Lenders have seen this type of case before and we have written about them, but they keep on coming. So the principles – comforting to lenders – are worthy of reciting anew when encountered, as is so in a recent case. [Eaddy v. U.S. Bank, N.A., 180 A.D.3d 756, 119 N.Y.S.3d 756 (2d Dept. 2019)]
This started out as a garden variety bank foreclosure which proceeded to judgment of foreclosure and sale – which happened to be on default – then to sale. Sometime thereafter, the former borrower, claiming to be aggrieved, brought a quiet title (or bar claim) action against the lender and its attorneys for damages for fraud and violation of Judiciary Law § 487 (this aspect against the attorneys) arising out of the prior foreclosure action.
Could this possibility succeed? If it could, lenders would be in almost eternal danger of disgruntled borrowers who had every opportunity to litigate and appeal the foreclosure action later suing lenders who were merely enforcing their rights under the mortgage. It is not quite an upside down world and so the answer is “no”, the borrowers’ action would not succeed.
Three critical related principles support the banishment of borrower assaults such as these.
One is the doctrine of res judicata which holds that a final adjudication of a claim on the merits (as in the underlying mortgage foreclosure) precludes relitigation of that claim – and all claims arising out of the same transaction or series of transactions.
Next, and specifically applicable to the foreclosure case, a judgment of foreclosure and sale is final as to all questions at issue between the parties and concludes all matters of defense which were or could have been litigated in the foreclosure action.
Finally, even a judgment obtained on default (as was so in this case), which has not been vacated, is conclusive for res judicata purposes and encompasses issues that were or could have been raised in the prior action – for our purposes here, the earlier foreclosure.
To restate it all free of any legal jargon, the borrower had his chance in the foreclosure to make his arguments. Had he done so and lost, the judgment would have served to take away any power to sue the lender later in another action. Even where the borrower defaults in the foreclosure, the judgment is effective as to any arguments the borrower might have raised had he chosen to do so. He elected not to and cannot later be given the proverbial second bite of the apple.
Will we see these cases yet again? Undoubtedly. But lenders can rely on the maxims recited here to confidently fend off attacks.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2019), 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.