At the inception of CPLR Rule 3408, New York’s Chief Judge and legislature charted a course for foreclosure litigation in New York, most notably from 2009. In the wake of the national financial crisis of 2008, the need arose to require more scrutiny of lenders, investors, and servicers of mortgage loans in the residential foreclosure process, and not just allow a judge to “rubber-stamp” a foreclosure case, quickly depriving a consumer of his/her home in the event of default. It was recognized that banks and other lending institutions bore some responsibility for the crisis; and the Courts would bring those entities to bear. While consumers still do lose their homes in foreclosure, since 2009, the process has become more fair, and case law has developed to give homeowners and their counsel a basis to fight lenders’ bad-faith conduct.
In 2009, the law CPLR 3408 was amended to institute a mandatory settlement conference process with the requirement that “[b]oth the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.” See CPLR 3408(f); see generally Wells Fargo Bank, N.A. v. Meyers, No.34632-09, slip op. (2d Dept. May 1, 2013); HSBC Bank USA, Nat’l Ass’n v. McKenna, 952 N.Y.S.2d 746 (Sup. Ct. 2012). This provision was enacted to, inter alia, provide homeowners at risk of foreclosure the opportunity to prevent foreclosure and avoid losing his or her home. The Courts have an affirmative duty to “ensure that each party fulfills its obligations to negotiate in good faith and see that conferences are not unduly delayed or subject to willful dilatory tactics so that the rights of both parties may be adjudicated in a timely manner.” 22 NYCRR 202.12-a(c)(4). In accordance therewith, the good faith requirement of CPLR 3408 dictates that “[i]t is the obligation of the parties to negotiate with an effort that would prevent the defendant from losing his, her, or their home.” Wells Fargo Bank, N.A. v. Ruggiero, No. 19322-07, slip op. at 7. (N.Y. Sup. Ct. May 29, 2013); see also U.S. Bank, N.A. v. Shinaba, No. 381917-09, slip op. at 9 (N.Y. Sup. Ct. July 31, 2013) (maintaining that “the ‘good faith’ requirement of CPLR 3408(f) was imposed to prevent one party to a mortgage contract from behaving in a manner that evades the spirit of the settlement conferences or denies the borrower the opportunity to reach a mutually acceptable solution.”); HSBC Bank USA, N.A. v. Sene, No. 18600-09, slip op. at 1 and n.1 (N.Y. Sup. Ct. February 28, 2012) (holding that, even where the action was instituted prior to the effective date of CPLR 3408, parties have an obligation to negotiate in good faith and come to court with “clean hands”).
In determining compliance with CPLR 3408, courts must look to “the totality of the circumstances.” U.S. Bank, N.A. v. Rodriguez, No. 380504-11, slip op. at 6-7 (N.Y. Sup. Ct. August 5, 2013); see also Wells Fargo Bank v. Van Dyke, 958 N.Y.S.2d 331 (1st Dept. 2012) (noting that compliance with the good faith requirement of CPLR 3408 will not be established by showing merely the absence of fraud or malice on the part of the lender by itself, or by the mere fact that plaintiff did not make the exact offer that plaintiff desired; the totality of the circumstances needs to be considered). In settlement conferences held pursuant to CPLR 3408, the Court’s finding of lack of good faith is typically determined from the conduct of the mortgagee/plaintiff. U.S. Bank, N.A. v. Shinaba, No. 381917-09, slip op. at 10 (N.Y. Sup. Ct. July 31, 2013) (requiring the plaintiff/lender to deal openly, honestly, and fairly during settlement conference proceedings so as not to take advantage of the borrower’s weaker bargaining position); Chase v. Butler, No. 1686-10 (N.Y. Sup. Ct. July 5, 2013). See also HSBC Bank USA, Nat’l Ass’n v. McKenna, 952 N.Y.S.2d 746 (Sup. Ct. 2012) (discussing that under New York law, “good faith” has generally been regarded as a subjective concept, requiring an examination of a state of mind). For purposes of CPLR 3408, "[c]onduct such as providing conflicting information, refusal to honor agreements, unexcused delay, unexplained charges, and misrepresentations [during settlement conference proceedings] have been held to constitute ‘bad faith.’" Flagstar Bank, FSB v. Walker, 946 N.Y.S.2d 850, 854 n.6 (Sup. Ct. 2012); U.S. Bank, N.A. v. Shinaba, No. 381917-09, slip op. at 9 (N.Y. Sup. Ct. July 31, 2013); Wells Fargo Bank, N.A. v. Ruggiero, No. 19322-07, slip op. at 7-8 (N.Y. Sup. Ct. May 29, 2013); One W. Bank, FSB v. Greenhut, 957 N.Y.S.2d 265 (Sup. Ct. 2012). Moreover, Courts have found a lack of good faith pursuant to CPLR 3408 where, at settlement proceedings, plaintiff has failed to produce a person with authority to settle the case. U.S. Bank, N.A. v. Shinaba, No. 381917-09, slip op. (N.Y. Sup. Ct. July 31, 2013); Bank of America v. Lucido, 950 N.Y.S.2d 721 (Sup. Ct. 2012); see also Deutsche Bank Nat’l Trust Co. v. Israelov, No. 5357-09, slip op. at 3 (N.Y. Sup. Ct. 2013) (“Nothing would be more useless, if not harmful to the statutory purpose [of CPLR 3408] than settlement discussions with a person who does not have the legal right to make the modifications ‘or other workout options’ envisioned by the statute.”).
The duty to negotiate in good faith does not, however, guarantee that the negotiations will be successful. See, e.g., Wells Fargo Bank v. Van Dyke, 958 N.Y.S.2d 331 (1st Dept. 2012) (explaining that “plaintiff’s failure to make [the exact] offer [desired by defendants] cannot be interpreted as a lack of good faith.”); JP Morgan Chase Bank, N.A. v. Ilardo, 940 N.Y.S.2d 829, 844 (Sup. Ct. 2012) (noting that “a determination not to modify a mortgage loan by a foreclosing bank that is under no legal obligation to modify such a loan ... does not constitute bad faith.”).
As shown above, case law flowing from CPLR 3408 has given homeowners and their attorneys a fighting chance when mortgage holders are behaving badly. Robert Unger uses the arguments coming from these cases on a regular basis whether or not the holder has denied modification or at some other juncture in the case.