For institutional lenders, receiving a mortgage payoff after default or after a foreclosure action has been begun is welcome. While a request for a payoff letter is hardly an assurance that the money will be forthcoming, it may be some indication that a conclusion is impending.
Payoff, of course, includes all sums due: principal, interest (default interest if applicable), late charges, legal fees and various advances (or overdrafts) for taxes, insurance and advances to senior mortgagees (in the case of a junior mortgage). We need not try to categorize other sums which may be due and the point should be apparent that care is necessary to assure that the amount in the payoff letter sent to a borrower is correct.
What happens if a mistake is made? Could it be fatal? It might be, a point found in a recent decision [Bankers Trust Company of California v. Sciarpeletti, 28 A.D.3d 408, 816 N.Y.S.2d 71 (2d Dept. 2006).]
In a hotly contested case (all the more reason for meticulousness), and after summary judgment to the foreclosing plaintiff, the borrower requested a payoff letter. There were two separate letters (one supplementing the other with handwritten additions) and the borrower paid more than $1,000,000 without protest. It was not until 8 months later that the servicer realized its letters had neglected to include some $96,000 in real estate taxes it had paid, for which it then made demand. (This miscue is not so uncommon by the way.)
Whether this sum was due under the noted circumstances was litigated with the result four years later a ruling on appeal that it was a question of fact to be resolved. So whether the servicer’s misstep was fatal remains unknown; it was certainly expensive and time consuming.
In trying to avoid such disasters, payoff letters typically recite that the letter is not an estoppel (an attempt to say the lender is not bound by a mistake) and that confirmation of the sum due must be obtained at the time of submission. When errors are made, they are usually discovered promptly which gives the lender or servicer some leverage and comfort.
In the end, though, the only remedy is the obvious one – the calculations need to be right at the outset. With taxes sometimes paid by a different department and on dates that can intersect with the payoff process, this is perhaps the most fertile category for blunder. But as the case instructs, extra attention is worth the effort.
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.