The New York State assembly has just passed a bill providing that a borrower does not waive the defense of a foreclosure lender’s lack of standing even if that defense is not asserted in a pre-answer motion or in an answer. (This is to be via a new RPAPL §1302-a). While the senate must yet vote on it as well, it may indeed become law and it is a very serious matter for lenders and servicers. We will explain.
The supposed defense of lack of standing has for a number of years been a particular favorite of defaulting borrowers. They readily assert it – after all, it is hardly unknown to their attorneys – and this serves as a source of much delay in the foreclosure process. While it is true that on some occasions a foreclosing party has not been sure to have the note in its possession prior to initiating the foreclosure, or neglected to have an assignment of the note (and mortgage which goes with the note) prior to inception, most of the time there really is no issue.
But the most creative of obfuscation presents challenges in this arena: how to satisfactorily demonstrate delivery of the note, meeting claims about a missing allonge, an assignment page unstapled from the note, among more than a few others. While lenders typically prevail in the end, they are subject to much agony in the process.
Perhaps because an issue of standing is or would be apparent at the inception of any case, it is a defense which if not interposed in a motion seeking to dismiss a complaint, or if not part of an answer to a complaint, is deemed waived – as a matter of statute in New York. Much case law over all the years has strongly supported this. Borrowers cause enough mischief presenting the defense in a motion or in an answer. What if they decide to try the defense long after summary judgment has been granted or after a judgment of foreclosure and sale has been entered?
It should not surprise lenders and servicers to learn – they probably already know – that borrowers will indeed present this defense at any time in the case. But when they do, the current law is absolutely clear that it is too late – the defense is waived if, as noted, it has not appeared earlier in the case in a pre-answer motion or in the borrower’s answer.
Comes the state legislature which believes that borrowers have great difficulty in some majority of cases in determining who is the owner of the loan. So they say. This is not at all our experience, and lenders and servicers will undoubtedly agree with that. Because, however, this is the view of the legislature, they seek remedial action through the mentioned bill which just passed in the assembly. While a part of that law is that the defense cannot be made after a foreclosure sale (one must be thankful for small favors) it would be available even after a sale if the foreclosure action proceeded on a default in appearing by the borrower.
So what does all this mean in the end? A borrower would now be free to hold in reserve a fanciful standing defense until sometime in the middle of the case or at the end of the action or even the eve of sale. This could be employed as a tactic to garner further delay or to force a settlement. Or, a borrower could choose to default in the foreclosure action, await a foreclosure sale and then launch the defense even after the sale.
If borrowers believe that the foreclosing lender is not really the holder of the note and the mortgage, they are free to raise that defense in an answer, and in fact they do, multitudinous times, even without basis. Lenders and servicers will likely be of the opinion that the need for this new legislation is capricious at best. And it does pose a threat to yet clog and delay the foreclosure process even more in the Empire State.
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.