Foreclosure Settlement Conferences in New York – Part Two: What Constitutes Good Faith Negotiations?

NY Bankruptcy LawyerIn Part One of this article, we reviewed the requirements for mandatory settlement conferences in New York foreclosure cases under New York Civil Practice Law and Rules (CPLR) Rule 3408. Under 2016 amendments to that law, homeowners who attend scheduled settlement conferences should expect the following:

  • The lender sent a representative authorized to agree to a settlement
  • The lender brought all necessary documents and information to the meeting
  • The lender is open to considering a variety of settlement options, including loan modifications, short sales, or deeds in lieu of foreclosure

In addition, the law states that “[b]oth the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution.”

Should the plaintiff fail to do so, CPLR Rule 3408 (j) 1-4 states:

[T]he court shall, at a minimum, toll the accumulation and collection of interest, costs, and fees during any undue delay caused by the plaintiff, and where appropriate, the court may also impose one or more of the following:

  1. Compel production of any documents requested by the court pursuant to subdivision (e) of this section or the court’s designee during the settlement conference;
  2. Impose a civil penalty payable to the state that is sufficient to deter repetition of the conduct and in an amount not to exceed twenty-five thousand dollars;
  3. The court may award actual damages, fees, including attorney fees and expenses to the defendant as a result of plaintiff’s failure to negotiate in good faith; or
  4. Award any other relief that the court deems just and proper.

CPLR Rule 3408 (k) and (l) lay out consequences should the defendant fail to negotiate in good faith.

The good faith requirement only applies to a settlement conference “held pursuant to [Section 3408],” and no statute requires such a standard for negotiations outside court-mandated conferences, such as pre-summons, pre-conferences, or post-conferences. This is another reason why defendants need skilled representation at settlement conferences.

New York courts have dedicated much time and discussion to what constitutes “good faith” in foreclosure settlement conferences.

In U.S. Bank National Association v. Padilla, the parties attended numerous settlement conferences with no clear resolution. The bank made many contradictory requests at each different conference, delaying the proceedings substantially. The court found the bank was acting in bad faith, stating, “This homeowner has appeared at every conference and has provided every document plaintiff has requested in a timely manner. Plaintiff’s piecemeal requests at each conference only serve to unnecessarily delay the modification application process while racking up interest, fees, and penalties to plaintiff’s benefit and the homeowner’s detriment.” U.S. Bank National Association v. Padilla, 31 Misc.3d 1208(A), 2011 WL 1348387 (N.Y. Sup). The court ordered the bank to consider the loan modification and to provide a full, detailed explanation of the denial, including why the bank’s own delays did not contribute to the denial.

In another notorious New York foreclosure case, IndyMac Bank v. Yano-Horoski, the bank continued, canceled, and rescheduled numerous settlement conferences, demonstrating no intention to actually negotiate. The court stated it “has been unable to find even so much as a scintilla of good faith on the part of plaintiff. Plaintiff comes before this court with unclean hands yet has the insufferable temerity to demand equitable relief against defendant.” In this case, the judge famously canceled the remainder of the mortgage, though that remedy was overturned by the Appellate Court.

Many lenders argued that to prove noncompliance with the good faith requirement, a defendant would need to show some type of intentional wrongdoing. Courts disagreed, as one court found:

[C]ourts have not required a showing of intentional misconduct, malice, or gross negligence when determining whether a party has failed to negotiate in good faith as required by CPLR 3408 (f). For example, one court observed that good faith is a subjective concept, generally meaning honest, fair, and open dealings, and a “state of mind motivated by proper motive” (HSBC Bank USA v McKenna, 37 Misc 3d 885, 905 [Sup Ct, Kings County 2012] [internal quotation marks omitted]). Unreasonable, arbitrary, or unconscionable conduct is inconsistent with the statutory purpose of good faith negotiations aimed at achieving a resolution (see id. at 908). Several trial-level courts have found that, where a plaintiff lost financial documents, sent confusing and contradictory communications, inexcusably delayed a modification decision, or denied requests for HAMP loan modifications without setting forth grounds, such conduct constituted a lack of good faith within the meaning of CPLR 3408 (f).

For years, courts would examine what did or did not take place in settlement conferences to try to decide whether a lender acted in good faith or not. However, in 2016, the amendments to the law include clarifications regarding what may or may not constitute good faith negotiations.

Specific Criteria Under Rule 3408

Before, the law simply stated that parties must negotiate in “good faith.” However, NY CPLR 3408(f) now includes specific factors the court should examine when looking at the “totality of the circumstances.” These factors are as follows:

Compliance with the requirements of this rule and applicable court rules, court orders, and directives by the court or its designee pertaining to the settlement conference process;

  1. Compliance with applicable mortgage servicing laws, rules, regulations, investor directives, and loss mitigation standards or options concerning loan modifications, short sales, and deeds in lieu of foreclosure; and
  2. Conduct consistent with efforts to reach a mutually agreeable resolution, including but not limited to, avoiding unreasonable delay, appearing at the settlement conference with authority to fully dispose of the case, avoiding prosecution of foreclosure proceedings while loss mitigation applications are pending, and providing accurate information to the court and parties.”

The law also makes it clear that “[n]either of the parties’ failure to make the offer or accept the offer made by the other party is sufficient to establish a failure to negotiate in good faith.”

Courts also hold foreclosure plaintiffs to a high standard when plaintiffs deny they acted in bad faith. For example, in one 2018 case, Wells Fargo Bank Natl. Assn. v Wolcott, the lender denied a loan modification based solely on the fact that “the owner of the loan does not allow for modifications.” The court found that reasoning to be insufficient on its own to demonstrate it engaged in good faith negotiations and considered the possibility of modification. Only after the plaintiff provided further evidence that it tried to obtain an exception to the policy for the possible modification did the court find that good faith negotiation took place.

It is important that you have a foreclosure defense lawyer who can bring bad faith to the attention of the court and seek possible relief for homeowners.

Possible Sanctions for Lack of Good Faith Negotiations

As mentioned above, the trial court in IndyMac Bank v. Yano-Horoski notoriously canceled the defendant’s mortgage due to the bad faith of the lender when it came to settlement conferences. On appeal, the court reversed that sanction, ruling:

Here, the severe sanction imposed by the Supreme Court of canceling the mortgage and note was not authorized by any statute or rule (see Tewari v Tsoutsouras, 75 NY2d 1, 5-7 [1989]), nor was the plaintiff given fair warning that such a sanction was even under consideration (see Matter of Harner v County of Tioga, 5 NY3d 136, 140 [2005]; Barasch v Barasch, 166 AD2d 399, 400 [1990]). The reasoning of the Supreme Court that its equitable powers included the authority to cancel the mortgage and note was erroneous, since there was no acceptable basis for relieving the homeowner [*2]of her contractual obligations to the bank.

However, just because the above sanction was deemed too severe and because the law does not set out specific relief for homeowners does not mean that courts cannot order reasonable sanctions under the circumstances. Some sanctions found to be reasonable include barring the plaintiff’s recovery of costs or attorney’s fees, as well as the inability to collect interest and fees that accrued during the delays caused by the lender. A skilled attorney can seek out appropriate remedies in your specific case when needed.

Contact Our Nassau County Foreclosure Defense Attorneys for Assistance

The Law Office of Ronald D. Weiss provides skilled foreclosure defense representation throughout and around Nassau County. Call (631) 271-3737 or contact us online to learn more today.