November 7, 2014
by Andrew Morganstern
Rosicki, Rosicki & Associates, P.C.
USFN Member (New York)
Court-mediated settlement conferences are mandatory in New York State in residential foreclosure actions involving a “home loan.” Pursuant to statute, CPLR 3408, the parties “shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.” The statute does not define “good faith,” nor does it specify the penalties that may be imposed in the event a party fails to negotiate in good faith. A recent appellate decision, US Bank National Association v. Sarmiento, 2014 WL 3732457 (2d Dept. 2014), helps to fill in the details.
What is good faith? Many of the judges and referees who conduct the conferences expect the servicer to offer a settlement of some form in order to satisfy the good faith requirement. However, in 2012, an appellate court held that the servicer’s failure to make a settlement offer did not establish a lack of good faith, considering the borrower’s financial circumstances. Wells Fargo Bank, N.A. v. Van Dyke, 101 A.D.3d 638 (1st Dept. 2012).
In the recent Sarmiento decision, the court explained the basis for finding that the servicer did not negotiate in good faith. The court held that the totality of the circumstances must be examined to ascertain whether the “party’s conduct did not constitute a meaningful effort at reaching a resolution.” The court further stated that a finding of “lack of good faith” is appropriate “where a plaintiff failed to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds.”
What penalty may be imposed? Without statutory guidance, courts have imposed various penalties upon servicers that fail to negotiate in good faith. Many of these penalties have been deemed inappropriate and stricken upon appeal. Appellate courts have ruled that even if the servicer did not act in good faith, a court cannot cancel a mortgage, reduce the mortgage payments, or compel a mortgagee to permanently abide by the terms of a trial loan modification.
In Sarmiento, the borrower requested that the court bar the plaintiff from collecting interest or fees that accrued from the date that the borrower submitted his complete HAMP application, bar attorneys’ fees, and require a new review for a HAMP modification excluding all interest and charges that accrued from the submission of the HAMP application. The lower court granted the borrower’s motion. The appellate court affirmed, noting that the plaintiff did not contend that these particular sanctions were excessive or improvident. However, the decision creates some uncertainty as to the type of penalty that may be imposed, by stating that courts may not rewrite the contract or impose contractual terms which were not agreed by the parties.
Conclusion — Sarmiento clarified the meaning of “good faith.” It also made clear that the lack of good faith allows imposition of appropriate penalties, yet the type of penalty that may be imposed is still uncertain.
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Autumn 2014 USFN Report