Settlement Negotiations Fatal To Foreclosure

In these extraordinary times it seems ever more prevalent – and necessary – for lenders and servicers to pursue settlement/loss mitigation efforts with defaulting  borrowers or those in foreclosure.  But a new case instructs that under some circumstances, settlement discussions can be fatal to the foreclosure, at least leading to vacating of a foreclosure judgment allowing a borrower to file an answer and move the case back to its inception.  [Deutsche Bank Nat.Trust Co. v. Miele, N.Y.L.J., Sept. 22, 2008, at 19. col. 3 (Sup. Ct., Richmond Co., Maltese, J.)]

What is at first most frightening about the ruling is its apparent attack on two bedrock tenets of foreclosure proceedings.  Servicers typically want to pursue settlement.  At the same time, though, knowing that borrowers can be either insincere or simply unable to settle as they promise, servicers do not halt the foreclosure action merely because settlement is being discussed.  It may fail, and often does.  Losing weeks or months of foreclosure progress holding in place, particularly in time consuming judicial foreclosure states like New York, is pointedly unwise.

So how did a servicer get in trouble doing just what it was supposed to do:  pursuing settlement while prosecuting the foreclosure apace?  It neglected one element.  Its attorneys didn’t tell the borrower the foreclosure was continuing.

Briefly in outline form, the borrowers defaulted in March 2007.  In July, through an attorney the borrower contacted the lender and the broker advising of claimed violations of law.  In response, the servicer began a foreclosure in August.

Upon being served, the borrowers instituted settlement negotiations, apparently with the servicer.  Because the borrowers did not answer the complaint (or appear) they were in default, which permitted servicer’s counsel to move through the foreclosure without further notice to the borrowers.  The case arrived at judgment of foreclosure and sale in December; in February the servicer advised the borrower there would be no loan modification.  The borrowers then hired counsel and moved to vacate the judgment.

On these facts, the court found that the servicer had not acted in good faith, that the borrowers had relied upon the negotiations in ignoring the action and that plaintiff’s counsel was, among other things, dishonorable.  (The court then shoehorned this view into practice technicalities – excuse for default and presence of defenses – as a basis to overturn the judgment.)

In a commercial foreclosure, such facts would be highly unlikely.  Mortgagees and their attorneys never negotiate without a letter agreement signed by the borrower confirming that the lender or servicer waives no rights, and reserves all remedies including continuing with the foreclosure.  While such formalities are seldom encountered in the residential case, if counsel receives a settlement offer, in conveying that to the servicer, counsel should, and typically will, advise the borrower that nonetheless the foreclosure is going forward.

That didn’t happen here and thus torpedoed the case.  The lesson is clear.

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.