Cannot a foreclosing lender protect its investment by securing the mortgaged premises if they are in some possible danger, such as, for example, vandalism or frozen pipes? With the usual mortgage provisions the answer is certainly yes, but a new case highlights the need to ever so carefully invoke those provisions. [Wells Fargo v. Tyson, 27 Misc. 3d 684, 897 N.Y.S.2d 610 (Sup. Ct. 2010)] There, the court found that in changing the locks, the lender trespassed and was ordered to pay: $200 for the trespass, $4,892 actual damages for claimed missing personalty and $150,000 as punitive damages.
How did this happen?
One answer is that some unfortunate facts (at least the way the court elected to perceive them) combined with less than diligent attention in conforming to the mortgage provisions left the lender in an exposed position.
Factually, the court found that the husband and wife owners of the property in foreclosure halted utility services at the premises because they had insufficient funds, although they winterized the plumbing and heating systems. They secured the building, maintained the exterior, left their personalty in the home and went to live elsewhere, although they notified the lender of all of this. The court found also that the borrowers did not intend to abandon the premises but did expect to return some day.
In the face of this, the lender, and without any notice to the borrowers, changed the locks of the premises, thus barring the borrowers from entry. A comedy – or tragedy – of errors followed whereby there was some confusion on the part of the lender or its agents as to precisely who was going to the property and what was going on. Indeed, when the issue arose in court, the property preservation service sent as a witness a supervisor who had no actual knowledge of the events and who was relying on what others told him – therefore, inadmissible hearsay.
Given these facts, turn to the typical mortgage provisions, one of which was that the lender could enter and inspect the property, but only in a reasonable manner, at reasonable times and upon notice to the borrower stating a reasonable purpose for the interior inspection. It was clear in this case that no such notice had ever been given by the lender to the borrowers.
Next, there was a standard clause in the mortgage that if the borrowers abandon the property, then lender can do and pay for whatever is reasonable to protect lender’s interests, including securing the property, making repairs or changing the locks. Recall, though, that the court found that the borrowers had indeed not abandoned the property and thus the ability to invoke this clause did not exist.
With the confluence of the noted facts and the mortgage provisions, the court found that the plaintiff had perpetrated a trespass against the borrowers’ real property, thus imposing the draconian damage award.
To be sure, this case is unusual and likely aberrational. Moreover, the court was exceptionally zealous in punishing the lender. It does not happen like this every day. That said, though, it does emphasize the need for lenders and servicers to be quite meticulous in determining the status of the property and giving notice where required. This case is an unfortunate and startling lesson.
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.