By Bruce J. Bergman, Member, Berkman, Henoch, Peterson, Peddy & Fenchel,
P.C., Author, Bergman on New
York Mortgage Foreclosures, 3 vols, LexisNexis Matthew Bender (rev. 2010)
This is a startling "heads up" for mortgage
lenders and servicers: A bill has passed
both houses of the New York State legislature and awaits the signature of the
governor. While no one can say with
certainty whether the governor will sign it, the easy guess is that he
will. The law is designed to award legal
fees to a residential borrower who successfully defends a mortgage foreclosure
action. That, however, not be quite so
benign as it may sound.
Designated
to be a new §282 of the Real Property Law, it is entitled "Mortgagor's Right to
Recover Attorneys' Fees in Actions or Proceedings Arising Out of Foreclosures
of Residential Property ." [2009 Bill Text NY S.B. 2614]
First,
whatever precisely the statute means, its application is solely to "Residential
Real Property". This is defined in subsection
2 of the statute as property:
"improved by a one-to-four-family residence, a
condominium that is occupied by the mortgagor or a cooperative unit that is
occupied by the mortgagor."
So while this clearly covers an owner
occupied condo or co-op, the one-to-four-family residence can apparently be an
investment property; the condition of owner occupied is appended only to the
condo and co-op.
The
essence of the new statute is that where a mortgage contains a legal fee provision
for the lender, then there must be implied in the mortgage a covenant that the
lender pay to the borrower the reasonable attorneys' fees and/or expenses
incurred by the borrower resulting from the failure of the lender to perform
any covenant or agreement on its part under the mortgage, or in the successful defense of any action commenced by the lender
against the borrower arising out of the "contract". (Any waiver of this new obligation in a
mortgage is deemed void as against public policy.)
While
the notion that a borrower might be entitled to collect legal fees in a
mortgage foreclosure action is generally unpalatable to lenders (and it has not
previously existed in New York),
where it might be the lender which breached a mortgage, that the borrower
should be reimbursed for legal fees does not seem so offensive. The problem, though, is that from time to
time courts may indict a lender for a supposed breach when the lender argues
quite genuinely that such a defalcation never occurred.
But
the real danger here is granting the award for a supposed successful defense of
any foreclosure action. What precisely a
successful defense is can be problematic.
If a lender loses a foreclosure because it made a mistake, such as the
borrower truly was not in default; the lender lost the record of funds having
been paid, or someone just stumbled and erroneously began a foreclosure. But what happens if a foreclosure is defeated
because a process server fumbled and the case was dismissed? Sometimes, not incidentally, a borrower will
claim that the person served at their home was unknown to them and a court
might accept it even if one might deem the assertion to be a prevarication.
Then
there is the problem of a lender being accused of not having sent a notice
where it did so but the records to prove it are imprecise. Is that a successful defense of a foreclosure
action entitling the borrower to be repaid its legal fees? It is one thing for a lender to be
substantively wrong and pay the price, it is another for a technical miscue to
elicit payment of a borrower's legal fees.
Some
comfort in this regard may, however, be in the offing. The new statute is modeled upon RPL §234
which awards legal fees to tenants who successfully defend an eviction
proceeding. Case law interpreting that
section does not grant the fee award when dismissal of the eviction is not on
the merits - such as for example, dismissal for errors in service of process or
notice mandates. If these
interpretations are carried over to the foreclosure arena (although this is not
at all certain) then the new statute may not be quite as offensive to mortgage
holders as would initially be perceived.
We invoke the bromide, only time will tell.
Mindful
that this section is referred to as the "Access to Justice in Lending Act" it
suggests most strongly that the governor will view it favorably. If the bill is signed, it will take effect on
the sixtieth day after it becomes law and will then apply to any residential
real property mortgage in existence on or after that effective date and will
apply to any actions commenced on or after that date.