Loss mitigation and settlements can be wonderful. No one doubts that lenders and mortgage servicers should always be alert to finding safe ways to avoid foreclosure. But care is in order and a new case in New York highlights the problem of just halting the foreclosure in place because there seems to be some settlement. [See Counsel Abstract, Inc. Defined Benefit Pension Plan v. Jerome Auto Center, 23 A.D.3d 274, 805 N.Y.S. 2d 14 (1st Dept., 2005)].
First, there is a critical statute to observe in New York (other states will have similar provisions). The applicable statute [CPLR §3215 (c)] says that if a plaintiff fails to enter a judgment within one year after a default, a judgment cannot be entered. Instead, the action must be dismissed, either by the court or by motion of some party – unless sufficient cause is shown why the complaint should not be dismissed.
Defaults (non-appearance) by borrowers and others in foreclosure actions are common so the cited provision will often be meaningful.
Obviously, there can be many good reasons why litigation or negotiations can stall or postpone a foreclosure case so that a judgment would not be entered within a year of default. Assuming the reason for the delay is not simply the servicer or its counsel having gone to sleep, there likely will be good cause and when a foreclosure judgment finally is sought, the court can grant it. (Of course, this observation confirms its own vital point: undue delay in a foreclosure can alone sometimes be a basis to dismiss the action.)
Why danger still lurks is exposed by the new mentioned case. A mortgage matures. Borrower corporation does not pay and so foreclosure is begun. Borrower defaults – does not appear in the action. Along comes the borrower’s accountant who “buys” a portion of the mortgage and makes periodic payments for that purchase. Plaintiff mortgagee agrees with the accountant to stay the foreclosure action and extend the mortgage so long as payments by the accountant are being made, including a later large lump sum.
All payments were made (by the accountant) before the “extended” date. For whatever reason, plaintiff did nothing to pursue the foreclosure action or enter judgment for another 7 years, at which time the court dismissed the foreclosure on motion of the borrower on the ground that more than one year had passed since the default in appearance.
Here, no good cause was shown for the delay in moving for judgment. The accountant was a stranger to the mortgage. Discussions or agreements with him could not bind the borrower. If plaintiff wanted to reserve its rights, all it needed to do was enter into a forbearance or mortgage modification agreement with the borrower.
The lesson: If a foreclosing party encounters a default in the action, always think about entering a judgment before a year expires if at all possible. If there is a compelling reason to refrain from entering a judgment, make sure the reason is memorialized in a clear writing with the parties liable for the debt and those who own the property.
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.