A recent decision is particularly meaningful for foreclosing lenders and title companies concerning the critical problem of the new statute in New York which eliminates a borrower’s waiver of the standing defense. [JP Morgan Chase Bank, N.A. v. Carducci, 67 Misc.3d 561, 124 N.Y.S.3d 642 (Sup. Ct., West. Co. 2020)]
Mortgage holders will be aware that the issue of whether a foreclosing plaintiff has standing or not is quite critical. Indeed, it is an oft-raised defense, although meaningfully that defense has always been waived if not raised in a motion addressed to the complaint or in an answer to that complaint. However, effective December 23, 2019 is RPAPL § 1302-a eliminates waiver of the standing defense in a home loan foreclosure action even though not raised in an answer or a pre-answer motion.
If the borrower raised the defense of lack of standing and litigated it (and lost) then the new statue presents no problems. If the borrower did not present the issue, however, but appeared in the case, the threat of the standing defense being interposed survives until the moment the hammer fell at the auction sale. More alarming, if the borrower defaulted in the action, then non-waiver of the standing defense per the new statute continues even after there is a foreclosure sale.
The immediate peril of such a construct is that the foreclosure title could always be in jeopardy (whenever a borrower defaults in the action) for a period of time after the foreclosure sale that would be very difficult to assess and define. That would likely devalue any such title being sold through a foreclosure. It also resulted in many title companies declining to insure such a title for fear of an interminable period of encountering an attack on the legitimacy of the title if standing were later challenged and found to be wanting. In sum, the new statute was a source of much consternation.
Traditionally, when a party is in default, if it wishes to vacate that default, that is to be heard on some defense for example, it was always required to do two things: One, provide an excuse for the default and two, offer a meritorious defense. The new statute affords the meritorious defense after foreclosure even when under existing case law held it had always been waived. But what about the excuse aspect? That is what the recent case mentioned addressed and it is there that cooler heads prevailed.
The court confirmed the accepted principle mentioned that in order to vacate a default – in that case the judgment of foreclosure and sale – a defendant must establish both a reasonable excuse for that default and the meritorious defense. Finding that the new statute did not, however, alter the requirement for an excuse, and finding in the case that the borrower did not have such an excuse, the attack on standing was rejected.
It must be observed that this was a decision in Supreme Court, the trial court level in New York. It is not the holding of an appeal level tribunal. Nonetheless, the point has great merit and is well taken. While no one can predict what the Appellate Division might say, it may be reasonable to assume that a principle like this would be affirmed. A defendant should not be given carte blanche to open a default and assert a defense merely because a statute says the defense is not waived – there must still be the excuse for not asserting that defense.
This decision too is somewhat diminished because the court found that even if the standing defense was supported by an excuse, the defense itself had no merit. So either way the court knew it would be correct in its ruling. Furthermore, whether this vital aspect of the scenario will entice title companies to be more anxious to insure certain foreclosure titles is unpredictable at best. But the ruling is a comforting one for any foreclosing party.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2020), 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.