Court Attitudes Can Hurt Lenders

It has been a regular message of these alerts that for various reasons, foreclosing lenders and servicers are subjected to erroneous decisions more often than would be expected, banishing them to the costly and time consuming process of appeals to be vindicated.  To use a cliché, though, “that is what makes horseracing”.  Appeals will be necessary from time to time and it is only our subjective observation that this is occurring with undue frequency in foreclosure cases.

A parallel thought which emerges from endeavoring to examine all the reported foreclosure decisions is that court attitudes can sometimes go beyond what is reasonable and thereby punish lenders and servicers.  We are reminded of this concept in revisiting a case where a court vacated a foreclosure sale based upon the idea that the legal fees – which had already been awarded in the judgment of foreclosure and sale of course – were “inflated” and thereby made redeeming on the obligation all the more difficult.  While this was fortunately and understandably reversed [NYCTL 1998-1 Trust v. Oneg Shabbos, Inc. 37 A.D.3d 789, 830 NYS 2d 763 (2d Dept. 2007)], what had been said at the trial court level was absolutely bizarre and worthy of some comment here.

For some basics to better understand how off center what occurred in this matter was, note the following:

• A judgment of foreclosure and sale is binding as to all issues which were litigated or could have been litigated; and
• When a foreclosure sale is conducted, there has to have been some fraud or egregiously unfair circumstance which would give the court the authority to vacate that sale; and
• The right to redeem, that is to pay off a mortgage (or in this case a tax lien, although that is a distinction without a difference) expires the moment the hammer falls at the foreclosure auction sale.

In sum, there were no standard or authorized grounds for a court in this case to vacate a foreclosure sale.  But here, the judge did so believing that the legal fees awarded in the judgment (otherwise inviolate) were “inflated”.  Because he viewed them as excessive, he found that this interfered with the ability of the property owner to pay off the debt (although there was no indication that any attempt to pay off the debt was made) and on that basis he vacated everything!

In the end, what the trial court did was mix concepts.  In expressing the social concept that it should be easier for borrowers and owners to pay off their obligations on the property, the judge assailed the award of legal fees (a different issue) to achieve a presumed social end.  As noted, it was just bizarre.  To be sure, on appeal, the appellate court found that the typical support for the amount of the legal fees to be awarded wasn’t provided and so sent the case back for an assessment of what was reasonable.  But as to vacating a sale on the concept that legal fees were somehow expensive, that was struck down.

Once again, the good guys won, except that the victory was punishingly excessive, imposing the loss of time and expense.  And, the foreclosing plaintiff had to face the headwinds of social forces.  It is certainly unfortunate.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.