This is too common a ploy, well known to mortgage servicers. Borrower is in default and compounds the breach by vigorously opposing the lender or servicer, thereby causing considerable legal fees to accrue. There comes a time, though, when borrower decides to reinstate or payoff, as the case may be, and while the submitted check contains all the principal and interest, it conveniently neglects all the legal fees. Can the borrower get away with it? Probably not, and a new case highlights the point. [Astoria Fed. Sav. & Loan Association v. Trakansook, 18 A.D.3d 586, 796 N.Y.S.2d 365 (2005)].
In the usual scenario, legal fees are a very small percentage of the mortgage. Suppose for example a residential borrower remits a payoff check for $250,000, but leaves out the $5,000 in legal fees. Assuming the legal fees are reasonable, the servicer encounters an apparent dilemma. If the check is retained, the borrower may cry waiver (servicer cashed and retained the remittance). In addition, if the foreclosure then goes forward, the servicer is forced into the unsympathetic position of trying to take someone’s property for a mere (in our example) $5,000. The servicer is legally correct, but courts are not so warm to facts like these.
If the servicer returns the insufficient check, there is discomfort in sending back $250,000 which could have been in the account, all for the sake of preserving $5,000.
So what is the answer? Sending back the principal and interest is the better legal approach. The new case hints at this (although the check was not returned) under these atypical facts.
A foreclosure sale was conducted. For reasons not explained in the decision, the court granted the borrower’s motion to vacate the sale on condition that the borrower redeem by paying the mortgage debt within twenty days in accordance with a certain payoff letter. That letter specified the debt as some $120,000 for principal and $18,000 in legal fees and disbursements. The borrower remitted the $120,000 of principal but no more.
The foreclosing lender understandably moved to hold the borrower in default. “No” said the trial court, the borrower’s check was a “good faith” tender of sufficient funds to redeem.
Happily, there was a reversal on appeal. A mortgage lien is also security for costs and disbursements. If a borrower wants to argue tender he must show he has paid everything due on the mortgage. Because the borrower failed to do that – he did not pay the legal fees – a good faith effort (if that’s what it was) is not the same as actually paying what is due.
Yes, legal fees need to be paid. Chalk this one up for lenders and servicers.
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.