A recent case confirms yet again how a lender holding a defaulted mortgage can be saved by a pre-negotiation letter with a borrower. [CSMC 2007-C1, Oswego Road, LLC v. Kimbrook Route 31, LLC, 120 A..D.3d 1539, 993 N.Y.S.2d 394 (4th Dept. 2014).]
With good reason, we have written about this before (in alerts and articles) but the point is meaningful enough to merit explanation anew. Lenders and servicers will recognize the impetus to settle foreclosure cases, among the reasons: it can be a better path than litigation; statutes and/or regulators may require it; compassion may dictate it; public relations can compel it. And so, settlement discussions often emerge when a mortgage goes into default or into foreclosure. Where might be the danger in such an approach?
The problem is that a borrower may claim that the lender made certain assertions or promises during the settlement process that binds the lender and forces them to settle – on terms never in fact agreed to. While there are legal arguments against such a result, the fact is that there can indeed be peril to a lender in such a scenario.
Protection for the mortgage holder can readily be found, though, in a pre-negotiation letter. This is a letter to the borrower, to be countersigned by the borrower, reciting that there is no settlement, no change or modification to the mortgage unless and until an actual writing to that effect is signed by the lender (or servicer). These letters typically are more detailed and nuanced than the statement presented, but that is the essence of it.
Does it work? Generally yes and such is precisely a ruling in the cited case. There, a foreclosure was begun, settlement was pursued, that failed and the lender proceeded to move for summary judgment.
As part of the settlement process, the lender prepared a pre-negotiation letter agreement which the court found provided that any negotiations were not binding on the parties without a written modification of the loan agreement. The court further found no such written modification ever emerged.
The borrower argued that a promise or conduct by the lender existed showing that there would be no foreclosure. Therefore, argued the borrower, foreclosure and summary judgment by the lender was “estopped” – barred. No, ruled the court. Pursuant to the pre-negotiation agreement there had to have been a signed, binding agreement not to foreclose and that did not exist. The case proceeded.
The clear principle then is that a pre-negotiation letter can be effective and is recommended. It is typically an aspect of any commercial foreclosure action, far less common – virtually non-existent – in the residential case. Lenders and servicers in the home loan arena may wish to revisit adoption of such letter agreements.
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.