DICKERSON, J.
The much-publicized subprime mortgage crisis, the impact of which would be difficult to exaggerate, devastated the financial markets, domestically and globally (see Jenny Anderson & Heather Timmons, Why a U.S. Subprime Mortgage Crisis Is Felt Around the World, NY Times, Aug. 31, 2007). A primary component of this phenomenon was an explosion in mortgage foreclosures in this country, beginning in 2007 (see Hon. Mark C. Dillon, The Newly-Enacted CPLR 3408 for Easing the Mortgage Foreclosure Crisis: Very Good Steps, but not Legislatively Perfect, 30 Pace L Rev 855, 855-856 [2010]; Nelson D. Schwartz, Can the Mortgage Crisis Swallow a Town?, NY Times, Sept. 2, 2007). In an effort to address the mortgage foreclosure crisis in New York, the legislature passed the Subprime Residential Loan and Foreclosure Law (see L 2008, ch 472; see also Hon. Mark C. Dillon, 30 Pace L Rev at 856). This law enacted, among other statutes, CPLR 3408, effective on August 5, 2008 (see L 2008, ch 472, § 3).
CPLR 3408 provides for mandatory settlement conferences in certain residential foreclosure actions (see former CPLR 3408). In 2009, shortly after the passage of the Subprime Residential Loan and Foreclosure Law, the legislature amended a number of the recently enacted statutes, including CPLR 3408 (see L 2009, ch 507). The purposes of the amendments were to allow more homeowners at risk of foreclosure to benefit from consumer protection laws and opportunities to prevent foreclosure; to establish certain requirements for plaintiffs in foreclosure actions obligating them to maintain the subject properties; to establish protections for tenants living in foreclosed properties; and to strengthen consumer protections aimed at defeating "rescue scams" (Governor's Approval Mem, Bill Jacket, L 2009, ch 507 at 5). The 2009 amendments include a provision requiring that "[b]oth the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible" (CPLR 3408 [f]).
While CPLR 3408 (f) requires the parties at a settlement conference to negotiate in good faith, that section "does not set forth any specific remedy for a party's failure" to do so (Hon. Mark C. Dillon, 30 Pace L Rev at 875). In the absence of specific statutes and rules to establish the consequences for a party's failure to comply with the good-faith obligation imposed by CPLR 3408 (f), the Supreme Court here fashioned its own remedy. While we agree with the Supreme Court's finding that the
On September 2, 2009, the plaintiff Wells Fargo Bank, N.A., as successor to Wells Fargo Home Mortgage, Inc. (hereinafter Wells Fargo), commenced this action in the Supreme Court, Suffolk County, to foreclose on three consolidated mortgages. The mortgaged premises were located in Deer Park. The defendant Paul Meyers (hereinafter Paul) allegedly executed the underlying note, and Paul and the defendant Michela Meyers (hereinafter Michela) (hereinafter together the defendants) were the mortgagors.
In its complaint, Wells Fargo alleged that the defendants defaulted on the consolidated mortgages by failing to make the monthly payment due on February 1, 2009, and that Wells Fargo elected to call due the entire amount secured by the consolidated mortgages, in the principal sum of $310,467.70, plus interest at a rate of 5.75% accruing from January 1, 2009. Wells Fargo also alleged that it was the holder of the note and mortgage being foreclosed. However, Wells Fargo subsequently indicated that the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, was actually the owner of the note and mortgage, and Wells Fargo was the servicer.
According to the defendants, when they refinanced their loan in 2004, their initial monthly payments were approximately $2,200. By December 2008, the payments had increased to $2,785.64. At some point, Paul, a New York City Police Officer, had his overtime hours decreased, and he also lost his second job. In or about November 2008, Michela contacted Wells Fargo about a loan modification. The defendants did not receive a response from Wells Fargo until January 2009. Michela was informed that the defendants would be required to default on the mortgage for a period of three months in order to qualify for a modification.
Although they had never previously defaulted on their monthly mortgage payments, based on the instructions of Wells Fargo representatives, the defendants stopped tendering their monthly mortgage payments. During the following three months, Michela called Wells Fargo "every couple of weeks" for assistance. According to Michela, in April 2009, a Wells Fargo
In August 2009, the defendants received a trial modification offer from Wells Fargo under the Federal Home Affordable Modification Program (also referred to as the Home Affordable Mortgage Program [hereinafter HAMP]). This initial modification offer required the defendants to make three trial payments in the amount of $1,955.49. The defendants signed the forms to accept the trial modification offer on September 1, 2009. The defendants made the trial payments. Michela contacted Wells Fargo to inquire about final modification status, and she was informed that the matter remained under review.
The initial modification offer indicated, among other things, that, so long as the defendants complied with the terms of the offer, Wells Fargo would not foreclose on the mortgage during the trial period. Nonetheless, Wells Fargo commenced this foreclosure action on September 2, 2009. Wells Fargo representatives would later state that they "had no idea" why the defendants had been served with a summons and complaint.
Thereafter, Wells Fargo informed the defendants that, due to a miscalculation, a second three-month trial period was required with slightly lower monthly payments. The defendants accepted the second HAMP trial modification offer and made the trial payments of approximately $1,898 per month. However, on April 28, 2010, Wells Fargo sent the defendants a letter denying their request for modification. The letter indicated that the defendants did not qualify for a HAMP modification since their monthly housing expense was less than 31% of their gross monthly income.
According to Michela, when the parties appeared for a conference before a referee, Wells Fargo indicated that it would send the defendants another modification offer within five to seven days. However, on May 20, 2010, the defendants received another letter indicating that Wells Fargo could not modify the terms of the mortgage. This letter stated that the defendants' application was denied because the "investor" on the mortgage,
Wells Fargo offered the defendants yet another modification, which required monthly payments of $2,554, would extend the term of the mortgage an additional 15 years, and would result in the defendants paying substantially more money in interest over the term of the loan. The defendants could not afford these payments and rejected the offer. Wells Fargo did not extend any additional offers to the defendants.
After the parties could not reach a settlement, the Supreme Court, without objection, set the matter down for a hearing to determine whether Wells Fargo fulfilled its obligation, imposed pursuant to CPLR 3408 (f), to "negotiate in good faith to reach a mutually agreeable resolution."
The Supreme Court conducted the hearing over a period of three days, on September 22, 23, and 27, 2010. The foregoing history of the parties' negotiating efforts was described through testimony at the hearing, and is undisputed. In addition, Tarlisha Nelson, a loss mitigation manager for Wells Fargo, testified at the hearing that Freddie Mac was the owner of the note and mortgage, and that there was no latitude to modify or restructure the loan without Freddie Mac's approval. According to Nelson, the final offer extended to the defendants had been approved by Freddie Mac. In fact, at the hearing, Nelson testified that this loan modification was still available to the defendants. Nelson stated that Wells Fargo had been willing to work with the defendants to restructure their loan. Nelson testified that Wells Fargo offered the defendants several "moratoriums."
Following the hearing, in the order appealed from, dated November 10, 2010, the Supreme Court found that Wells Fargo failed to negotiate with the defendants in good faith, as required under CPLR 3408 (see Wells Fargo Bank, N.A. v Meyers, 30 Misc.3d 697, 701 [2010]). Upon that finding, the Supreme Court directed Wells Fargo to execute a final loan modification based on the terms of the original modification proposal, and directed the dismissal of the complaint (see id.). The court set forth its reasoning as follows:
As a preliminary matter, the order appealed from here did not decide a motion made on notice. As such, this order is not appealable as of right, as no appeal lies as of right in an action, originating in the Supreme Court, from an order which does not determine a motion made on notice (see CPLR 5701 [a] [2]). Nonetheless, since this case presents a very important issue, we deem Wells Fargo's notice of appeal to be an application for leave to appeal, and grant Wells Fargo leave to appeal (see CPLR 5701 [c]).
As the Supreme Court observed, Wells Fargo offered no explanation for commencing this action despite its representation that it would not initiate any foreclosure action during the HAMP trial period. Additionally, Wells Fargo does not deny that its own representatives advised the defendants to default on their mortgage in order to qualify for a loan modification program. Wells Fargo maintains that this conduct should not be taken into consideration in determining whether it satisfied its obligation pursuant to CPLR 3408 (f) to "negotiate in good faith to reach a mutually agreeable resolution" at the mandatory settlement conference because they occurred prior thereto. However, this conduct is relevant in the overall context of the parties' relationship and the negotiations between them.
Furthermore, it is undisputed that, during a settlement conference in May 2010, Wells Fargo informed the defendants that they could expect to receive a final modification within one week. Instead, the defendants received another denial letter, and an invitation to begin yet another HAMP trial period.
Moreover, Wells Fargo's final offer to the defendants would have extended the defendants' mortgage term by 15 years, would have required the defendants to pay hundreds of thousands of dollars more in interest, and would have only offered them relief in the form of monthly payments amounting to $271.93 less than their monthly payments before they sought modification.
Granting deference to the Supreme Court, which presided over this case, including the settlement conferences and the "good faith hearing" (see Decker v Decker, 91 A.D.3d 1291, 1292 [2012]), we see no reason to disturb that court's finding that Wells Fargo failed to satisfy its obligation pursuant to CPLR 3408 (f) to "negotiate in good faith to reach a mutually agreeable resolution."
The original version of CPLR 3408 applied only to those foreclosure actions involving high cost home loans or subprime or nontraditional home loans (see former CPLR 3408 [a]). CPLR 3408 (a) imposed the requirement that, in residential foreclosure actions involving the type of loans within the ambit of that section, in which the defendant was a resident of the subject property, the court would hold a mandatory conference for settlement discussions,
In November 2009, the legislature amended the statute to broaden its applicability (see L 2009, ch 507, § 9). As amended, the statute now applies to "any residential foreclosure action involving a home loan as such term is defined in section thirteen hundred four of the real property actions and proceedings law, in which the defendant is a resident of the property subject to foreclosure" (CPLR 3408 [a]). As amended, CPLR 3408 (a) provides,
The 2009 amendments to CPLR 3408 also added subdivision (f), which provides, "Both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible." This is the section at issue on this appeal.
Section 10-a (1) of chapter 507 of the Laws of 2009 provided,
The procedures and rules for CPLR 3408 settlement conferences promulgated by the Chief Administrator of the Courts are set forth in 22 NYCRR 202.12-a. With regard to the obligation of the parties to negotiate in good faith imposed by CPLR 3408 (f), these rules provide,
Notwithstanding the obvious intent of the foregoing statutes and rules, again, "CPLR 3408(f) does not set forth any specific remedy for a party's failure to negotiate in good faith" (Hon. Mark C. Dillon, 30 Pace L Rev at 875). While section 10-a (1) of chapter 507 of the Laws of 2009 expressly provided that the rules to be promulgated by the Chief Administrator of the Courts to govern CPLR 3408 (f) settlement conferences "may include granting additional authority to sanction the egregious behavior of a counsel or party," no specific sanction or remedy was set forth in these rules.
It would certainly seem that CPLR 3408 (f) and 22 NYCRR 202.12-a (c) (4) both provide the courts with the authority to take some action where a party fails to satisfy its obligation to
It is vital to remain mindful of the entirely appropriate limitations of CPLR 3408. The section requires settlement conferences in foreclosure actions to explore the issue, among others, of "whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to" (CPLR 3408 [a]). Moreover, the parties are required to negotiate in good faith (see CPLR 3408 [f]). However, it is obvious that the parties cannot be forced to reach an agreement, CPLR 3408 does not purport to require them to, and the courts may not endeavor to force an agreement upon the parties.
In the absence of specific guidance from the legislature or the Chief Administrator of the Courts as to the appropriate sanctions or remedies to be employed where a party is found to have violated its obligation to negotiate in good faith pursuant to CPLR 3408 (f), the courts have resorted to a variety of alternatives in an effort to enforce the statutory mandate to negotiate in good faith. For example, upon finding that foreclosing plaintiffs have failed to negotiate in good faith, courts have barred them from collecting interest, legal fees, and expenses (see Bank of Am. N.A. v Lucido, 35 Misc.3d 1211[A], 2012 NY Slip Op 50655[U] [Sup Ct, Suffolk County 2012]; BAC Home Loans Servicing v Westervelt, 29 Misc.3d 1224[A], 2010 NY Slip Op 51992[U] [Sup Ct, Dutchess County 2010]; Emigrant Mtge. Co. Inc. v Corcione, 28 Misc.3d 161 [Sup Ct, Suffolk County, 2010], vacated on rearg 2010 WL 7014850 [Sup Ct, Suffolk County, Oct. 14, 2010, No. 2009-28917]; Wells Fargo Bank, N.A. v Hughes, 27 Misc.3d 628 [Sup Ct, Erie County 2010]), imposed exemplary damages against them (see Bank of Am. N.A. v Lucido, 35 Misc.3d 1211[A], 2012 NY Slip Op 50655[U] [2012]; Emigrant Mtge. Co. Inc. v Corcione, 28 Misc.3d 161 [2010], vacated on rearg 2010 WL 7014850 [2010]), stayed the foreclosure proceedings (see Deutsche Bank Trust Co. of Am. v Davis, 32 Misc.3d 1210[A], 2011 NY Slip Op 51238[U] [Sup Ct, Kings
In IndyMac, we determined that the "severe sanction imposed by the Supreme Court of cancelling the mortgage and note was not authorized by any statute or rule" (IndyMac Bank F.S.B. v Yano-Horoski, 78 AD3d at 896). However, with the exception of IndyMac, we have not had occasion to review the propriety of other means of enforcing the statutory mandate of CPLR 3408 (f).
While we do not rule out the possibility of other permissible remedies, we conclude that the one employed here — the imposition of the terms of the so-called "original modification agreement proposed by the plaintiff and accepted by the defendants" (Wells Fargo Bank, N.A. v Meyers, 30 Misc 3d at 701), as the new, binding terms of the agreement between the defendants and Freddie Mac — was unauthorized and inappropriate.
The "original modification agreement" was merely a trial arrangement, not an agreement for the binding obligations of the parties going forward. Moreover, in light of Wells Fargo's representation that Freddie Mac did not approve of the earlier trial modification terms,
Moreover, as the Court of Appeals stated, and as we have observed in, among other things, the context of foreclosure actions,
Indeed, the Supreme Court's interpretation of CPLR 3408 (f) as authorizing it to, in effect, rewrite the mortgage and loan agreement would violate the Contract Clause of the United States Constitution (see US Const, art I, § 10 [1] [hereinafter the Contract Clause]). The potential impairment to contracting parties under such an interpretation would be substantial, and, notwithstanding the laudable purpose of the legislation, such an interpretation would be neither reasonable nor necessary to accomplish the legitimate public purpose at issue (see generally Association of Surrogates & Supreme Ct. Reporters Within City of N.Y. v State of New York, 79 N.Y.2d 39, 46 [1992]). The Contract Clause "is not an absolute and utterly unqualified restriction of the State's protective power" (Home Building & Loan Assn. v Blaisdell, 290 U.S. 398, 447 [1934]). Thus, in theory, a remedy could be fashioned to address a violation of CPLR 3408 (f). However, the remedy employed by the Supreme Court here, in binding the parties to terms never agreed upon by either side, is without any source for its authority, and goes well beyond what would be justified by the State "to safeguard the vital interests of its people" (Exxon Corp. v Eagerton, 462 U.S. 176, 190 [1983] [internal quotation marks omitted]).
In addition, the Supreme Court's determination violated Wells Fargo's due process rights. Wells Fargo was not on notice that the Supreme Court was considering a remedy such as the imposition of the terms of the modification proposal on a permanent basis (see IndyMac Bank F.S.B. v Yano-Horoski, 78 AD3d at 896), and due process requires that a party receive notice that the court would entertain such a remedy (cf. Novick v Novick, 251 A.D.2d 385, 386 [1998]).
In sum, it is beyond dispute that CPLR 3408 is silent as to sanctions or the remedy to be employed where a party violates its obligation to negotiate in good faith. In amending CPLR 3408 to add subdivision (f), the legislature declined to authorize or set forth any particular sanction or penalty to impose upon a party found to have failed to satisfy its obligation under CPLR 3408 (f) to negotiate in good faith. Unless the legislature chooses to specify appropriate sanctions or remedies to be employed in such circumstances, the courts will continue to endeavor to enforce the mandate of CPLR 3408 (f) as best they can in the absence of a sanctioning provision.
The remedy employed by the Supreme Court here was unauthorized and violated the Contract Clause and Wells Fargo's due process rights. Thus, the order directing Wells Fargo to execute a final modification patterned after the terms of the trial loan modification proposal and directing dismissal of the complaint cannot stand.
In the absence of a specifically authorized sanction or remedy in the statutory scheme, the courts must employ appropriate, permissible, and authorized remedies, tailored to the circumstances of each given case. What may prove appropriate recourse in one case may be inappropriate or unauthorized under the circumstances presented in another. Accordingly, in the absence of further guidance from the legislature or the Chief Administrator of the Courts, the courts must prudently and carefully select among available and authorized remedies, tailoring their application to the circumstances of the case.
In light of our determination, we need not reach Wells Fargo's remaining contention.
Ordered that on the Court's own motion, the plaintiff's notice of appeal from the order is treated as an application for leave to appeal, and leave to appeal is granted (see CPLR 5701 [c]); and it is further,
Ordered that the order is reversed, on the law, without costs or disbursements, and the matter is remitted to the Supreme Court, Suffolk County, for further proceedings consistent herewith.
