This is yet another one of those issues that might be seen as arcana solely for lawyers to worry about, but it surely impacts mortgage servicers so that exploration of the subject can be enlightening. Such an excursion also exposes anew what a trap foreclosures in New York have become for lenders.
All this is elicited by a new case where a court ruled that a foreclosing plaintiff’s motion for an order of reference more than a year after the borrower’s default was still permitted [LNV Corporation v. Forbes, 122 A.D.3d 805, 996 N.Y.S.2d 696 (2d Dept. 2014)]. Understanding the significance of this, though, requires some discussion.
The real issue arises from an unrecognized clash between New York procedure generally and the nature of a foreclosure action.
Servicers should be aware that in New York after all defendants have been served with process (and assuming no answer has been received), the next stage, or plateau, is the appointment of a referee to compute; pedestrian so far. Servicers should also know that after the referee is appointed, and has computed the sum due on the mortgage, only then can an application for the judgment of foreclosure and sale be pursued. This means that the stage of applying for the referee’s appointment is not a judgment application, but here is where foreclosures run afoul of the noted clash; stay with us on this one.
When the appointment of a referee is sought, the foreclosing party advises the court that everyone has been served and the various defendants have either appeared or defaulted. (If anyone had answered it would lead to a motion for summary judgment.)
We now must turn to New York practice, CPLR 3215(c), which in essence states that if a plaintiff fails to enter a judgment within one year after a default, the judgment shall not be entered but the complaint shall be dismissed as abandoned (unless sufficient cause is shown why the complaint should not be dismissed). So – and now we get to the heart of it – is the application for the appointment of a referee akin to a judgment? The answer is not really. This is a stage peculiar to foreclosure actions and it is a hybrid, that is, while the actual judgment comes later in the case (when the judgment of foreclosure and sale is sought) there is still a declaration when applying for the order of reference that some defendants are in default. Case law acknowledges the intermediate nature of the application for an order of reference, but this is all so obscure that challenges to an order of reference a year after any defendant has defaulted are not uncommon.
The problem is of course exacerbated because the system already tends to impose considerable delay upon foreclosing plaintiffs – issues with notices and filing the right papers, conference mandates among other roadblocks.
In the cited case, more than one year after the borrower’s default the plaintiff moved for the usual appointment of a referee, and the declaration of default as to those defendants who did not answer or appear. The borrower opposed the motion and asked that the complaint be dismissed because more than a year had expired since his default and asked alternatively for permission to interpose a late answer.
Both the trial court and the appellate tribunal said it was proper to exercise discretion in denying the borrower’s assault, observing that the lender met its burden of demonstrating both a reasonable excuse for the delay in timely moving for a default judgment and a potentially meritorious cause of action. Still further, there was no prejudice to the borrower caused by the lender’s delay.
And the lesson here? Well certainly foreclosing plaintiffs have yet further incentive to reach the order of reference stage as soon as possible. The problem, as noted, is that many times best efforts won’t bring that about. If a borrower who is in default then challenges the supposed tardiness, the foreclosing lender needs to be in a position to show why it was late. They should be able to do that it if it wasn’t because of their own inaction – and to confirm that of course there is a valid cause of action – the borrower defaulted and there is a basis for the foreclosure.
The decision is encouraging, but the anomaly (not so widely recognized) will undoubtedly continue to bedevil 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.