Short Sale Not A Defense To Foreclosure


1 October, 2018


Mortgage Lender and Servicer Alerts

Certainly since the financial, crisis short sales have become commonplace, although perhaps a bit less intense of late.  Where the property is apparently worth less than the sum due on the mortgage, the borrower might hope to sell for that diminished market value and the lender might be agreeable. But must a lender accept a short sale when tendered?  Would a borrower even try to assert such a tender as a defense?  The respective answers are, not surprisingly, “no” and “yes”, as a recent case illustrates.  [U.S. Bank, N.A. v. Nava, 2018 N.Y. Misc. LEXIS 155].  Speeding immediately to the conclusion, the court ruled that the borrowers’ desire to proceed with a short sale is not a defense to a foreclosure action and the court cannot force an agreement upon a Plaintiff.

This conclusion is not unexpected, although certainly helpful to have had a ruling like this since it is reasonable to expect that borrowers will raise such a defense from time to time.  But then, the facts of the case were somewhat unusual and are worthy of recitation, particularly because they add other helpful elements.

Here, the judgment of foreclosure and sale had been obtained on January 30, 2017 but a bankruptcy filing by the borrower made it impossible to conduct the sale within 90 days of the judgment [as required by RPAPL §1351(1)].  Nonetheless, the foreclosure sale was conducted, albeit beyond the 90 days and thereafter the plaintiff sought the blessing of the court after the fact by way of an extension for the sale date.  The borrowers opposed that motion and claimed that they wanted to complete a short sale.  Prior to the foreclosure sale the borrowers had made an offer and a proof of funds but the plaintiff declined to consider it.  The borrowers argued that the foreclosure sale was improper because it was late and further that the short sale application would have been considered if the improper sale had not been scheduled.

The court observed, however, that the borrower defendants had been in default in the action, had failed to vacate their default and therefore were not even qualified to seek affirmative relief in the case.  As to the late sale, the court pointed out that a court is authorized to extend any time fixed by statute as may be just and upon good cause shown whether such an application for such an extension is made before or after expiration of the time fixed.  Finding that the plaintiff had good cause for its delay in setting the sale (after all, the borrowers had filed bankruptcy) and that the borrowers did not demonstrate any prejudice as a result of the delay (indeed the defendants waited a year after entry of judgment of foreclosure and sale to proceed with a short sale) there was just no basis to upset the foreclosure sale.

While the circumstances of this case provided yet other support for the court to deny the short sale proposal as a defense, the basic concept should still apply: that a borrower hopes to proceed with a short sale is not a defense to a foreclosure.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2018), 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.