Lender’s Good Faith At The Settlement Conference

This will no doubt be a never-ending issue, although helpful and pleasing elucidation is found in a recent case: Bank of America v. Lucido, 114 A.D.3d 714, 981 N.Y.S.2d 433 (2d Dept. 2014).

As mortgage lenders and servicers well recognize, in the instance of a home loan mortgage (not a commercial case) a settlement conference is required.  In turn, this procedure adds not only many, many months of delay to the course of a foreclosure action, but can lead to charges by the borrower or by the court that the lender or servicer is not acting in good faith in bargaining about a possible resolution to the mortgage default.  And if the latter happens, what action the court might take is uncertain and mysterious, certainly portentous.

The statute providing for this settlement conference path does indeed require good faith bargaining, but does not specify the penalty for failure to meet that standard, nor does it define what “good faith” is.  That therefore creates an uncertain latitude for trial courts to discern good faith or to impose sanctions when good faith is found to be wanting.  In this new case, the trial court, in finding that the servicer was acting in bad faith, barred the foreclosing plaintiff from ever in any way collecting any sums secured by the mortgage which fall under the category of interest, attorneys’ legal fees, costs and disbursements, or any sums other than the principal balance and advances for taxes and insurance.  This was certainly a draconian remedy.

But enlightenment came upon appeal – when the decision was reversed.  The higher court found that while the court below had the authority to impose a sanction – after a hearing – there had to be an application for that relief.  But no application had been made.  In addition, the imposition of the sanctions was done without notice to the plaintiff that the court was considering such an action and that deprived the foreclosing party of its right to due process.

The court further found that neither the plaintiff’s refusal to consider a reduction in principal, nor its delay in producing the pooling and servicing agreement established that the plaintiff failed to negotiate in good faith.  Of course, these events had led the lower court to condemn the foreclosing party for lack of good faith.

In the end, the appeals court said that nothing in the statute required the foreclosing plaintiff to make the exact offer desired by the borrower-defendant and the plaintiff’s failure to make that offer could not be interpreted as a lack of good faith.

So, some helpful further standards are emerging from time-to-time, although it is apparent that trial court judges, upset with what they perceive as a plaintiff’s bargaining posture, will continue to impose penalties and constrain foreclosing parties to seek a remedy upon appeal.

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.