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Borrower Starts Separate Fraud Suit against Lender – and Loses

Posted By USFN, Tuesday, October 10, 2017
Updated: Tuesday, October 3, 2017

October 10, 2017

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

Some disgruntled borrowers are not satisfied with defending and delaying foreclosures. Rather, they carry it further and separately sue lenders in other actions brought, for example, in federal court. Among these approaches, exposed by a recent case [MAA-Sharda, Inc. v. First Citizens Bank & Trust Co., 149 A.D.3d 1484, 54 N.Y.S.3d 785 (4th Dept. April 28, 2017)] the issue arises where a lender obtained a judgment of foreclosure and sale, and the borrower — contending that the lender had foisted a fraud claim upon the court — initiates a separate action founded upon such a cause of action. Case law confirms that this will not work.

Where the complaint of the borrower in the new case alleges fraud, misrepresentation, or other misconduct of an adverse party committed during earlier litigation, the new plaintiff (here the borrower) is confined solely to the remedy of a motion to vacate the court’s prior order pursuant to New York practice [CPLR § 5105(a)(3)]. Accordingly, the remedy for the asserted fraud during a legal action is limited exclusively to that lawsuit itself; i.e., by moving [under CPLR § 5105] to vacate the judgment based upon its supposed fraudulent procurement, but not through a second plenary action collaterally assailing the judgment.

In the noted case, while the court confirmed that there is an exception to the rule, it only applies when the asserted fraud or perjury is simply a means to facilitate a larger fraudulent scheme that is greater in breadth than the one in the prior proceeding complained of. In MAA-Sharda, though, the assertion was found to be manufactured just to try to fit within that exception. It wasn’t real; the general rule prevailed and the borrower lost.

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