) issued a decision holding the reinstatement provision of a mortgage does not prevent the acceleration of the loan prior to entry of a foreclosure judgment. In Bank of New York Mellon v. Dieudonne, 2019 WL 1141973 (2d Dept. Mar. 13, 2019), the Second Department affirmed the Kings County Supreme Court’s decision granting defendant Dieudonne’s (“Defendant”) motion to dismiss the complaint pursuant to CPLR 3211(a)(5) because the foreclosure action was barred by the expiration of the statute of limitations. Specifically, the Second Department held that “the extinguishment of the defendant’s contractual right to de-accelerate the maturity of the debt pursuant to the reinstatement provision of paragraph 19 of the mortgage was not a condition precedent to the plaintiff’s acceleration of the mortgage” and, therefore, acceleration occurred upon commencement of the prior foreclosure action.

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NY’s Fourth Department Holds That Notice of Default Did Not Provide Clear and Unequivocal Notice to Accelerate the Debt

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By: Andrea M. Roberts and Diana M. Eng

In Ditech Financial LLC v. Corbett, 2018 WL 6006682, at *1, —N.Y.S.3d —- (4th Dept. Nov. 16, 2018), the Appellate Division, Fourth Department, held that a notice of default sent to the borrowers-defendants, which discussed a possible future event, did not provide clear and unequivocal notice sufficient to accelerate the debt, thereby triggering the statute of limitations.

In January 2016, plaintiff, Ditech Financial LLC (“Plaintiff”), commenced an action to foreclose against borrowers, Timothy Corbett and Sheila Corbett (“Borrowers”). Plaintiff moved for summary judgment (the “Motion”), and Borrowers opposed the Motion on the grounds that the statute of limitations to foreclose had expired. In support, Borrowers alleged that a January 2010 notice of default (“2010 Default Letter”) sent by Plaintiff’s predecessor-in-interest accelerated the debt and therefore, the statute of limitations to foreclose began to run on the entire debt at that time. The Onondaga County Supreme Court (“Lower Court”) granted Plaintiff’s Motion. Borrowers appealed. Continue reading →

NY Appellate Court Holds CPLR 205(a) Applies to Note Owner’s Successor in Interest If Prior Action Not Dismissed for Failure to Prosecute

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By: Andrea M. Roberts and Diana M. Eng

In Wells Fargo Bank, N.A., as Trustee, in Trust for the Registered Holders of Park Place Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2005-WCW1 v. Doron Eitani, Index No. 2014-9426 (2d Dept. Feb. 8, 2017), the New York Appellate Division, Second Department, determined the novel issue of whether a plaintiff, such as the Trust, who is a successor in interest as the holder and owner of the note and mortgage, is entitled to take advantage of the savings provision of CPLR 205(a). The Second Department decided in the affirmative by affirming the denial of defendant David Cohan’s motion pursuant to CPLR 3211(a)(5) to dismiss the foreclosure action on the grounds that it was time-barred.

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New York Appellate Court Affirms that Default Letter Did Not Accelerate Mortgage Debt

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By:      Alexander J. Franchilli

The New York Supreme Court, Appellate Division, Third Department, recently held that a 2007 default letter demanding payment of all past due amounts under a mortgage did not accelerate borrowers’ mortgage debt and therefore did not trigger the six-year statute of limitations to bring a foreclosure action. Goldman Sachs Mortg. Co. v. Mares, 23 N.Y.3d 444, 445 (3d Dep’t 2016). Consequently, the Third Department held that the plaintiff’s action, which was commenced in 2014, was not time-barred. Id.

In Mares, the foreclosing plaintiff moved for summary judgment striking defendants’ answer, and the defendants, two borrowers under the mortgage, cross-moved for summary judgment alleging that the action was time-barred. Id. When the lower court denied borrower’s cross-motion, the borrowers appealed. Id.

On appeal, the borrowers argued that plaintiff’s action was untimely because the debt was accelerated by a demand letter, triggering the six-year statute of limitations to foreclose. Id., see also CPLR 213(4). The Third Department rejected borrowers’ argument, explaining that “[w]here, as here it is alleged that the debt was accelerated by demand, that fact must be communicated to the mortgagor in a clear and unequivocal manner.” Id. Notably, the Third Department held that the following language “falls far short of providing clear and unequivocal notice” to borrowers that the entire mortgage debt was being accelerated:

Failure to pay the total amount past due, plus all other installments and other amounts becoming due hereafter . . . on or before the [30th] day after the date of this letter may result in acceleration of the sums secured by the mortgage.

Id. (emphasis added in original). Instead, the Third Department found that the demand letter was “nothing more than a letter discussing a possible future event.” Id. (citing Pidwell v. Duvall, 28 A.D3d 829, 831, 815 N.Y.S.2d 754 (3d Dep’t 2006)).

This decision highlights the importance of the language of default letters, while clarifying the legal standard for assessing the statute of limitations in mortgage foreclosure actions. Mare is also significant because it defeats the borrowers’ bars’ recent attempts to argue that the statute of limitations has expired based on default letters sent to borrowers.

New York Adopts More Stringent Debt Collection Regulations

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By:  Diana M. Eng and Jennifer L. Neuner

The New York State Department of Financial Services recently issued new regulations requiring debt collectors to provide additional disclosures to consumers. The new regulations (see 23 NYCRR § 1) are intended to provide protections beyond what is currently required by the Fair Debt Collection Practices Act (“FDCPA”). These new debt collection regulations will become effective in March 2015, except that provisions regarding required disclosures for charged-off debt[1] and substantiation of a charged-off debt[2] will become effective in August 2015.[3]

Required Initial Disclosures

The regulations require enhanced initial disclosures when a new debt collector first contacts an alleged debtor. The newly mandated disclosures include specific notices that are not formally required by the FDCPA. Specifically, pursuant to 23 NYCRR § 1.2, the debt collector must, within 5 days of the initial communication with the consumer, provide “clear and conspicuous written notification” that 1) debt collectors are prohibited from engaging in “abusive, deceptive, and unfair debt collection efforts” under the FDCPA; and 2) a written statement that if a creditor or debt collector receives a money judgment against the consumer in court, state and federal laws may prevent certain types of income from being taken to pay the debt, including, among others, social security, public assistance, unemployment and disability benefits, pensions and veterans’ benefits.

Similarly, with respect to debts that have been charged-off, the debt collector must, within 5 days of the initial communication with the consumer, provide a “clear and conspicuous” written notification about the debt, including 1) the name of the original creditor; and 2) an itemized accounting of the charged-off debt, including the amount owed as of charge-off, total amount paid on the debt since the charge-off and the total post charge-off interest, charges and fees. 23 NYCRR § 1.2(b).

Required Disclosures Regarding Collection of So-called “Zombie Debts”

The regulations also require disclosures regarding the collection of debts for which the statute of limitations has already expired. 23 NYCRR § 1.3. Further, the debt collector must maintain reasonable procedures to determine the applicable statute of limitations of a debt and to determine whether the statute of limitations has expired. The FDCPA does not contain such requirements.

Under the New York regulation, if a debt collector “knows or has reason to know” that the statute of limitations for a debt may have expired, the debt collector must provide a “clear and conspicuous” notification to the consumer that 1) the debt collector believes that the statute of limitations may be expired; 2) suing on a debt for which the statute of limitations has expired is a violation of the FDCPA, and, if the consumer is sued, the consumer may present evidence to the court that the statute of limitations has run; 3) the consumer is not required to provide the debt collector with an admission of any kind that the debt is still owed, or to waive the statute of limitations; and 4) a partial payment of the debt, or other admission that the debt is owed, may restart the statute of limitations. 23 NYCRR § 1.3(a)-(b). Further, the regulation provides specific language that would comply with the notice requirement.

Requirements Regarding “Substantiation” of the Debt

The regulations also contain important changes regarding a debt collector’s obligations when a consumer disputes the validity of a charged-off debt. 23 NYCRR § 1.4. Currently, under the FDCPA, consumers must dispute the debt in writing and request verification of the debt within 30 days of the first collection attempt. See 15 U.S.C. § 1692g. Under the new New York regulations, consumers may request “substantiation” of the debt at any time during the collections process, and may do so orally. Once a request is received, the debt collector must provide the consumer written substantiation of a charged-off debt within 60 days of receiving the request. 23 NYCRR § 1.4(b). The debt collector must also cease collection until written substantiation has been provided to the consumer. The regulation further lists the various forms of documentation required to substantiate the debt.

In addition, the New York regulation includes a document retention requirement related to a request for substantiation of a charged-off debt under 23 NYCRR § 1.4. 23 NYCRR § 1.4(d). Specifically, debt collectors must retain evidence of the consumer’s request for substantiation and all documents provided in response to such request until the charged-off debt is discharged, sold or transferred.[4]

Requirements for Agreements to Settle a Debt

The regulations also include procedures for documenting any agreement between the consumer and the debt collector to satisfy or otherwise settle the debt. 23 NYCRR § 1.5. The FDCPA does not regulate communications from a debt collector regarding settlement. Under the new regulations, a debt collector must, within 5 business days of agreeing to a debt payment schedule or other agreement to settle the debt, provide the consumer with 1) written confirmation of the debt payment schedule or agreement, including all material terms and conditions relating to the agreement; and 2) a notice stating that if a creditor or debt collector receives a money judgment against the consumer in court, state and federal laws prevent certain types of income from being taken to satisfy the debt.[5] The debt collector is also required to provide the consumer with 1) an accounting of the debt on at least a quarterly basis while the consumer is making scheduled payments; and 2) a written confirmation of the satisfaction of the debt, along with the name of the original creditor and the account number, within 20 days of receipt of the final payment.[6] 23 NYCRR § 1.5.

Debt collection companies that operate in New York should review their current policies and take steps to comply with the new regulations in advance of the 2015 effective dates. Specifically, debt collectors should ensure that initial disclosures satisfy the new regulations, that disclosures inform consumers regarding the potential expiration of the statute of limitations and that procedures are in place to substantiate the debt upon a debtor’s request.

[1] 23 NYCRR § 1.2(b).
[2] 23 NYCRR § 1.4.
[3] 23 NYCRR § 1.7.
[4] Debt collectors who transfer a charged-off debt should consult the CFPB rules regarding mortgage servicing transfers to the extent applicable.
[5] This notice provision is identical to the statement required in the initial disclosures (23 NYCRR § 1.2) noted above.
[6] 23 NYCRR § 1.6 provides that, after mailing the initial disclosures required by Section § 1.2, a debt collector and consumer may communicate via email, if the consumer voluntarily provides an email address and consents to receiving email correspondence regarding a specific debt.

Borrowers Judicially Estopped from Asserting Claims in their Mortgagee’s Chapter 11 Bankruptcy Proceeding Due to Failure to Disclose Such Claims in Borrowers’ Own Chapter 7 Proceeding

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By:  Shane M. Biffar

On November 18, 2014, the Bankruptcy Court of the Southern District of New York issued an opinion and order finding, inter alia, that two residential mortgage borrowers are judicially estopped from bringing claims against debtor GMAC Mortgage, LLC (“GMAC”) in its chapter 11 proceeding because the factual events underlying the claims preceded the borrowers’ own chapter 7 bankruptcy case and the borrowers never disclosed the claims as assets in their bankruptcy case.  In re Residential Capital, LLC, et al., Case No. 12-12020 (MG) (Bankr. S.D.N.Y. July 24, 2014).

The claims the borrowers sought to assert in the chapter 11 proceeding were predicated on GMAC’s conversion from a corporation to a limited liability company by merger in October, 2006 (the “Conversion”).  The borrowers alleged violations of federal and Illinois state law relating to GMAC’s foreclosure on their residential mortgage loan following the Conversion.  Specifically, the borrowers alleged that GMAC foreclosed their mortgage loan without providing notice that the loan had been “transferred,” as required by the Real Estate Settlement Procedures Act (“RESPA”).  As a result of the alleged RESPA violation, the borrowers claimed that GMAC’s foreclosure of their mortgage was wrongful, causing the Borrowers considerable damages, including lost value of their home, moving expenses, living expenses, and other “personal harms.”

The Bankruptcy Court’s decision disallowed and expunged the borrowers’ claims by invoking Section 521(1) of the Bankruptcy Code and the doctrine of judicial estoppel.  Section 521(1) requires a debtor in a bankruptcy proceeding to disclose all of her actual or potential assets, including any and all known causes of action.  See 11 U.S.C. §§ 521(1); 1306.  To invoke judicial estoppel in the Second Circuit, “(1) the party against whom it is asserted must have advanced an inconsistent position in a prior proceeding, and (2) the inconsistent position must have been adopted by the court in some matter.” Peralta v. Vasquez, 467 F.3d 98, 205 (2d Cir. 2006).  Judicial estoppel does not apply where the inconsistent statement in the first proceeding was the product of a “good faith mistake or an unintentional error.” Ibok v. Siac-Sector, Inc. 2011 WL 293757, at *7 (S.D.N.Y. Feb. 2, 2011).

The Bankruptcy Court found that all of the factual allegations supporting the borrowers’ claims preceded their chapter 7 bankruptcy filing.  Specifically, the Conversion occurred in October 2006, the borrowers’ mortgage was referred to foreclosure in May 2010, GMAC foreclosed on the Loan in February 2011, and the borrowers commenced their chapter 7 proceeding in July 2011.  Further, the borrowers’ schedules of assets in their joint chapter 7 proceeding (1) failed to disclose any potential claims against GMAC, and (2) were relied upon by that court to calculate the discharge the borrowers ultimately received.  Accordingly, the borrowers’ claims were barred by the doctrine of judicial estoppel.

In reaching this decision, the Court discounted any possibility that the borrowers’ failure to list the causes of action in the chapter 7 proceeding was the product of a “good faith mistake or unintentional error.”  Indeed, the fact that the borrowers had scheduled certain potential causes of action against other parties as assets in the chapter 7 proceeding belied any possibility that the borrowers lacked knowledge of the significance of scheduling potential causes of action as assets.

The Bankruptcy Court further noted that even assuming the borrowers’ claims were not barred, the borrowers also failed to meet their burden on the merits.  Specifically, the Bankruptcy Court explained that a mortgage loan servicer that changes its name “d[oes] not violate sections 2605(b)-(c) of RESPA, which require transferor and transferee mortgage loan servicers, respectively, to notify the applicable borrower in writing of any transfer of loan servicing.”  Under RESPA, transfers between affiliates or resulting from mergers or acquisitions are not considered “transfers” requiring a RESPA notice if “there is no change in the payee, address to which payments must be delivered, account number, or amount of payment due.” See Madura v. BAC Home Loans Servicing L.P., 2013 WL 3777094, at *8-9 (M.D. Fla July 17, 2013) (citing 24 C.F.R. 3500.21(d)(1)(i)).

This decision highlights the importance of mining borrower’s prior bankruptcy filings when evaluating borrower claims that are subsequently asserted against a mortgage loan servicer.  Such filings may provide ammunition that bars a borrower’s claims.

Second Circuit Holds that Liens Incident to Property Ownership are not “Debt” Under the FDCPA

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By: Shane Biffar

A recent Second Circuit Court of Appeals decision ruled that mandatory water and sewer charges are not subject to the Fair Debt Collection Practices Act (“FDCPA”). In Boyd v. J.E. Robert Co., Inc., 2014 U.S. App. LEXIS 16620 (2d Cir. Aug. 27, 2014), the Second Circuit affirmed a New York district court’s holding that liens for mandatory water and sewer charges, which are imposed as an incident to property ownership, do not involve a “debt” as that term is defined in the FDCPA and therefore are not subject to the statute.

In Boyd, the defendants purchased water and sewer lien certificates from the City of New York before commencing foreclosure actions on the plaintiffs’ properties. The putative class action plaintiffs were property owners who alleged that the defendants violated the FDCPA by obtaining unauthorized attorneys’ fees and costs in connection with the foreclosure actions. The district court granted summary judgment for defendants and dismissed the FDCPA claims on the basis that, inter alia, the liens did not involve a “debt” as defined by the FDCPA.

On appeal, the plaintiffs argued that the district court erred in dismissing their FDCPA claims. The Second Circuit rejected plaintiffs’ argument and denied FDCPA recovery, noting that any violation of the FDCPA must occur in connection with the collection of a “debt,” which is defined as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which [] the subject of the transaction [is] primarily for personal, family, or household purposes . . . .” (emphasis added).

In its analysis, the Second Circuit cited its prior decision in Beggs v. Rossi, 145 F.3d 511 (2d Cir. 1998), which held that “municipal taxes levied automatically in connection with ownership of personal property do not involve a ‘transaction’ as that term is understood under the FDCPA and, accordingly, are not “debt” for purposes of the FDCPA.” Applying this reasoning, the Court similarly concluded that water and sewer charges, like property taxes, “are levied, in some amount, as an incident to property ownership in New York” and therefore “do not involve ‘debt’ under the FDCPA.”

Further, the Second Circuit distinguished the Third Circuit’s holding in Piper v. Portnoff Law Assoc., Ltd., 396 F.3d 227 (3d Cir. 2005), which held that certain water and municipal charges are subject to the FDCPA. Specifically, the Second Circuit highlighted that the water and sewer services in Piper were first requested by the property owner before they could be charged by the City. Accordingly, the payment obligation in Piper arguably arose out of the “transaction” of requesting water services and therefore constituted “debt” within the meaning of the FDCPA.

“Totality of the Circumstances” Standard Used in New York to Sanction Mortgagee for Lack of “Good Faith” Negotiation in Foreclosure Matter

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By: Jill E. Alward and Timothy W. Salter

New York’s Appellate Division, Second Department, recently ruled that a mortgagee’s conduct in evaluating a borrower’s loan modification application should be judged using the “totality of the circumstances” standard to determine whether the mortgagee negotiated in good faith during mandatory foreclosure settlement conferences. Applying that standard in US Bank N.A. v. Sarmiento, 2014 NY Slip Op 05533 (2d Dep’t July 30, 2014), the Appellate Division affirmed a lower court’s holding that a foreclosing plaintiff failed to negotiate in good faith.

In Sarmiento, the plaintiff, over the course of a series of settlement conferences, offered the borrower an in-house loan modification but denied the borrower’s HAMP application four times. The borrower, after refusing to accept the in-house modification, moved for sanctions, which sought to bar the plaintiff from collecting any interest, costs, or attorneys’ fees from the date of the first settlement conference (December 1, 2009). In addition, the borrower asked the court to direct the plaintiff to review the borrower’s loan for HAMP “using correct information and without regard to interest or fees that have accrued on the subject loan since December 1, 2009.” The lower court granted the borrower’s motion in its entirety.
On appeal, the plaintiff argued that the lower court lacked the authority to impose sanctions for violating the good faith requirement of CPLR 3408(f) and further applied the wrong standard in support of its holding. The Second Department rejected both arguments.

In summarizing the offending conduct, the Second Department held that “[w]here a plaintiff fails to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds…such conduct could constitute the failure to negotiate in good faith to reach a mutually agreeable resolution.” The court further held that while “any one of the plaintiff’s various delays and miscommunications, considered in isolation, [did] not rise to the level of lack of good faith,” the plaintiff’s conduct, when reviewed using the “totality of the circumstances” standard, “evidenced a disregard for the settlement negotiation[,]” regardless of whether the borrower ultimately qualified for a HAMP modification.

While the court warned that its holding should be construed as a deviation from the principal limiting a court’s role in a foreclosure action “to interpretation and enforcement of the terms agreed to by the parties,” it ultimately alters and expands the standard of review for determining a mortgagee’s “good faith” during the foreclosure settlement process. The court’s holding has already been cited by at least one court, and does not appear to be an isolated ruling.

New York Bankruptcy Court Rules that Borrower Can Proceed with a Claim for Non-Economic Damages Resulting from a RESPA Violation

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By:  Diana M. Eng

On July 24, 2014, the Bankruptcy Court of the Southern District of New York issued an opinion and order ruling that the majority of a borrower’s claims against GMAC Mortgage LLC (GMAC) were barred by res judicata, but borrower could proceed with his claim for emotional distress for GMAC’s violation of the Real Estate Settlement Procedures Act (RESPA).  In re Residential Capital, LLC, et al., Case No. 12-12020 (MG) (Bankr. S.D.N.Y. July 24, 2014).  The Bankruptcy Court reasoned that given the remedial purpose of RESPA, the interpretation of “actual damages” under RESPA should be consumer-oriented to allow for emotional distress damages in appropriate cases.

Notably, however, Judge Glenn indicated that borrower “faces an uphill battle in demonstrating causation and damages” with respect to his emotional distress claim; these issues will be resolved in the course of litigating borrower’s claim.  The Bankruptcy Court also expressly reserved the ability to revisit the issue of recovery of non-economic harm for a RESPA violation before the borrower’s claim is fully resolved.

The resolution of borrower’s claim will be a decision of interest, as courts are divided on the issue of whether a plaintiff can recover non-economic damages from a loan servicer under RESPA.