Finality Of Foreclosure Judgment As Bar To Later Borrower Suit

Lawyers are trained to understand this concept – for lenders and servicers it may seem more academic – but it is quite meaningful as a practical matter: “A judgment of foreclosure and sale entered against a defendant is final as to all questions at issue between the parties, and concludes all matters of defense which were or might have been litigated in the foreclosure action”.

This vital point was discussed under particularly relevant circumstances in a recent case. [Chapman Steamer Collective, LLC v. Keybank National Association, 163 A.D.3d 760, 81 N.Y.S.3d 501 (2d Dept. 2018)].

First, the usual application of this principle in the foreclosure case is as follows.  A defendant answers the foreclosure and raises a multitude of issues, whether in affirmative defenses, counterclaims or both.  The foreclosing plaintiff moves for summary judgment, is successful, the sum due is computed by the referee and then a judgment of foreclosure and sale issues.  Even though there is a judgment in the case, borrowers will often argue yet again all the points that were defeated by the earlier summary judgment motion (and then finalized in the judgment of foreclosure and sale).  This can take the form of orders to show cause to stay a sale or such orders employed at the eviction stage.  But the principle, as noted, is that once there is a judgment of foreclosure and sale, it cuts off any arguments that the borrower had made or could have made.  This is obviously an important concept.

But it goes even further in the more recent case.  There, the borrowers answered the foreclosure complaint with a counterclaim alleging that the bank lured them into signing a note and mortgage as a bridge loan by promising them a permanent loan with tax credits at below market rate interest and that the bank ultimately refused to close on the permanent loan.  The claim, however, was apparently wanting and the borrower was defeated on summary judgment.  Later a judgment of foreclosure and sale was entered, the borrower appealed that, but it was affirmed.

After the foreclosure was over the borrowers launched this case, suing the bank to recover damages for fraudulent misrepresentation, arguing the very same points upon which it had lost in the foreclosure action and which resulted in a judgment of foreclosure and sale.  This then invoked the rules about finality of judgment.  One was that the doctrine of res judicata provides that once a claim is brought is a final conclusion, all other claims arising out of the same transaction or series of transactions are barred – even if they are based upon different theories or if they are seeking a different remedy.  In addition, this doctrine of res judicata bars a party from relitigating any claim which could have been or should have been litigated in a prior proceeding.

Here, the borrowers’ claims arise out of the same allegations raised in the counterclaim in the foreclosure action which was dismissed and therefore, this doctrine of res judicata (and the finality of the judgment of foreclosure and sale) barred pursuit of this suit.  The borrower lost again – appropriately so.

Of course, it did not prevent the borrower from having started this suit and causing the lender to incur legal expense in defending a claim baseless as a matter of law, but such are the vicissitudes of the foreclosure arena.  In any event, the concept of finality of a judgment of foreclosure and sale is justly comforting.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2019), 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.