Editor: David Reiss
Brooklyn Law School

May 31, 2013

NY Appellate Court Rules Modification Not Enforceable in Foreclosure

By David Reiss

The Appellate Division ruled in Wells Fargo Bank, N.A. v. Meyers, 2013 Slip Op. 03085 (2d Dep’t), that a failure to negotiate a loan modification in good faith, which is required under NY foreclosure law, does not support the unilateral imposition of a mortgage modification.

The uncontested facts in this case read like one of the well-publicized Alice-in-Wonderland tales of homeowners trying to negotiate a modification with a Red-Queen-like loan servicer:

  • Wells Fargo alleges that it is the holder of the note and mortgage but later says that Freddie Mac is
  • Wells Fargo tells the homeowners to default in order to get into the loan modification program and then forecloses, although the Wells Fargo representative states that they “had no idea” why the foreclosure had been initiated. (4)
  • Wells Fargo repeatedly loses documents sent by the homeowners
  • Wells Fargo changes the terms of its modification offer because of a “miscalculation” (4)

The Court upholds the finding that Wells Fargo did not negotiate in good faith.  One can only imagine how homeowners feel dealing with such a bureaucratic counter-party:  is it grossly incompetent or slyly malevolent?

The Appellate Division notes that the statute at issue provides, “Both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible” (8, quoting CPLR 3408[f]).  This provision contains no remedies, however, for the failure to do so.  The Court then identifies a variety of sanctions that have been employed against mortgagees/servicers pursuant to this statute.  These include

  • barring them from “collecting interest, legal fee, and expenses” (10)
  • imposing exemplary damages
  • staying the foreclosure
  • imposing a monetary sanction

The Court also noted that it determined in another case that cancelling the mortgage and note was too severe a sanction, one that was not authorized by law.  The Court found that the remedy in this case, imposing a modification, was also inappropriate.  The court stated that to do so would be to rewrite a contract that had voluntarily been entered into in violation of the Contracts Clause of the United States Constitution.  The court also states that such a unilateral action “is without any source for its authority” and appears inconsistent with CPLR 3408 itself. (12) It is is unclear to me whether the Court is reading the Contracts Clause properly, but I agree that the trial court’s remedy seems extreme on these facts.


(Hat tip Wilson Freyermuth)

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