Federal and state governments regularly pass laws to protect consumers. It is up to private businesses to adapt. This requires a thorough, well-counseled understanding of legislative objectives. Two recent foreclosure cases illustrate how common sense and extra postage might have averted litigation disaster for the lender.
The Home Equity Theft Prevention Act was New York’s response to the subprime lending crisis and the resulting cascade of foreclosures threatening to dispossess millions from their homes. The Legislature found that between default and foreclosure sale, homeowners in financial distress, especially the poor, elderly and financially unsophisticated, were vulnerable to unscrupulous equity poachers who fraudulently induced homeowners to sell off or sign away their homes for a fraction of their value. The law now requires lenders, before starting foreclosure proceedings, to give 90-days’ written notice to defaulting borrowers, by registered or certified mail and by first-class mail, advising them that they risked losing their homes and of available government-approved housing counselors and financial services. The statute also requires that the notice be sent in an envelope separate from any other mailing or notice, and must include specific language from the statute.
These requirements appear straight-forward, and one might not think they could provoke years of litigation, but they have.
On September 29, 2021, the Appellate Division, Second Department, decided Wells Fargo Bank, N.A. v. Yapkowitz, 199 A.D.3d 126 (2d Dep’t 2021), where a foreclosure, commenced in 2013, was dismissed because the lender’s required pre-foreclosure notice did not comply with the statute. The borrowers, married individuals, defaulted on a $532,000.00 mortgage loan. In defense, the borrowers argued that their lender failed to provide the proper pre-foreclosure notice. The lender had sent one notice addressed to both borrowers, rather than notice to each borrower separately. To be sure, the envelope did name both borrowers, and was sent to the correct address by first-class mail and by certified mail signed for by one of the borrowers.
The lender maintained that the statute’s use of the word “borrower” in the singular meant that only one notice was necessary even if there was more than one “borrower.” The lender also argued that the court should presume the borrower who signed for the mailing, informed the other of the notice.
The Second Department agreed with the borrowers, with one Justice dissenting. The Court held that the statute required strict compliance and focused on the Legislature’s intent to provide greater protections to homeowners facing impending foreclosure. Moreover, the statute’s legislative purpose would be subverted if it was left to the one borrower who happens to sign for the envelope to notify the others. Therefore, a separate mailing to each borrower was required.
On December 15, 2021, the Second Department decided Bank of America, N.A. v. Kessler, 2021 N.Y.Slip.Op. 06797, ___ A.D.3d ___ (2d Dep’t 2021). In 2014 the lender brought an action to foreclose a $590,302.00 mortgage. The Court considered the provision of the statute which states that the notice “shall be sent . . . in a separate envelope from any other mailing or notice.” Id. at *5. The lender had seen fit to add information to the form notice adopted by the Legislature. A majority of the Court concluded that the lender failed to strictly comply with the statute, and affirmed dismissal of the foreclosure.
In both cases, the Court’s majority and dissenting Justices provided reasoned and thorough legal analyses. But the more vexing question is why the lender in Yapkowitz decided it was proper to send the notice to both borrowers in one envelope rather than sending separate notices, or why the lender in Kessler decided to deviate from the Legislature’s prescribed language for the notice. Certainly both lenders and their respective loan servicers – presumably sophisticated, experienced and well-counseled business entities – knew the 90-day notice was a statutory pre-condition to foreclosure, and that the statute’s purpose was to protect homeowners in economic crisis. So too, foreclosure has historically been an equitable remedy, and courts have in general required strict compliance with statutory prerequisites before dispossessing homeowners.
Knowing these factors should have made it clear to the lender in Yapkowitz that separatenotice to each borrower was necessary. So too, had the statutory language been adopted, without deviation, the lender in Kessler would likely have been compliant. If the lender did want to provide additional information to the borrower, it should have simply sent a separate mailing. In both cases, the extra postage would have been well worth it.
These cases illustrate how ordinary business decisions made long before litigation ensues could result in years of unsuccessful litigation, and emphasize the importance of understanding the purpose of any statute, consequences of non-compliance, and need to implement well-counseledbusiness practices to avoid litigation disaster.
Michael J. Spithogiannis, Esq. and Floyd G. Grossman, Esq. each have over 35 years’ experience litigating commercial and real-property disputes in state and federal courts throughout New York.
Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.
ATTORNEY ADVERTISING: PRIOR RESULTS DO NOT GUARANTEE FUTURE OUTCOMES.