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New York: Commercial vs. Residential Foreclosure Settlement Negotiations

Posted By USFN, Monday, September 9, 2013
Updated: Tuesday, November 24, 2015

September 9, 2013


by Bruce J. Bergman
Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. – USFN Member (New York)

If there was ever a time that foreclosing lenders were under pressure to settle cases (at least those involving home loans), today is the time. Courts insist upon it; the government demands that it be done; and there is the lender’s and servicer’s own desire to achieve a performing loan. So it would seem that there could hardly be anything wrong in pursuing some settlement path — except that, in practice, danger lurks if the lender or servicer does not assiduously make clear its position. To immediately make the point: a foreclosure can be upset at any stage if the borrower comes forward and convinces a court that he thought settlement negotiations were proceeding and that he, therefore, was not obliged to defend the case. This is rarely an issue in a commercial foreclosure setting.

In the commercial foreclosure action and the typical magnitude of the case, the foreclosing plaintiff has both the wherewithal and the desire to assure that settlement negotiations do not lead to borrowers’ untoward claims that some concession had been made by the lender. This is accomplished by lenders’ insistence that borrowers sign a pre-negotiation letter before discussions can proceed. Among other things, the letter provides that no change in the mortgage document obligations is arrived at unless there is a new writing signed by the plaintiff and that the foreclosure proceeds during any settlement negotiations, all without waiver of any of the plaintiff’s rights. [Naturally, there is more to it than this; and for those who wish to explore it, attention is invited to 2 Bergman on New York Mortgage Foreclosures § 24.07, LexisNexis Matthew Bender (rev. 2012)]. This formality, however, is rarely pursued in the residential foreclosure case, which then leaves lenders and servicers open to a possible charge that a borrower believed settlement was in the offing.

In an illustrative case, a residential borrower had defaulted in the foreclosure action and later moved to vacate that default, claiming that his lawyer had failed to interpose an answer. For reasons not particularly relevant here, the court was unimpressed with that excuse. Additionally, though, the borrower stated that his attorney had assured him that the foreclosure action would not proceed while negotiations took place, and that his counsel had made five attempts to obtain a loan modification.

Although all of these contentions lacked any documentary support (upon which basis it could be opined that the court could have rejected them), the court found that the assertions were combined with the borrower’s claim that his failure to timely respond to the complaint was also due to his good faith belief in settlement negotiations. The court then ruled that such a good faith belief will supply a reasonable excuse for failure to timely answer.

While it appears that the borrower’s belief was based upon what his own attorney told him, rather than on any representations by the servicer, there was nevertheless some indication that the servicer was entertaining the possibility of a settlement; i.e., perhaps by way of mortgage modification.

The failure here — and which led to the court allowing the borrower to “open up” the action — was the absence of a lender-written declaration that the foreclosure action was proceeding apace, notwithstanding any possible negotiations or any consideration of a mortgage modification. Without that, the door was open for the court to do what it really wanted to do: give the borrower a chance to submit an answer. As a consequence, an answer would necessitate a motion for summary judgment and all of the expense and delay that portends. This is something that might have been avoided by a more dedicated approach to the settlement process.

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