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Bank of New York v. Silverberg & Why It’s Important

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MERS has become a mysterious figure in the recent foreclosure boom. Many attorneys that work in the industry remain unsure of what exactly MERS is and who exactly works for MERS. MERS serves as a common agent for numerous participating banks. It was created in the early 1990’s in response to delays at local recording offices. The idea was that if all of the participants used a common agent the agent could track ownership and assignments, while saving the participants recording costs and speeding up the transfer process.

While MERS does not lend money or service loans it was involved in the origination of approximately 60% of all United States mortgage loans. MERS participating banks have typically named MERS nominee on a Mortgage while leaving themselves listed as the lender on the Note. A Note is a promise to pay money; a Mortgage attaches that promise to pay to a piece of property. If someone doesn’t pay their Note (aka the promise to pay) they may be at risk of losing their property because the Mortgage clearly states that if the Note is violated the underlying property can be sold.

When MERS serves as nominee on the Mortgage it is generally stated that it has the power to assign the Mortgage. As a result, when one MERS participating bank buys a loan from another MERS participating bank they create an Assignment of Mortgage that assigns the Mortgage from “MERS as nominee for the First Bank” to “the Second Bank”. This was relatively simple and straightforward way of transferring Mortgages back and forth. Silverberg (a currently unpublished Second Department decision issues on June 7, 2011) likely changed everything.

In a typical MERS Assignment of Mortgage it states that the Note is transferred with the Mortgage. The issue, as the Court in Silverberg points out, when a Note is transferred to and accepted by an assignee, the Mortgage naturally follows. In contrast, the transfer of a Mortgage without the transfer of the Note does not actually transfer anything. Remember….a Note is the promise to pay; the Mortgage simply backs up that promise with a piece of property. MERS (or any person or entity) would have the authority to transfer the Note if possessed or owned the Note or was given authority by the owner. Nowhere is it stated that MERS was given the authority to transfer the Note by the owner and it is rarely proven that MERS actually possess the physical Note. Therefore, in Silverberg the Plaintiff, Bank of New York, stepped in the shoes of MERS and had the power to assign the Mortgage but did not gain ownership of the Note because MERS was unauthorized to transfer ownership. In addition, since MERS did not have the power to commence a foreclosure on behalf of the previous owner, Bank of New York did not have standing to bring the action and the defendants Motion to Dismiss the Action was granted.

The simple rule that comes out of this case is one that has been around forever – a foreclosing party must be the holder or assignee of the Mortgage and the Note at the time the action is commenced. The twist that is about to cause a lot of banks a lot of problems is that a typical MERS Assignment of Mortgage does not properly transfer ownership of the Note. Since so many banks have commenced foreclosure based on an Assignment that did not actually give them ownership of the underlying Debt at minimum hundreds (at most thousands) of active New York foreclosures will need to be discontinued and then re-filed after new Assignments are created. At minimum this case will slow down New York Residential Foreclosures 6 months to a year. At maximum it prolong the foreclosure boom another couple of years.

Written by: Adam J. Friedman, Esq.

Plaintiff’s Right to Assign the Winning Bid at a Foreclosure Auction

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Court appointed referees commonly permit successful bidders to assign their bid and vest title via the Referee’s Deed into the entity of their choosing. While defense attorneys making a last ditch effort to oppose a Motion to Confirm the Referee’s Report of Sale may claim this assignment is improper, a review of relevant case law shows that courts believe this to be proper procedure.

The Second Department recognized the near unfettered right of Plaintiff or its assignee to assign its successful bid at a foreclosure auction in Polish National Alliance of Brooklyn U.S.A. In this matter Plaintiff was the successful bidder at auction and assigned the bid to an unrelated party. Subsequently the Referee delivered the Referee’s Deed directly to the third party. The court determined that an assignment of a successful bid should not be set aside absent factors such as diminished bidding competiton or the imposition of other inequitable benefits upon the mortgagee.

Further, the Fourth Department held that Plaintiff has the full power to assign their winning bid to a third party and then direct the Referee to execute the Referee’s Deed directly to that third party. See Geddes Federal Savings & Loan Association v. Ferrante 226 A.D.2d 1099, 642 N.Y.S.2d 109 (1996) and Forest Hill Cementery Association v. Sullivan, et al, 235 A.D. 269, 271 (1932).

In Lennar Northeast Partners Limited Partnership v. Gifalidi the Supreme Court of Monroe County went as far as to recognize the right of Plaintiff to receive a Referee’s Deed executed in blank so that it could secure a buyer for the bid at a later date without having to pay additional transfer taxes. Lennar Northeast Partners Limited Partnership v. Gifaldi et al. 181 Misc.2d 113, 695 N.Y.S.2d 213 (1998).

Perhaps more indicative of the case law listed above is the fact that it is there is no case on point that even questions this absolute right to assign post bid. It appears that an attorney or party claiming otherwise is merely trying to slow down the proceedings.

Written by: Adam J. Friedman, Esq.

Criticism of Cuomo’s Certificate of Merit Law & The Real Effects It Will Have

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Foreclosure defense attorneys and the general New York media alike have praised Governor Cuomo for enacting a bill that will require lenders’ lawyers to file certificates of merit at the commencement of an action (click here for the complete language of the Act). Much like the October 2010 Order of Chief Judge Jonathan Lippmann (often referred to as the “OCA Affidavit/Affirmation”), the new law will certainly pressure plaintiffs and their counsels to exercise heightened discretion when reviewing the merits and standing of a potential foreclosure.  But, the consensus opinion that this law has helped countless homeowners by “closing a loophole” is misplaced.

Yes, there are a number of foreclosure cases in New York that remain in “shadow dockets”- court calendars specifically held for cases in which an action was commenced, but a request for judicial intervention (RJI) was never filed. The factor that all those championing this law have forgotten to mention  is that an RJI can be filed by either party, meaning that a defendant is never “trapped” by the system as the proponents suggest. Arguing that the legislative intent is to help those people that have remained in shadow docket limbo for multiple years is bogus. At any point during that time, the homeowner could have paid the fee to file an RJI and had his/her opportunity to negotiate a loan modification or other settlement under court supervision.

The fact that the legislative body pats itself on the back for “speeding up” foreclosures and saving homeowners from “fees and interest adding up” is another display of political smoke and mirrors. Requiring certifications at the time of filing does not necessarily “speed up” foreclosures. In some instances, it will certainly reduce the amount of time the foreclosure case is open, but if a foreclosing lender simply waits multiple years before commencing, how has that helped save the homeowner? Does interest magically stop accruing?

By the same token, it is overreaching to assume that homeowners will be in better position to modify as a result of this law. While a more expeditious entrance into the conference part is possible, it can never be guaranteed due to the statute of limitations-the fact that a foreclosing lender has six years from acceleration to commence an action.

While the legislature’s attempts to improve the foreclosure crisis are noble, the desired results can be achieved by other means. For instance, if the goal is to speed up the foreclosure process while in the court system, one would think that improving the efficiency of the court’s foreclosure parts/systems would be a good start. It’s telling that my firm currently has several unopposed motions pending a Judge’s decision since as far back as December 2012.  Are we expected to believe that the elimination of shadow dockets will lead to a robust increase in court expediency and efficiency?

Outside of the criticisms of the law’s intent and in light of the upcoming August 30th effective date, it’s prudent to review two other less-discussed facets of the law: first, it nullifies CPLR 3015(d) (“unless specifically denied in the pleadings, each signature on a negotiable instrument is admitted”) with respect to unrepresented defendants; second, it requires plaintiffs to file proof of service within 20 days of service on the defendant, regardless of the method of service. The latter will accomplish the goal of getting homeowners into a settlement conference within 80 days or less from the date service is effectuated.

The biggest potential effect that plaintiffs must prepare for pertains to a defendant’s use of the defense of standing. Currently, with a few exceptions, Judges will not permit a standing defense to be raised once the defendant’s time to answer has expired. In light of this new law, plaintiffs must now, essentially, certify that they have standing to commence. Thus, even if a defendant has waived his right to a standing defense, it’s likely many defendants and defense attorneys will raise this defense indirectly by asserting that plaintiff’s certifications were improper.

Overall, the meaty part of the law will essentially simply supplant the OCA Affidavit/Affirmation with a more rigid requirement. It also requires that a copy of the note, mortgage, assignments, etc. be included with the certification if not otherwise provided in the complaint. Good plaintiff attorneys have already been submitting all the 3408(e) docs along with their complaints, but it’s conceivable that this will rectify the poor habits of those who have been willing to commence actions without having the requisite proof from their clients.

Written By: Ralph Vartolo, Esq.

A Practical Interpretation of Cuomo’s New Foreclosure Certificate of Merit Act

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Governor Cuomo recently signed an act that amends the CPLR by (1) adding a new section, 3012-b, and (2) amending subdivision (a) of CPLR 3408. This post is meant to function strictly as a practical interpretation of the changes created by the Act.

Section 1

Section 1 of the Act amends the CPLR to add section 3012-b. The most pertinent sections of 3012-b are as follows:
3012-b (A)
Statutory Language: 3012-b (A) states that “in any residential foreclosure action involving a home loan…in which the defendant is a resident of the property…the complaint shall be accompanied by a certificate, signed by the attorney for the Plaintiff, certifying that the attorney has:
(1) reviewed the facts of the case; and
(2) that, based on consultation with representatives of the Plaintiff…and the attorney’s review of pertinent documents, including the mortgage, security agreement and note or bond underlying the mortgage executed by the defendant and all instruments of assignment, if any, and any other instrument of indebtedness including any modification, extension, and consolidation, to the best of such attorney’s knowledge, information and belief that there is a reasonable basis for the commencement of such action and that the Plaintiff is currently the creditor entitled to enforce rights under such documents.”

Practical Application: In order to commence a residential foreclosure action of a home loan, Plaintiff’s attorney must file a Certificate along with the foreclosure complaint. In said certificate, Plaintiff’s counsel must affirmatively state that the attorney “reviewed the facts of the case” and that based upon a consultation with their client and a review of pertinent 3408 documents believe there is a reasonable basis to conclude that there was a default and that their client has standing to commence.

While the 3012-b Certificate requirement does not expressly do away with the OCA Affirmation requirement, it imposes nearly identical requirements on Plaintiff’s attorney. The only major difference between the two requirements is that the Certificate must be filed along with the Complaint whereas the OCA Affirmation was not required until the RJI filing.

3012-b (C)
Statutory Language: 3012-b (C) states that if “a copy of the mortgage, security agreement and note or bond underlying the mortgage executed by defendant, and all instruments of assignment, if any, and any other instrument of indebtedness including any modification, extension and consolidation shall be attached to the certificate.” If said documents are lost, the Plaintiff shall attach to the Certificate “supplemental affidavits by such attorney or representative of Plaintiff attesting” that said documents are lost “whether by destruction, theft or otherwise.”

Practical Application: 3408 documents must be included either within the complaint or the Certificate. At this point, most foreclosure attorneys include these documents along with the Complaint and this should not create too many issues.

3012-b (D)
Statutory Language: 3012-b (D) states that “subdivision (d) of rule 3015 of this article shall not be applicable to a defendant who is not represented by an attorney.” 3015 states that “unless specifically denied in the pleadings, each signature on a negotiable instrument [presented by Plaintiff] is admitted”.

Practical Application: Prior to the Act, all defendants had to challenge the signatures on Notes, Mortgages and Assignment of Mortgages within their answer. This subsection preserves the defense for pro se defendants indefinitely.

3012-b (E)
Statutory Language: 3012-b (E) states that where Plaintiff fails to provide the documents that are required by 3012-(a) and the court determines that said papers “ought to have been provided the court may dismiss the complaint” or impose a conditional order with regard to said failure and may impose penalties such as the “denial of the accrual of any interest, costs, attorneys’ fees and other fees…”. Further, “any such dismissal shall be without prejudice and shall not be on the merits.”

Practical Application: Taken literally, this subsection states that failure to comply with subsection (a) warrants, at the court’s discretion, dismissal and tolling of interest. Practically, this subsection will likely be interpreted to read that failure to comply with subsection (c) warrants the same penalties.

Section 2

Section 2 of the Act amends CPLR 3408. The most pertinent part is as follows:
Statutory Language: In residential foreclosure actions concerning a home loan (as defined by CPLR 3408), Plaintiff must file affidavits of service of resident defendants within “twenty days of such service, however service is made, and the court shall hold a [foreclosure settlement] conference within sixty days after the date when proof of service upon such defendant is filed with the county clerk.”
Practical Application: This section imposes two strict timeframes – (1) Where a resident defendant is served in a residential foreclosure action concerning a home loan, Plaintiff must file affidavits of service within twenty days. (2) The court must hold a foreclosure settlement conference within sixty days of said filing.

Conceptually, this leaves the courts to answer numerous questions. Must Plaintiff file an RJI with the affidavit of service? What if service of other defendants is not complete within the 20 day time period? What if the main defendant is served but there are other defendants left to be served by the time of the conference? What is the penalty for failure to file the affidavits of service timely? While this subsection lacks complete clarity, it certainly seems to suggest that Plaintiffs will need to move from Complaint to conference in a shorter time frame. As most service processors file their affidavits of service immediately upon completion, it’s not clear if this requirement will pose any difficulty on the average Plaintiff’s attorney.

Written By: Adam J. Friedman, Esq.

No More “Re-Notice” Requirement Westchester and Putnam County

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Westchester County and Putnam County just became more favorable places to have a Foreclosure Settlement Conference for non-performing note investors in lieu of a new unwritten rule of the Part.

Previously, if a borrower failed to appear at the first scheduled settlement conference, which is mandated by CPLR §3408, the appearing attorney for the noteholder would be unsuccessful at having the matter released from the foreclosure settlement conference part as the policy was not to default non-appearing borrowers the “first time on.” Instead, attorneys for individuals and large institutions that own non-performing notes were required to re-notice the borrower of the next available conference date, which traditionally was not scheduled for two-three months later due to heavy volume.

Now, the time in the conference stage, especially for non-appearing borrowers has been dramatically as there is no longer a re-notice requirement for first time “no shows”.  Because the conference lag time has been cut down and foreclosure actions are able to proceed much more quickly, Westchester and Putnam County have spurred even greater interest from NPN investors.

Should you have any questions on NPN’s in these Counties specifically or any foreclosure matter in NY/NJ please follow the link below to contact me directly.

Written by: Michael Derosa, Esq.