Revisiting Two Important Concepts Lenders Should Know

We never do this – repeat an alert.  There is always plenty that is new and fresh, worthy of attention.  But the two aspects of our alert below of three years ago (May 15, 2012 to be precise) occur with such frequency that underscoring them anew may be helpful.

The dual lender miscues inviting a revisit are issuing an erroneous satisfaction and volitionally or carelessly delaying a case which allows a borrower to demand elimination of interest for the delay period.

With that in mind, we invite a consideration of the issues below as they were presented:

In these extraordinarily difficult times for lenders and servicers, mistakes are the last things they need.  While minor miscues can be treated by the courts as meaningless, major missteps are a serious matter, and in a recent case, there was a confluence of two blunders which consequentially cost the mortgage holder. [Deutsche Bank Trust Co. Americas v. Stathakis, 90 A.D.3d 983, 935 N.Y.S.2d 651 (2d Dept. 2011).]  These were issuance of an erroneous satisfaction and then delaying the foreclosure – which happened to be a result of the errant satisfaction.

As to the satisfaction, oddly, this mistake is more commonplace than might be imagined.  If often arises out of a CEMA (consolidation, extension and modification agreement); here, it came from a simple assignment.

In this case, the foreclosing bank assigned the mortgage after judgment was entered – hardly unusual.  (This would have allowed the assignee to complete the sale without necessity of amending the caption of the action.)  While, of course, the bank was paid for the assignment, the mortgage was not satisfied; it was still alive as owned by the assignee.  Nonetheless, and inexplicably, there was generated and filed on behalf of the assigning bank a satisfaction of the assigned mortgage.  This in turn led the borrower to pounce and claimed that he had relied upon the satisfaction when he contracted for renovation of the mortgaged premises.

One critical factor here is that if the borrower had, for example, sold the property to someone who did not know that the satisfaction was erroneous, their title would be free of the bank’s mortgage, as would any subsequent mortgage obtained by that new purchaser.  The applicable rule, cited by the court in this case, was that a lender can have an erroneous mortgage satisfaction discharged where the debt has not in fact been satisfied, and have the mortgage reinstated, but only where there has been no detrimental reliance upon that mistaken recording.  In this instance, and fortunately for the assignee of the mortgage, the court found the borrower’s assertions baseless because the bank had already filed an action to cancel the mistaken satisfaction.  (Thus, he had to know of the error in that satisfaction and could not have relied upon it.)

So here, the unfortunate satisfaction avoided creating a complete disaster.  But then, all the jousting generated by that satisfaction delayed the case extensively.

The borrower then argued that he should not be liable for the accrual of interest during the period of delay engendered by the fight over the satisfaction.  The court agreed – and correctly so.

The other principle mentioned at the outset, of which the lender ran afoul, was that recovery of interest in an equitable action (foreclosure is such an action) is within the discretion of the court.  That is to say, the court can reduce or eliminate interest for a period of delay which may have been created by the foreclosing party.  Here, that is precisely what the court found and so a considerable amount of interest was just lost.

The lesson of all this is helpful only to a certain degree.  Lenders and servicers need to well understand when a satisfaction should issue – and when it should not.  This ought to be a specific point of training so erroneous satisfactions are not generated.

Regarding the delay, foreclosing plaintiffs typically seek to proceed as quickly as possible in any event and almost invariably suffer delay only because of court schedules and defensive efforts by various defendants, most notably borrowers.  The situation does remind, though, that lenders cannot hold in place in a foreclosure without a good valid reason.  Otherwise, they can be subject to reduction or extinguishment of interest for the period when no progress was achieved.

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.