CARMEN GOMEZ, Plaintiff,
v.
RESURGENT CAPITAL SERVICES, LP and LVNV FUNDING, LLC, Defendants.

Concepcion A. Montoya, Esq., Han Sheng Beh, Esq., Jason Joseph Oliveri, Esq., HINSHAW & CULBERSON LLP, New York, NY, Attorneys for the Defendants.

OPINION

ROBERT W. SWEET, District Judge.

Two duelling motions for summary judgment are currently pending before the Court in this unfair debt collection practices case: one filed by Defendants Resurgent Capital Services, LP (“Resurgent”) and LVNV Funding, LLC (“LVNV,” collectively with Resurgent, the “Resurgent Defendants” or the “Defendants”) seeking dismissal of the complaint filed by Plaintiff Carmen Gomez (“Gomez” or the “Plaintiff”), and one filed by Gomez seeking summary judgment on liability against the Resurgent Defendants, with proceedings to continue regarding the amount of damages. (Dkt. Nos. 57 & 79.) Also pending is Resurgent’s motion for a protective order covering certain documents submitted by Gomez in her summary judgment briefing. (Dkt. No. 97.) For the reasons stated below, both summary judgment motions are granted in part and denied in part, and the motion for a protective order is granted.

Prior Proceedings

Gomez brought this case on October 18, 2013, filing a complaint against former defendants Inovision-Medclr Portfolio Group, LLC; Peter T. Roach & Associates, P.C.; Kirschenbaum, Phillips & Roach, P.C.; Timothy Murtha; NCO Financial Systems, Inc., and the two remaining defendants, LVNV Funding, LLC and Resurgent Capital Services, LP. (Dkt. No. 1.) The Complaint alleged that the defendants had engaged in abusive debt collection practices in violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (the “FDCPA”), the Telephone Consumer Protection Act, 47 U.S.C. § 227 et seq., New York General Business Law § 349, and New York Judiciary Law § 487.^[1] (See generally id.)

On January 14, 2014, defendants Inovision-Medclr Portfolio Group, LLC and NCO Financial Systems, Inc. made Gomez an offer of judgment pursuant to Fed R. Civ. P. 68, which Gomez accepted two weeks later. (See Dkt. No. 22.) The Court dismissed those two defendants on June 5, 2014. (Dkt. No. 33.) In March of 2014, the parties agreed to a Protective Order governing the treatment of confidential information, which the Court approved on June 25, 2014. (Dkt. No. 41.) On January 13, 2015, Gomez dismissed her claims against defendants Peter T. Roach and Associates, P.C.; Kirschenabaum & Phillips, P.C.; and Timothy Murtha pursuant to a settlement agreement. (Dkt. Nos. 68 & 70.)

The Resurgent Defendants filed their motion for summary judgment on December 30, 2014. (Dkt. Nos. 56-62.) Gomez filed her opposition papers on January 24, 2015 (Dkt. Nos. 72-75), and then filed her own motion for partial summary judgment five days later. (Dkt. Nos. 79-83.) The Resurgent Defendants filed papers on February 18, 2015 replying to Gomez’ opposition to its summary judgment motion and opposing the one she filed. (Dkt. No. 87-88.) Gomez filed her reply brief in support of her summary judgment motion on March 5, 2015 (Dkt. No. 92), and the Resurgent Defendants filed a sur-reply on March 26, 2015. (Dkt. No. 96.) The motion was head on submission on March 4, 2015. (See Dkt. No. 86.)

The Resurgent Defendants filed their motion for a protective order on March 26, 2015. (Dkt. No. 97-99.) Gomez filed her opposition on April 9 (Dkt. No. 102) and Resurgent filed its reply on April 13. (Dkt. No. 103.)

The Facts

The facts are set forth in the parties’ various Rule 56.1 Statements (Dkt. Nos. 61, 75, 82, & 88) and are not in dispute except as noted below.

The events that gave rise to this case began on September 12, 2005, when Mel S. Harris and Associates, LLC filed a lawsuit against Gomez, seeking to collect a debt she had allegedly incurred to Chase Bank, U.S.A., N.A. (“Chase”), which was later assigned to Inovision-Medclr Portfolio Group, LLC (“Inovision”). The parties dispute whether Gomez was ever served; an affidavit of service says that she was served on September 28, 2005, but Gomez states that she never received notice of the lawsuit and speculates that she may have been the victim of “sewer service.” Either way, it is undisputed that Gomez did not appear in the suit, and a default judgment was entered against her.

The history of the alleged debt is a tangled one. Gomez admits that she had an account with Chase, but maintains that she ceased using it in or before 1995, rendering the validity of any action regarding it in 2005 dubious. Although the lawsuit regarding the debt was brought by Inovision, Gomez questions whether Chase ever sold that account to anyone and states that there is no evidence that title to the account ever passed from Chase to Inovision. Defendants state that Inovision sold Gomez’ debt to Sherman Originator III, LLC (“Sherman”), a nonparty to this case, and that Sherman transferred the debt to defendant LVNV Funding, LLC (“LVNV”). Gomez questions whether the alleged paperwork of those sales, which covers an unknown number of accounts, actually includes hers, since they make no specific mention of her. She also states that she never received any notice that her debts had been assigned and argues that any attempt to collect the debts is therefore invalid.

Defendants utilized a chain of entities to collect Gomez’ debt. LVNV had a contractual relationship with Resurgent, its “master servicer.” Resurgent then hired the law firm of Eltman, Eltman and Cooper, P.C. (“EEC”) to collect on the judgment against Gomez. EEC in turn retained Peter T. Roach and Associates, P.C. (together with successor firm Kirschenbaum, Phillips & Roach, P.C., “Roach”) to collect on the judgment. Roach employed former defendant Timothy Murtha (“Murtha”) as an attorney to handle the case. Roach also used another corporation, Global Connect, to make automated calls.

On or around October 19, 2012, Murtha signed an information subpoena and restraining notice to be sent to Municipal Credit Union, Gomez’ bank, seeking to enforce the judgment against her. The parties differ on how much attention Murtha put into the notice. Gomez cites Murtha’s deposition from another civil lawsuit involving Roach, in which he estimated he signed approximately 400 postjudgment enforcement documents per week, and alleges that Murtha “robo-signed” her notice without actually reviewing its merits. Defendants note that in this case Murtha testified that he executes approximately two and a half postjudgment execution devices per work day, and contend that he did not “robo-sign” the document.

MCU sent a copy of the restraining notice to Gomez on November 7, 2012. On December 5, 2012, Gomez sent a letter to Roach saying that she had no knowledge of the debt, stating that the statute of limitations on the debt had expired, and requesting proof of the debt. She also requested not to be called on her cellular phone. On December 11, 2012, Roach sent Gomez a letter seeking to collect a judgment of $2,366.46, plus interest at a rate of 9 percent annually, amounting to $3,864.91 in total. The check was to be made payable to Roach.

During this time, Gomez states that she continued receiving debt collection phone calls. She received debt collection calls to her cellular phone on November 21, 27, and 29, 2012; December 4, 7, and 31, 2012; and January 7, 18, and 19, 2013.^[2] Roach’s records indicate that additional calls were made.

Gomez filed an Order to Show Cause in Bronx Civil Court, seeking to vacate the 2005 judgment against her. On February 19, 2013, the Honorable Ruben Franco signed the Order, which required that all debt collection activities be stayed. On March 8, 2013, Judge Franco vacated the default judgment and ordered that “any funds including fees in the possession of [LVNV], [the] City Marshal, or any other agent shall be returned to [Gomez] forthwith.” However, even after Judge Franco’s order was entered, the City Marshal continued to garnish Gomez’ wages three times on Defendants’ behalf, totalling roughly $400, with a similar amount being taken and held in trust. Gomez also filed an answer and a motion to dismiss in the original debt collection action. Her motion to dismiss was granted on May 31, 2013.

Gomez alleges that she has suffered severe emotional distress as a result of the debt collection actions taken against her, including the phone calls she received, the restraints placed on her bank account, and the garnishment of her wages. According to her, she could not sleep and suffered “extreme stomach pain after every meal,” and even had suicidal thoughts. It is undisputed that she incurred attorney’s fees in fighting the attempts to collect the debt. Gomez estimates that the fees amount to over $1,500; Defendants assert that her evidence for that total is lacking and deny that the amount is so high.

Applicable Standard

Summary judgment is appropriate only where “there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). A dispute is “genuine” if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The relevant inquiry on application for summary judgment is “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Id. at 251-52. A court is not charged with weighing the evidence and determining its truth, but with determining whether there is a genuine issue for trial. Westinghouse Elec. Corp. v. N.Y. City Transit Auth., 735 F. Supp. 1205, 1212 (S.D.N.Y. 1990) (quoting Anderson, 477 U.S. at 249).

As to the motion for a protective order, “Rule 26(c) confers broad discretion on the trial court to decide when a protective order is appropriate and what degree of protection is required.” In re Zyprexa Injunction, 474 F. Supp. 2d 385, 415 (E.D.N.Y. 2007) (quoting Seattle Times Co. v. Rhinehart, 467 U.S. 20, 36 (1984)). The touchstone of the court’s power under Rule 26(c) is the requirement of “good cause.” Id. The party wishing to seal materials bears the burden of demonstrating good cause as to why the material should be concealed from the public. New York v. Actavis, PLC, No. 14 Civ. 7473, 2014 WL 5353774, at *3.

The Case Is Not Mooted by the Resurgent Defendants’ Offer of Judgment

On March 4, 2014, Defendants made Gomez an offer of Judgment pursuant to Fed R. Civ. P. 68, in the amount of $4,001 “plus reasonable attorney’s fees” stemming from this litigation. Gomez declined the offer. Defendants argue that because their offer fully satisfied Gomez’ claim, the case is now moot.

Rule 68 provides that a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued. Fed. R. Civ. P. 68(a). If the claimant accepts the offer, the clerk enters judgment on those terms. Id. If the claimant declines the offer, and later obtains a judgment that is less favorable, she must pay the costs incurred after the offer was made. Fed. R. Civ. P. 68(d). If the proposed offer of judgment satisfies the entire demand, the claim is mooted, and the Court may enter judgment according to the offer’s terms. See Ambalu v. Rosnblatt, 194 F.R.D. 451, 453 (E.D.N.Y. 2000); see also Abrams v. Interco Inc., 719 F.2d 23, 32 (2d Cir. 1983).

The parties dispute whether the offer of $4,001 does in fact satisfy the Plaintiff’s entire claim. The FDCPA allows a victim of abusive debt collection practices to recover any actual damages she has suffered as a result of any violation, plus additional statutory damages up to $1,000, attorney’s fees, and costs. 15 U.S.C. § 1692k(a). The damages that Gomez alleges amount to over $1,500 in attorney’s fees spent in order to vacate the default judgment entered against her in 2005, plus what her briefing refers to as “garden variety emotional distress.” (Dkt. No. 72.)

Defendants appear to have arrived at the $4,001 figure by adding $1,000 in statutory damages under 15 U.S.C. § 1692k(a) to the $1,500 in attorney’s fees Gomez claims she paid and $1,500 in emotional damages, which they believe is the maximum that Gomez could possibly obtain in this Circuit. For this latter proposition, they cite a number of FDCPA cases in which courts in this Circuit have limited recovery for emotional damages to amounts under $1,500 or reduced higher damage awards to amounts below $1,500. E.g., Mira v. Maximum Recovery Solutions, No. 11 Civ. 1009, 2012 WL 4511623 (E.D.N.Y. Aug. 31, 2012); Krueger v. Ellis, Crosby & Assocs., Inc., No. 05 Civ. 0160, 2006 WL 3791402 (D. Conn. Nov. 9, 2006); Gervais v. O’Connell, Harris & Assocs., Inc., 297 F. Supp. 2d 435 (D.Conn. 2003). Gomez does not cite any case awarding a greater amount.

Accepting Defendants’ argument would require the Court to rule as a matter of law that a FDCPA plaintiff’s potential recovery for emotional distress is capped at $1,500. While the Defendants establish that courts in the Second Circuit have generally been circumspect in awarding damages for emotional harm in FDCPA cases, they do not cite any statute or case law establishing a cap on such damages, and courts elsewhere have awarded amounts for emotional harm many times greater what the Defendants have offered Gomez. See, e.g., Goodin v. Bank of Am., N.A., No. 13-cv-102, 2015 WL 3866872, at *13 (M.D. Fla. June 23, 2015) (“Accordingly, the Court, as fact-finder, finds that Mr. and Mrs. Goodin have proven entitlement to $50,000 each for their emotional distress.”); Nelson v. Equifax Info. Servs., LLC, 522 F. Supp. 2d 1222, 1239 (C.D. Cal. 2007) (upholding jury award in FDCPA case of $85,000 in damages based on emotional distress); see also McCaig v. Wells Fargo Bank (Texas), N.A., 788 F.3d 463, 484 (5th Cir. 2015) (affirming $75,000 in damages for emotional distress awarded under equivalent Texas statute). As a matter of law, the maximum amount that Gomez can recover in damages for emotional harm cannot be established, and summary judgment on these grounds is not appropriate. See Sibersky v. Borah, Goldstein, Altschuler, & Schwartz, P.C., 242 F. Supp. 2d 273, 278 (S.D.N.Y. 2002).

Partial Summary Judgment is Granted for Gomez on her FDCPA Claim

The FDCPA creates a private right of action for persons who are subjected to a variety of abusive debt collection practices. See 15 U.S.C. § 1692k. The Second Circuit summarizes its function and operation thus:

The purpose of the FDCPA is to “eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.” 15 U.S.C. § 1692(e). The FDCPA “establishes certain rights for consumers whose debts are placed in the hands of professional debt collectors for collection, and requires that such debt collectors advise the consumers whose debts they seek to collect of specified rights.” DeSantis v. Computer Credit, Inc., 269 F.3d 159, 161 (2d Cir.2001). The legislative history of the passage of the FDCPA explains that the need for the FDCPA arose because of collection abuses such as use of “obscene or profane language, threats of violence, telephone calls at unreasonable hours, misrepresentation of a consumer’s legal rights, disclosing a consumer’s personal affairs to friends, neighbors, or an employer, obtaining information about a consumer through false pretense, impersonating public officials and attorneys, and simulating legal process.” S.Rep. No. 95-382, at 2 (1977), reprinted in 1977 U.S.C.C.A.N. 1695, 1696. The FDCPA sets forth examples of particular practices that debt collectors are forbidden to employ. See 15 U.S.C. § 1692e. The list, however, is non-exhaustive, and the FDCPA generally forbids collectors from engaging in unfair, deceptive, or harassing behavior. See 15 U.S.C. §§ 1692 et seq.

Kropelnicki v. Siegel, 290 F.3d 118, 127 (2d Cir. 2002). In order to establish a violation under the FDCPA, 1) the plaintiff must be a “consumer” who allegedly owes the debt or a person who has been the object of efforts to collect a consumer debt, 2) the defendant collecting the debt is considered a “debt collector,” and 3) the defendant has engaged in any act or omission in violation of FDCPA requirements. Plummer v. Atl. Credit & Fin., Inc., 66 F. Supp. 3d 484, 488 (S.D.N.Y. 2014). Here, it is unquestioned that Gomez was the object of efforts to collect a consumer debt, and Defendants do not dispute that they are “debt collectors” under the terms of the FDCPA. See id. at 488-89 (declaring that assignees who purchase consumer debt for the purposes of collection qualify as a debt collector under the FDCPA).

The motion therefore turns on the third prong of the test — whether the Resurgent Defendants violated the FDCPA. Gomez essentially points to four actions taken against her as violations of the FDCPA: first, that she repeatedly received collection calls even after demanding that they stop; second, that Murtha “robo-signed” the execution documents enforcing the 2005 judgment against her; third, that she was never sent a notice of assignment informing her that LVNV now owned her debt; and fourth, that the debt collectors continued to garnish her wages and refused to return her money, in violation of the stay and vacatur orders issued by Judge Franco.^[3]

Since the parties vigorously dispute whether Murtha “robo-signed” the execution documents and whether Gomez received a notice of assignment, and since neither party has mustered sufficient evidence to prevail on either matter as a matter of law, summary judgment cannot be granted on those bases.^[4] However, both sides agree that Gomez sent a letter on December 5, 2012 denying the debt and asking for collection calls to stop, but that calls continued to be placed to her afterwards. Similarly, both sides agree that her wages continued to be garnished on the Resurgent Defendants’ behalf even after Judge Franco ordered collection activity to cease and vacated the 2005 judgment against Gomez. Each of these incidents violated the FDCPA. See 15 U.S.C. § 1692c(c) (“If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt. . . .”); 15 U.S.C. § 1692f(1) (proscribing “[t]he collection of any amount . . . unless such amount is expressly . . . permitted by law.”).

Neither violation, however, was committed by the Defendants, who never contacted Gomez directly. Instead, they utilized a chain of entities to collect the debt on their behalf, beginning with LVNV, the actual debt holder, and extending through Resurgent, LVNV’s master servicer, to EEC, a law firm hired by Resurgent, onwards to the Roach law firm and its successor, which were hired by EEC, and then on to Murtha, the attorney at the Roach firm in charge of executing on Gomez’ debt, and Global Connect, which was retained by Roach to make telephone calls. Gomez does not allege that the Defendants ordered, oversaw, or even were aware of the actions taken to collect Gomez’ debt on their behalf.^[5]

Thus, the motion turns on whether the Defendants can be held vicariously liable for FDCPA violations committed by the people who worked for them, but not under their direct control. Courts are split on this issue, both within this District and among the Courts of Appeals. Some judges have followed the Third Circuit’s holding in Pollice v. National Tax Funding, L.P., 225 F.3d 379, 404 (3d Cir. 2000) and allowed entities that themselves meet the definition of debt collector under the FDCPA to be held vicariously liable for the actions taken to collect debts on their behalf, whether or not they actually exercised control over them. The leading case for the proposition within this District is Okyere v. Palisades Collection, LLC, 961 F. Supp. 2d 508 (S.D.N.Y. 2013). See also, e.g., Plummer, 66 F. Supp. 3d at 493; Fritz v. Resurgent Cap. Servs., LP, 955 F. Supp. 2d 163, 177 (S.D.N.Y. 2013).^[6] The second line of cases follows the Ninth Circuit’s holding in Clark v. Capital Credit & Collection Services, Inc., 460 F.3d 1162, 1173 (9th Cir. 2006) to require that any vicarious liability in a FDCPA case be based on “general principles of agency,” under which “to be liable for the actions of another, the principal must exercise control over the conduct or activities of the agent.” (quotation omitted) The leading case following Clark in this district is Bodur v. Palisades Collection, LLC, 829 F. Supp. 2d 246, 259 (S.D.N.Y. 2011). See also, e.g., Nichols v. Niagara Credit Recovery, Inc., No. 12-cv-1068, 2013 WL 1899947, at *5 (N.D.N.Y. May 7, 2013); Sanchez v. Abderrahman, No. 10 Civ. 3641, 2013 WL 8170157, at *6 (E.D.N.Y. July 24, 2013).^[7]

This decision will follow Pollice and Okyere in holding that debt collectors such as the Defendants are vicariously liable for FDCPA violations committed by agents acting on their behalf, whether or not they exercised direct control over them. Although the FDCPA is silent on the issue, the fact that Congress defined “debt collector” to include any person “who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another,” 15 U.S.C. § 1692a(6), indicates an intent to apply liability to all entities involved in the debt collection process, regardless of whether they face the consumer directly. Moreover, the same subsection contains several subcategories excluding various types of debt collectors’ agents from the provisions of the FDCPA, indicating that Congress took care to break the liability relationship between debt collectors and agents within those categories, and implying that it wished to keep a liability relationship between debt collectors and agents not so excluded. See id.

The legislative history of the FDCPA also indicates a congressional intent to include large debt collection entities such as the Resurgent Defendants within the FDCPA’s ambit. According to the Senate Committee on Banking, Housing, and Urban Affairs, the Act is geared toward collection agencies generally, since “[u]nlike creditors, who generally are restrained by the desire to protect their good will when collecting past due accounts, independent collectors are likely to have no future contact with the consumer and often are unconcerned with the consumer’s opinion of them.” S. Rep. No. 95-382, at 2 (1977). Neither the text of the FDCPA nor its legislative history indicates that Congress intended to draw a line between the activities of large debt collection agencies like the Resurgent Defendants, who buy consumer debt in bulk but contract out the actual collection work, and the ground-level operations that actually contact individual debtors. Rather, the Act’s recognition that “[e]xisting laws and procedures for redressing these injuries [were] inadequate to protect consumers” indicates that Congress intended to stop debt collectors large and small from using legalistic means to avoid liability for abusive practices. See 15 U.S.C. § 1692(b).

Contrary to the Defendants’ assertions, holding debt collectors vicariously liable for their agents’ actions is consistent with traditional common law principles. As Judge Gorenstein noted in Okyere, the common law “ordinarily make[s] principals liable for acts of their agents merely when the agents act `in the scope of their authority.'” Okyere, 961 F. Supp. 2d at 517 (quoting Meyer v. Holley, 537 U.S. 280, 285 (2003)). That authority need not even be authentic, due to “the established rule of agency law that a principal is liable to third parties for the acts of an agent operating within the scope of the agent’s real or apparent authority.” See Security Pac. Mortg. & Real Estate Servs., Inc. v. Herald Ctr., Ltd., 891 F. 2d 447, 448 (2d Cir. 1989). Where a ground-level debt collector contacts a consumer, claiming that it is acting on behalf of an assignee that has purchased his or her debt, the collector acts on behalf of assignee and represents to the consumer that it has the assignee’s permission to do what it does. The assignee, as the party whose authority the ground-level debt collector is utilizing and the party who stands to benefit from any aggressive tactics, can be held liable under traditional common-law principles.

In addition to being consistent with the common law and with Congress’ intention in enacting the FDCPA, holding debt collectors liable for FDCPA violations made on their behalf should incentivize them to actively supervise their agents with an aim toward minimizing abusive practices. To allow debt collectors to shield themselves from liability by placing a long enough chain of entities in between themselves and the consumer would encourage willful blindness to the actions taken in their name. Adopting Bodur’s control requirement would also place significant evidentiary burdens on plaintiffs who, given their status as debtors, are likely to lack the resources to sort out complex links between the debt collection entities aligned against them.^[8]

Since it is undisputed that Roach took actions that amount to violations of the FDCPA, and that it did so on behalf of the Resurgent Defendants,^[9] summary judgment is granted for the Plaintiff as to liability on her FDCPA claim, insofar as it pertains to telephone calls made to her after she sent her letter demanding they cease and to the garnishment of her wages after the entry of Judge Franco’s Orders. Both sides’ motions for summary judgment are denied in all other respects.

Summary Judgment is Granted for Defendants on Gomez’ § 349 Claim

New York General Business Law § 349 outlaws “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state,” and creates a private right of action for persons harmed by any such deceptions. In order to state a cause of action under § 349, a plaintiff must show 1) that the defendant’s conduct is “consumer-oriented,” 2) that the defendant is engaged in a “deceptive act or practice,” and 3) that the plaintiff was injured by this practice. Wilson v. Nw. Mut. Ins. Co., 625 F.3d 54, 64 (2d Cir. 2010).

Gomez alleges that Defendants violated § 349 by “filing time barred collection lawsuits, entering default judgments based on sewer service, seeking to collect on those sewer service default judgments on time barred debts. . . . [and] robo–signing post-judgment executions impliedly represented to consumers that an attorney had done a meaningful review prior to issuing the execution when none was done.” [sic] (Complaint, Dkt. No. 1, at ¶ 80.) Any § 349 claim based on the filing of the initial 2005 lawsuit against her, any putative sewer service, or the obtaining of the initial default judgment is time-barred due to § 349’s three-year statute of limitations. Gaidon v. Guardian Life Ins. Co. of Am., 96 N.Y.2d 201, 210 (2001). A claim based on the enforcement of the judgment against her, or on the “robo–signing” of the execution paperwork would not be time-barred, but fails for a different procedural reason.

Rather than a claim based on § 349, a general statute which covers deceptive business practices, Gomez’ state law claim is actually one for a violation of General Business Law § 601, which prohibits a variety of abusive debt collection practices, including to “[c]laim, or attempt or threaten to enforce a right [to collect a debt] with knowledge or reason to know that the right does not exist.” While this statute covers Roach’s attempts to collect on a debt that it should have known was invalid, Gomez cannot sue the Resurgent Defendants under it because “[t]he New York Court of Appeals has stated unequivocally that Section 601 does not supply a private cause of action.” Conboy v. AT&T Corp., 241 F.3d 242, 258 (2d Cir. 2001) (citing Varela v. Investors Ins. Hldg. Corp., 81 N.Y.2d 958, 961 (1993)). “Plaintiffs cannot circumvent this result by claiming that a Section 601 violation is actionable under Section 349.” Id. Summary judgment is granted for the Defendants on Gomez’ § 349 claims.

The Motion for a Protective Order is Granted

Defendants separately move for a protective order sealing a set of documents submitted by Gomez in support of her reply brief. These documents consist of 1) the Amended and Restated Servicing Agreement between LVNV and Resurgent, 2) the Collection Services Agreement between Resurgent and EEC, 3) the Service Provider Master Agreement between EEC and Roach, and 4) Resurgent’s Attorney Standards and Operations Manuals. (D.’s Protective Order Br., Dkt. No. 99, at 4). The three contracts were produced during this case, while the manuals were produced by a third party in a different litigation.

Defendants have adequately shown that the materials contain proprietary information that could harm their business if it were to be disclosed. The Attorney Standards and Operations Manuals contain information about Resurgent’s computer system, the codes put into it, protocols for transferring account information, procedures for handling accounts, and descriptions of fee arrangements with the law firms it employs to collect debts. (D.’s Protective Order Br., Dkt. No. 99, at 7-8.) While the contracts between LVNV, Resurgent, EEC, and Roach are less substantive in nature, Defendants aver that they “identify the fee arrangements and structures, set down procedures regarding Roach’s settlement authority during all debt collection litigation, and other policies regarding litigation of collection suits.” (Id.)

The Court is satisfied that disclosure could cause harm to Defendants’ business, and that there is good cause for the documents to remain confidential. The conclusion is buttressed by the fact the documents are offered in support of an argument that was first raised in a reply brief, and therefore waived, see In re Motors Liquidation Co., No. 15 Civ. 4685, 2015 WL 5076703, at *7 n.4 (S.D.N.Y. Aug. 27, 2015) (quoting Conn. Bar Ass’n v. United States, 620 F.3d 81, 91 n.13 (2d Cir. 2010)), and by the fact that this Opinion resolves both sides’ summary judgment motions without the need to refer to them. The Defendants’ motion for a Protective Order is therefore granted.

Conclusion

Summary judgment is granted for the Plaintiff as to liability on her FDCPA claim, insofar as it pertains to telephone calls made to her after she sent her letter demanding they cease, and to the garnishment of her wages after the stay and vacatur of the default judgment against her. Summary judgment is granted for Defendants on Plaintiff’s General Business Law § 349 claim. Both parties’ motions for summary judgment are denied in all other respects. The Defendants’ motion for a protective order is granted.

It is so ordered.

[1] Gomez withdrew her Telephone Consumer Protection Act claim while briefing these motions. (See Pl.’s Opp. Br., Dkt. No 72, at 14.) The Judiciary Law claim was only alleged against Roach (see Complaint, Dkt. No. 1 at 17), and is thus no longer active after Roach’s dismissal from the case.

[2] Defendants’ response to these assertions is puzzling. They “deny that the facts set forth . . . are undisputed” and state that Gomez’ proffered evidence does not support the assertions that the calls were made by or on behalf of Roach, or that they were made for the purposes of debt collection. However, while the Defendants deny that the facts are undisputed, they do not actually dispute them by offering any evidence to the contrary, or even by asserting that the facts are incorrect. (See D.’s Response to Pl.’s Local Civil Rule 56.1 Statement, Dkt. No. 88, at 14.) These facts, and those alleged in several other paragraphs to which Defendants responded with similar non-denial denials, are deemed admitted for the purposes of this motion. See Local Civil Rule 56.1(c) (“Each numbered paragraph in the statement of material facts . . . will be deemed to be admitted for the purposes of the motion unless specifically controverted. . . .” (emphasis added)).

This measure is particularly warranted given that inconsistencies in Defendants’ Rule 56.1 statements indicate that these murky responses are being utilized to avoid making potentially harmful admissions. (Compare, e.g., D.’s Local Civil Rule 56.1 Statement, Dkt. No. 61, ¶ 13 (“On March 15, 2013, [Roach] received notice that the Gomez Judgment was vacated.”) with D.’s Response to Pl.’s Local Civil Rule 56.1 Statement, Dkt. No. 88, at 18 (“there is no indication [in the evidence offered by Gomez] that the Roach Defendants or the Resurgent Defendants received notice of the vacatur of the Gomez Judgment. The contents of paragraph [sic] are denied because the citations to the record do not support this statement of fact.”).

[3] Gomez makes a fifth allegation, claiming that she received a phone call in November 2013 from a man who identified himself as “Brandon” and threatened to garnish 20 to 25 percent of her wages. The allegation cannot be credited at the summary judgment stage because it is based only on her own affidavit, and she did not attempt to depose Raymond Hunter, the employee who both sides agree was the person who identified himself as Brandon. The telephone call also does not fit Gomez’ offered timeline, since November 2013 was well after Judge Franco vacated her alleged debt, and even after she had filed her Complaint in this case. Although Defendants responded to the allegation with another non-denial denial (See Dkt. No. 88 ¶ 38), they did cite to deposition testimony by Murtha that tended to contradict the proposition.

[4] Defendants point to two documents sent to Gomez “that disclosed the assignment of the judgment,” but the documents themselves simply state that Gomez owes a debt to Inovision and that Roach is attempting to collect on it. (See Dkt. Nos. 83-8 and 83-9.) These documents are insufficient to inform her of which debt is at issue and how LVNV came to own it, with one of the documents even listing Inovision, not LVNV, as the only creditor. The issue of whether she received a notice of assignment thus comes down to Gomez’ word that she received no notice against Murtha’s testimony that he mailed her one.

[5] Gomez argues for the first time in her reply brief that she has obtained several contracts and training manuals showing that the Defendants exercised control over the Roach entities. “[I]ssues raised for the first time in a reply brief are generally deemed waived.” In re Motors Liquidation Co., No. 15 Civ. 4685, 2015 WL 5076703, at *7 n.4 (S.D.N.Y. Aug. 27, 2015) (quoting Conn. Bar Ass’n v. United States, 620 F.3d 81, 91 n.13 (2d Cir. 2010)). Since summary judgment can be granted based on the vicarious liability issue alone, the Court need not reach this question.

[6] LVNV litigated the issue of whether it was vicariously liable for debt collection actions taken on its behalf in Fritz, and lost. See Fritz, 955 F. Supp. 2d at 177. As such, LVNV (but not Resurgent) is collaterally estopped from rearguing the issue. District courts in the Second Circuit are permitted to raise the issue of collateral estoppel sua sponte. See Curry v. City of Syracuse, 316 F.3d 324, 330-31 (2d Cir. 2003).

[7] Gomez argues that Defendants’ control over Roach and their agents is established by the attorney-client relationship between Resurgent and the EEC law firm, which in turn hired the Roach firm. While the contention may have merit, it runs head-on into the same split in authority. Compare Okyere, 961 F. Supp. 2d at 517 (“Moreover, the nature of an attorney-client relationship itself reflects that the client has the power to `control’ its agent in material respects if the client wishes to do so.”) with Bodur, 829 F. Supp. 2d at 259 (Without evidence that [debt collector client] exercised control over [law firm]’s conduct . . . [client] is not vicariously liable and therefore is entitled to summary judgment.”). Moreover, neither the parties nor the cases cited touch on whether the question of control is different when the law firm retains another law firm, as happened here. As with Gomez’ allegations of direct control, since the motions can be resolved on the issue of vicarious liability alone, the Court need not reach the attorney-client question.

[8] Moreover, the Bodur rule could cut plaintiffs off from recovery altogether if debt collectors are clever enough to avoid direct control in each link of the chain, while leaving consumer-facing entities so undercapitalized as to be judgment-proof. Although the financial picture of the entities working on the Resurgent Defendants’ behalf is incomplete, the record before the Court indicates that as the entities in the chain came closer to contact with consumers, they had ever-shallower pockets.

[9] Defendants argue for the first time in their reply brief that Roach acted outside the scope of its agency. “[I]ssues raised for the first time in a reply brief are generally deemed waived.” In re Motors, 2015 WL 5076703 at *7 n.4. Even if the issue were not waived, the contention is without merit. Defendants argue that a “rogue attorney” who violates the law cannot act within the scope of his authority, by definition, citing a fifteen-year-old case from the Western District of New York Bankruptcy Court and a 22-year-old case from the Ohio Court of Appeals. Their argument would result in the abolition of vicarious liability altogether, since a plaintiff could only recover for conduct that violated the law and any violation of the law would be outside the scope of an agent’s authority.

GSAA HOME EQUITY TRUST 2006-2, BY AND THROUGH LL FUNDS LLC, Plaintiff,
v.
WELLS FARGO BANK, N.A., and SAXON MORTGAGE SERVICES, INC., Defendants.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS

ROBERTO A. LANGE, District Judge.

Plaintiff GSAA Home Equity Trust 2006-2 (the Trust) is a residential mortgage-backed securities trust. Defendant Wells Fargo, N.A. (Wells Fargo) is the Master Servicer of the Trust and Defendant Saxon Mortgage Services, Inc. (Saxon) was the Trust’s Servicer. The Trust, by and through Plaintiff LL Funds LLC (LL Funds), filed suit in this Court, asserting breach of contract and tort claims against both Defendants and a claim under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, against Wells Fargo. Doc. 1. Defendants have moved to dismiss all of LL Funds’ claims under Rules 12(b)(6) and 12(b)(1) of the Federal Rules of Civil Procedure. Docs. 25, 28. For the reasons explained below, this Court grants in part and denies in part Defendants’ motions to dismiss.

I. Facts

This case involves residential mortgage-backed securities (RMBS). RMBS are a type of asset-backed financial product created through securitization. The securitization process begins when the originator of a residential mortgage loan sells the loan to a financial institution. Doc. 1 at 12. The financial institution then pools the loan with others, deposits the loans into a trust, and sells certificates issued by the trust to investors. Doc. 1 at ¶¶ 12, 17. The certificates entitle the investors to a portion of the mortgage payments made by the borrowers on the loans within the trust. Doc. 1 at ¶¶ 15-16.

The Trust in this case was established in January 2006 pursuant to a Master Servicing and Trust Agreement (MSTA). Doc. 1 at ¶¶ 1-2. The parties to the MSTA were GS Mortgage Securities Corporation as Depositor; Deutsche Bank National Trust Company (Deutsche) as Trustee and Custodian; and Wells Fargo as Master Servicer. Doc. 1 at ¶ 2. The MSTA provides that it is governed by New York law. Doc. 27-2 at 51. Saxon agreed to be the Servicer for the loans in the Trust by entering into a Flow Servicing Rights Purchase and Servicing Agreement (Servicing Agreement) with Goldman Sachs Mortgage Company. Doc. 1 at ¶ 5; Doc. 27-1 at 46. The Servicing Agreement was eventually assigned to Deutsche.

Saxon’s responsibilities under the Servicing Agreement included collecting mortgage loan payments from borrowers, Doc. 30-1 at 26, remitting the collected payments to the Trust, Doc. 30-1 at 26-28, engaging in loss mitigation efforts with delinquent borrowers, Doc. 30-1 at 22-23, and, if necessary, pursuing foreclosure proceedings on the Trust’s behalf, Doc. 30-1 at 24-25. Under the Servicing Agreement, Saxon had a duty to ensure that its mortgage servicing practices were in conformity with those of prudent mortgage lending institutions which service similar mortgage loans. Doc. 1 at ¶ 20; Doc. 30-I at 7, 22, 24. As the Master Servicer, Wells Fargo had a duty under the MSTA to “monitor the performance of the Servicer under the related Servicing Agreements” and to “use its reasonable good faith efforts to cause the Servicer to duly and punctually perform their duties and obligations thereunder.” Doc. 27-2 at 30; Doc. 1 at ¶ 21.

Section 12.07 of the MSTA contains what is commonly referred to as a “no-action clause” which provides in relevant part:

No Certificateholder shall have any right by virtue or by availing itself of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Trustee a written notice of an Event of Default and of the continuance thereof, as herein provided, and unless the Holders of Certificates evidencing not less than 25% of the Voting Rights evidenced by the Certificates shall also have made written request to the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses, and liabilities to be incurred therein or thereby, and the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity shall have neglected or refused to institute any such action, suit or proceeding. . . .

Doc. 27-2 at 53.

LL Funds owns and holds certificates issued under the MSTA evidencing 25% or greater of the voting rights of the Trust. Doc. 1 at ¶¶ 3, 10. The Complaint does not aver that LL Funds owned 25% or greater of the voting rights during the time Saxon was the Servicer. In March 2014, after Saxon no longer was servicing loans in the Trust, LL Funds sent a letter to Deutsche directing it to sue Saxon and “any other parties under the MSTA . . . while Saxon was a Servicer” for, among other things, breach of contract and negligence. Doc. 1 at ¶ 3; Doc. 1-1 at 1. LL Funds explained in the letter that it was making a written request under § 12.07 of the MSTA for Deutsche to institute an action in its own name as Trustee. Doc. 1 at ¶ 3; Doc. 1-1 at 1-2. LL Funds further explained that it had not given a separate notice of an Event of Default under § 12.07 because Saxon was no longer the Servicer for the Trust and could not remedy the conduct in question. Doc. 1 at ¶ 3; Doc. 1-1 at 2. To the extent that a separate notice of an Event of Default was necessary, however, LL Funds asked Deutsche to consider the letter as providing such notice. Doc. 1-1 at 2.

After Deutsche allowed more than sixty days to pass without bringing suit, LL Funds filed the present Complaint against Saxon and Wells Fargo. Doc. 1 at ¶ 3. Rather than focusing on Wells Fargo’s actions as the Master Servicer of the Trust, the Complaint consists in large part of allegations concerning Wells Fargo’s conduct as the servicer for loans in other trusts or other settings. Doc. 1 at ¶¶ 30-34, 40-45. According to the Complaint, Wells Fargo entered into consent orders with various federal agencies after investigations by these agencies revealed that Wells Fargo had engaged in “robo–signing“^[1] and other improper conduct in its capacity as a servicer of loans not in this particular Trust. Doc. 1 at ¶¶ 30-34, 40-45.

The Complaint contains similar allegations about Saxon. LL Funds alleged in the Complaint that Saxon entered into a Consent Order (Saxon Consent Order) with the Board of Governors of the Federal Reserve in April 2012. Doc. 1 at ¶ 35. The Consent Order alleged that when foreclosing on certain residential mortgage loans that it serviced, Saxon had filed or caused to be filed affidavits purportedly based on the affiant’s personal knowledge when in fact they were not; litigated foreclosure proceedings without ensuring that the mortgage and related documents were in order; failed to allocate proper resources to handle the increased level of foreclosures and loss mitigation activities; and failed to exercise adequate control over the foreclosure process. Doc. 1 at ¶ 35; Doc. 30-3 at 1-4. LL Funds alleged in the Complaint that “[o]n information and belief, . . . Saxon filed in county recording or land offices and in courts flawed, misleading, improper and arguably unlawful documents as set forth in the above-referenced [Saxon Consent Order] with regard to the Trust.” Doc. I at ¶ 36.

Based on these allegations and others, LL Funds asserted claims for breach of contract against Wells Fargo (Count I); breach of contract against Saxon (Count II); negligence against Wells Fargo and Saxon (Count III); willful misfeasance/misconduct or gross negligence against Wells Fargo and Saxon (Count IV); and a violation of RICO against Wells Fargo (Count V). Doc. 1. Defendants offer multiple arguments in support of their motion to dismiss, each of which is discussed below.

II. Standards of Review

On a motion to dismiss under Rule 12(b)(6), courts must accept the plaintiff’s factual allegations as true and construe all inferences in the plaintiff’s favor, but need not accept a plaintiff’s legal conclusions. Retro Television Network, Inc. v. Luken Commc’ns, LLC, 696 F.3d 766, 768-69 (8th Cir. 2012). To survive a motion to dismiss for failure to state a claim, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). Although detailed factual allegations are unnecessary, the plaintiff must plead enough facts to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. When determining whether to grant a Rule 12(b)(6) motion, a court generally must ignore materials outside the pleadings, but it may “consider `matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, items appearing in the record of the case, and exhibits attached to the complaint.— Dittmer Props, L.P. v. FDIC, 708 F.3d 1011, 1021 (8th Cir. 2013) (quoting Miller v. Redwood Toxicology Lab., Inc., 688 F.3d 928, 931 n.3 (8th Cir. 2012)); see also Kushner v. Beverly Enters., Inc., 317 F.3d 820, 831 (8th Cir. 2003) (explaining that courts may also consider “documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading” (quoting Rosenbaum v. Syntex Corp. (In re Syntex Corp. Sec. Litig.), 95 F.3d 922, 926 (9th Cir. 1996))). In addition to the allegations in the Complaint, this Court has considered the Saxon Consent Order (but not for the truth of the allegations therein), the Servicing Agreement, the MSTA, and LL Funds’ letter to Deutsche.

Rule 12(b)(1) provides for dismissal of a suit when the court lacks subject matter jurisdiction. The United States Court of Appeals for the Eighth Circuit has drawn a distinction between facial and factual 12(b)(1) motions, explaining the applicable standard in each instance. See Osbom v. United States, 918 F.2d 724, 728-30 (8th Cir. 1990). Under a facial attack, “the court restricts itself to the face of the pleadings, and the non-moving party receives the same protections as it would defending against a motion brought under Rule 12(b)(6).” Jones v. United States, 727 F.3d 844, 846 (8th Cir. 2013) (quoting Osborne, 918 F.2d at 729 n.6). Under a factual attack, however,

the trial court may proceed as it never could under 12(b)(6) or Fed. R. Civ. P. 56. Because at issue in a factual 12(b)(1) motion is the trial court’s jurisdiction—its very power to hear the case—there is substantial authority that the trial court is free to weigh the evidence and satisfy itself as to the existence of its power to hear the case. In short, no presumptive truthfulness attaches to the plaintiff’s allegations, and the existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of jurisdictional claims.

Osborne, 918 F.2d at 730 (quoting Mortensen v. First Fed. Say. & Loan Ass’n, 549 F.2d 884, 891 (3d Cir. 1977)). Plaintiffs faced with either a factual or facial attack under Rule 12(b)(1) have the burden of proving subject matter jurisdiction. V S Ltd. P’ship v. Dep’t of Hous. & Urban Dev., 235 F.3d 1109, 1112 (8th Cir. 2000).

III. Analysis

A. Standing

Saxon contends that LL Funds’ claims are derivative and therefore must be dismissed for lack of standing because LL Funds failed to comply with the contemporaneous ownership rule embodied in Federal Rule of Civil Procedure 23.1(b)(1) and New York Business Corporation Law § 626. Alternatively, Saxon argues that even if LL Funds’ claims are direct rather than derivative, LL Funds still lacks standing because LL Funds purchased its certificates on the secondary market and further did not have a contractual relationship with Saxon.

Federal Rule of Civil Procedure 23.1 “applies when one or more shareholders or members of a corporation or an unincorporated association bring a derivative action to enforce a right that the corporation or association may properly assert but has failed to enforce.” Fed. R. Civ. P. 23.1(a). One of the pleading requirements of Rule 23.1 is that the plaintiff must allege in a verified complaint that it “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b)(1). “Similarly, New York Business Corporation Law § 626(b) requires that a plaintiff in a shareholder derivative suit have been `a [share]holder at the time of the transaction of which he complains’ in order to have standing.” Kaliski v. Bacot (In re Bank of N.Y. Derivative Litig.), 320 F.3d 291, 297 (2d Cir. 2003) (alteration in original) (quoting N.Y. Bus. Corp. § 626(b)). “The main purpose of this so-called contemporaneous ownership rule is to prevent courts from being used to litigate purchased grievances.” Id. (alterations, citation, and internal quotation marks omitted).

Although neither Rule 23.1 nor New York Business Corporation Law § 626 specifically mention suits by beneficiaries of a trust, federal district courts have applied these rules to derivative suits by certificateholders in mortgage-backed securities trusts. See Fed. Hous. Fin. Agency v. WMC Mortg., LLC, No. 13 Civ. 584(AKH), 2013 WL 5996530, at *1 (S.D.N.Y. June 12, 2013); SC Note Acquisitions, LLC v. Wells Fargo Bank, 934 F. Supp. 2d 516, 528-29 (E.D.N.Y. 2013), aff’d, 548 F. App’x 741 (2d Cir. 2014). The question here, then, is whether LL Funds’ claims are direct or derivative.

When analyzing whether a claim is derivative, courts “must look to the nature of the alleged wrong rather than the designation used by plaintiffs.” Ellington Credit Fund v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162, 188 (S.D.N.Y. 2011) (quoting Primavera Familienstiftung v. Askin, No. 95 Civ. 8905 (RWS), 1996 WL 494904, at *14-15 (S.D.N.Y. Aug. 30, 1996)). In the past, some federal district courts in New York followed the rule that “an alleged injury that is `equally applicable’ to all shareholders gives rise to a derivative, not a direct, action.” Dall, Cowboys Football Club, Ltd. v. Nat’l Football League Tr., No. 95 CIV. 9426 (SAS), 1996 WL 601705, at *2 (S.D.N.Y. Oct. 18, 1996) (quotation omitted); SC Note, 934 F. Supp. 2d at 530 (quoting and applying rule announced in Dallas Cowboys). Just this year, however, the author of Dallas Cowboys abandoned the rule stated in that decision in favor of the test articulated by the Supreme Court of Delaware in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). See Royal Park Invs. SA/NV v. HSBC Bank USA, Nos. 14-cv-8175 (SAS), 14-cv-9366 (SAS), 14-cv-10101 (SAS), 2015 WL 3466121, at *15-16 (S.D.N.Y. June 1, 2015) (noting that a New York appellate court had adopted the Tooley test and concluding that the test was consistent with New York law); see also Hansen v. Wwebnet, Inc., No. 1:14-cv-2263 (ALC), 2015 WL 4605670, at *4 (S.D.N.Y. July 31, 2015) (applying Tooley to determine whether claim was derivative under New York law). A New York appellate court has adopted Tooley, so the test in Tooley should control whether an action is direct or derivative under New York law. See Serino v. Lipper, 994 N.Y.S.2d 64, 69 (N.Y. App. Div. 2014) (acknowledging adoption of the Tooley test and explaining that the test is consistent with existing New York law); Yudell v. Gilbert, 949 N.Y.S.2d 380, 384 (N.Y. App. Div. 2012) (adopting Tooley).

In Tooley, the Supreme Court of Delaware explained that the test for determining whether a stockholder’s claim is direct or derivative must be based “solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” Tooley, 845 A.2d at 1033. To be considered direct under the Tooley test, a stockholder’s “injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.” Id. at 1039. The stockholder’s injury need not be distinct from the injury suffered by other stockholders to be direct, however. The Supreme Court of Delaware in Tooley “expressly disapprove[d]” of “the concept that a claim is necessarily derivative if it affects all stockholders equally.” Id.; see also Blackrock Allocation Target Shares: Series S Portfolio v. U.S. Bank Nat’l Ass’n, No. 14-cv-9401 (KBF), 2015 WL 2359319, at *6 n.12 (S.D.N.Y. May 18, 2015) (concluding an allegation that all certificateholders would suffer harm equally was “immaterial” under Tooley).

Whether LL Funds’ claims are direct or derivative under Tooley is a difficult question, which the parties have not analyzed. Compounding the difficulty of that question, the Supreme Court of Delaware in NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175 (Del. 2015), recently deemed Tooley to have “no bearing on whether a party with its own rights as a signatory to a commercial contract may sue directly to enforce those rights.” NAF Holdings, 118 A.3d at 176. The facts of NAF Holdings are distinguishable, and none of the parties briefed whether LL Funds is suing “directly to enforce those rights” LL Funds (as opposed to the Trust) has under a commercial contract. Instead of addressing Tooley, LL Funds argued in its brief that its claims are direct because it “seeks to recover its own unique losses within the waterfall,” because the Complaint states that the claims are direct, and because it is suing on behalf of the Trust and in the name of the Trustee. These arguments are not satisfactory; whether LL Funds’ injuries are unique from other Certificateholders is irrelevant under Tooley, the labels LL Funds applies to its claims are not determinative, and LL Funds has not provided any legal authority in support of its contention that a certificateholder’s action on behalf of a trust or in the name of the trustee is direct. This entire question may be academic if in fact LL Funds owned the requisite certificates at the time of the transactions complained of, and thus this Court will allow LL Funds twenty-one days to file an Amended Complaint to satisfy the contemporaneous ownership rule. Alternatively, LL Funds may file a supplemental brief with citation to legal authority explaining why and how this is a direct action. Saxon and Wells Fargo then will be given an opportunity to respond within twenty-one days, and LL Funds may file a reply brief within fourteen days thereafter.

If LL Funds establishes that it may bring a direct action, this leaves Saxon’s alternative argument that LL Funds lacks standing. Saxon contends that LL Funds does not have standing to sue it directly because LL Funds “necessarily purchased its Certificates in the secondary market” and any causes of action against Saxon did not transfer from the prior Certificateholder to LL Funds. See Ellington, 837 F. Supp. 2d at 180-83 (holding that plaintiff did not have standing to assert claims against servicer that accrued prior to plaintiff’s purchase of certificates because New York General Obligation Law § 13-107 did not provide for the transfer of such claims). The viability of this argument depends on when Saxon’s alleged breach of contract occurred and when LL Funds purchased its Certificates. LL Funds failed to plead when it became a Certificateholder and should plead at a minimum that it owned Certificates when Saxon was the Servicer. LL Funds can address this standing issue through amendment of its Complaint or in the supplemental briefing ordered by this Court.

B. No-Action Clause

Defendants make several arguments concerning why the no-action clause bars LL Funds’ claims. First, Wells Fargo contends that because the no-action clause refers to an “Event of Default” rather than a “Master Servicer Event of Default,” the clause bars all of LL Funds’ claims against Wells Fargo, the Master Servicer. Second, Wells Fargo argues that even if the no-action clause applies to its conduct, LL Funds’ notice letter to the Trustee was deficient with respect to Wells Fargo because the letter only expressly addressed claims against Saxon. Third, both Defendants assert that the no-action clause bars all of LL Funds’ claims because the Events of Default alleged in LL Funds’ notice letter were not continuing. Finally, Saxon argues that the no-action clause bars LL Funds’ claims against it because LL Funds failed to give notice of an “Event of Default” as that term is defined in § 11.01(d) of the Servicing Agreement. In response, LL Funds contends that it was not required to comply with the no-action clause, that it has satisfied the requirements of the clause anyway, and that the clause does not apply to its tort and RICO claims.

No-action clauses limiting the rights of individual securityholders to sue are “standard provision[s]” in many trust agreements. Akanthos Capital Mgmt., LLC v. CompuCredit Holdings Corp., 677 F.3d 1286, 1298 (11th Cir. 2012). The main purpose of a no-action clause is “to avoid duplicative suits and protect the majority interests [of securityholders] by mandating that actions be channeled through the Trustee.” Quadrant Structured Prods. Co. v. Vertin, 16 N.E.3d 1165, 1177 (N.Y. 2014). Courts have enforced no-action clauses “in a variety of contexts,” McMahan & Co. v. Wherehouse Entm’t, Inc., 65 F.3d 1044, 1050-51 (2d Cir. 1996), including on motions to dismiss under Rule 12(b)(6), SC Note, 934 F. Supp. 2d at 531-33 (dismissing claim under Rule 12(b)(6) for failure to comply with no-action clause); Sterling Fed. Bank v. DLJ Mortg. Capital, Inc., No. 09 C 6904, 2010 WL 3324705, at *4-5 (N.D. Ill. Aug. 20, 2010) (same).

Although no-action clauses need not be followed when enforcing them would require the “absur[ity]” of asking “the Trustee to sue itself,” Cruden v. Bank of N.Y., 957 F.2d 961, 968 (2d Cir. 1992) (applying New York law), courts have enforced such clauses when doing so would require the trustee to sue a manager of the trust, Peak Partners v. Republic Bank, 191 F. App’x 118, 126-27 (3d Cir. 2006); SC Note, 934 F. Supp. 2d at 532; Ellington, 837 F. Supp. 2d at 186-87. Under New York law, which the MSTA specifies to govern, no-action clauses “are to be construed strictly and thus read narrowly.” Quadrant, 16 N.E.3d at 1172. Courts interpreting no-action clauses should “give effect to the precise words and language used.” Id.

1. Whether the No-Action Clause Applies to LL Funds’ Contract Claims

The no-action clause in the MSTA provides in relevant part that: “No Certificateholder shall have any right by virtue or by availing itself of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless” the Certificateholder satisfies certain conditions. Doc. 27-2 at 53. LL Funds’ breach of contract claims plainly fall within the scope of the no-action clause because they seek to enforce the terms of the MSTA itself.^[2] See Sterling, 2010 WL 3324705, at *3-5 (concluding that no-action clause with language substantially similar to the no-action clause in this case applied to certificateholder’s breach of contract claims); Quadrant, 16 N.E.3d at 1170, 1178 (holding that no-action clause applied to securityholder’s contract claims where clause precluded suits “upon or under or with respect to this Indenture”).

LL Funds’ argument that it was not required to comply with the no-action clause at all is unpersuasive. LL Funds’ only support for such an argument is In re Oakwood Homes Corp., No. 02-13396(PJW), 2004 WL 2126514 (Bankr. D. Del. Sept. 22, 2004). In Oakwood, the Delaware bankruptcy court relied on the trustee exception set forth by the Second Circuit in Cruden, 957 F.2d at 968, to conclude that the plaintiff could sue the servicer of a trust despite failing to comply with a no-action clause. Oakwood, 2004 WL 2126514, at *3. Courts applying New York law like the Second Circuit was in Cruden have required compliance with no-action clauses when the situation is not akin to asking the trustee to sue itself. See Peak Partners, 191 F. App’x at 126-27; SC Note, 934 F. Supp. 2d at 532; Sterling, 2010 WL 3324705, at *5. Although the plaintiff in Oakwood was not suing the trustee directly, the bankruptcy court interpreted the plaintiff’s claim as alleging that the servicer had given the trustee mistaken instructions on how to distribute funds within the trust. The bankruptcy court concluded that the servicer was essentially acting as the trustee’s agent when it gave the distribution instructions and that the trustee and servicer could therefore both be liable for the mistake. Given these circumstances, the bankruptcy court concluded that the plaintiff’s claim was analogous enough to a claim against the trustee that the no-action clause did not apply. Oakwood, 2004 WL 2126514 at *3.

In contrast to Oakwood, the claims in LL Funds’ Complaint do not implicate Deutsche as Trustee, so there is no justification for applying the reasoning in Oakwood to this case. Moreover, since the decision in Oakwood, several courts have held that even when there are allegations of trustee misconduct, there remains a distinction between demanding that a trustee sue itself and demanding that the trustee sue a servicer or master servicer. Peak Partners, 191 F. App’x at 122-27 (concluding that no-action clause applied to claims against servicer in negligence suit against servicer and trustee); SC Note, 934 F. Supp. 2d at 532 (“[I]t is not akin to asking the trustee to bring an action against itself when the request is to sue a servicer or another manager of the trust, even if it may implicate some misconduct by the trustee.”); Sterling, 2010 WL 3324705, at *5 (“There is an important difference between asking the trustee to sue itself— an `absurd’ requirement that we presume the parties did not intend—and asking it to sue a third party, even when the investor alleges wrongdoing by the trustee.”). The reasoning in Peak Partners, SC Note, and Sterling is more persuasive than the reasoning in Oakwood. LL Funds had a contractual obligation to comply with the no-action clause to invoke rights under the MSTA.

2. Whether the No-Action Clause Allows Suits Against Wells Fargo

Wells Fargo argues that because the no-action clause refers to an “Event of Default” rather than a “Master Servicer Event of Default,” the clause only authorizes Certificateholder suits against the Servicer. The text of the MSTA provides some support for this argument, but contains conflicting language. As set forth above, the no-action clause provides in relevant part: “No Certificateholder shall have any right . . . to institute any suit, action or proceeding . . . with respect to this Agreement, unless such Holder previously shall have given to the Trustee a written notice of an Event of Default. . . .” Doc. 27-2 at 53. The MSTA refers to the Servicing Agreement for the definition of an “Event of Default.” Doc. 27-1 at 31. The Servicing Agreement, in turn, defines an “Event of Default” as certain improper conduct by the Servicer. Doc. 30-1 at 53-54. The MSTA defines a “Master Servicer Event of Default” separately as various improper conduct by the Master Servicer. Doc. 27-2 at 33-35. Thus, Wells Fargo argues, the no-action clause should be construed as not allowing Certificateholders to sue the Master Servicer, but only to sue the Servicer for an Event of Default by the Servicer.

Yet § 9.11 of the MSTA supports a different interpretation of the no-action clause. Section 9.11 states in relevant part:

Limitation on Liability of the Master Servicer. Neither the Master Servicer nor any of the directors, officers, employees or agents of the Master Servicer shall be under any liability to the Trustee, the Securities Administrator, the Servicer or the Certificateholders for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Master Servicer or any such person against any liability that would otherwise be imposed by reason of willful malfeasance, bad faith or negligence in the performance of its duties or by reason of reckless disregard for its obligations and duties under this Agreement.

Doc. 27-2 at 37 (italics added). The inclusion of Certificateholders in this provision limiting the Master Servicer’s liability suggests that Certificateholders have some right to sue the Master Servicer under the MSTA.

Other portions of the MSTA further support interpreting the no-action clause as not precluding all Certificateholder suits against the Master Servicer. Section 9.04, which sets forth the definition of Master Servicer Events of Default, states:

In each and every such case, so long as a Master Servicer Event of Default shall not have been remedied, in addition to whatever rights the Trustee may have at law or equity to damages, including injunctive relief and specific performance, the Trustee, by notice in writing to the Master Servicer, may, and (a) upon the request of the Holders of Certificates representing at least 51% of the Voting Rights (except with respect to any Master Servicer Event of Default related to a failure to comply with an Exchange Act Filing Obligation) or (b) the Depositor, in the case of a failure related to an Exchange Act Filing obligation shall terminate with cause all the rights and obligations of the Master Servicer under this Agreement.

Doc. 27-2 at 34. This paragraph can best be understood as allowing the majority of Certificateholders to remove the Master Servicer from its position should certain Master Servicer Events of Default remain unremedied. It would be strange to conclude that the parties to the MSTA intended to allow the Certificateholders to remove the Master Servicer for a Master Servicer Event of Default, but not allow them to sue the Master Servicer for the Default itself. In addition, at least one portion of the MSTA uses the term “Event of Default” more generally to refer to conduct by parties other than the Servicer. The Definitions section of the MSTA states that “with respect to the Securities Administrator, the Master Servicer, the Servicer and the Depositor only, the occurrence of an Event of Default under this Agreement” constitutes a “Reportable Event.” Doc. 27-1 at 45. This suggests that the term “Event of Default” in this particular no-action clause is not limited to defaults by the Servicer.

Under New York law which governs the MSTA, the contract is to be read as a whole, Westmoreland Coal Co. v. Entech, Inc., 794 N.E.2d 667, 670 (N.Y. 2003), and no-action clauses “are to be construed strictly and thus read narrowly,” Quadrant, 16 N.E.3d at 1172. On a motion to dismiss, this Court must draw all inferences in LL Funds’ favor, making it reasonable to interpret the MSTA as allowing Certificateholders to sue the Master Servicer. Even if Wells Fargo’s interpretation of the no-action clause is deemed reasonable as well, then the no-action clause is ambiguous. See Am. Bldg. Maint. Co. of N.Y. v. Acme Prop. Servs., Inc., 515 F. Supp. 2d 298, 311 (N.D.N.Y. 2007) (applying New York law and explaining that a “contract that is susceptible to two reasonable interpretations is considered ambiguous”). When the language of a contract is ambiguous, “its construction presents a question of fact, which of course precludes summary dismissal” under Rule 12(b)(6). Paysys Int’l v. Atos SE, No. 14 Civ. 10105(SAS), 2015 WL 4533141, at *4 (S.D.N.Y. July 24, 2015) (quoting Maniolos v. United States, 741 F. Supp. 2d 555, 567 (S.D.N.Y. 2010)).

3. Whether there was Sufficient Notice of Claims Against Wells Fargo

One of the requirements of the no-action clause is that the Certificateholder give the Trustee “a written notice of an Event of Default” prior to bringing suit. Doc. 27-2 at 53. Wells Fargo argues that LL Funds failed to comply with this requirement because its notice letter to the Trustee only addressed claims against Saxon. Although the notice letter mainly focuses on alleged events of defaults by Saxon, LL Funds accurately alleges in its complaint that the letter also requests that the Trustee “institute an action, suit or proceeding in its own name as Trustee against Saxon Mortgage Services, Inc. and/or any relevant affiliates acting through Morgan Stanley, and any other parties under the MSTA and/or documents incorporated into or related to the MSTA while Saxon was a Servicer, based on the grounds listed in this letter.” Doc. 1-1 at 1; Doc. 1 at ¶ 3. Given that Wells Fargo was one of only three parties to the MSTA and was responsible for supervising Saxon’s conduct, this statement, when construed in LL Funds’ favor, gave sufficient notice of and requested a suit against Wells Fargo. Accordingly, LL Funds has pleaded sufficient facts to survive Wells Fargo’s motion to dismiss for failure to comply with the no-action clause’s notice requirement.

4. Whether the No-Action Clause Requires that Events of Default Be Continuing

The no-action clause states that before bringing suit, a Certificateholder must give the Trustee “a written notice of an Event of Default and of the continuance thereof.” Doc. 27-2 at 53. Defendants argue that this language requires Certificateholders to give notice of a continuing or “live” Event of Default before they can bring suit. Defendants contend that because Saxon had ended its role as Servicer before LL Funds sent the notice letter to Deutsche, LL Funds was unable to give notice of a continuing Event of Default and its Complaint therefore must be dismissed for failure to comply with the no-action clause.

However, the phrase “continuance thereof’ does not unambiguously establish that a Certificateholder must give notice of a “live” or active Event of Default. It is at least as plausible to interpret the phrase as simply requiring that the Event of Default remain uncured. Under this interpretation, LL Funds satisfied the no-action clause by alleging in its letter to Deutsche that Saxon had committed Events of Default and that these Defaults had not been corrected.

5. Whether the No-Action Clause Bars LL Funds’ Claims Against Saxon for Failure to Give Notice

In the notice letter, LL Funds alleged that Saxon committed an Event of Default under § 11.01(d) of the Servicing Agreement. Doc. 1-1 at 2. Section 11.01(d) provides:

[T]he failure by the Servicer duly to observe or perform in any material respect any other of the covenants or agreements on the part of the Servicer set forth in this Agreement or in the Custodial Agreement which continues unremedied for a period of 30 days after the date on which notice of such failure, requiring the same to be remedied, shall have been given to the Servicer by the Purchaser (the date of delivery of such notice, the “Notice Date”); provided, however, that in the case of a failure that cannot be cured within thirty (30) days after the Notice Date, the cure period may be extended if the Servicer can demonstrate to the reasonable satisfaction of the Purchaser that the failure can be cured and the Servicer is diligently pursuing remedial action. . . .

Doc. 30-1 at 54. Saxon argues that because LL Funds failed to give it notice and an opportunity to cure, the no-action clause bars LL Funds’ claims against it. This Court disagrees.

New York law does “not require strict compliance with a contractual notice-and-cure provision if providing an opportunity to cure would be useless, or if the breach undermines the entire contractual relationship such that it cannot be cured.” Giuffre Hyundai, Ltd. v. Hyundai Motor Am., 756 F.3d 204, 209 (2d Cir. 2014). Courts have found that compliance with a notice-and-cure provision is unnecessary when the “cure is unfeasible.” Id. at 210 (quoting Sea Tow Servs. Intl, Inc. v. Pontin, 607 F. Supp. 2d 378, 389 (E.D.N.Y. 2009)); see also Hicksville Mach. Works Corp. v. Eagle Precision, Inc., 635 N.Y.S.2d 300, 302 (N.Y. App. Div. 1995) (asserted “right to cure” irrelevant where “there was no evidence in the record to support the proposition that a cure was possible”). Here, Saxon had ceased working as the Servicer for the Trust by the time LL Funds sent its letter to Deutsche. Doc. 1 at ¶ 3. Drawing all inferences in LL Funds’ favor, it would not have been feasible for Saxon to cure its alleged Events of Default when it was no longer the Servicer. Thus, LL Funds did not need to comply with the notice-and-cure provision in § 11.01(d) of the MSTA with regard to its contract-based claim against Saxon under these circumstances.

C. Whether LL Funds’ Claims are Sufficient under Rule 12(b)(6)

1. Contract Claims

Defendants make two main arguments for dismissal of LL Funds’ breaches of contract claims, the first of which focuses on the Complaint’s references to the Saxon Consent Order. Saxon argues that any references to the Saxon Consent Order are immaterial under Federal Rule of Civil Procedure 12(f) and therefore should be stricken. Similarly, Wells Fargo argues that references to the Saxon Consent Order should be disregarded because the Order is not a proper basis for pleading liability. Defendants contend that once references to the Saxon Consent Order are stricken or set aside, LL Funds’ breaches of contract claims fail.

Defendants’ primary support for disregarding references to the Saxon Consent Order is the Second Circuit’s decision in Lipsky v. Commonwealth United Corp., 551 F.2d 887 (2d Cir. 1976). Lipsky was a breach of contract case in which the plaintiff sued the defendant for failing to use its “best efforts” to register the plaintiff’s stock with the Securities Exchange Commission (SEC). 551 F.2d at 890. One of the plaintiff’s arguments in support of his claim was that the defendants had filed a deficient registration statement with the SEC when attempting to register his stock. Id. at 891. Rather than alleging improprieties in this registration statement in his complaint, however, the plaintiff referenced allegations in an SEC complaint that the defendants had filed deficient registration statements when attempting to register other stock. Id. at 891-92. The defendants argued that because the SEC complaint had been settled by a consent judgment rather than an adjudication on the merits, any allegations referring to the SEC complaint should be struck as immaterial under Federal Rule of Civil Procedure 12(f). The district court agreed and dismissed the complaint with prejudice for failure to state a claim. Id.

The Second Circuit in Lipsky affirmed in part, holding that although the consent judgment and SEC complaint were immaterial under Rule 12(f), the district court should have given the plaintiff an opportunity to amend the complaint to plead facts about the registration statement for his stock. Id. at 893-94. To arrive at this conclusion, the Second Circuit began with the proposition that a Rule 12(1) motion to strike should be denied unless no evidence in support of the allegations would be admissible. Id. at 893. Next, the Second Circuit concluded that because the consent judgment was not the result of an adjudication on the merits, it would be inadmissible at trial and therefore was immaterial under Rule 12(f). Id. at 893-94. Because the consent judgment was immaterial, the Second Circuit reasoned, so too was the SEC complaint that preceded it. Id. at 894. Accordingly, the Second Circuit held that “neither a complaint nor references to a complaint which results in a consent judgment may properly be cited in the pleadings under the facts of this case.” Id. at 893. However, the Second Circuit in Lipsky reversed the district court’s dismissal being with prejudice. Id.

District courts have disagreed over how to interpret Lipsky. Some courts read Lipsky as meaning that “references to preliminary steps in litigations and administrative proceedings that did not result in an adjudication on the merits or legal or permissible findings of fact are, as a matter of law, immaterial under Rule 12(f).” In re Merrill Lynch & Co. Research Reports Sec. Litig., 218 F.R.D. 76, 78 (S.D.N.Y. 2003); see also Waterford Twp. Police & Fire Ret. Sys. v. Smithtown Bancorp., Inc., No. 10-CV-864 (SLT)(RER), 2014 WL 3569338, at *4 (E.D.N.Y. July 18, 2014) (striking references to an FDIC consent order where the plaintiffs were relying on the consent order to show that the defendants had, in fact, failed to maintain an adequate allowance for estimated loan losses and had fraudulently understated delinquent loans); In re Platinum & Palladium Commodities Litig., 828 F. Supp. 2d 588, 593-94 (S.D.N.Y. 2011) (concluding that unajudicated CTFC findings were immaterial under Rule 12(f) when plaintiff was attempting to use findings to prove liability); Dent v. U.S. Tennis Ass’n, No. CV-08-1533 (RID) (VVP), 2008 WL 2483288, at *2-3 (E.D.N.Y. June 17, 2008) (striking allegations derived from a settlement agreement with the attorney general where the plaintiff was relying on the settlement agreement to show that the defendant had engaged in discrimination in the past). Other courts have read Lipsky more narrowly. See Marvin H. Maurras Revocable Tr. v. Bronfman, Nos. 12 C 3395, 12 C 6019, 2013 WL 5348357, at *16 (N.D. Ill. Sept. 24, 2013) (concluding that when “a plaintiff does not make allegations about the content of an inadmissible document but rather alleges independently sourced and appropriately supported facts that track . . . that inadmissible document’s factual allegations,” the allegations are not immaterial under Lipsky); VNB Realty, Inc. v. Bank of Am. Corp., No. 11 Civ. 6805(DLC), 2013 WL 5179197, at *3 (S.D.N.Y. Sept. 16, 2013) (“A close reading of Lipsky reveals that it does not mandate the elimination of material from a complaint simply because the material is copied from another complaint.”); In re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458, 471 (S.D.N.Y. 2012) (“Lipsky does not, as defendants argue, stand for the proposition that any factual allegation derived from a government investigation or pleading must be stricken from a private plaintiff’s complaint.”); In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746, 768 n.24 (S.D.N.Y. 2012) (explaining that although “some courts in [the Southern District of New York] have stretched the holding in Lipsky to mean that any portion of a pleading that relies on unajudicated allegations in another complaint is immaterial under Rule 12(f). . . . [n]either Circuit precedent nor logic supports such an absolute rule”).

Lipsky can best be understood as requiring that references to a consent order be struck in certain situations, such as when a plaintiff is relying on the order for a purpose that would be inadmissible at trial, but not as establishing a rule that all references to a consent order are per se immaterial. With that understanding, this Court concludes that the main focus of Defendants’ arguments—paragraphs 35 and 36 of the Complaint—do not deserve to be stricken. Paragraph 35 recites the Federal Reserve’s allegations in the Saxon Consent Order after which paragraph 36 states:

On information and belief, and as a result of Defendants’ activities in these and other matters, Defendant Saxon filed in county recording or land offices and in courts flawed, misleading, improper and arguably unlawful documents as set forth in the above-referenced Consent Order with regard to the Trust. This conduct constituted negligence, gross negligence and/or bad faith and willful misfeasance.

Doc. 1 at ¶ 36. Although inartfully pleaded, paragraphs 35 and 36 appear to allege that the allegations in the Saxon Consent Order provide an accurate description of how Saxon serviced the loans in the Trust. LL Funds is not relying on the Consent Order to prove that Saxon entered into a settlement or to establish that the facts alleged in the Consent Order did, in fact, occur. Rather, LL Funds appears to use the Consent Order to detail conduct that LL Funds alleges to have taken place when Saxon serviced the Trust’s loans. Accordingly, this Court denies Saxon’s motion to strike paragraphs 35 and 36 and rejects Wells Fargo’s argument that these paragraphs should be disregarded.^[3]

Defendants’ second main argument in support of dismissal asserts that LL Funds was required to allege wrongdoing with respect to specific loans within the Trust. According to Defendants, the Second Circuit’s decision in Retirement Board of the Policemen’s Annuity & Benefit Fund of Chicago v. Bank of New York Mellon, 775 F.3d 154 (2d Cir. 2014), petition for cert. filed, (U.S. Sep. 14, 2015) (No. 14-314), requires LL Funds to plead their claims on a “loanby-loan” and “trust-by-trust” basis. In Mellon, the plaintiffs in a putative class action alleged that the trustee of over five hundred RMBS trusts had failed to take appropriate action when mortgage loans within the trusts defaulted. Id. at 156-57. The question before the Second Circuit in Mellon was whether the plaintiffs had standing to assert claims concerning certificates issued by trusts in which the plaintiffs had never invested. Id. at 156-57. To demonstrate such standing, the plaintiffs needed to show that the trustee’s conduct that harmed the plaintiffs “implicate[d] the same set of concerns’ as [the trustee’s] alleged failure to take action with respect to defaults in other trusts in which Plaintiffs did not invest.” Id. at 161. The Second Circuit explained that the nature of the plaintiffs’ claims—including allegations that the trustee had failed to notify the plaintiffs of breaches by the loan originator, failed to force the originator to repurchase defaulted loans, and failed to ensure that the loans were properly documented— required that the claims “be proved loan-by-loan and trust-by-trust.” Id. at 162. Although the plaintiffs argued that evidence of the trustee’s “policy of `inaction’ in the face of widespread defaults” would be applicable to all of the trusts, the Second Circuit reasoned that “even proof that [the trustee] always failed to act when it was required to do so would not prove [the plaintiffs’] case, because they would still have to show which trusts actually had deficiencies that required [the trustee] to act in the first place.” Id. Given the “significant differences in the proof that will be offered for each trust,” the Second Circuit held that the plaintiffs did not have standing to assert claims concerning trusts in which they had never invested. Id. at 163.

Although Mellon established that plaintiffs need to prove their claims “loan-by-loan and trust-by-trust” at trial, it did not hold that plaintiffs must plead their claims in this manner. Mellon does not impose a stricter pleading standard in cases involving RMBS. See Royal Park, 2015 WL 3466121, at *6 (concluding that Mellon did not “implicate plaintiffs’ burden at the pleading stage” and rejecting argument that Mellon created “a heightened pleading requirement into the RMBS context”). Rather, even after Mellon, the relevant question under Rule 12(b)(6) in cases such as this is whether plaintiffs “have pleaded `factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ Id. (quoting Iqbal, 556 U.S. at 678). Under this standard, LL Funds’ breach of contract claims are sufficient.

There are four elements to a breach of contract claim under New York law: 1) the existence of a contract; 2) plaintiff’s performance of the contract; 3) breach of the contract by defendants; and 4) damages. Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996). To properly plead a breach of contract claim, a plaintiff must identify the provisions of the contract that were breached and the “defendant’s acts or omissions constituting the breach.” Dilworth v. Goldberg, 914 F. Supp. 2d 433, 457-58 (S.D.N.Y. 2012).

In regard to Saxon’s alleged breach of contract, LL Funds alleges in Count II that the MSTA and Servicing Agreement obligated Saxon to “employ the mortgage servicing practices of prudent mortgage lending institutions” and that Saxon breached this obligation by engaging in “numerous illicit and illegal acts with regard to its servicing of the mortgage loans in the Trust.” Doc. 1 at ¶¶ 73-74. As an example, LL Funds alleges that Saxon “caused to be filed in state courts and federal bankruptcy courts false affidavits, improperly notarized affidavits, and otherwise failed to ensure that proper foreclosure processes were in place.” Doc. 1 at ¶ 75. These allegations, along with the other factual content pleaded in the Complaint, allow for a reasonable inference that Saxon breached its contractual obligations. Although Saxon takes issue with paragraph 36 of the Complaint being based on “information and belief,” plaintiffs may plead in this manner in certain situations, even after the Supreme Court’s decisions in Iqbal and Twombly. See Pope v. Fed. Home Loan Mortg. Corp, 561 F. App’x 569, 573 (8th Cir. 2014) (per curiam) (“While plaintiffs may at times plead upon information and belief, . . . `[i]nformation and belief does not mean pure speculation.” (quotation omitted)). Specifically, the “Twombly plausibility standard . . . does not prevent a plaintiff from pleading facts alleged upon information and belief where the facts are peculiarly within the possession and control of the defendant.” Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (internal quotation marks and citation omitted). In its brief, LL Funds asserts that pleading more specifically “loan-by-loan” is an “impossible and futile endeavor until discovery begins in this case.” Doc. 33 at 13. Defendants counter that § 8.02 of the MSTA allows LL Funds to request the documents necessary to plead its claims with more specificity. Section 8.02 of the MTSA states that the “Custodian shall provide access to the Mortgage Loan documents in possession of the Custodian” upon request of various parties, including the Certificateholders. Doc. 27-2 at 18. Counsel for LL Funds claims that the documents allegedly robo-signed would be in possession of the Servicer rather than the Custodian. Doc. 42 at 73. Thus, § 8.02 appears not to be a vehicle for LL Funds to have obtained the documents needed to plead its claims with more specificity. Given these circumstances, LL Funds may appropriately plead certain matters on information and belief.

LL Funds alleges in Count I that Wells Fargo breached its obligation under the MSTA to ensure that Saxon “duly and punctually perform[ed]” its servicing duties. Doc. I at in ¶¶ 63-66 (alteration in original). As Saxon’s failure to perform its servicing duties, LL Funds invokes Saxon’s alleged robo–signing. Doc. 1 at ¶ 65. Drawing all inferences in LL Funds’ favor, the factual allegations in the Complaint make Count I plausible.

2. Tort Claims

Defendants argue that LL Funds’ tort claims should be dismissed because they fail to state a basis for relief that is independent from the MSTA and Servicing Agreement. New York law governs the contract claims, but LL Funds asserts that South Dakota law applies to its tort claims. Saxon has no connection with South Dakota, but is based in Texas.^[4] Regardless of which state’s law applies to the tort claims, the outcome is the same. Courts in New York, Texas, and South Dakota have all held that a breach of contract does not give rise to a tort claim unless a legal duty independent of the contract itself has been violated. See UTex. Commc’ns Corp. v. Pub. Util. Comm’n, 514 F. Supp. 2d 963, 972 (W.D. Tex. 2007) (applying Texas law and explaining that a “defendant’s conduct that breaches an agreement between the parties and does not breach an affirmative duty imposed outside the contract is not actionable in tort”); Sundt Corp. v. S.D. Dep’t of Transp., 566 N.W.2d 476, 478 (S.D. 1997) (“[T]here can be no cause of action sounding in negligence unless there is a legal duty which arises independent of the duties under the contract”); Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 516 N.E.2d 190, 193-94 (N.Y. 1987) (“It is a well-established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated. This legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract.”) (internal citations omitted).

Here, LL Funds alleges in Count III that Defendants “had a duty to perform their servicing duties with due care” but failed to do so. As “one example,” Count III states:

Defendants were required to properly service the loans and to ensure any foreclosure activities were performed legally, and “duly and punctually,” and in conformance with the practices “of prudent mortgage lending institutions which service mortgage loans of the same type” as the loans held in the Trust for the benefits of its Certificateholders. As documented in the Consent Orders described in this Complaint, Defendants failed to properly and legally service the loans and perform their foreclosure activities. Doc. 1 at ¶¶ 84-85 (emphasis added). The emphasized language in this block quote comes directly from the MSTA and the Servicing Agreement. Doc. 27-2 at 30; Doc. 30-1 at 7. Similarly, Count IV, in which LL Funds alleges that Defendants engaged in “Willful Misfeasance/Misconduct or Gross Negligence,” alleges that Defendants “had a duty to perform their servicing duties with due care” and “the obligation not to act with willful misconduct or willful misfeasance.” Doc. 1 at ¶¶ 92-93. At bottom, LL Funds in Counts III and IV is seeking to enforce obligations the Defendants contractually undertook in the MSTA and the Servicing Agreement. The misconduct and damages alleged in Counts III and IV are essentially the same as the misconduct and damages alleged in LL Funds’ breaches of contract claims. Because LL Funds has failed to plead any facts or cite any cases suggesting that Defendants have an independent duty under tort to perform the obligations under the MSTA and Servicing Agreement, Counts III and IV fail to state claims upon which relief can be granted.

LL Funds makes three arguments to avoid this conclusion, none of which are persuasive. First, LL Funds argued in its brief that Defendants have a duty to “service borrowers’ mortgage loans in compliance with all applicable laws,” that is independent of their duties under the MSTA and the Servicing Agreement. Doc. 33 at 14. At the hearing, counsel for LL Funds contended that this duty arose out of Defendants’ performance of professional services. Courts in New York, Texas, and South Dakota have recognized that certain professionals “may be subject to tort liability for failure to exercise reasonable care, irrespective of their contractual duties.” Sommer v. Fed. Signal Corp., 593 N.E.2d 1365, 1369 (N.Y. 1992); Kreisers Inc. v. First Dakota Title Ltd. P’ship, 852 N.W.2d 413, 420 (S.D. 2014) (recognizing that a provider of professional services may have an independent duty to perform the services with reasonable care); Averitt v. PriceWaterhouseCoopers L.L.P., 89 S.W.3d 330, 334 (Tex. Ct. App. 2002) (“Whether a written contract providing for professional services exists between a professional and his client or not, a cause of action based on the alleged failure to perform a professional service is a tort rather than a breach of contract.”). “Professionals” who have an independent duty to exercise reasonable care include lawyers, Univ. Nat’l Bank v. Ernst & Whinney, 773 S.W.2d 707, 710 (Tex. Ct. App. 1989), accountants, O’Bryan v. Ashland, 717 N.W.2d 632 (S.D. 2006); Cumin Ins. Soc’y Inc. v. Tooke, 739 N.Y.S.2d 489, 492-93 (N.Y. App. Div. 2002) Univ. Nat’l Bank, 773 S.W.2d at 710; veterinarians, Limpert v. Bail, 447 N.W.2d 48, 51 (S.D. 1989), doctors, Martinmaas v. Engelmann, 612 N.W.2d 600 (S.D. 2000), and architects, Liberty Mut. Ins. Co. v. N. Picco & Sons Contracting Co., No. 05 Civ. 217(SCR), 2008 WL 190310, at *17 (S.D.N.Y. Jan. 16, 2008). Courts also have found an independent duty when a party holds itself out to the plaintiff as an expert in a particular area. See William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 602-03 (2d Cir. 1989) (finding duty of care under New York law outside contract was imposed by law when defendants held themselves out as experts in trademark law); see also Kreisers, 852 N.W.2d at 420-21 (holding that company owed independent duty of care to ascertain what type of like-kind property exchange client wanted where company advertised that it performed exchanges without limitation but did not actually perform the type of complex exchange the client desired).

Here, LL Funds has not cited any cases holding that the servicer or master servicer of a mortgage-backed securities trust perform “professional” services that give rise to an independent duty of care. Nor has LL Funds pleaded any facts or offered any argument suggesting that the work of a mortgage servicer or master servicer is analogous to professions where courts have found such an independent duty. And while LL Funds has alleged that Defendants entered into contracts in which they agreed to perform services in regard to the Trust, this alone does not establish that LL Funds may sue Defendants in tort. See Niagra Mohawk Power Corp. v. Stone & Webster Eng’g Corp., 725 F. Supp. 656, 666 (N.D.N.Y. 1989) (“The mere fact that the alleged breach involved a contract that encompassed the performance of services does not suffice as special additional allegations of wrongdoing which amount to `a breach of a duty distinct from, or in addition to, the breach of a contract.'” (quoting N. Shore Bottling Co., v. C. Schmidt & Sons, Inc., 239 N.E.2d 189, 193 (N.Y. 1968))).

Second, LL Funds argued at the hearing that under the Sommer decision, Defendants had an independent duty to perform their obligations under the MSTA and the Servicing Agreement. According to LL Funds, this duty arose out of the public importance of Defendants’ obligations. In Sommer, the Court of Appeals of New York held that a fire alarm company owed its client a duty of reasonable care that was independent of the company’s contractual obligations. 593 N.E.2d at 1370. The court reasoned that the fire alarm company’s duty arose out of the nature of the services it was providing, in which there was a significant public interest. Id. (“Fire alarm companies . . . perform a service affected with a significant public interest; failure to perform the service carefully and competently can have catastrophic consequences.”). Although the public has some interest in having the servicers of RMBS trusts perform their obligations in a nonnegligent manner, this interest is a far cry from the protection of the personal safety of citizens that was at issue in Sommer. The Sommer decision does not justify imposing a tort duty independent of contractual obligations on these Defendants in this case.

Third, LL Funds argues that it should be allowed to assert its tort claims because § 9.11 of the MSTA and § 8.02 of the Servicing Agreement “carve out of their coverage any contractual liability for Defendants’ negligence.” Doc. 33 at 14. Section 9.11 of the MSTA states in relevant part:

Limitation on Liability of the Master Servicer. Neither the Master Servicer nor any of the directors, officers, employees or agents of the Master Servicer shall be under any liability to the Trustee, the Securities Administrator, the Servicer or the Certificateholders for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Master Servicer or any such person against any liability that would otherwise be imposed by reason of willful malfeasance, bad faith or negligence in the performance of its duties or by reason of reckless disregard for its obligations and duties under this Agreement. . . .

The Master Servicer shall not be liable for any acts or omissions of the Servicer except to the extent that damages or expenses are incurred as a result of such act or omissions and such damages and expenses would not have been incurred but for the negligence, willful malfeasance, bad faith or recklessness of the Master Servicer in supervising, monitoring and overseeing the obligations of the Servicer as required under this Agreement.

Doc. 27-2 at 37-38. Similarly, Section 8.02 of the Servicing Agreement provides in part:

Limitations on Liability of Servicer and Others. Neither the Servicer nor any of the directors, officers, employees or agents of the Servicer shall be under any liability to the purchaser for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment, provided, however, that this provision shall not protect the Servicer or any such person against any breach of warranties or representations made herein, its own negligent actions, or failure to perform its obligations in compliance with any standard of care set forth in this Agreement, or any liability which could otherwise be imposed by reason of any breach of the terms and conditions of this Agreement.

Doc. 31-1 at 47. This “carve-out language,” however, does not excuse LL Funds from identifying an independent duty that would require Defendants to perform their obligations under the MSTA and the Servicing Agreement. See BNP Paribas Mortg. Corp. v. Bank of Am., N.A., 949 F. Supp. 2d 486, 506-08 (S.D.N.Y. 2013) (concluding that language in trust agreement carving out claims of negligence did not relieve plaintiff of identifying a duty independent of the agreement). Because LL Funds has failed to identify such a duty, Counts III and IV of the Complaint are dismissed.

3. RICO Claim

“RICO provides a private right of action for any person `injured in his business or property by reason of a violation of’ its substantive provisions.” Dahlgren v. First Nat’l Bank of Holdrege, 533 F.3d 681, 689 (8th Cir. 2008) (quoting 18 U.S.C. § 1964(c)). LL Funds alleges in Count V of the Complaint that Wells Fargo violated § 1962(c) of the RICO Act. Section 1962(c) makes it “unlawful for any person employed by or associated with any enterprise engaged in . . . interstate . . . commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.” 18 U.S.C. § 1962(c). To state a claim under § 1962(c), LL Funds must plead “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Stonebridge Collection, Inc. v. Carmichael, 791 F.3d 811, 822-23 (8th Cir. 2015) (quoting Nitro Distrib., Inc. v. Alticor, Inc., 565 F.3d 417, 428 (8th Cir. 2009)).

RICO defines “racketeering activity” as numerous so-called predicate acts, including mail fraud, wire fraud, bank fraud, and obstruction of justice. 18 U.S.C. § 1961(1). To plead a pattern of racketeering activity, a plaintiff must allege “two or more related [predicate] acts . . . that `amount to or pose a threat of continued criminal activity.'” Nitro Distrib., 565 F.3d at 428 (quoting Wisdom v. First Midwest Bank, 167 F.3d 402, 406 (8th Cir. 1999)). A plaintiff relying on fraud as a predicate act under RICO must “state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b); Murr Plumbing, Inc. v. Scherer Bros. Fin. Servs. Co., 48 F.3d 1066, 1069 (8th Cir. 1995) (applying Rule 9(b) to allegations of fraud used as predicate acts for RICO claims). “The `[c]ircumstances” of the fraud include `such matters as the time, place and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby.” H & Q Props., Inc. v. Doll, 793 F.3d 852, 846 (8th Cir. 2015) (alteration in original) (quoting Murr Plumbing, 48 F.3d at 1069)). “[C]onclusory allegations that a defendant’s conduct was fraudulent and deceptive are not sufficient to satisfy [Rule 9(b)].” Drobnak v. Anderson Corp., 561 F.3d 778, 783 (8th Cir. 2009) (first alteration in original) (quoting Schaller Tel. Co. v. Golden Sky Sys., Inc., 298 F.3d 736, 746 (8th Cir. 2002)).

LL Funds alleged in the Complaint that Wells Fargo engaged in a pattern of racketeering activity by committing mail and wire fraud in violation of federal law and perjury and subornation of perjury in violation of South Dakota law. Perhaps recognizing the shaky foundations for its RICO claim, LL Funds alleges in its brief that Wells Fargo also committed bank fraud and obstruction of justice.

i. Wire and Mail Fraud

“When plead as RICO predicate acts, mail and wire fraud require a showing of: (1) a plan or scheme to defraud, (2) intent to defraud, (3) reasonable foreseeability that the mail or wires will be used, and (4) actual use of the mail or wires to further the scheme.” Wisdom, 167 F.3d at 406. Under Crest Construction II, Inc. v. Doe, 660 F.3d 346, 358 (8th Cir. 2011), to state a RICO claim based on wire and mail fraud, plaintiffs under Rule 9(b) must allege the who, what, when, where, and how of wire and mail fraud.^[5] LL Funds does not meet this standard.

LL Funds alleges that Wells Fargo engaged in a scheme to defraud the Trust and the Trust’s Certificateholders by “committing acts of robo–signing and the other improper and illegal servicing practices alleged in this Complaint.” Doc. 1 at ¶ 105; see also Doc. 33 at 34 (“Plaintiff has alleged that Defendant Wells Fargo engaged in a scheme to defraud the Trust and the Trust’s certificateholders and that Wells Fargo used the mail and the wires in furtherance of that scheme.”). “Specifically,” LL Funds alleges, “Wells Fargo intended to defraud Plaintiff (and the residential mortgage industry as a whole) when it created and facilitated the circulation of false and fraudulent documents submitted in connection with its foreclosure practices, and when it mailed to borrowers their mortgage loan statements containing improper servicing fees.” Doc. 1 at 11106. LL Funds’ allegations, however, that Wells Fargo engaged in robo–signing and other illegal servicing practices are based mainly on either consent orders between Wells Fargo and two federal agencies or a complaint by the United States against Wells Fargo and other banks that ultimately resulted in Wells Fargo entering into a consent judgment.^[6] Doc. 1 at ¶¶ 33, 42, 43. As explained above, a plaintiff may not rest its allegations in a complaint wholly on unajudicated consent orders or unadmitted complaints to establish that the defendant did, in fact, engage in the conduct alleged therein. See Lipsky, 551 F.2d at 893-94; Waterford Twp. Police & Fire Ret. Sys., 2014 WL 3569338, at *4; In re Platinum & Palladium Commodities Litig., 828 F. Supp. 2d at 593-94; Dent, 2008 WL 2483288, at *2-3.

The Eighth Circuit likewise has been reluctant to accept reference to a consent agreement as establishing that a defendant engaged in misconduct, even at the pleading stage. See Insulate SB, Inc. v. Advanced Finishing Sys., Inc., 797 F.3d 538, 546 n.7 (8th Cir. 2015). The plaintiff in Insulate SB argued that the Eighth Circuit should infer that the defendant violated antitrust laws based on an FTC complaint against the defendant and a corresponding consent agreement. Id. The Eighth Circuit declined to draw such an inference, explaining that the consent agreement not only involved an entirely different antitrust dispute, but also explicitly stated that the defendant was not admitting its guilt. Id. Although the Eighth Circuit granted the plaintiff’s request to take judicial notice of the FTC complaint, it declined “to consider the [complaint] as evidence [the defendant] actually engaged in any anticompetitive conduct alleged therein.” Id. at 543 n.4.

LL Funds’ allegations that Wells Fargo engaged in a scheme to defraud the Trust and its Certificateholders are based on conduct of Wells Fargo separate and apart from the Trust. LL Funds bases its allegations on Wells Fargo’s alleged conduct as a mortgage servicer on loans outside of the Trust. However, for the Trust at issue here, Wells Fargo was the Master Servicer, a role distinct from being a mortgage servicer. Indeed, during the time relevant to this Complaint, Saxon—and not Wells Fargo—was the Servicer. LL Funds for its RICO claim against Wells Fargo alleges no specific conduct concerning the Trust, but relies instead on consent orders and the like—the very material Lipsky and its progeny declare cannot form the sole basis of a claim.

Unlike with its breaches of contract claims where LL Funds cites the Saxon Consent Order involving Saxon’s mortgage-servicing conduct and then alleges that Saxon engaged in the same mortgage-servicing conduct with regard to the Trust, the substance of the RICO claim against Wells Fargo lacks any connection to conduct involving the Trust or LL Funds’ holdings. Unlike with the breach of contract claim where this Court does not have to take as true allegations of the Saxon Consent Order to make the breaches of contract claims plausible, the RICO claim against Wells Fargo requires this Court to assume the truth of the consent orders and government investigations and findings to support any predicate act. In short, the wire and mail fraud allegations fail.

ii. Bank Fraud

LL Funds alleges in its brief that Wells Fargo committed bank fraud under 18 U.S.C. § 1344, “when it instructed its employees to robo-sign and falsify various mortgage-related documents and then subsequently filed those fraudulent documents in various courts, local land record and other government agencies.” Doc. 33 at 36. Section 1344 makes it a crime to

knowingly execute[], or attempt[] to execute, a scheme or artifice—

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.

18 U.S.C. § 1344. By its terms, then, § 1344 only applies to schemes that have at least some connection to a “financial institution,” a term that is defined in 18 U.S.C. § 20.

Here, LL Funds not only neglected to identify the financial institution it claims was harmed, but also failed to plead any facts suggesting that this entity qualified as a financial institution as that term is defined in 18 U.S.C. § 20. Under these circumstances, LL Funds’ invocation of bank fraud in its brief is insufficient under Rule 9(b) and Rule 12(b)(6) to preserve the RICO claim. See Viviani v. Vahey, No. 2:10-cv-01445-LRH-GWF, 2011 WL 3048733, at *3 (D. Nev. July 25, 2011) (“Without specific facts showing that each Plaintiff qualifies as a protected financial institution, Plaintiffs have not sufficiently plead acts of bank fraud under section 13[4]4. . . .”); Holmes v. MBNA Am. Bank, N.A., No. 5:05-cv-16, 2007 WL 952017, at *1 (W.D.N.C. Mar. 27, 2007) (dismissing bank fraud claim where plaintiff failed to plead suggesting that the entity harmed was a financial institution). Because LL Funds’ claims of wire, mail, and bank fraud all fail, it is unnecessary to analyze whether LL Funds’ claim that Wells Fargo engaged in obstruction of justice can serve as a predicate act under RICO.

IV. Conclusion

For the reasons explained above, it is hereby

ORDERED that Defendant Wells Fargo’s Motion to Dismiss, Doc. 25, and Saxon’s Motion to Dismiss, Doc. 28, are granted in part and denied in part, in that Counts III, IV, and V of the Complaint are dismissed without prejudice. It is further

ORDERED that Plaintiff is granted leave to file an Amended Complaint within twenty-one days of the date of this order to allege that it was a Certificateholder at the time of the transactions complained, as well as when Saxon’s alleged breach of contract occurred and when LL Funds purchased its Certificates. It is further

ORDERED that Plaintiff has twenty-one days within which to file the supplemental brief as set forth in 111.A. above, that Defendants have twenty-one days to respond, and that Plaintiff has fourteen days thereafter to file a reply, if Plaintiff chooses to do so.

[1] LL Funds defines robo–signing as “the practice of signing mortgage assignments, satisfactions and other mortgage-related documents in assembly-line fashion, often with a name other than the affiant’s own, and swearing to personal knowledge of facts of which the affiant has no knowledge.” Doc. 1 at ¶ 29.

[2] Because LL Funds’ tort claims and RICO claim are being dismissed on other grounds, it is unnecessary to determine whether the no-action clause applies to these claims.

[3] Saxon also moved to strike other paragraphs of the Complaint as immaterial under Rule 12(f). Although this Court will disregard LL Funds’ statement in paragraph 35 that the Federal Reserve Board “found” that Saxon engaged in certain misconduct, Saxon’s motion is otherwise denied.

[4] Wells Fargo argues that New York law applies to LL Funds’ tort claims against it, while Saxon contends that Texas law applies. LL Funds asserted for the first time at the hearing that South Dakota law governs its tort claims. Because LL Funds has failed to establish that Defendants owed it an independent duty under the law in New York, Texas, or South Dakota, it is unnecessary to engage in a choice of law analysis.

[5] This Court recognizes that a mailing or wire communication need not be fraudulent on its face to constitute an act of wire or mail fraud. In the present case, however, LL Funds is claiming that the mailings and wire communications themselves were “false and fraudulent.” LL Funds has not pleaded any facts to suggest that Wells Fargo used factually accurate mailings or wire communications as part of a scheme to defraud.

[6] The Complaint also bases its allegations of robo–signing on a Memorandum of Review by the Office of the Inspector General. Doc. 1 at ¶¶ 40, 41, 44.

Decided on July 15, 2015

850039/2011
Peter H. Moulton, J.

These two foreclosure actions encompass many of the faults that plague the current system of refinancing residential property that is in default and/or in foreclosure. In this age of securitized loans, governing documents cabin discretion and flexibility, leading to the absurd result here. Like so many homeowners in the wake of the 2008 financial crisis, Lawrence and Bonnie Singer, the defendants herein, have sought to climb out of default. They have been thwarted by unresponsive loan servicers, unprepared lawyers, boilerplate form letters, and the banks’ or servicers’ often-changing and repetitive demands for financial information. Unique to these actions, the Singers have been vexed by the banks’ or servicers’ refusal to consolidate two mortgages originally secured by two apartments now combined into one.

Before the court are two tolling motions that concern two separate mortgages held by a series of lenders on two contiguous condominium apartments, apartments 400 and 401 located at 160 Wadsworth Avenue, New York, New York 10033.^[FN1] The apartments at issue were purchased separately by defendants Lawrence and Bonnie Singer (the Singers) in July 2003 and November 2004, respectively, and thereafter physically combined into a single condominium apartment now known only as Apt. 401. Action No. 1 seeks to foreclose on the mortgage on Apt. 400, while Action No. 2 seeks foreclosure on the mortgage secured by what was originally Apt. 401. Both mortgages are now owed by Federal National Mortgage Association (Fannie Mae), but are apparently serviced by two separate servicers, Seterus, Inc. (Seterus) and Bank of America, N.A. (BOA).^[FN2]

The Singers move in both actions for an order reducing the accrued compounded interest owed on both of the mortgages due to an alleged breach of a duty of good faith and fair dealing by the lenders and/or their agents in both actions. They rely on CPLR 3408, the federal Home Affordable Modification Program (also referred to as the Home Affordable Mortgage Program [HAMP]) guidelines, and the Business Conduct Rules, Banking Law Article 12-D, 3 NYCRR 419.2 and 419.11.

On July 21, 2003, the Singers purchased Apt. 400 for $235,000. They put down $23,500, and financed the balance with a mortgage from Citi-Mortgage in the amount of $188,000 and a Citibank Home Equity Loan in the amount of $23,500, for a total debt of $211,500. In November 2004, the Singers refinanced their mortgage on Apt. 400 with Countrywide Financial Corp. (Countrywide), obtaining a mortgage in the amount of $204,000 and a home equity loan in the [*2]amount of $51,000, for a total principal debt of $255,000.

In March 2005, the Singers obtained a second Citibank Home Equity Line of Credit on Apt. 400 in the amount of $90,000, allegedly for “construction costs.” On March 6, 2007, the Singers refinanced their mortgage on Apt. 400, along with the home equity loans, with Greenpoint Mortgage Funding, Inc. (Greenpoint) into a fixed rate loan at 7.375% interest for $310,000 (hereinafter, the 400-Mtge.). Greenpoint sold all of their mortgages to Countrywide/BOA in November 2008. The 400-Mtge., and its corresponding note, was assigned to plaintiff Fannie Mae by an assignment of mortgage executed on October 11, 2010.

The Singers acquired Apt. 401 on November 11, 2004. The purchase price was $220,000, and the Singers put down $22,440, and obtained a mortgage from Homebridge Mortgage Bankers Corp. in the amount of $201,960 (hereinafter, the 401-Mtge.). The 401-Mtge. was later purchased by Countrywide, which was acquired by BOA in July 2008. The 401-Mtge. is a 30-year convertible jumbo mortgage with an interest rate of 6.75% and required private mortgage insurance (PMI) of $252.45 a month. The 401-Mtge. was assigned from Mortgage Electronic Registration Systems, Inc. (MERS) to BOA on August 29, 2011. The mortgage was assigned from BOA to Fannie Mae on April 16, 2015.

Although the actual date of the construction work is not clear from the record, the Singers combined the two contiguous apartments. The Singers allege, without challenge, that the closing for the March 2007 refinancing of the 400-Mtge. was held in their apartment, which had been physically combined by that time (Singer 5/9/14 Aff., ¶ 5). The undisputed documentary evidence establishes that the necessary paperwork to combine the two tax lots and to amend the condominium’s offering plan was filed with the City of New York in September 2010. According to the architectural certification that was filed as part of the amendment to the condominium’s offering plan, the wall that separated the two apartments was opened in two places and other substantial changes to the apartments’ configuration were undertaken.

In or about the Spring of 2009, Bonnie Singer attempted to refinance the 401-Mtge. through Countrywide/BOA so that the two mortgages could be combined, a time when both loans were held by Countrywide/BOA. According to the Mortgage Loan Questionnaire the Singers submitted, the apartments were last appraised at $775,000 and the Singers requested a new loan in the amount of $515,000. This appraisal has not been submitted to the court and its date is uncertain. Although the details of this refinancing attempt are sketchy at best, it is undisputed that the Singers were denied refinancing at this time (see Singer 5/9/14 Aff., ¶¶ 6 and Ex. B attached thereto).

In December of 2009, the Singers asked a friend of theirs, Robert Feldman, Esq., for help in trying to obtain loan modifications on both mortgages from BOA (Singer 5/9/14 Aff., ¶ 8). Bonnie Singer avers that they could not get past the customer service department of BOA, who was insisting that the Singers made too much money for a modification since it was only considering each mortgage separately (id.). The Singers were told that they were not eligible for loss mitigation or modifications on either mortgage, because their monthly payment on each loan, standing alone did not exceed 31% of their combined gross income (id.). The undisputed evidence is that the Singers and Mr. Feldman made numerous unsuccessful attempts to contact BOA in December 2009 and January 2010 to avoid defaulting on their mortgages and to obtain a loan modification (id., Ex. C).

In January of 2010, the Singers stopped making payments on both mortgages after draining all their cash resources (Singer 5/9/14 Aff. ¶ 9). Bonnie Singer avers that, immediately after their [*3]default, BOA’s collection department wasted no time in harassing them for payment and they were able to talk to representatives on a daily basis, but not with anyone knowledgeable about securing a loan modification (Singer 5/9/14 Aff. ¶ 9). On January 14, 2010, Mr. Feldman wrote a letter to BOA in which he advised that the two apartments had been combined and the tax lots merged (id., part of Ex. C). In this letter, Mr. Feldman also claimed that the interest rates on the two loans were nearly usurious in the current market, and advised that the Singers could not afford to pay their monthly housing expenses, which amounted to approximately $5,000 when including both mortgages, maintenance, common charges, and taxes. Mr. Feldman further advised that Bonnie Singer had been unemployed since August 2009 and Larry Singer’s private drama coach business was suffering due to the economic downturn. It appears that the only response that the Singers or Mr. Feldman ever received was three “form” letters dated February 5, March 10 and March 17, 2010 from BAC Home Loans Servicing, LP, a subsidiary of BOA, thanking Mr. Singer for his recent correspondence, and promising a complete response in 20 days (Singer 8/15/14 Supp. Aff., Exs. 1, 2 and 3).

In July of 2010, Mr. Feldman faxed another letter to BOA literally begging the bank to file a lis pendens “as soon as possible so we may go before a Court that is capable of understanding the simple fact that these loans represent ONE APARTMENT and that the monthly loan payments GREATLY exceed 31 percent of their gross income and that they DO qualify for a loan modification” (Singer 5/9/14 Aff., part of Ex. C). This same letter was faxed eight more times between July 7 and August 11, 2010 (id.). On August 11, 2010, Mr. Feldman wrote another letter, advising that he was getting “robo calls” on his cell phone every 24 hours, and demanded to speak only to an authorized underwriter or attorney (id.). This letter was faxed again on August 16, 2010 (id.). Bonnie Singer avers that, sometime in August 2010, BOA assigned an advocate named Joana Villataro and a negotiator named Ronnie Franklin (id.; see also letter dated September 13, 2010 from Mr. Feldman to BOA Negotiator Ronnie Franklin, submitted as part of Ex. C to Singer 5/9/14 Aff). She claims that, after Mr. Franklin verbally conveyed to Mr. Feldman that BOA agreed to merge the two loans, they submitted the necessary paperwork to merge and modify both mortgages, but that neither she nor Mr. Feldman ever heard back from BOA and that they were never sent a letter of denial. Bonnie Singer further avers that they were completely ignored by Countrywide/BOA for the duration of 2010 and 2011 (id. ¶ 11). Notably, Bonnie Singer submits no documentary proof that BOA ever agreed to “merge” both mortgages, nor does she offer any testimonial evidence from Mr. Feldman to support her statements.

BOA’s counsel claims that BOA sent the Singers a letter on or about March 10, 2010 advising them that they may be eligible for HAMP (Burlingame 7/14/14 Affirm., ¶ 16). This letter is allegedly attached to counsel’s affirmation in opposition as Exhibit E. However, the only March 10, 2010 letter attached as Exhibit E is a letter that has the same content as the form letter dated March 17, 2010, thanking Mr. Singer for his recent correspondence, and promising a complete response in 20 days. There is no evidence in the record that BOA offered the Singers an opportunity to apply for a HAMP modification in March of 2010, or that it was considered, denied and the Singers’ given written notification of the grounds for a denial.

However, BOA admits that, on November 5, 2010, it spoke to Mr. Feldman about the Singers’ loan modification request (Burlingame 9/18/14 Supp. Affirm., Ex. A: Affidavit of Lorena P. Diaz sworn to on September 18, 2014 [Diaz Aff.], ¶ 4). According to Ms. Diaz, BOA’s business [*4]records show that Mr. Feldman claimed to have already worked out a modification with Ronnie Franklin, but that BOA insisted that there was no way to provide the Singers with an affordable payment plan based on the mortgagors’ deficit income of $5,864.00 per month and that they did not qualify and did not meet the guidelines for a loan modification (id., ¶¶ 4-5).^[FN3] Mr. Feldman was advised that BOA was removing the file from consideration of “traditional loan modification” based on the financial information provided, and the loan was returned to “normal servicing” (id., ¶¶ 6, 7).

On June 14, 2011, the law firm of Stephen J. Baum, P.C. (the Baum firm) commenced Action No. 1 to foreclose on the 400-Mtge. The complaint reflects that the mortgaged premises is “160 Wadsworth Avenue, Part of Unit 401 f/k/a [formerly known as] Unit 400.” The complaint further indicates that the property is “Block 2164 Part of Lot 1101 f/k/a Block 2164, Lot 1100.” Thus, the complaint reflects the Singers’ consistent position- – that they live in one apartment, not two. The Singers filed their Verified Answer and Counterclaims on August 31, 2011. On November 22, 2011 (three months later), the Baum firm filed a Request for Judicial Intervention (RJI) requesting the scheduling of a residential mortgage foreclosure settlement conference. Thereafter, the Baum firm was forced to close its doors after being blacklisted by Freddie Mac and Fannie Mae for allegedly engaging in faulty and fraudulent foreclosure practices. At some point the law firm of Rosicki & Associates P.C. (the Rosicki firm) was substituted as counsel for the Baum firm.^[FN4] At that time, no legal action had been taken with respect to the 401-Mtge., although the Singers continued to receive monthly invoices regarding the 401-Mtge. with late fees adding up until January of 2012, when they stopped receiving any invoices from BOA (Singer 5/9/14 Aff. ¶¶ 12-14).

On January 26, 2012, the law firm of Frenkel Lambert Weiss & Gordon LLP (the Frenkel firm) sent the Singers a letter advising that they represented BOA, that the 401-Mtge. was in default, and that the outstanding balance was $230,175.20 (Singer 5/9/14 Aff., part of Ex. F). Bonnie Singer avers that they did not respond to the Frenkel firm’s letter as they still hoped the mortgages could be merged thereby resolving all the default issues (id. ¶ 14). The firm did not file a foreclosure action until July 18, 2013 (discussed infra).

In March of 2012, the Singers started to represent themselves, pro se. The first of many mandatory settlement conferences was scheduled on March 14, 2012. Presumably due to the failure of the Rosicki firm to file a notice of appearance, written notice of the conference was sent to the Baum firm and there was no appearance for plaintiff Fannie Mae. The conference was adjourned to May 2, 2012, another month and one-half delay. Although both sides appeared, no progress was made. However, the parties discussed with the court mediator that one possible solution would be [*5]to “merge” or “recast” the two mortgages since the investor on both mortgages was Fannie Mae. The following day, May 3, 2012, Bonnie Singer wrote a letter to the Rosicki firm requesting that this be done (Singer 5/9/14 Aff., part of Ex. C).

The Rosicki firm did not respond. Two more court conferences were held on June 2, 2012 and July 12, 2012. Each time, a different attorney from the Rosicki firm would appear, without any knowledge of the case and without any settlement authority.^[FN5] At this point the conference was adjourned to August 14, 2012, and my court attorney directed via email that the Rosicki firm email responses to the following queries: (1) would Fannie Mae agree to consolidate the mortgages and refinance since it owns both; (2) whether Seterus (the servicer of the 400-Mtge) could also service the 401-Mtge. so that only one servicer would be assigned to both mortgages; and (3) what documents were needed for the Singers to apply for a loan modification of the 400-Mtge.

Iyanna Grisson, Esq. of the Rosicki firm responded by email dated July 26, 2012, insisting that: (1) consolidation of the two loans was not an option, but without explaining why; (2) the servicer on the 401-Mtge. could not be changed to Seterus; and (3) insisting that Fannie Mae would be able to foreclose on Apt. 400 despite the physical combination of the two apartments. As for applying for a loan modification, the Singers were advised to complete and submit to Tammera Wells, a paralegal at the Rosicki firm, the attached modification package along with “copy of one month’s most current paystubs, two month’s most current bank statements; year-to-date P & L statement if self-employed, signed 2010 and 2011 tax returns signed and dated.”

At that point, the court ordered the Singers to submit the required loan modification documents to the Rosicki firm by August 1, 2012, and that the latter advise of the need for additional documents no later than August 13, 2012. Although the Singers attempted to submit the requested documentation for a loan modification, their submission was initially deficient. For example, the 2010 tax return was not signed and the Rosicki firm claimed that the Singers did not submit a return for 2011 (disputed by Bonnie Singer). However, the Rosicki firm also began to change the parameters of its requests. For example, although the July 16, 2012 email from Iyanna Grissom asked for “[t]wo months most current bank statements,” on August 2nd, she was insisting that the Singers provide “most current and consecutive 3 months of bank statements for ALL accounts, personal and business, with income deposits circled and labeled; no online statements accepted.” Likewise, no mention was made of the need to submit IRS Form 4506 in the earlier email, yet two weeks later, Ms. Grissom was insisting on these documents. On August 6, 2012, paralegal Tammera Wells confirmed that the documents received from the Singers had been sent to the lender on August 2 and 3, 2012 for review. Yet, by letter dated August 7, 2012, yet another paralegal at the Rosicki firm was demanding additional information be provided (some of which, like the IRS Form 4506, had clearly already been submitted by the Singers), and was asking that new forms be filled out (Singer 5/9/14 Aff., part of Ex. C). This same paralegal emailed Bonnie Singer on August 21, 2012, claiming that Fannie Mae was having “great difficulty” locating the 401-Mtge., even though the information is on Fannie Mae’s website and on ACRIS.

By email dated August 2, 2012, the court directed the appearance of a Fannie Mae representative (in addition to Seterus) at the next court conference scheduled on August 14, 2012. Two days prior to the scheduled conference, the Rosicki firm advised the court that Fannie Mae was still determining “the best person to appear on this case based on the issues presented,” and that no one was available for the conference scheduled on August 14th. More delay ensued. The court agreed to adjourn the matter to early September 2012, but despite diligent efforts on the part of my court attorney, the court could not get the parties and a Fannie Mae representative back in court until October 25, 2012.

In the meantime, no determination had been made by Fannie Mae on the loan modification requested by the Singers and, in early October 2012, the Rosicki firm began asking for “updated documents” so that the bank could complete its review of their loss mitigation application. The bank thus created another moving target. The Singers objected, claiming, and rightly so, that they submitted all of this documentation back in August and that they had been waiting for Fannie Mae to provide a date when one of its representatives could be available for a court conference. Finally, the court scheduled a conference on October 25, 2012 at 2:15 p.m. Edward Rugino, Esq. of the Rosicki firm responded that day, stating that the representative with whom he had worked had just left employment with Fannie Mae and that he was given the name of another contact at Fannie Mae, and that he was attempting to fix a date for the court appearance. Mr. Rugino also insisted that the financial documents Bonnie Singer produced in early August were now two months stale, and the underwriter needed the updated information to complete its review. Ever mindful of the moving target problem, but striving to obtain an acceptable loan modification for the 400-Mtge., by email dated October 10, 2012, the court directed the Singers to provide the documents needed to update their application, but that the court stood firm on the October 25, 2012 conference.

Finally, by letter dated October 11, 2012, Seterus advised the Singers, that they “were unable to approve your request for a permanent loan modification under [HAMP], because your current payment . . . does not exceed 31% of your gross monthly income which is a requirement of the program” (Rugino 7/14/14 Affirm., Ex. B). Presumably, the calculation did not include the expenses of the mortgage which is the subject of Action No. 2. The letter goes on to say that the Singers might be eligible for a “Fannie Mae Loan Modification,” and proposes a “Trial Period Plan,” whereby three payments of $1,724.96 must be made by 11/1/12, 12/1/12 and 1/1/13. The letter states that the trial period payment is “approximately 24% of your total gross monthly income” of $10,802.00 based on documentation previously provided. The Singers promptly accepted this proposed trial plan and made the first required payment.

By email dated October 16, 2012, Edward Rugino of the Rosicki firm advised that Fannie Mae had finished researching the Singers’ request (made more than five months earlier) to “merge” the two mortgages into a single mortgage loan.^[FN6] Mr. Rugino advised that, per Fannie Mae, the request could not be granted since there are two separate mortgages encumbering two different parcels of real property, and that the only thing that could be done was to create an entirely new loan, [*6]but that Fannie Mae cannot issue new loans. “[T]he only way for the mortgagors to accomplish their desired result would be for [the] mortgagors to refinance the two mortgage loans with an authorized mortgage lender.” Mr. Rugino also claimed that merging the two mortgages would create major liability-related problems since the two mortgages were purchased from a different seller. He further claimed that the Singers’ action in combining the two apartments without notice or prior approval of either lender:

“was a breach and violation of both mortgage contracts, potentially compromising the security position of Fannie Mae in the properties and certainly complicating any foreclosure proceedings and subsequent disposition of the properties. The mortgage documents were intended to prevent such unilateral activity by the mortgagors and, as far as FNMA is concerned, it makes no sense for mortgagors to benefit from such activity performed in violation of both of the mortgage contracts, or for the court to condone such inappropriate activity.”

Mr. Rugino’s email went on to state that, while Fannie Mae cannot combine the two mortgages, it was willing to offer the Singers a trial payment plan for the 400-Mtge., the essential terms being:

“Loan Term: 322 months

Unpaid Principal Balance: $301,686.17

Balloon Amount: $0.00

Note Rate: 2.00%

Monthly Payment (PI): $1508.14

Monthly Tax & Insurance Payment: $202.90

Monthly HOA Payment: 869.45

Monthly Payment (PITIAS) $2594.41

Monthly MI Payment: $0.00

Trial First Payment Due Date: 11/01/2012″

Mr. Rugino’s email clearly advises that the terms are subject to change upon completion of the trial modification. Although Mr. Rugino insisted that this was not a HAMP modification, the 2% initial interest rate certainly mimicked HAMP.

On October 25, 2012, the court conducted yet another settlement conference. Christian Rudolph, a Portfolio Manager for Fannie Mae’s National Servicing Organization attended the conference. Rather than contribute to the process, he merely deferred to Seterus on all matters. It was suggested that the Singers attempt a loan modification on the 401-Mtge. through the Frenkel firm and submit proof of the current modification that had just been worked out on the 400-Mtge.

On or about November 2, 2012, the Frenkel firm sent the Singers a loan modification application for completion (Burlingame Affirm. and Ex. G). By letter dated November 15, 2012, the Singers were notified by BOA that a dedicated Customer Relationship Manager by the name of Anne Lacava had been assigned to their loan (id.). Bonnie Singer alleges that she submitted all of the required documentation within 48 hours (Singer 5/9/14 Aff. ¶ 20). Indeed, by letter dated November 20, 2012, BOA sent a form letter regarding the 401-Mtge. acknowledging receipt of the Singers’ loan modification request and promising a response when the necessary information was reviewed, which included proof that the Singers were already approved for a Fannie Mae trial modification (Burlingame 7/14/14 Affirm., ¶ 19 and Ex. G). Bonnie Singer avers that, even though [*7]BOA promised to expedite the process, they stopped responding in a few weeks and then never responded again until the Singers received a foreclosure notice in Action No. 2 (Singer 5/9/14 Aff. ¶ 20).

After BOA’s November 20, 2012 letter, counsel asserts that (without reference to any documents or BOA’s business records) “[a]lthough the Defendants provided many documents for the loan modification review, they still did not qualify for a loan modification” (see Burlingame 7/14/14 Affirm. ¶ 19). In counsel’s supplemental affirmation, she attaches two “form letters” from BOA dated February 6 and 23, 2013 (Burlingame 9/18/14 Supp. Affirm., Exs. B & C thereto). The February 6, 2013 letter requested tax returns, pay stubs and HOA documentation, all of which had previously been requested by the Frenkel firm back in November 2012. The letter dated February 21, 2013 merely suggests that the Singers commence the loan modification application process all over again by submitting, for example, the same “Uniform Borrower Assistance Form” attached to the Frenkel firm’s November 2, 2012 letter (compare Exs. G and and I to Burlingame 7/14/14 Affirm.). There is also no documentary support for counsel’s unsupported claim that the Singers’ HAMP application was denied on or about April 2, 2013 “for incomplete application.” If it was, the Singers apparently were never notified of the same.

In the meantime, the Singers had made all three trial payments on the 400-Mtge. by December 18, 2012, and were anxiously awaiting the permanent loan modification papers from Seterus. On January 2, 2013, Seterus sent a letter to the Singers advising that they were pleased to offer them “a Loan Modification Agreement and Escrow Agreement.” According to the proposed agreement, the Singers owed $374,811.61 as of that date as the “Unpaid Principal Balance” (Rugino Affirm., Ex. C thereto). The letter explained that the interest rate on the loan would be 2% interest for first 5 years, with initial monthly payments of $1,726.08, 3% for the 6th year, and 3.375% for the years 7-27, with an October 1, 2039 maturity date (id.). Although not broken down in the letter from Seterus, Mr. Rugino later advised by email in mid-February 2013 that $63,632.21 of the loan amount was accrued interest and $5,605.23 represented the escrow deficiency as of December 18, 2012.

By email dated January 15, 2013, Bonnie Singer objected to the permanent loan modification offered by Seterus and claimed it was not what had been agreed to in court and not what Fannie Mae’s lawyer, Edward Rugino, had proposed via his October 16, 2012 email, which was a loan balance of only $301,686.17. The Singers also objected to the permanent loan modification being offered by Seterus, claiming that the escrow deficiency was incorrect and that the payment of real estate taxes on Apt. 400 should have ceased after the date the two units were combined. Seterus’s investigation into the tax payments revealed that it had in fact been erroneously making tax payments on a different unit in the same complex commencing with the December 2011 payment, and the investigation also uncovered some other discrepancies (8/7/13 Burden Aff., attached to Iraci letter dated August 15, 2013). By letter dated October 28, 2013, Seterus advised the Singers that they were being offered a loan modification agreement on the same terms as the January 2013 proposed loan modification agreement, but that the new “Unpaid Principal Balance” was $380,281.61, of which $81,341.90 represented capitalized interest from their default through November 1, 2013 (Rugino Affirm., Ex. D thereto).^[FN7]

In the meantime, for reasons which have never been explained to the court, it was not until July 18, 2013 that the Frenkel firm commenced Action No. 2 on BOA’s behalf seeking foreclosure on Apt. 401.^[FN8] At this point, the Singers retained legal counsel, and, on August 30, 2013, an answer was filed in Action No. 2 on the Singers’ behalf by Paul Kerson, Esq. of the Law Offices of Leavitt & Kerson. On September 27, 2013, Mr. Kerson filed a motion in Action No. 2 (seq. no. 001) to consolidate the two foreclosure actions.^[FN9]

At this point, the court ordered that a settlement conference be held in both actions, directing that representatives from both servicers attend the conference. An unsuccessful conference was held on December 9, 2013, when counsel for BOA failed to appear. On January 1, 2014, Mr. Kerson sent a written proposal in response to Seterus’s proposed loan modification agreement on the 400-Mtg., advising that the Singers were unwilling to pay the $81,000 in accrued interest, and Mr. Kerson proposed a total interest payment of $18,000. After numerous requests by my court attorney for a response from counsel for Fannie Mae, the court directed another conference on April 25, 2014 to be attended by both lenders with a representative with authority to settle. This was the last court conference on these matters, and thereafter the matters were adjourned without date. Counsel for the Singers advised that he intended to bring the instant motion to bar interest on both mortgages. Fannie Mae offered a loan modification on the 400-Mtge. whereby the Singers would pay $1,992.00 per month towards their mortgage arrears, but no interest would be tolled for delay. Counsel for BOA advised that the Singers were in the process of submitting yet another loan modification request, but claimed that their counsel had been advised that the loan application package was incomplete and that additional financial information was needed.

By letter dated April 28, 2014, counsel for the Singers attempted to accept Fannie Mae’s offer, but with the proviso that the Singers have a right to offset any interest payments if they are reduced by the court in response to his planned motion to bar interest payments. By email dated May 6, 2014, Mr. Rugino advised that Fannie Mae:

“will be withdrawing its loan modification offer very soon unless accepted and brought current in the immediate future. FNMA further stated that, if mortgagor would like to pursue further litigation with regards to Tolling’ of interest, that is their prerogative, but FNMA would not sign any affidavits or agreements pertaining to said anticipated litigation and the offered loan modification.”

Thus, the Singers were presented with the dilemma of either agreeing to an amount that they did not believe was due and owing, in order to save the modification or, forego the modification in lieu of filing tolling motions. They choose to file the motions and accordingly any future attempts to obtain loan modifications ceased.

DISCUSSION

Before addressing the merits of the motions, the court notes that this motion was initially brought, by order to show cause, in Action No. 2 as motion sequence 002, but with a double caption. On July 30, 2014, as directed by my court attorney, counsel for the Singers attempted to e-file a copy of the order to show cause in Action No. 1 (see ECF Doc. 23), but the papers were “rejected returned for correction.” By letter dated September 17, 2014, counsel for Fannie Mae objected to the fact that the signed order to show cause was never e-filed in Action No. 1 (see ECF Doc. 38). Nevertheless, counsel for Fannie Mae e-filed opposition papers to what he deemed an “unfiled motion,” and the motion was fully briefed and argued before the court. Accordingly, since the court has the power to disregard such technical defects or irregularities (CPLR 2001), the motion is considered. The court directs the E-Filing Resource Center (Rm. 119A) to e-file a copy of the May 20, 2014 order to show cause in Action No. 1, under motion sequence no. 001, upon proof of payment of the appropriate motion fee by the Singers which shall be paid within 7 business days of today’s date. Mr. Kearson, as an attorney who practices in New York County, should know how to file and e-file documents, and should not further disregard the directives of the court.^[FN10]

Turning to the merits,3 NYCRR 419.2 establishes a “duty of good faith and fair dealing” by mortgage loan servicers in connection with their transactions with borrowers. This duty requires that servicers “make borrowers in default aware of loss mitigation options and services offered by the servicer in accordance with section 419.11” (3 NYCRR 419.2 [e]). This duty also requires servicers to “provide trained personnel and telephone facilities sufficient to respond promptly to borrower inquiries regarding their mortgage loans” (id., 419.2 [f]), and to “pursue loss mitigation with the borrower whenever possible in accordance with section 419.11” (id., 419.2 [g]). Part 419.11 creates an obligation on the part of servicers to make reasonable and good faith efforts to pursue appropriate loss mitigation options, including loan modifications as an alternative to foreclosure. Notably, section 419.11 (d) requires that servicers must complete their review of a borrower’s eligibility for a loan modification or other loss mitigation options and advise the borrower or their representative of the determination in writing within 30 days of receiving all required documentation. Finally, section 419.11 (i) creates a good faith presumption on the part of servicers if they offer loan modifications in accordance with HAMP guidelines.

While these banking regulations create a duty on the part of lenders that arises once a default occurs, CPLR 3408 requires mandatory settlement conferences in certain mortgage foreclosure actions once a mortgage foreclosure action has been commenced. CPLR 3408 (a) and (f) read, in pertinent part, as follows:

“(a) In any residential foreclosure action involving a home loan . . . in which the defendant is a resident of the property subject to foreclosure, the court shall hold a mandatory conference . . . for the purpose of holding settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan [*8]documents, including, but not limited to determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to, and for whatever other purposes the court deems appropriate.

…..

(f) Both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.”

To conclude that a party failed to negotiate in good faith pursuant to CPLR 3408 (f), a court must determine that “the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution” (US Bank N.A. v Sarmiento, 121 AD3d 187, 203 [2d Dept 2014]). Following the adoption of CPLR 3408, the Chief Administrator of the Courts promulgated regulations setting forth the rules and procedures governing CPLR 3408 settlement conferences (see 22 NYCRR 202.12—a). This regulation requires that “[i]f the parties appear by counsel, such counsel must be fully authorized to dispose of the case” (22 NYCRR 202.12-a [c] [3]).

Fannie Mae argues that the Singers’ request to toll interest from January 2010, the date of their default, is “drastic and draconian relief,” and that a court of equity may not toll interest due on a mortgage in default out of sympathy for the homeowners. Likewise, BOA contends that the “stability of contract obligations must not be undermined by judicial sympathy,” quoting Emigrant Mtge. Co., Inc. v Fisher (90 AD3d 823, 824 [2d Dept 2011] [internal quotation marks and citations omitted]). While is it true that a court may not “rewrite” the parties’ agreement (see e.g., Wells Fargo Bank, N.A. v Meyers, 108 AD3d 9, 17 [2d Dept 2013]), it would be nonsensical for there to exist no suitable remedy for violations of CPLR 3408 (f), or for there to exist no suitable remedy where a plaintiff lacks good faith and files an action seeking equitable relief (such as in mortgage foreclosure cases). Foreclosure is an equitable remedy which triggers the equitable powers of the court (Notey v Darien Constr. Corp., 41 NY2d 1055 [1977]; Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d 835, 836 [2d Dept 2012]).

To the contrary, courts are authorized to impose sanctions for violations of CPLR 3408 (f), and one such sanction is the barring of interest on the loan for the period of time that the servicer acted in bad faith and unduly prolonged the foreclosure proceedings (see U.S. Bank N.A. v Smith, 123 AD3d 914 [2d Dept 2014] [mortgagee barred from collecting interest on mortgage for 9-month period]; US Bank N.A. v Williams, 121 AD3d 1098 [2d Dept 2014] [court canceled all interest accrued on the subject mortgage loan between the date of the initial settlement conference and the date that the parties agreed to a loan modification]; US Bank N.A. v Sarmiento, 121 AD3d at 200 [interest tolled from date mortgagor began placing $2,000 per month in an escrow fund, at the court’s direction]; see also Bank of America N.A. v Lucic, 45 Misc 3d 916 [Sup Ct, NY County 2014]; U.S. Bank, N.A. v Shinaba, 40 Misc 3d 1239[A], 2013 NY Slip Op 51484[U] [Sup Ct, Bronx County 2013]; Wells Fargo Bank, N.A. v Ruggiero, 39 Misc 3d 1233[A], 2013 Slip Op 50871[U] [Sup Ct, Kings County 2013]; Deutsche Bank Trust Co. of Am. v Davis, 32 Misc 3d 1210[A], 2011 Slip Op 51238 [Sup Ct, Kings County 2011]). Because foreclosure is an equitable remedy which triggers the equitable powers of the court (Notey, 41 NY2d 1055 supra; Norwest Bank Minn., NA, 94 AD3d at 836, supra), courts have not hesitated to toll interest when it is an appropriate remedy for a [*9]mortgagee’s unconscionable delay in prosecuting foreclosure actions (see Dayan v York, 51 AD3d 964 [2d Dept 2008]; Danielowich v PBL Dev., 292 AD2d 414 [2d Dept 2002]; Dollar Fed. Sav. & Loan Assn. v Herbert Kallen, Inc., 91 AD2d 601 [2d Dept 1982]; South Shore Fed. Sav. & Loan Assn. v. Shore Club Holding Corp., 54 AD2d 978 [2d Dept 1976]).

At least two courts have tolled interest back to the date of the borrower’s default. In Emigrant Mortg. Co. v Corcione (28 Misc 3d 161 [Sup Ct, Suffolk County April 16, 2010]), in addition to assessing the bank $100,000 in exemplary damages for failing to act in good faith during the settlement conferences, the court also barred the bank from collecting any interest from the date of default in May 2008 to March 2010, noting that the bank offered no explanation for the 14-month delay between default and suit.^[FN11] And in HSBC Bank USA v McKenna (37 Misc 3d 885 [Sup Ct, Kings County 2012]), the court found that the bank acted in bad faith in refusing to agree to a short sale of the mortgaged property and, as a consequence, could not recover interest from the date of the mortgagor’s default.

Both Fannie Mae and BOA argue that, even if their servicers violated Part 419, these regulations do not provide the Singers with a private cause of action for any violations, and that the sole remedy is the imposition of fines and penalties on servicers by the Superintendent of the Banking Department, citing Banking Law § 595-b (1) and 3 NYCRR 418.10. Assuming that to be true, and mindful that communications between a loan servicer and the mortgagors after their initial default (but prior to an appearance in the settlement part) “cannot be the basis of a violation of CPLR 3408(f)” (Deutsche Bank Natl. Trust Co. v Izraelov, 40 Misc 3d 1238[A], *4, 2013 Slip Op 51482[U] [Sup Ct, Kings County 2013], citing Wells Fargo Bank, N.A., 108 AD3d at 17, supra), tolling interest prior to the settlement conference may be appropriate as a matter of equity.

Counsel for both lenders argues that the physical and legal combination of the two apartments by the Singers, without notice or prior approval by the lenders, was a breach of the mortgage contracts. This is not the case. Counsel has never identified what provision of each mortgage was violated. A full copy of the 400-Mtge. has never been filed with the court (see Rugino 7/14/14 Affirm., Ex. A [attaching only pages 1, 2 and 16 of the 400-Mtge.]). However, it appears to be the same form as the 401-Mtge. (i.e., “NEW YORK – Single Family – Fannie Mae/Freddie Mac UNIFORM INSTRUMENT – MERS Form 3033 1/01”). This mortgage, in section 7 (a) thereof, states only that the borrower may not “destroy, damage or harm the Property” or “allow the Property to deteriorate” (see Tarab 11/11/13 Affirm., Ex. A). There is no language that restricts a borrower from making physical improvements or structural changes to the premises or requires prior notice to, and approval by, the lender for such changes.^[FN12] Thus, the Singers did not act in bad faith or in [*10]derogation of the mortgage in physically combining two contiguous apartments. In fact, it appears that the combination was legally permitted under the mortgages, without notice to, or prior approval of, the lenders. The Singers assert, without contradiction, that the value of Apt. 401 has substantially increased. There is no evidence or argument regarding how the property was destroyed, damaged, harmed or allowed to deteriorate.

Fannie Mae also argues that there is no basis to toll interest in Action No. 1 pursuant to CPLR 3408, because its servicer negotiated in good faith during the course of the CPLR 3408 conferences and because the Singers were offered a trial loan modification in October 2012 even though they did not qualify for HAMP. Fannie Mae also contends that, even though there was an inadvertent calculation error regarding the escrow amounts, the error was corrected and thereafter the Singers refused to accept the revised loan modification plan offered in October 2013 arguing over payment of the capitalization of accrued interest.

The court disagrees with plaintiffs’ positive assessment of the negotiations. It is belied by the history recited above. To summarize:

Fannie Mae delayed filing of Action No. 1 (filed on June 14, 2011) 17 and 1/2 months after the date of default. Counsel then delayed filing the RJI for another three months after the answer was filed. The first settlement conference, scheduled on March 14, 2012, had to be rescheduled to May 2, 2012 due to Fannie Mae’s non-appearance, a one and one-half month delay. It took Fannie Mae and its counsel another five and 1/2 months to provide an explanation for why the two mortgages could not be merged or consolidated, and only after wasting time at two conferences in June and July attended by attorneys without knowledge of the case or settlement authority and only after my court attorney probed for answers. Thereafter, the Singers submitted the requested documentation for a loan modification of the 400-Mtge., despite confusing and conflicting requests by the Rosicki firm, by August 3, 2012. When that application became “stale,” the court directed the Singers to update the information and, finally, after another two-month delay, Seterus offered the Singers a trial modification plan on or about October 11, 2012. When the Singers received the permanent loan modification papers from Seterus in January 2013, they objected to the

payment of $63,632.21 in accrued interest and the $5,605.23 accrued interest.^[FN13] It took many months for Seterus to admit its mistake on the escrow deficiency, and only after much prodding by the court for status updates.^[FN14] Seterus did not offer the Singers a new loan modification agreement until the [*11]very end of October 2013 — a whopping nine-month delay. Finally, it took Fannie Mae’s counsel another five months to reject the Singers’ January 1, 2014 counteroffer to pay $18,000 of the accrued interest.

Accordingly, the court holds that Fannie Mae and/or its counsel have acted in bad faith and have unreasonably delayed a resolution of this foreclosure action. As a result, interest should be tolled on the note and mortgage in the amount over and above 2% annually, for the period from September 30, 2011 (one month after Singers’ filing of their answer in Action No. 1) through the date of this Decision and Order.^[FN15]

Similarly, BOA contends that there is no basis to toll interest and asserts that it has negotiated with the Singers in good faith to offer them a loan modification on the 401-Mtge., both prior to and after the commencement of Action No. 2. BOA’s counsel claims that: (1) there is no evidence that BOA acted in bad faith in denying the Singers’ 2009 refinancing application, and that, in any event, it predated the enactment of Part 419; (2) the bank offered the Singers a HAMP loan modification in March 2010, but they did not qualify based on their finances; (3) the Frenkel firm sent the Singers a second loan modification application in November 2012, which was denied in April 2013 for incompleteness; (4) BOA did negotiate in good faith with the Singers during and since the initial CPLR 3408 conference in Action No. 2, first held on April 25, 2014; and (5) that, again due to the Singers’ failure to complete the loan modification application process, their applications were denied on May 29, 2014.

Part 419 was not enacted until August 18, 2010, and did not become effective until October 1, 2010, thus these regulations were not in place when the Singers attempted to refinance the 401-Mtge. with BOA to consolidate the two loans. There is no evidence that BOA acted in bad faith in denying the 2009 refinancing application. According to the Singers’ own profit and loss statement, as of December 2008, the Singers’ total income was $106,071.76, and total expenses was $136,253.22 (Singer 5/9/14 Aff., part of Ex. B).^[FN16]

However, the Singers and Mr. Feldman made repeated attempts to contact BOA, who held both mortgages at that time, to obtain loan modifications, but they were told in 2010 that their monthly mortgage payment, standing alone, did not exceed 31% of their combined gross income (the same claim made by Fannie Mae in rejecting the Singers’ request for a HAMP modification in 2012). This was incorrect since, one of the four basic requirements for HAMP eligibility, is that “[t]he borrower’s monthly mortgage payment (including principal, interest, taxes, insurance, and when applicable, association fees, existing escrow shortages) prior to the modification is greater than 31 percent of the borrower’s verified monthly gross income” (see Making Home Affordable® Handbook for Servicers of Non—GSE Mortgages, Version 4.1, ch. 2, § 1.1.2 at 69 [HAMP Tier 1 Eligibility Criteria]). Indeed, according to “Exhibit A: Model Clauses for Borrower Notices,” what is to be considered is the borrower’s “currently monthly housing expense . . . on your first lien mortgage loan plus property taxes, . . .” (id., Ex. A at 207). Since the 400-Mtge. and the 401-Mtge. are both “first liens” on the mortgaged premises, the monthly payments under both loans should have been considered in determining whether the Singers’ “monthly housing expense” exceeded 31% of their gross monthly income. Although Fannie Mae’s counsel argues that HAMP “expressly provide[s] for the modification of two mortgages separately when a property is encumbered by two different mortgages” (Rugino 7/14/14 Affirm ¶¶ 18, 20), his reference is to the Second Lien Modification Program, discussed in Chapter V of the Handbook which relates to subordinate loans (i.e., an equity loan, a HELOC or any “mortgage lien that would be in second lien position but for a tax lien, a mechanic’s lien or other non-mortgage related lien that has priority”). It is beyond dispute that neither Fannie Mae nor BOA would take the position that its mortgage is subordinate to the other’s mortgage.

Further, while BOA’s counsel claims that the Singers were advised in March 2010 that they might be eligible for a HAMP modification of the 401-Mtge., no evidence to support that statement has been offered. The only evidence is that the Singers were considered for a traditional loan modification and, that Mr. Feldman was orally advised on November 5, 2010 that they had been denied based on their financial situation, and that their loan was “returned to normal servicing” (see Diaz Aff., ¶¶ 6, 7), even though it had been in default for over 10 months. And for the next two years, the 401-Mtge. appears to have fallen into a black hole, despite the fact that my court attorney inquired about the status of BOA’s foreclosure filing at nearly every conference with the Singers and the Rosicki firm. With the exception of sending a default letter in January 2012, BOA took no further action with respect to the 401-Mtge. until November 2012, when the Frenkel firm sent, at the Singers’ request, a loan modification application. However, despite the Singers’ good faith attempt to obtain a loan modification for the 401-Mtge. from BOA at that time, their request was never properly addressed, allowed to lapse and go stale, and then ignored. It was not until July 18, 2013, that the Frenkel firm commenced Action No. 2, creating another lengthy delay with interest at the [*12]rate of 6.75% racking up. And due to BOA’s non-appearance at the December 9, 2013 scheduled conference due to “inclement weather and emergencies” (Burlingame 7/14/14 Affirm., ¶ 21), the first joint settlement conference in both actions could not be held until April 25, 2014. BOA failed to timely and properly process the Singers’ 2010 request for a loan modification, refused to consider the Singers’ total housing expenses and delayed commencement of the foreclosure action to the prejudice of the Singers, who had already been found eligible for a Fannie Mae loan modification in 2013 and 2014.

Based on the foregoing evidence, BOA did not act in good faith to explore loss mitigation options with the Singers from November 5, 2010 through the date of this Decision and Order, and that interest on the note and 401-Mtge. should be barred during that time on that portion of the interest rate over and above 2% annually. While this includes a period of time prior to the settlement conferences, it would be an absurd result if BOA, who delayed filing its mortgage foreclosure action by two years as compared to Fannie Mae, were to be penalized less than Fannie Mae, who engaged in the statutory process. Such a result would also create incentives for lenders to forestall filing foreclosure actions and frustrate the entire intent of the statutory process. A court in equity cannot countenance such a result.

Accordingly, for the foregoing reasons, it is hereby

ORDERED that the motion of defendants Lawrence and Bonnie Singer for an order forgiving interest owed by defendants on the notes and mortgages which are the subject of these actions is granted to following extent:

plaintiff Federal National Mortgage Association and its agents, successors and assigns are forever barred, foreclosed and prohibited from demanding, collecting or attempting to collect, directly or indirectly, accrued interest on the note and mortgage that is the subject of Federal National Mortgage Association v Singer, et al., Index No. 850039/11 (Action No. 1) which is over and above 2% annually for the period from September 30, 2011 through the date of this Decision and Order; and

plaintiff Bank of America, N.A. and its agents, successors and assigns are forever barred, foreclosed and prohibited from demanding, collecting or attempting to collect, directly or indirectly, accrued interest on the note and mortgage that is the subject of Bank of America, N.A. v Singer, et al., Index No. 850200/13 (Action No. 2) which is over and above 2% annually for the period from November 5, 2010 through the date of this Decision and Order;

and it is further

ORDERED that the plaintiffs recalculate the amounts owed on each note and mortgage, in light of the court’s barring of a portion of the interest, and notify the Singers and their counsel and the court of those amounts in writing within ten (10) business days of today’s date; and it is further

ORDERED that after said ten (10) business days, plaintiffs in Action No. 1 and Action No. 2 are directed to reprocess the Singers for HAMP, Fannie Mae and/or any appropriate in-house loan modifications using the recalculated figures (and considering the expenses of both mortgages [*13]together as a whole); and it is further

ORDERED that within twenty (20) days, the parties shall contact the court to schedule a further CPLR 3408 conference; and it is further

ORDERED that the Singer’s counsel shall serve a copy of this Decision and Order, with Notice of Entry, on counsel in Action No. 1 and Action No. 2 within seven (7) business days of today’s date; and it is further

ORDERED that upon the Singer’s counsel notification to the E-Filing Resource Center and payment of the appropriate motion fee with seven (7) business days of today’s date, the E-Filing Resource Center (Rm. 119A) shall e-file a copy of the May 20, 2014 order to show cause in Action No. 1, under motion sequence no. 001 (originally returned for correction).

This Constitutes the Decision and Order of the Court.

Dated: July 15, 2015

ENTER:

________________________

J.S.C.

Footnote 1:In this decision, as well as in the case law, the term tolling interest is used interchangeably with, and is synonymous with, cancelling interest or barring the collection of interest.

Footnote 2:According to ACRIS (New York City’s automated city register information system), BOA assigned the mortgage in Action No. 2 to Fannie Mae on April 16, 2015. Back in 2012, Fannie Mae’s counsel had indicated to the court his belief that Fannie Mae owned the mortgages in Action No. 1 and Action No. 2. Accordingly, the court had understood that BOA was acting only as the servicer of the mortgage. To the extent that the understanding was incorrect, it had no impact on the settlement conferences or this decision.

Footnote 3:Ms. Diaz does not indicate the year in which the mortgagors had the deficit income of $5,864.00 per month. According to the Singers’ own profit and loss statement, as of December 2008, the Singers’ total income was $106,071.76, and total expenses was $136,253.22 (Singer 5/9/14 Aff., part of Ex. B [NYSCEF No. 27]). However, the phone conversation was in November, 2010. It would not be proper to base a 2010 loan modification determination on 2008 financial information.

Footnote 4:Formal substitution of counsel papers were never filed in Action No. 1 signaling a change in counsel for plaintiff Fannie Mae, but the Rosicki firm began appearing for plaintiff Fannie Mae sometime in March or April of 2012.

Footnote 5:Eventually Edward Rugino, Esq. of the Rosicki firm appeared. Of all the players in this matter, the court found him by far the most knowledgeable and responsive. It appears that the bulk of his efforts were hampered by the servicer, Seterus. The court appreciates his involvement in this matter.

Footnote 6:The email uploaded as an attachment to this decision contains underlining which was inadvertently made by the court. My court attorney’s computer does not have email extending back to 2012. Thus, the only copy is the underlined email that was in her file and uploaded herein.

Footnote 7:Once again, the capitalized interest amount was not specified in the communication from Seterus, but was provided by Mr. Rugino in an email dated August 24, 2013.

Footnote 8:Paragraphs 26 and 27 of the complaint seek reformation for an allegedly incorrect property description in the mortgage, stating “the deed and mortgage were intended to describe the same property identified . . . as Block 2164, Lot 1101.”

Footnote 9:By Decision and Order dated July 8, 2015, the motion to consolidate was denied, with leave to renew upon letter application, after the cases are remanded out of the settlement part (should the matters not settle).

Footnote 10:For purposes of convenience, the court issues one Decision and Order for both actions (but issues separate “gray sheets” in the actions referencing this decision).

Footnote 11:This decision was vacated on rehearing when the parties reached an amicable and fair settlement (Emigrant Mortg. Co., Inc. v Corcione, 2010 NY Misc LEXIS 6933 [Sup Ct, Suffolk County Oct. 14, 2010]).

Footnote 12:Bonnie Singer avers that she and her husband always had every intention of refinancing and combine the two mortgages once the merger of the two tax lots was legally finalized (Singer 5/9/14 Aff. ¶ 5).

Footnote 13:Bonnie Singer objected to paying any accrued interest, claiming that it was not what was agreed to in court and was unfair, as she and her husband had been trying to get modifications since 2009. Contrary to her belief, neither Fannie Mae or its counsel ever agreed in court to waive the accrued interest on the 400-Mtge., and Mr. Rugino’s October 16, 2012 email clearly stated that the “Unpaid Principal Balance” was “$301,686.17,” not the outstanding loan balance, and thus Bonnie Singer’s belief in this regard was unfounded.

Footnote 14:For example, in an email dated July 23, 2013, my court attorney advised Mr. Rugino: “The court has inquired several times about the status of the matter after our last conference on 4/22/13 and have gotten no response from plaintiff although you indicated that you will inquire and advise. If you cannot provide a detailed status by August 1, 2013, please have your client submit [by mail] a detailed affidavit explaining the status of this matter by August 7, 2013.” The following day, Mr. Rugino advised that he “understands” her frustration, but still had no response from Seterus.

Footnote 15:Although the majority of cases which bar interest do so for the entire amount of interest owed for a particular period (as opposed to a portion thereof), the court finds that the most equitable result here would be to bar that portion of the interest on the note and mortgage over and above 2% annually. This translates to the Singers paying an annual interest of 2%, which would mimic the loan modification finally offered by Fannie Mae to the Singers in 2013 and 2014 after much delay.

Footnote 16:The Singers also claim that they had contacted BOA in 2009 in regards to having the PMI removed “[a]s we had a perfect payment record with them for over two years” (Singer 5/9/14 Aff., ¶ 7). Bonnie Singer claims that BOA verbally refused, because one payment in January of 2009 was three days late (id.). She then claims that BOA promised to send them an application, but it was never received (id.). However, attached to her affidavit as part of exhibit B is a letter dated July 1, 2009 from BOA to Lawrence Singer thanking him for his recent inquiry to cancel the PMI on the 401-Mtge. This letter further advises that, in order to qualify, the loan-to-value ratio must be 75% or less, and gives directions on what they need to do to apply, one item being paying for and obtaining an appraisal from a BOA-approved appraiser. There is no evidence that the Singers ever followed through with this process.

Consumer protection touches on a number of areas of law, and as such, has been broadly defined by Nolo’s Plain-English Law Dictionary as “[f]ederal and state laws established to protect retail purchasers of goods and services from inferior, adulterated, hazardous, and deceptively advertised products, and deceptive or fraudulent sales practices; these laws cover everything from food to cosmetics, from banking to fair housing.”  Because laws that deal with consumer protection can be found in several different areas of law, starting one’s research in “consumer protection law” can be somewhat overwhelming.  Through this Beginner’s Guide, we hope to provide some access points to this significant field of study.

Federal and State Statutes and Regulations

Many consumer protection laws can be found in both federal and state statutes. Federal statutes can be found in the U.S. Code. You can access state statutes through our Guide to Law Online page. Indexes are generally not available online, so it helps if you know the name of the title or code which is concerned with consumer protection so you can browse that title. The organization of statutes varies by jurisdiction, but you might want to look in areas like: “commerce and trade”; “public health and welfare”; “banks and banking”; “business and professions”; “commercial codes”; “insurance”; “health and safety”; “food and agriculture”; “regulation of trade, commerce, investments, and solicitations”; “commercial relations”; “motor vehicle sales”; and, as you might expect, “consumer protection.”

Be sure to also check federal and state regulations that implement consumer protection statutes.

Case Law

You may also want to locate cases that support your claim. You can locate free case law online. In addition to searching for keywords of interest, you may want to search for cases that cite to the consumer protection statutes you have located.  Also, be sure to visit your local law library to use a legal citator like KeyCite or Shepard’s to make sure the cases you wish to rely upon have not been questioned, distinguished, overturned, or repealed by a subsequent case or statute.

Books

As always, we suggest that researchers entirely new to an area of law like this start their research by using a secondary source, like a book or journal article.  Below, please find a selection of resources from the Law Library of Congress collection that might be good options for a researcher new to consumer protection law:

• Consumer Protection Law in a Nutshell, by Gene A. Marsh
• Consumer Survival: An Encyclopedia of Consumer Rights, Safety, and Protection, edited by Wendy Reiboldt and Melanie Horn Mallers
• Consumer Law & Protection: A Practical Approach for Paralegals and the Public, by Neal R. Bevans
• Everyday Law for Consumers, by Michael L. Rustad
• Problems and Materials on Consumer Law, by Douglas J. Whaley
• Consumer Class Actions, by Stuart T. Rossman and Charles Delbaum
• Selected Consumer Statutes, edited by John A. Spanogle
• Consumer Arbitration Agreements: Enforceability and Other Topics, by F. Paul Bland
• Review of Consumer Protection Law Developments, by Section of Antitrust Law, American Bar Association
• Consumer Rights Law, by Margaret C. Jasper
• Consumer Law: Cases and Materials, by John A. Spanogle, Ralph J. Rohner, Dee Pridgen, Jeff Sovern, and Christopher L. Peterson

Websites

In addition to the resources listed above, researchers can find a substantial amount of information and guidance on the free web, including the wealth of information included in these websites:

• Federal Trade Commission’s Bureau of Consumer Protection
  • Homepage: http://www.ftc.gov/about-ftc/bureaus-offices/bureau-consumer-protection
  • Consumer.gov: http://www.consumer.gov/
  • Consumer Information Blog: http://www.consumer.ftc.gov/blog/
  • Consumer Advocates Information: http://www.consumer.ftc.gov/features/feature-0010-consumer-advocates
  • Commission and Staff Reports: http://www.ftc.gov/policy/reports/policy-reports/commission-and-staff-reports
• Consumer Financial Protection Bureau: http://www.consumerfinance.gov/
• Federal Deposit Insurance Corporation – Consumer Protection: https://www.fdic.gov/consumers/
• Department of Justice Consumer Protection Branch: http://www.justice.gov/civil/consumer-protection-branch-home
• OnGuardOnline: http://www.onguardonline.gov/
• Consumer Product Safety Commission: http://www.cpsc.gov/
• Better Business Bureau: http://www.bbb.org/
• National Association of Consumer Advocates: http://www.consumeradvocates.org/issues
• National Consumer Law Center – Brochures: http://www.nclc.org/for-consumers/brochures-by-topic.html
• Global Legal Monitor – Topic: Consumer Protection: http://www.loc.gov/lawweb/servlet/lloc_news?browse_topic_Consumer-protection
• National Consumer Protection Week – Consumer Topics: http://www.ncpw.gov/consumer-topics
• GSA Federal Citizen Information Center – Consumer Action Handbook: http://www.usa.gov/topics/consumer/consumer-action-handbook.pdf
• Local Sources (Generally, state consumer protection sections can be found in the attorney general’s office)
  • DC Office of the Attorney General – Consumer Protection: http://oag.dc.gov/service/consumer-protection-asst
  • Virginia Office of the Attorney General – Consumer Protection: http://www.oag.state.va.us/index.php/citizen-resources/consumer-protection
  • Maryland Attorney General Consumer Protection Division: http://www.oag.state.md.us/Consumer/index.Htm

Source: http://blogs.loc.gov |  by Barbara Bavis

The defendant was represented by Jordan T. Schiller, Esq. of Schiller P.C., 55 Broad Street, Suite 18B, NY, NY

GENINE D. EDWARDS, J.

This foreclosure action was referred to this Court for a bad faith and standing hearing after twenty-five foreclosure settlement conferences, over the course of more than three years, from January 2010 to April 2013, were held before Special Referee Deborah L. Goldstein. From June 2013 to August 2014, this Court held several additional settlement conferences to reach a mutually agreeable resolution. After repeated attempts to reach an agreement failed, this Court conducted the hearing on October 27, 2014.

CPLR § 3408 mandates “settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents, including, but not limited to determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to….” CPLR § 3408(a). Plaintiff is to appear in person or by counsel fully authorized to dispose of the action and is to bring, among other documents, the mortgage and note. CPLR § 3408(c); CPLR § 3408(e). “If the plaintiff is not the owner of the mortgage and note, the plaintiff [is to] provide the name, address and telephone number of the legal owner of the mortgage and note.” CPLR § 3408(e). The statute requires all parties to “negotiate in good faith to reach a mutually agreeable resolution, including a loan modification….” CPLR §3408(f). Flagstar Bank v. Walker, 112 AD3d 885, 977 N.Y.S.2d 359 (2d Dept. 2013). Failure to act reasonably and cooperatively leads to a finding of bad faith. US Bank, N.A. v. Williams, 121 AD3d 1098, ___ N.Y.S.2d ___ (2d Dept. 2014); US Bank. N.A. v. Sarmiento, 121 AD3d 187, 991 N.Y.S.2d 68 (2d Dept. 2014) (“[T]he issue of whether a party failed to negotiate in good faith’ within the meaning of CPLR 3408 (f) is determined by considering whether the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution.”); Wells Fargo Bank v. Meyers, 108 AD3d 9, 966 N.Y.S.2d 108 (2d Dept. 2013).

The referee’s report indicated the following: defendant Amadou Diakite qualified for a HAMP modification trial and made three monthly payments of $2,637.00 on December 1, 2009, January 1, 2010, and February 1, 2010. Referee’s Report, dated April 9, 2013. Additional payments were rejected and returned to him. Id. Plaintiff Aurora Loan Services LLC (“Aurora”) kept the three trial payments, rejected the final modification, and insisted that defendant Diakite re-start the process because Aurora claimed to have not received the signed modification agreement from defendant Diakite, who denied receiving same.^[1] Id. Thereafter, defendant Diakite submitted multiple complete packages, but plaintiff repeatedly requested documents that defendant Diakite had already submitted, and appeared at settlement conferences by various attorneys, including per diem counsel, who lacked personal knowledge of defendant Diakite’s loan history.^[2] Id. In a letter, dated July 15, 2012, Nationstar Mortgage LLC (“Nationstar”) informed defendant Diakite that the servicing of his loan was being assigned, sold or transferred from plaintiff to Nationstar. Id. In another letter, with the same date, July 15, 2012, Nationstar informed defendant Diakite that the debt is owed to Wilmington Trust Company, Trustee, SASCO Series 2005-4XS, but is being serviced by Nationstar. Id. Subsequently, Nationstar denied defendant Diakite’s HAMP application on October 16, 2012 because Defendant Diakite did not provide Nationstar with the documents it requested. In another denial letter, dated November 16, 2012, Nationstar simply stated “[w]e are unable to create an affordable payment equal to 31% of your reported monthly gross income without changing the terms of your loan beyond the requirements of the program.” Id. The parties appeared at further settlement conferences but no agreement was reached. On April 9, 2013, the referee issued a directive and report that referred the action this Court. Neither party moved to confirm or reject all or part of the referee’s report.

Upon referral, at the initial Court appearance on July 3, 2013, the Court ordered the parties to appear for a bad faith and standing^[3] hearing to be held on October 11, 2013. That hearing was deferred as the parties were still interested in pursuing a mutually agreeable resolution. As of December 13, 2013, plaintiff indicated that the HAMP application was fully submitted and under review. It later requested additional documentation. Then, as of May 23, 2014, the HAMP application was once again in underwriting and awaiting a decision. The application was denied on or about May 30, 2014 and plaintiff was ordered to provide defendant Diakite with the HAMP inputs for review. On August 1, 2014, the Court ordered the parties to appear for a bad faith hearing on October 27, 2014. In a letter, dated September 4, 2014, plaintiff’s counsel advised defense counsel that defendant Diakite had been denied for HAMP Tier 1, HAMP Tier 2, and a Standard Modification. The letter listed the figures the plaintiff used to issue the May 30, 2014 denial.

In preparation for the hearing, this Court directed plaintiff to produce the mortgage and note with any assignments and proof of ownership of both instruments. Plaintiff failed to produce any documents.

At the hearing, defendant Diakite testified that he submitted modification packages over and over to the plaintiff. At the end of 2009, he was offered a trial modification, and he timely made the three trial payments. Defendant Diakite testified that he thought his mortgage would be modified, but he never heard from the plaintiff after the last payment. Sometime later he was required to continuously submit further documents to his counsel in an effort to modify his mortgage payments, all to no avail. He admitted that at some point he began receiving mail and document requests from a new bank, Nationstar, but denied receiving a denial letter dated May 30, 2014.

Milly Rhodes, a Nationstar default case specialist since March 2014, testified on behalf of the plaintiff. Ms. Rhodes had no knowledge of the history of this loan or why a permanent modification was not offered to defendant Diakite. In 2014, three modification reviews, HAMP Tier 1, HAMP Tier 2, and the in-house were performed, but modification was denied because defendant Diakite lacked sufficient income. Ms. Rhodes did not have the documents to substantiate what was actually done. She did not produce the note, mortgage, assignments, or any documents at all.

After due deliberation and consideration, this Court finds that the record supports the referee’s findings that the plaintiff failed to negotiate in good faith pursuant to CPLR § 3408. The referee’s report is confirmed. Accordingly, all interest, costs, and attorneys’ fees are stayed from March 1, 2010 to October 27, 2014.

This constitutes the decision and order of this Court.

[1] The referee directed plaintiff to appear with proof that a final HAMP agreement was mailed to Defendant Diakite via certified mail but no proof was provided. Referee’s Report, dated April 9, 2013; Referee’s Directive, dated December 10, 2012.

[2] Originally, Steven J. Baum P.C. represented plaintiff. Thereafter, plaintiff was represented by Fein, Such and Crane, LLP.

[3] An answer was not filed in this action. Neither was a pre-answer motion to dismiss.

Jaime Lathrop, Brooklyn, N.Y. (David Lavery of counsel), for respondent.

Before: Peter B. Skelos, J.P., Sheri S. Roman, Sylvia O. Hinds-Radix, Hector D. Lasalle, JJ.

DECISION & ORDER

ORDERED that the order dated November 18, 2013, is modified, on the law, on the facts, and in the exercise of discretion, (1) by deleting the provision thereof directing the plaintiff to submit a proposed loan modification order to the defendant Fay Williams and the court, (2) by deleting the provision thereof canceling interest accrued between the date of the initial settlement conference in June 2010 and the date that the parties agree to a loan modification, and substituting therefor a provision canceling interest accrued between the date of the initial settlement conference in June 2010 and the date on which settlement negotiations recommence, (3) by deleting the provision thereof barring the plaintiff from charging the defendant Fay Williams any attorney’s fees or costs incurred in this action, and substituting therefor a provision barring the plaintiff from charging the defendant Fay Williams any attorney’s fees or costs incurred in this action between the date of the initial settlement conference in June 2010 and the date on which settlement negotiations recommence, (4) by deleting the provision thereof directing the plaintiff, within 60 days, to provide the defendant Fay Williams with a payoff statement which incorporates the cancellation of interest from June 2010 and which does not assess any attorney’s fees or costs incurred in this action, and substituting therefor a provision directing the plaintiff, within 60 days from service upon it of a copy of this decision and order, to provide the defendant Fay Williams with a payoff statement which incorporates the cancellation of interest accrued between the date of the initial settlement conference in June 2010 and the date on which settlement negotiations recommence and which does not assess any attorney’s fees or costs between the date of the initial settlement conference in June 2010 and the date on which settlement negotiations recommence, (5) by deleting the provision thereof denying that branch of the plaintiff’s motion which was to reject the referee’s report and substituting therefor a provision granting that branch of the plaintiff’s motion to the extent indicated hereinabove, and (6) by deleting the provision thereof confirming stated portions of the referee’s report and substituting therefor a provision confirming those stated portions to the extent indicated hereinabove; as so modified, the order dated November 18, 2013, is affirmed insofar as appealed from, with one bill of costs to the defendant Fay Williams, and the matter is remitted to the Supreme Court, Kings County, for further proceedings consistent herewith.

In June 2006, the defendant Fay Williams and nonparty Credit Suisse Financial Corporation (hereinafter Credit Suisse) agreed to an adjustable rate mortgage loan in the sum of $516,800 for property located in Brooklyn (hereinafter the property). The terms of the mortgage note provided that in the event of default, Williams would pay the mortgagee’s attorney’s fees and costs. The defendant Mortgage Electronic Registration Systems (hereinafter MERS) recorded the mortgage as nominee for Credit Suisse. In July 2009, Williams allegedly defaulted on the mortgage note. In February 2010, MERS purportedly assigned the mortgage note to the plaintiff, US Bank National Association, as Trustee for CSMC ARMT 2006-3 (hereinafter US Bank).

In February 2010, US Bank commenced this action to foreclose on the mortgage. US Bank never appeared for mandatory conferencing. Instead, nonparty servicer ASC/Wells retained nonparty Steven J. Baum, P.C. (hereinafter Baum, and hereinafter collectively with ASC/Wells and US Bank, the foreclosing parties), to prosecute the action and participate in foreclosure conferencing. Between June 2010 and July 2011, Baum and Williams participated in 10 settlement conferences, during which Baum represented that Williams might qualify for loan modification via the federal Home Affordable Modification Program (hereinafter HAMP) and repeatedly asked her to submit additional documentation regarding the HAMP application. In July 2011, the foreclosing parties advised the Supreme Court that, notwithstanding their prior representations, US Bank had denied review of Williams’s HAMP application because it was contractually prohibited by a 2006 Pooling and Servicing Agreement (hereinafter PSA) from modifying the interest rate or term of the mortgage.

In a referee’s report dated May 8, 2012, the referee found, inter alia, that the foreclosing parties failed to negotiate in good faith for more than a year, prolonged the workout process, and wasted judicial resources by causing Williams to submit multiple HAMP applications and to attend numerous settlement conferences, even though they knew the PSA prohibited US Bank from modifying the applicable interest rate or term. Accordingly, the referee recommended an order (1) directing ASC/Wells to review Williams for an affordable loan modification under HAMP using payoff figures from June 2010 and to submit a proposed modification offer to Williams and the court; (2) directing the parties to appear for a hearing to determine whether to impose sanctions against the foreclosing parties for failure to negotiate in good faith; (3) barring US Bank from recovering an attorney’s fee and costs from Williams; and (4) tolling all interest accrued on the mortgage note between the initial conference date in June 2010 and the date on which the parties enter into a loan modification agreement.

By order dated July 2, 2012 (hereinafter the July 2012 order), the Supreme Court, on its own initiative, in effect, confirmed the relevant provisions of the referee’s report. In September 2012, the Supreme Court directed the parties to make a further attempt at modification. The foreclosing parties subsequently refused to offer loan modification to Williams due to US Bank’s refusal to allow reductions in the interest and term. On or about April 23, 2013, US Bank provided a payoff statement to Williams which included interest accrued since June 2010 and an attorney’s fee incurred in the action.

On or about July 5, 2013, Williams moved to hold US Bank in civil contempt based on its failure to comply with the provisions of the July 2012 order directing it, in effect, to provide a payoff statement excluding accrued interest since the date of the initial settlement conference in June 2010 and charges for an attorney’s fee and costs. US Bank opposed the motion and moved to vacate the July 2012 order and reject the referee’s report. The Supreme Court accepted US Bank’s contention that it had no notice of the referee’s report or of the court’s order confirming it, and thus, the court treated US Bank’s motion as a timely motion to reject the referee’s report.

In the order appealed from, the Supreme Court, in effect, denied Williams’s motion to hold US Bank in civil contempt and denied that branch of US Bank’s motion which was to reject the referee’s report. The Supreme Court also, in effect, granted that branch of US Bank’s motion which was to vacate the July 2012 order and, thereupon, confirmed the referee’s report to the extent of directing US Bank to review Williams for an affordable mortgage loan modification pursuant to the HAMP using payoff figures from June 2010 and to submit a proposed loan modification order to Williams and the court, canceling all interest accrued on the subject mortgage loan between the date of the initial settlement conference in June 2010 and the date that the parties agree to a loan modification, barring US Bank from charging Williams any attorney’s fees or costs incurred in this action, and directing US Bank, within 60 days, to provide Williams with a payoff statement which incorporates the cancellation of interest from June 2010 and which does not assess any attorney’s fees or costs incurred in this action. US Bank appeals.

“A foreclosure action is equitable in nature and triggers the equitable powers of the court” (Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d 835, 836; see Notey v Darien Constr. Corp., 41 NY2d 1055, 1055-1056; Mortgage Elec. Registration Sys., Inc. v Horkan, 68 AD3d 948, 948). “Once equity is invoked, the court’s power is as broad as equity and justice require'” (Mortgage Elec. Registration Sys., Inc. v Horkan, 68 AD3d at 948, quoting Norstar Bank v Morabito, 201 AD2d 545, 546).

The record supports the referee’s finding that the foreclosing parties failed to negotiate in good faith. Thus, the Supreme Court properly directed US Bank to review Williams for HAMP modification, in light of the referee’s findings, in effect, that it had thus far failed to fulfill its statutory obligation to do so (see Wells Fargo Bank, N.A. v Meyers, 108 AD3d 9, 23).

However, the Supreme Court erred in directing US Bank to submit a proposed loan modification order to Williams and the court, as the court was without authority to force parties to reach an agreement (see Flagstar Bank, FSB v Walker, 112 AD3d 885, 886; Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 20, 22).

Contrary to US Bank’s contention, the Supreme Court providently exercised its discretion canceling certain interest accrued on the mortgage note after June 2010. “In an action of an equitable nature, the recovery of interest is within the court’s discretion. The exercise of that discretion will be governed by the particular facts in each case, including any wrongful conduct by either party” (Dayan v York, 51 AD3d 964, 965 [citations omitted]; see CPLR 5001[a]; Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d at 837; Danielowich v PBL Dev., 292 AD2d 414, 415). The record demonstrates that the foreclosing parties repeatedly represented to the referee and to Williams that they were considering Williams for HAMP loan modification and repeatedly demanded that Williams submit additional documentation in support of that application, notwithstanding the prohibition against such a modification in the PSA, which they did not disclose until approximately 13 months after negotiations began. Under these circumstances, the Supreme Court providently exercised its discretion in finding that US Bank was not entitled to collect interest accrued as a result of its wrongful conduct (see generally US Bank N.A. v Sarmiento, ___ AD3d ___, 2014 NY Slip Op 05533 [2d Dept 2014]; Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d at 836; Dayan v York, 51 AD3d at 965).

However, the Supreme Court improvidently exercised its discretion in canceling interest accrued between June 2010 and until such date as the parties agreed to loan modification, as the Supreme Court lacked authority to force US Bank to agree to modify the mortgage note (see Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 20; Flagstar Bank, FSB v Walker, 112 AD3d at 886). Rather, the court should have directed cancellation of interest accrued between June 2010 and the date on which settlement negotiations recommence (see Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 20; Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d at 837; Dayan v York, 51 AD3d at 965-966; Preferred Group of Manhattan, Inc. v Fabius Maximus, Inc., 51 AD3d 889, 890; Danielowich v PLB Dev., 292 AD2d at 415).

Further, the Supreme Court erred in barring US Bank from charging Williams an attorney’s fee and costs incurred as a result of the action, as that provision of the order constituted an improper attempt to rewrite the mortgage note. Instead, upon its finding that the Referee’s report was supported by the record, that sanctions were appropriate, and, in effect, that US Bank still was obligated pursuant to CPLR 3408(f) to negotiate in good faith, the court should have barred US Bank from charging Williams an attorney’s fee and costs incurred between the date of the initial settlement conference and the date on which settlement negotiations recommence (see Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d at 837; Dayan v York, 51 AD3d at 965-966; Preferred Group of Manhattan, Inc. v Fabius Maximus, Inc., 51 AD3d at 890; Danielowich v PLB Dev., 292 AD2d at 415).

US Bank’s remaining contentions are without merit.

SKELOS, J.P., ROMAN, HINDS-RADIX and LASALLE, JJ., concur.

IN THE SUPREME COURT OF OHIO

SRMOF 2009-1
TRUST
Appellee

vs

SHARI LEWIS, et aL *
Appellant.

“Pay no attention to the man behind the curtain.”
– L. Frank Baum, The Wonderful Wizard of Oz

REPLY ARGUMENT
SRMOF offers the Court three different propositions of law which it believes will validate the Court of Appeals’s decision and lead to a conclusion that it had standing to sue because of its acquisition of an interest in the mortgage. Some of the arguments are premised on the “complexity” of modern mortgage financing. Others are based on a limited reading of the Mortgage itself. Still others find life in circumstances not before the Court. What it does not do, however, is examine the actual verbiage of the mortgage. Neither does it explore the underpinnings of the general rules on which its arguments are based. Once that is done, once the curtain is pulled back, the issues before the Court become much simpler to resolve.

FACTS REDUX:

Much of SRMOF’s argument relates to the rights it claims it acquired under the Assignment of Mortgage from Selene Finance, LP in August 2011. Because so much of SRMOF’s argument revolves around the contractual language of the Mortgage and the path of the Note, Lewis asks the Court to carefully review the record. Doing so will outline why the rights that were transferred by and to the various parties involved in Lewis’s loan did not confer standing on SRMOF until long after suit was filed.

Where’s The Note?

The complete path of the Note is not shown by the record. ‘The record reveals that at only two points of time was the location of the note positively known. Lewis issued the Note to First Union Mortgage Corporation on November 21, 2001.
Appellee Supp. S-4.

First Union apparently endorsed the Note in blank, making it bearer paper (the date of the endorsement is unknown). “There is nothing in the record to indicate where the Note went after the endorsement. SRMOF came into possession of the original Note sometime between August 14, 2012 and August 24, 2012. Notice To Withdrawal of Amended Motion for Summary Judgment Appellee Supp. S-66.

The lack of a Note did not, however, slow the wheels of the secondary mortgage market. On December 10, 2010, Wells Fargo Bank, N.A. executed a Lost Note Affidavit And Indemnification Agreement “in favor of Selene Finance.” Appellee Supp. S-50.

Contrary to SRMOF’s contention, the Lost Note Affidavit And Indemnification Agreement did not provide any information about the location of the Note since Lewis issued it. Neither was the document sufficient to grant to any person the right to enforce the Note.

The Mortgage Moves – A Lot.

Lewis executed the Mortgage on November 21, 2001. Appellee Supp. S- 7.

The Mortgage was granted to Mortgage Electronic Registration Systems, Inc., (MERS) “solely as nominee for Lender and Lender’s successors and assigns.” Id. “Lender” is defined as First Union Mortgage Corporation. Appellee Supp. S-8.’
The Mortgage was then assigned thrice.

A. Assignmerit No. 1- from MERS, “acting solely as nominee for First Union Mortgage Corporation” to “Wells Fargo.” (June 9, 2011). Appellee Supp. S-23.
This assignment was executed more than six months after Wells Fargo Bank, N.A. executed the Lost Note Affidavit And Indemnification Agreement.

B. Assignment No. 2 – from Wells Fargo Bank, N.A. to Selene Finance, LP (August 8, 2011) Appellee Supp. S-26

C. Assignment No. 3 – Selene Finance, LP to SRMOF 2009-1 ‘Trust (August 24, 2011). Appellee Supp. S-29.

1. AN INTEREST IN THE MORTGAGE IS NOT ENOUGH TO CONFER STANDING.

Lewis does not contest the general proposition that a mortgagee to whom specific rights are granted can sue for breach of the mortgage’s terms. This general principal, however, presumes two important facts. First, the mortgage must indeed grant rights to the mortgagee. In other words, the mortgagor’s duties must flow to the mortgagee, not to a third party for whom the mortgagee is acting. Second, the mortgagee whose rights have been violated must actually sue for a breach of its rights. Neither of those facts is present in this case.

[…]

Decided on June 20, 2014

2480/2011

Bruce H. Ashbahian, Esq.

DeRose & Surico

Attorney for Plaintiff

213-44 38th Avenue

Bayside, New York 11361

Nicole M. Black, Esq.

Clair & Gjersten, Esqs.

Attorney for Defendant

720 White Plains Road

Scarsdale, New York 10583
Victor G. Grossman, J.

The following papers, numbered 1 to 28, were considered in connection with Plaintiff’s motion to: (1) strike Defendant’s answer and grant summary judgment in Plaintiff’s favor; (2) change the name of plaintiff pursuant to an assignment of the mortgage; (3) amend the caption of the summons and complaint, notice of pendency, and all other papers filed by discontinuing the action against “John Doe” #1-10, “Mary Doe” #1-10, and “Jane Doe” #1-10 without prejudice; (4) appoint a referee; and (5) grant Plaintiff such other and further relief as the Court may deem just and proper; and Defendant’s Cross-Motion to Dismiss the Action in its Entirety.

PAPERSNUMBERED

Notice of Motion/Affirmation/Affidavit of Indebtedness/

Exhs. A-K1-14

Notice of Cross Motion/Affirmation in Opposition and In

Support of Cross Motion/Exhs. A-D15-20

Affirmation in Opposition/Exhs. A-G21-28

On February 18, 2003, Defendants Cosmo and Carmela Tassone executed an Adjustable Rate Note (the “Note”) with New Century Mortgage Corporation, wherein Defendants promised to repay New Century Mortgage Corporation, the principal sum of $280,000.00 with interest (Affirmation, Exh. A). At the same time, Defendants executed an Adjustable Rate Rider (Affirmation, Exh. A). To secure payment of the sum represented in the Note, Defendants duly executed and delivered to New Century Mortgage Corporation, a mortgage (the “Mortgage”), dated February 18, 2003, encumbering property located at 9 Fieldstone Road, Putnam Valley, New York 10579 (Affirmation, Exh. B). The Mortgage was recorded on April 2, 2003, in the Office of the Clerk of Putnam County at Liber 3552, Page 275 (Affirmation, Exh. B).

According to the documents presented to this Court, New Century Mortgage Corporation allegedly assigned the Mortgage and Note to Deutsche Bank National Trust Company f/k/a Bankers Trust Company of California, N.A., as Trustee (Affirmation, Exh. C). However, it is unclear when this occurred because the date of this document is January 2, 2004, but the document was not notarized until May 6, 2005 (Affirmation, Exh. C).

On July 1, 2011, Deutsche Bank National Trust Company f/k/a Bankers Trust Company of California, N.A., apparently assigned the Mortgage to Deutsche Bank National Trust Company, as Trustee Under Pooling and Servicing Agreement Dated as of May 1, 2003 Morgan Stanley ABS Capital 1 Inc. Trust 2003-NC5 (Affirmation, Exh. C).

There appears to be another assignment of the Mortgage on May 20, 2013 by Plaintiff Deutsche Bank National Trust Company, as Trustee Under Pooling and Servicing Agreement Dated [*2]as of May 1, 2003 Morgan Stanley ABS Capital 1 Inc. Trust 2003-NC5, to Deutsche Bank National Trust Company, As Trustee For Morgan Stanley ABS Capital 1 Inc. Trust 2003-NC5, Mortgage Pass-Through Certificates, Series 2003-NC5 (Affirmation, Exh. C) — almost two years after this action for foreclosure was commenced (Affirmation, Exh. D).

According to Plaintiff, Defendants defaulted by failing to make the monthly payment that was due on December 1, 2009, and each successive month thereafter (Affirmation, Exh. D).

On March 24, 2011, Plaintiff allegedly sent Defendants their ninety (90) day notice (Cross-Motion, Exh. B). The next day, on March 25, 2011, Plaintiff allegedly sent Defendants a thirty (30) day notice of default. As a result of Defendants’ failure to cure the default, Plaintiff declared the balance of the principal indebtedness immediately due and owing (Affirmation; Affidavit of Indebtedness; Exh. J).

On August 11, 2011, Plaintiff filed the Summons and Complaint and Notice of Pendency (Affirmation, Exhs. D-E). On August 24, 2011, Defendant Carmela Tassone was personally served the Summons and Complaint, along with RPAPL §1303 Notice (Affirmation, Exh. F).

Defendants interposed an Answer on September 6, 2011, denying the allegations in the complaint and alleging thirteen (13) affirmative defenses (Affirmation, Exh. G).

Settlement conferences were held on February 8, 2012, April 11, 2012, May 23, 2012, and July 25, 2012 (Report to Court, Exh. K). After the July 25, 2012 hearing, Court Attorney-Referee Albert J. DeGatano ruled that Plaintiff, by virtue of being under a pooling agreement, was not acting in bad faith for not offering a loan modification where that pooling agreement specifically prohibited Plaintiff from do so, the matter was released from the Foreclosure Settlement Part, and the instant motion was filed. Defendants are opposing, and cross moving for dismissal.RPAPL §1304 provides that at least 90 days before a lender commences an action to foreclose on a mortgage, notice must be provided to the borrower that the loan is in default and that his or her home is at risk. The lender is required to send this notice “by registered or certified mail and also by first-class mail” See RPAPL §1304. “[P]roper service of RPAPL notice on the borrower or borrowers is a condition precedent to the commencement of a foreclosure action, and the plaintiff has the burden of establishing satisfaction of this condition.” Aurora Loan Services, LLC v. Weisbaum, 85 AD3d 95, 103 (2d Dept. 2011). Since satisfaction of a statutory condition precedent is an element of the claim itself which must be proved by plaintiff, the failure to show strict compliance would require dismissal. Id.

Here, the 90-day notice was sent to Defendant on March 24, 2011 (Affirmation, Exh. J). While there is a typed notation at the top of the document reflecting that it was sent “VIA First Class Mail,” and “VIA Certified Mail (return receipt requested),” and noting the certified number, there is no affidavit of service submitted to establish proper service on the borrowers, thereby confirming these notations. See Aurora Loan Services, LLC v. Weisblum, 85 AD3d, supra at 106. As such, Plaintiff has failed to satisfy a “mandatory condition precedent,” and the foreclosure action must be dismissed.

And to the extent Plaintiff submitted its opposition to Defendants’ cross-motion and attached a printout from the USPS reflecting the same certified number, this Court will not accept it. First, this affirmation, dated February 28, 2014, was served over two months after Defendants’ December 13, 2013 cross-motion was made, and there is no indication in the papers or the file that Plaintiff was granted an extension. Moreover, Plaintiff fails to explain why there was a delay. While this Court prefers to decide issues on their merits, this Court cannot ignore [*3]this excessive delay. And second, even it the Court were to consider this printout — which is arguably not even in admissible form — Plaintiff cannot rely on evidence submitted for the first time in its reply papers to remedy deficiencies in its prima facie showing. See Novita, LLC v. Hotel Times Square, LLC, 2013 WL 5785929 (Sup.Ct. October 17, 2013), citing Those Certain Underwriters at Lloyds, London v. Gray, 49 AD3d 1, 9 (1st Dept. 2007); see also Gampero v. Mathai, 105 AD3d 995 (2d Dept. 2013). As such, this Court will not consider the reply papers.In further support of their cross-motion, Defendants contest Plaintiff’s standing to commence this action. Although the failure to properly serve RPAPL §1304 Notice is sufficient reason to grant Defendants’ cross-motion and dismiss the complaint, this Court will address the standing issue in light of the possibility that the action may be recommenced after Plaintiff effects proper service of RPAPL §1304 Notice.

The plaintiff in a foreclosure action must establish the existence of the promissory note and a related mortgage referable to the subject property, its ownership of the mortgage and the defendant’s default in payment. Campaign v. Barba, 23 AD3d 327 (2d Dept. 2005). With respect to the issue of ownership, “[a]n assignment of a mortgage without assignment of the underlying note or bond is a nullity, and no interest is acquired by it.” Deutsche Bank National Trust Co. v. Barnett, 88 AD3d 636, 637 (2d Dept. 2011). The foreclosing party, as plaintiff, must establish that it is “both the holder or assignee of the subject mortgage, and the holder of the underlying note, at the time the action is commenced.” Homecomings Financial, LLC v. Guldi, 103 AD3d 506 (2d Dept. 2013), quoting Bank of New York v. Silverberg, 86 AD3d 274, 282-83 (2d Dept. 2011).

Here, in the documents provided, the initial assignment of the mortgage and note from New Century Mortgage Corporation to Deutsche Bank National Trust Company f/k/a Bankers Trust Company of California, N.A., is circumspect, thereby rendering any subsequent assignments questionable. Moreover, the subsequent assignment of the mortgage to the current Plaintiff fails to indicate whether the Note was assigned as well.

Moreover, putting aside the validity of the initial assignment, it is still unclear from the affidavit of Alexa Benincasa whether Plaintiff was in physical possession of the Note at the time the action was commenced. As a threshold matter, as Defendant correctly points out, there is no indication in the record or moving papers, what authority a “Contract Management Coordinator” has to attest to the facts that she has. Moreover, her blanket statement that Plaintiff possessed the Note at the time of the commencement of the action, without any facts to support this statement, is insufficient to establish that Plaintiff did in fact have such possession. And the assignment of mortgage to the instant Plaintiff lends no further proof. As such, Plaintiff needs to be prepare to answer these questions at a future hearing, if one is ordered, as it has failed to establish a prima facie case.In light of the foregoing, this Court need not address the remaining issues, and it is hereby

ORDERED that Plaintiff’s motion is denied; and it is further

ORDERED that Defendant’s cross-motion is granted, and the action is dismissed without prejudice.The foregoing constitutes the Decision and Order of the Court.

Dated:Carmel, New York

June 20, 2014

__________________________________

HON. VICTOR G. GROSSMAN, J.S.C.

Decided on August 12, 2014

2009-04422

Larry T. Powell, Esq.

Davidson Fink LLP

Attorneys for Plaintiff

28 East Main Street

Rochester, New York 14614

John Batanchiev, Esq.

Ian S. Wilder, Esq.

Long Island Housing Services Inc.

Attorneys for Defendant BRIAN DONO

640 Johnson Avenue

Bohemia, New York 11716
Jeffrey Arlen Spinner, J.

Plaintiff, through predecessor counsel Steven J. Baum P.C., commenced this action pursuant to Real [*2]Property Actions and Proceedings Law Article 13, claiming the foreclosure of a first mortgage which encumbers residential real property located at 77 Winchester Drive, Lindenhurst, Town of Babylon, Suffolk County, New York. In its Verified Complaint, the Plaintiff alleges that it is the owner and holder of an Adjustable Rate Note in the principal amount of $ 420,000.00 which is secured by a Mortgage, recorded with the Suffolk County Clerk. Plaintiff demands foreclosure of the Mortgage together with recovery of interest, costs, disbursements, attorney’s fees and a deficiency judgment. Defendant does not deny the default, instead freely admitting that the course of events which brings these parties before the Court occurred as a direct result of his incarceration. The Court recalls that prior to Defendant’s discharge from custody, his wife appeared at the settlement conferences in the exercise of a vain but honest attempt to reach an amicable disposition herein.

In compliance with the provisions of CPLR § 3408, a series of mandatory settlement conferences were held, upon which there were no less than 24 appearances before the Court. Indeed, as early as March 16, 2009, the Court’s records reflect that Defendant requested provision of the appropriate settlement conference package, apparently evincing his intention to attempt to reach an amicable resolution herein.

Defendant, through counsel, now moves this Court for an Order tolling interest and other costs on the mortgage debt, asserting that Plaintiff has failed to negotiate in good faith, as mandated by CPLR § 3408. Not surprisingly, Plaintiff vociferously opposes Defendant’s application, insisting that it has acted in good faith throughout the process and that there exists no basis for Defendant’s application.

In support of its application, Defendant submits the Affirmations of John Batanchiev Esq. and Ian S. Wilder Esq. together with the Affidavit of Brian Dono, supported by a number of exhibits as well as a Reply Memorandum of Law. Plaintiff has submitted the Affirmation of Larry T. Powell Esq. together with a Sur-Reply Affirmation but has not seen fit to provided proof from a party with actual knowledge. The Court is constrained to note that in the particular matter that is sub judice, Plaintiff has failed to appear through a representative during the mandatory settlement conference process, despite having been ordered to do so by the undersigned.

In essence, Defendant asserts, without any factual or admissible contravention by Plaintiff, that since at least October 1, 2010, he has fully complied with each and every document request received from Plaintiff’s various loan servicers, each of whom, it is claimed, have acted in bad faith. Defendant claims, again without contraversion by Plaintiff, that the real property that secures the loan has an approximate fair market value of $ 317,265.00 juxtaposed against a claimed balance due of $ 676,361.45. Defendant further states, once again without opposition, that Plaintiff has unreasonably and wrongfully delayed these proceedings by interposing multiple and duplicitous document demands, that Plaintiff and its servicers have willfully failed to comply with the applicable HAMP guidelines, to which its initial servicer was subject, by offering a “modified” payment equal to 70% of his gross monthly income while knowing that the “cap” was set at 31% within those guidelines, that Plaintiff surreptitiously conveyed the loan to a different, non-HAMP servicer so as to avoid being subject to the HAMP guidelines and which also caused the process to start anew, that Plaintiff failed and neglected to provide HAMP-compliant denials, that Plaintiff refused to consider Defendant’s reasonable counter-offer which fell well within HAMP guidelines and finally, that Plaintiff has refused to negotiate, instead propounding a “take it or leave it” modification which contained unconscionable terms including a waiver of defenses, counterclaims and setoff together with a reverter clause in the nature of a penalty. While Defendant’s sworn averments are supported by efficacious documentation together with Affirmations from two respected attorneys who possess actual and personal knowledge of this particular matter (both attorneys have appeared before the undersigned on multiple occasions with respect to this matter), Plaintiff has failed to submit any evidence whatsoever in opposition, instead relying upon counsel’s cavalier Affirmation.

Plaintiff’s opposition, distilled to its essence, consists solely of counsel’s stentorian albeit factually unsupported assertions that inasmuch as a mortgage is a contract, the Court may neither interfere with nor modify its terms; that since this proceeding is one sounding in equity this Court is bound to comply with the rules of equity (and hence must rule in Plaintiff’s favor), citing IndyMac Bank F.S.B. v. Yano-Horoski 78 AD3d 895 (2nd Dept. 2010) and Bank of America v. Lucido 114 AD3d 714 (2nd Dept. 2014), among others; that the Court may not force a settlement upon the parties; and finally, counsel refers this Court to the decision of a court of co-ordinate jurisdiction in such a manner as to strongly suggest that said opinion is controlling herein. Counsel urges this Court to summarily deny the relief sought by Defendant, stating that Plaintiff has asked for nothing more than that the note and mortgage be strictly enforced according to their terms and further, that it is Defendant who has acted in bad faith. None of these meretricious assertions are supported by so much as a scintilla of evidence and indeed, they are both factuallly inaccurate and decidedly fallacious. Counsel fails and neglects to substantively address any of Defendant’s efficacious claims, instead stridently admonishing this Court that it may not act in a manner that is based upon sympathy, citing Graf v. Hope Building Corp. 254 NY 1 (1930) and further strongly admonishing this Court that in view of the clear language of the note and mortgage, that this Court is “…not at liberty to revise while professing to construe” citing Sun Printing & Publishing Ass’n v. Remington Paper & Power Co. 235 NY 338 (1923).

Interestingly, the Affirmation of Plaintiff’s counsel does not state the basis upon which his bald and unsupported statements are based, other than his position as an associate with Plaintiff’s successor counsel. Again, the opposition submitted is quite conspicuous for its complete absence of any Affidavit of a party with actual knowledge herein and as counsel surely must be aware, an Affirmation of counsel, absent proof of actual first-hand knowledge, is wholly devoid of probative value, Barnet v. Horwitz 278 AD 700 (2nd Dept. 1951).

The decision in this matter is necessarily based upon and is controlled by the provisions of CPLR § 3408, which was promulgated by the Legislature in response to the mortgage foreclosure crisis that was (and is) facing New York homeowners. The statute, remedial in nature, was passed in 2008 and was substantially amended late in 2009.

The relevant portions for purposes of this decision are CPLR § 3408(a) & (f), which read, in pertinent part, as follows:

“(a) In any residential foreclosure action involving a home loan…in which the defendant is a resident

of the property subject to foreclosure, the court shall hold a mandatory conference…for the purpose

of holding settlement discussions pertaining to the relative rights and obligations of the parties under

the mortgage loan documents, including, but not limited to determining whether the parties can reach

a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating

the potential for a resolution in which payment schedules or amounts may be modified or other

workout options may be agreed to, and for whatever other purposes the court deems appropriate.

“(f) Both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable

resolution, including a loan modification, if possible.” CPLR 3408(a), (f)

While the express language of CPLR § 3408 appears clear on its face, the term “good faith” is nowhere defined in the statute. Too, the legislative history fails to reveal any clue at all as to the definition of this term. Instead, working within a statutory vacuum, various trial courts have assiduously attempted to give real meaning to this concept in the absence of any definition or other guidance. Both Defendant and Plaintiff have cited a plethora of case law in their respective papers, none of which is controlling, in view of a new decision from our Appellate Division, which was released subsequent to the submission of the instant [*3]application.

Instead, this Court finds itself inexorably guided by the decision in the matter of US Bank N.A. v. Jose Sarmiento

2014 NY Slip Op 05533, 2014 NY App Div LEXIS 5457 (2nd Dept., July 30, 2014). In a searching and thoughtful opinion by Justice Leventhal, the Appellate Division painstakingly explored and expounded upon the provisions and guidelines of HAMP, CPLR § 3408 and, most important, the concept of good faith as applied to the mandatory settlement conference process. For purposes of the matter at bar, this Court is only concerned with the issue of good faith. Indeed, the Appellate Division, in that opinion, has expressly and unequivocally stated that “…the issue of whether a party failed to negotiate in good faith’ within the meaning of CPLR 3408(f) should be determined by considering whether the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution.”Therefore, this express language constitutes the yardstick by which this Court must measure the conduct of Plaintiff and Defendant in order to determine which party, if either, failed to act in good faith.

In accord with the ruling of the Appellate Division in US Bank N.A. v. Sarmiento, supra, close and careful examination and consideration of the totality of the circumstances reveals that Defendant has fully complied with Plaintiff’s various document demands on multiple occasions, that Defendant and/or his counsel have appeared on at least 24 occasions before the undersigned with respect to mandatory settlement conferences, that Plaintiff has failed to comply with the HAMP guidelines by offering a “modification” which was facially and obviously not affordable and which exceeded the applicable housing expense ceiling by 39%, that Plaintiff failed and refused to negotiate at all with Defendant, that Plaintiff failed and refused to produce a representative in court despite a Court order to do so, that Plaintiff conveyed the loan to a different servicer which engendered further delay in that the process had to begin anew, all of which has inured to the detriment of Defendant. Since October 1, 2010, interest has continued to accrue at an adjustable rate of not less (and possibly greater) than 8.2% together with the accrual of added costs, disbursements and, presumably, a claim for reasonable counsel fees.

Based upon the totality of circumstances, this Court is constrained to find that Plaintiff, and the servicers acting upon its behalf, have acted in bad faith throughout the mandatory settlement conference process, as “bad faith” has been defined in US Ban k N.A. v. Sarmiento, supra, thus inexorably warranting the granting of Defendant’s application.

It is, therefore,

ORDERED that Defendant’s application shall be and is hereby granted in its entirety; and it is further

ORDERED that all interest, disbursements, costs and attorneys fees which have accrued upon the loan at issue since October 1, 2010 shall be and the same are hereby permanently abated, shall not be a charge on account of or to the detriment of Defendant and that Plaintiff and any assignee is forever barred, prohibited and foreclosed from recovering the same from Defendant; and it is further

ORDERED that such abatement shall continue in futuro and that no further interest, disbursements, costs or attorney’s fees shall accrue or be chargeable to Defendant absent further Order of this Court; and it is further

ORDERED that any relief not expressly granted herein shall be and is hereby denied; and it is further

ORDERED that Defendant’s counsel shall, within twenty one days after entry hereof, serve a copy of this Order with Notice of Entry upon all parties in this action as well as all counsel who have appeared in [*4]this action.

Dated: August 12, 2014

Riverhead, New York

E N T E R:

______________________________________

JEFFREY ARLEN SPINNER, J.S.C.

Supreme Court of the State of New York
Appellate Division: Second Judicial Department

D39377
W/hu
AD3d Argued – June 6, 2013
REINALDO E. RIVERA, J.P.
PETER B. SKELOS
JOHN M. LEVENTHAL
PLUMMER E. LOTT, JJ.

2012-03513 OPINION & ORDE

Hogan Lovells US LLP, New York, N.Y. (David Dunn and Nathaniel E. Marmon of counsel), for appellant.

Fuster Law, P.C., Long Island City, N.Y. (J. A. Sanchez-Dorta of counsel), for respondent.

Before: Reinaldo E. Rivera, J.P. Peter B. Skelos John M. Leventhal Plummer E. Lott, JJ.

APPEAL by the plaintiff, in an action to foreclose a mortgage, from so much of an order of the Supreme Court (Leon Ruchelsman, J.), dated December 19, 2011, and entered in Kings County, as, upon a finding that the plaintiff failed to negotiate in good faith during settlement conferences conducted pursuant to CPLR 3408, granted the motion of the defendant Jose Sarmiento to bar the plaintiff from collecting interest or fees that accrued on the subject loan since December 1, 2009, to bar the plaintiff from recovering from him any costs or attorneys’ fees it incurred in this action, and to direct the plaintiff to review the issue of whether the subject loan may be eligible for a loan modification pursuant to the Home Affordable Modification Program by employing correct information and without regard to interest or fees that have accrued on the subject loan since December 1, 2009.

LEVENTHAL, J.

OPINION & ORDER

On appeal in this mortgage foreclosure action, the plaintiff contends that the Supreme Court erred in determining that it failed to negotiate in good faith during mandatory settlement conferences conducted pursuant to CPLR 3408, and that, in any event, the Supreme Court lacked the authority to impose any sanctions against it on the ground that it violated the “good faith” requirement of CPLR 3408(f). In addressing these contentions, we set forth the proper standard for determining whether a party acted in good faith pursuant to CPLR 3408(f). Further, we hold that the Supreme Court properly concluded that the plaintiff failed to negotiate in good faith and that the Supreme Court had the authority to sanction the plaintiff for that failure.

In May 2009, the plaintiff, as successor trustee to Bank of America, National Association (Successor by Merger to LaSalle Bank National Association), as trustee for Morgan Stanley Mortgage Loan Trust, 2007-2AX, commenced this action in the Supreme Court, Kings County, to foreclose a mortgage secured by residential property located in Brooklyn. In the complaint, the plaintiff alleged that the defendant homeowner, Jose Sarmiento, defaulted on the subject mortgage by failing to make the monthly payment due on October 1, 2008. The plaintiff elected to call due the entire amount secured by the mortgage, in the principal sum of $578,388.75, plus interest at an annual rate of 8.25%, accruing from September 1, 2008. Issue was joined by Sarmiento’s service of a pro se verified answer dated July 17, 2009, which was accompanied by a notice to produce documents.

In an affidavit, Sarmiento averred that, in May 2008, he lost much of his monthly income and that, as a consequence, he was unable to make his monthly mortgage payment due on October 1, 2008, and the payments due thereafter. In September 2008, Sarmiento contacted America’s Servicing Company (hereinafter ASC), the mortgage servicing agent of the lender, and a wholly owned subsidiary of Wells Fargo Bank, N.A. (hereinafter together ASC/Wells), in order to discuss a loan modification. Sarmiento was told that he did not qualify for a loan modification because he had insufficient income. In February 2009, Sarmiento found an additional tenant for the subject property, and began receiving monthly rental income in the sum of $4,652. According to Sarmiento, notwithstanding his augmented income, ASC/Wells repeatedly refused to modify his loan.

In September 2009, this matter was referred to a Court Attorney Referee for a mandatory settlement conference pursuant to CPLR 3408. Sarmiento initially appeared pro se at the settlement discussions, and later obtained pro bono counsel. ACS/Wells, through their counsel,^[1] appeared at the settlement discussions on behalf of the plaintiff. From September 14, 2009, to January 14, 2011, 18 settlement conferences were held. What transpired during the settlement conferences is detailed in the report of the Court Attorney Referee, dated April 20, 2011.

The Court Attorney Referee’s Report

The report of the Court Attorney Referee set forth the following facts. On October 29, 2009, Sarmiento submitted to ACS/Wells a Home Affordable Mortgage Program (hereinafter HAMP) application^[2]. On November 18, 2009, upon the request of ASC/Wells, Sarmiento submitted updated financial documents. According to the Court Attorney Referee, Sarmiento met the basic criteria for HAMP eligibility since: (1) the subject property was a one-to-four-family residence; (2) Sarmiento’s monthly mortgage payment of principal, interest, property tax, and insurance exceeded 31% of his gross monthly income; and (3) the principal balance of the loan was equal to or less than $729,750.

At a settlement conference held on November 30, 2009, ASC/Wells confirmed that it had received Sarmiento’s HAMP application and his updated financial documents, and represented that it would make a decision on the application within one week, even though it had 30 days to make that decision. Upon her review of Sarmiento’s income, the Court Attorney Referee directed him to set aside the sum of $2,000 per month beginning December 1, 2009, to demonstrate his good faith and his ability to make modified mortgage payments and, if necessary, to use as a down payment on a non-HAMP, traditional loan modification.

First HAMP Denial

By letter dated January 12, 2010, ASC/Wells denied Sarmiento’s HAMP application on the ground that he did not reside at the subject property as his primary residence. After Sarmiento asserted that there was no factual basis for ASC/Wells to have concluded that the property was not his primary residence, ASC/Wells conceded that Sarmiento resided at the property.

At a settlement conference conducted on February 2, 2010, ASC/Wells reported that Sarmiento’s HAMP application was complete and still under review. ASC/Wells asserted, however, that it required a broker’s price opinion (hereinafter BPO) to determine the value of the property, which was necessary before a Net Present Value (hereinafter NPV) test could be conducted under HAMP. The NPV test would determine whether a loan modification or a foreclosure sale was more lucrative to the mortgage lender/investor.

Second HAMP Denial

By letter dated April 2, 2010, ASC/Wells advised Sarmiento that his HAMP application was again denied, this time on the ground that an affordable monthly payment amount—equal to or less than 31% of gross monthly income—could not be reached. In an email message from ASC/Wells’s counsel to Sarmiento’s counsel, ASC/Wells stated that Sarmiento’s HAMP application was denied because of a monthly income deficit of $1,100. According to the Court Attorney Referee, “Servicer ASC/Wells was evaluating . . . Sarmiento for a [HAMP] modification using the wrong income figures, although the defense thoroughly documented the employment and rental income that . . . Sarmiento and his wife earned each month.” By letter dated April 7, 2010, Sarmiento’s counsel informed ASC/Wells of this error, and referred ASC/Wells to Sarmiento’s previously submitted pay stubs, bank statements, and rental agreements, which reflected a gross monthly income of $6,303. Sarmiento’s counsel further requested a denial notice with greater specificity than set forth in the denial letter of April 2, 2010. Pursuant to Sarmiento’s rights under HAMP, his counsel requested that ASC/Wells produce the inputs and data that ASC/Wells used in performing the NPV test.

In an email message dated April 9, 2010, ASC/Wells advised Sarmiento’s counsel that it had never conducted an NPV test on Sarmiento’s HAMP application because the file had not reached the NPV calculation phase, and that the denial was “due to [an inability to] reach an affordable payment.” By letter dated April 12, 2010, Sarmiento’s counsel reiterated his objections to the HAMP denials, and requested “that ASC/Wells comply with HAMP guidelines and complete its modification review.”

At a settlement conference held on April 13, 2010, and by letter dated April 22, 2010, Sarmiento requested a proper review of his HAMP application. According to the Court Attorney Referee, ASC/Wells replied that it “had misplaced income documentation” and that some other documentation had become “stale.” As a consequence of its characterization of the status of the documentation, ASC/Wells requested that Sarmiento submit a new HAMP application. The Court Attorney Referee instructed Sarmiento’s counsel to resubmit and update the HAMP application, and directed “ASC/Wells to escalate and expedite the HAMP review.” Sarmiento submitted an updated HAMP application to ASC/Wells on April 26, 2010.

Third HAMP Denial

At a settlement conference held on May 11, 2010, ASC/Wells reported that it had “escalated” review of Sarmiento’s HAMP application, and that such review was still incomplete. Two days later, however, ASC/Wells informed Sarmiento’s counsel, in an email message, that it was again denying his HAMP application “due to not being able to reach affordability.” The email message further stated the “this property is not affordable,” and requested Sarmiento’s counsel to “refer the borrower to our liquidations department for further foreclosure prevention options.” According to the Court Attorney Referee, the email message dated May 13, 2010, “failed and refused to demonstrate that Sarmiento was ineligible for a HAMP modification.”

By letter dated May 28, 2010, Sarmiento’s counsel requested more specific information about the denial, and again demanded the inputs and data that ASC/Wells used to conduct the NPV test in connection with Sarmiento’s HAMP application. ASC/Wells did not provide the requested information. The Court Attorney Referee observed that, “[a]lthough HAMP guidelines require production of the NPV inputs upon request so that borrowers can review the propriety of a denial and challenge the accuracy of the NPV inputs, Services ASC/Wells ignored[] the written requests [from Sarmiento’s counsel] for the data, and failed to produce the NPV values. Indeed, ASC/Wells failed to demonstrate that an NPV test had, in fact, been run.”

As set forth in the report of the Court Attorney Referee, on June 2, 2010, Sarmiento filed a formal complaint against ASC/Wells with the HAMP support center on the ground that ASC/Wells refused to properly assess his HAMP application. On June 8, 2010, the HAMP support center advised Sarmiento that ASC/Wells had denied his HAMP application because he had $25,000 in liquid assets, which exceeded the maximum limit. The report of the Court Attorney Referee noted, however, that the $25,000 reflected funds which she had previously directed Sarmiento to set aside.

Nevertheless, at a settlement conference held on July 1, 2010, ASC/Wells reported that Sarmiento’s HAMP application was “still under review,” and that this review would be completed no later than two weeks after that date. ASC/Wells added that the funds that Sarmiento set aside at the direction of the Court Attorney Referee would not affect his HAMP application. Sarmiento’s counsel made a third request for the inputs and data that ASC/Wells used in the NPV test; ASC/Wells replied that it “did not have the NPV inputs because the latest denial related to a non-HAMP modification.” The Court Attorney Referee adjourned the settlement conference until July 19, 2010, to await the results of ASC/Wells’s review of Sarmiento’s HAMP application.

At the settlement conference held on July 19, 2010, ASC/Wells reported that it had not completed its HAMP review. Moreover, consistent with the statement of the HAMP support center dated June 8, 2010, counsel for ASC/Wells reported that ASC/Wells had previously denied Sarmiento’s HAMP application because of “excess resources.” The Court Attorney Referee stated that, “[i]n light of the repeated delays, the baseless denials, and obvious mishandling of the loan file by both ASC/Wells and [counsel for ASC/Wells] before a HAMP review was even done, I directed an ASC/Wells representative with personal knowledge and settlement authority to appear in person at the next settlement conference.”

At the next settlement conference, which was held on September 14, 2010, Eliza Melendez of ASC/Wells appeared, and explained that “Sarmiento’s HAMP application was still under review and that a new BPO was required to value the [property] for the NPV test.” The Court Attorney Referee described Melendez as having limited knowledge of Sarmiento’s file, and no settlement authority. Sarmiento’s counsel asserted that ASC/Wells should waive at least nine months of accrued interest because of the “inexplicable delays” in ASC/Wells’s HAMP review. The Court Attorney Referee directed the vice president of ASC/Wells to personally appear at the next settlement conference.

The next settlement conference was held on September 28, 2010. At that time, Tracy Brooks, a Loan Administration Manager in the Home Preservation Department of ASC/Wells, personally appeared, and she reported that the HAMP review was incomplete because Sarmiento had not submitted certain documents. However, when Brooks accessed Sarmiento’s loan file on her personal laptop computer, she confirmed that the file was complete. Upon Brooks’s request, she was allowed to review the file overnight. The next day, Brooks reported that ASC/Wells needed a property tax bill and a copy of Sarmiento’s property insurance declaration page, and that she was expediting the HAMP review.

At the next settlement conference, which was held on October 5, 2010, ASC/Wells offered a traditional, non-HAMP loan modification, in which the annual percentage rate (hereinafter APR) was lowered from 8.25% to 4%. ASC/Wells explained that it “had not made a HAMP offer because it was still trying to figure out what to do’ about the informal escrow account that . . . Sarmiento had set aside at [the Court Attorney Referee’s] direction.”

Fourth HAMP Denial

Meanwhile, according to the Court Attorney Referee, “ASC/Wells sent . . . Sarmiento a denial letter [dated October 6, 2010], erroneously and preposterously stating that he was denied a HAMP modification because he was current on his mortgage loan and not at risk of default.“

At a settlement conference held on October 12, 2010, ASC/Wells “reported for the first time that an NPV test had been run and that [Sarmiento] had failed,” meaning that a HAMP modification would not be more favorable to the plaintiff than a foreclosure sale. ASC/Wells provided none of the data or inputs it had used to conduct the NPV test, and reiterated its offer of a traditional, non-HAMP loan modification. Sarmiento rejected the non-HAMP loan modification as unaffordable.

A few weeks later, in an email message dated November 2, 2010, ASC/Wells provided some of the data and inputs it had used to conduct the NPV test. According to the Court Attorney Referee, this data showed that ASC/Wells conducted the NPV test in November 2010, which was 25 months after Sarmiento defaulted, and one year after ASC/Wells had initially denied Sarmiento’s HAMP application. The Court Attorney Referee calculated that, as a result of ASC/Wells’s delay, more than $40,000 in arrears accrued on the loan.

On November 5, 2010, ASC/Wells offered Sarmiento a second traditional, non-HAMP modification, in which the APR was initially dropped to 2%, but then increased to 4%. Sarmiento rejected that offer.

At a settlement conference held on January 14, 2011, ASC/Wells stated that it would make no further modification offers. ASC/Wells then retained Hogan Lovells, LLP (hereinafter Hogan) as cocounsel to Steven J. Baum, P.C., in anticipation of a hearing pursuant to CPLR 3408 before the Supreme Court to determine whether it had failed to negotiate in good faith. According to the Court Attorney Referee, at that conference, Hogan acknowledged that ASC/Wells had handled Sarmiento’s loan “poorly,” but stated that ASC/Wells could not “do anything for . . . Sarmiento because of excessive forbearance.”

No progress on a settlement was made in three subsequent settlement conferences. With the parties at an impasse, the Court Attorney Referee directed them to submit position statements for use in the preparation of the report. In her report, the Court Attorney Referee determined that the plaintiff and ACS/Wells had failed to negotiate a loan modification in good faith, and had not complied with HAMP guidelines. Thus, the Court Attorney Referee recommended, inter alia, that the Supreme Court conduct a hearing to determine whether sanctions should be imposed against the plaintiff and ASC/Wells and its counsel.

Sarmiento’s Motion for an Award of Sanctions

By notice of motion dated June 17, 2011, Sarmiento moved to bar the plaintiff from collecting interest or fees accrued on the subject loan from December 1, 2009, “to date,” to bar the plaintiff from collecting from him any attorney’s fee or costs incurred “to date” in this action, and to direct the plaintiff to review the subject loan for a HAMP modification using an unpaid principal balance that excluded interest, fees, and costs that had accrued from December 1, 2009, “to date.” In support of his motion, Sarmiento submitted, inter alia, his counsel’s affirmation, to which were appended, as exhibits, an affidavit from Sarmiento, excerpts from a handbook entitled “Making Home Affordable Handbook for Servicers of Non-GSE Mortgages,” letters and copies of email messages between ASC/Wells and Sarmiento that were sent during 2010, and a proposed order. In an affirmation, Sarmiento’s counsel argued that the conduct of ASC/Wells demonstrated an “egregious refusal to negotiate in good faith, including its repeated delays and baseless denials of Mr. Sarmiento’s request for a modification in violation of HAMP guidelines.”

The Plaintiff’s Opposition

In opposition to Sarmiento’s motion, the plaintiff submitted, inter alia, an affidavit from Kyle N. Campbell, Vice President of Loan Documentation for ASC/Wells.

Campbell averred as follows: on February 18, 2010, the plaintiff received all documents necessary to review Sarmiento’s HAMP application. By letter dated April 2, 2010, the application was denied because Sarmiento’s debt-to-income ratio exceeded HAMP limits, inasmuch as his monthly expenses were $7,823.64 and his monthly income was only $4,728.94. After receiving additional financial documents in late April 2010, the plaintiff again reviewed the loan file but, by letter dated May 13, 2010, Sarmiento’s HAMP application was again denied, as was the possibility of a traditional, non-HAMP loan modification, because his debt-to-income ratio remained excessive, specifically, he had monthly income of $3,839.91, and monthly expenses of $7,253.22.

In September 2010, the plaintiff offered Sarmiento a non-HAMP loan modification, lowering the APR of the loan from 8.25% to 4%. Sarmiento rejected that offer, as it was not made pursuant to HAMP. In response, the plaintiff made a second non-HAMP loan modification offer, in which the APR of the loan would be initially lowered to 2% and gradually increased to 4%. Sarmiento also rejected that offer. Campbell asserted that the plaintiff could not offer any further modifications because of Sarmiento’s “limited income and his delinquency in making any payments under the loan for more than two years.”

On August 2, 2011, the parties stipulated, among other things, that Sarmiento’s motion seeking, inter alia, to bar the plaintiff from collecting interest or fees that accrued on the subject loan since December 1, 2009, would be decided without an evidentiary hearing.

The Order Appealed From

Based upon the papers submitted, the Supreme Court, in the order appealed from, inter alia, granted Sarmiento’s motion to bar the plaintiff from collecting interest or fees that accrued on the subject loan since December 1, 2009, to bar the plaintiff from recovering any costs or attorneys’ fees it incurred in this action, and to direct the plaintiff to review the subject loan for a HAMP loan modification using correct information and without regard to interest or fees that have accrued on the subject loan since December 1, 2009. The Supreme Court determined that, while the plaintiff had failed to negotiate in good faith as required by CPLR 3408(f), Sarmiento had acted in good faith. The court determined that, while Sarmiento and his counsel acted quickly and had been in contact with the plaintiff and ASC/Wells, the plaintiff and ASC/Wells has failed to respond to Sarmiento’s “requests for very basic information” related to his HAMP application, and their counsel’s communications with Sarmiento had sown confusion, distress, and doubt by including, among other things, confusing and vague rejection notices and requests for duplicative documents. The court stated:

“To describe the Plaintiff’s attitude succinctly: it was happy to do equity when it brought the underlying action for foreclosure, but stubbornly refused to do equity when as a result of statute (CPLR 3408), it was forced to sit down at the negotiating table with the homeowner and attempt to work out a deal. Put otherwise, the only delay’ that is legal in a foreclosure action is the delay imposed by CPLR 3408, and good faith means participating honestly, cleanly, and mutually in that delay’ process. Otherwise, this Court may exercise its equitable powers to restrict any remedy otherwise available.”

The plaintiff appeals.

HAMP

The federal response to the mortgage foreclosure crisis included the creation of HAMP, which arose as part of the Emergency Economic Stabilization Act of 2008 (12 USC §§ 5201 et seq.) and the Helping Families Save Their Homes Act of 2009 (Pub L 111-22, § 1[a], 123 Stat 1632, 1632 [111th Cong, 1st Sess, May 20, 2009]) (see JP Morgan Chase Bank, N.A. v Ilardo, 36 Misc 3d 359, 366 [Sup Ct, Suffolk County]). HAMP is administered by the Federal National Mortgage Association (hereinafter Fannie Mae), as an agent of the United States Treasury Department (see id. at 366). The purpose of HAMP “is to provide relief to borrowers who have defaulted on their mortgage payments or who are likely to default by reducing mortgage payments to sustainable reduced levels, without discharging any of the underlying debt” (id.).

Fannie Mae entered into agreements with numerous home loan servicers, including Wells Fargo, pursuant to which the servicers “agreed to identify homeowners who were in default or would likely soon be in default on their mortgage payments, and to modify the loans of those eligible under the program” (Wigod v Wells Fargo Bank, N.A., 673 F3d 547, 556 [7th Cir]). HAMP provides lenders and loan servicers an incentive “to offer loan modifications to eligible homeowners” (Young v Wells Fargo Bank, N.A., 717 F3d 224, 228 [1st Cir]; see Edwards v Aurora Loan Servs., LLC, 791 F Supp 2d 144, 148 [D DC] [explaining that, under HAMP, the United States Treasury Department “pay(s) financial incentives to servicers and loan owners/investors that are sufficient to make a HAMP modification a better financial outcome than foreclosure for the servicer and investor”]).

When a borrower applies for a HAMP loan modification, the first step is to determine HAMP eligibility, which includes, among other things, consideration of whether the subject loan originated prior to January 1, 2009, the subject property is improved by a one-to-four-family house, the borrower resides in the house, and, prior to modification, the borrower’s monthly mortgage payment exceeded 31% of the borrower’s verified gross monthly income (see Making Home Affordable Handbook for Servicers of Non-GSE Mortgages vers 3.2, ch 2, § 1.1 [HAMP Eligibility Criteria]). If the initial HAMP eligibility criteria are met, upon the borrower’s submission to the servicer of the required financial information, the servicer must apply a “waterfall,” i.e., a multiple-step process that is to be applied in a particular sequence, one step at a time, which here involves a five-step review of the terms of the loan to determine whether modification of one or more of those terms might reduce the monthly mortgage payment to no more than 31% of the borrower’s gross monthly income. The five steps of the standard waterfall, in the order in which they are to be applied, are capitalization modification, interest rate reduction, term extension, principal forbearance, and principal forgiveness (see Making Home Affordable Handbook for Servicers of Non-GSE Mortgages vers 3.2, ch 2, § 6.3 [Standard Modification Waterfall]; see also Edwards v Aurora Loan Servs., LLC, 791 F Supp 2d at 149). Deviations from the standard waterfall are not precluded and, under certain circumstances, servicers may offer borrowers modifications more favorable than those required under HAMP (see Making Home Affordable Handbook for Servicers of Non-GSE Mortgages vers 3.2, ch 2, § 6.3.6 [Variation from Standard Modification Waterfall]).

Moreover, “[a]ll loans that meet HAMP eligibility criteria and are either deemed to be in imminent default or delinquent as to two or more payments must be evaluated using a standardized NPV test that compares the NPV result for a modification to the NPV result for no modification” (Making Home Affordable Handbook for Servicers of Non-GSE Mortgages vers 3.2, ch 2, § 7]; see Edwards v Aurora Loan Servs., LLC, 791 F Supp 2d at 149 [citations omitted]). Using the standard modification waterfall, if the NPV test result under the modification scenario is greater than the NPV test result without modification, the result is deemed “positive” and the servicer “must offer the [HAMP] modification” (Making Home Affordable Handbook for Servicers of Non-GSE Mortgages vers 3.2, ch 2, § 7]). If the opposite occurs, the result is deemed “negative,” and the servicer, with the express permission of the investor, has the discretion to offer the HAMP modification (id.). If, after a negative result, the servicer opts not to offer the borrower a modification, it “must send a Non-Approval Notice and consider the borrower for other foreclosure prevention options” (id.).

CPLR 3408(f) and Good Faith

We now turn from the federal response to the financial crisis, and address New York’s response to the 2008 mortgage crisis. New York’s response included the enactment of CPLR 3408, a remedial statute which required that, “in residential foreclosure actions involving the type of loans within the ambit of that section, in which the defendant was a resident of the subject property, the court would hold a mandatory conference for settlement discussions” (Wells Fargo Bank, N.A. v Meyers, 108 AD3d 9, 17; see L 2008, ch 472; CPLR 3408).

In 2009, CPLR 3408 was amended by, among other things, requiring mandatory settlement conferences in mortgage foreclosure actions involving any home loan in which the defendant is a resident of the subject property—regardless of when the home loan was made—and requiring both the plaintiff and defendant to negotiate in “good faith” to reach a resolution of the action, including, if possible, a loan modification (L 2009, ch 507, § 9, amending CPLR 3408[a] and adding CPLR 3408[f]). The Chief Administrator of the Courts thereafter promulgated 22 NYCRR 202.12-a, a regulation setting forth the rules and procedures governing CPLR 3408 settlement conferences (see 22 NYCRR 202.12-a [directing the court to “ensure that each party fulfills its obligation to negotiate in good faith”]). “The purpose of the good faith requirement [in CPLR 3408] is to ensure that both plaintiff and defendant are prepared to participate in a meaningful effort at the settlement conference to reach resolution” (2009 Mem of Governor’s Program Bill, Bill Jacket, L 2009, ch 507, at 11). While the aspirational goal of negotiations pursuant to CPLR 3408 is that the parties “reach a mutually agreeable resolution to help the defendant avoid losing his or her home” (CPLR 3408[a]), the statute requires only that the parties enter into and conduct negotiations in good faith (see Wells Fargo Bank, N.A. v Van Dyke, 101 AD3d 638). In its present form, CPLR 3408 provides, in pertinent part, as follows:

“(a) In any residential foreclosure action involving a home loan . . . in which the defendant is a resident of the property subject to foreclosure, the court shall hold a mandatory conference . . . for the purpose of holding settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents, including, but not limited to determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to, and for whatever other purposes the court deems appropriate.

“(f) Both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible” (CPLR 3408[a], [f] [emphasis added]).

A review of the legislative history does not reveal any discussion of the “good faith” standard envisioned by the Legislature (see L 2009, ch 507).

On this appeal, the plaintiff essentially argues that a party to a mortgage foreclosure action can only be found to have violated the good-faith requirement of CPLR 3408(f) when that party has engaged in egregious conduct such as would be necessary to support a finding of “bad faith” under the common-law. The plaintiff maintains that it did not engage in any egregious conduct such as gross negligence or intentional misconduct and, therefore, it satisfied the good-faith requirement of CPLR 3408(f).

In the absence of a statutory definition of “good faith,” we must first determine whether a lack of good faith should be measured by the common-law standard of bad faith or by a plaintiff’s failure to comply with HAMP guidelines. No published decision appears to specifically define “good faith,” as that term is employed in CPLR 3408(f). In Wells Fargo Bank, N.A. v Van Dyke (101 AD3d at 638-639), the Appellate Division, First Department, rejected a plaintiff mortgagee’s argument that compliance with the good faith requirement of CPLR 3408 is established “merely by proving the absence of fraud or malice on the part of the lender,” and briefly addressed the issue of what constitutes “good faith” by noting that “[a]ny determination of good faith must be based on the totality of the circumstances” taking into account that CPLR 3408 is a remedial statute. However, the standard to apply in determining what constitutes a lack of good faith pursuant to CPLR 3408(f) is a matter of first impression in this Court (cf. IndyMac Bank, F.S.B. v Yano-Horoski, 78 AD3d 895, 896 [the plaintiff did not challenge “bad faith” determination on appeal, but only contested the sanction of cancellation of the debt]).

A review of various trial-level court decisions shows that courts have not required a showing of intentional misconduct, malice, or gross negligence when determining whether a party has failed to negotiate in good faith as required by CPLR 3408(f). For example, one court observed that good faith is a subjective concept, generally meaning honest, fair, and open dealings, and a “state of mind motivated by proper motive” (HSBC Bank USA v McKenna, 37 Misc 3d 885, 905 [Sup Ct, Kings County] [internal quotation marks omitted]). Unreasonable, arbitrary, or unconscionable conduct is inconsistent with the statutory purpose of good faith negotiations aimed at achieving a resolution (see id. at 908). Several trial-level courts have found that, where a plaintiff lost financial documents, sent confusing and contradictory communications, inexcusably delayed a modification decision, or denied requests for HAMP loan modifications without setting forth grounds, such conduct constituted a lack of good faith within the meaning of CPLR 3408(f) (see e.g. Wells Fargo Bank, N.A. v Ruggiero, 39 Misc 3d 1233[A], 2013 NY Slip Op 50871[U] [Sup Ct, Kings County] [finding it appropriate to sanction the plaintiff for its failure to act in good faith where the plaintiff, inter alia, provided conflicting information, refused to honor agreements, engaged in unexcused delay, imposed unexplained charges, made misrepresentations, and failed to deal honestly, fairly, and openly]; HSBC Bank USA v McKenna, 37 Misc 3d at 888, 898-899, 910 [accepting a referee’s recommendation that the plaintiff be found to have failed to act in good faith where the plaintiff rejected a proposed short sale at a sum the plaintiff had previously stated was its minimum sale amount and, in dicta, advising that, in determining whether the plaintiff failed to act in good faith in rejecting a short sale proposal, the factors to be considered included the outstanding debt, the likely market movement, and whether a short sale would result in a greater yield than a public foreclosure auction]; cf. Wells Fargo Bank, N.A. v Van Dyke, 101 AD3d 638 [the defendants did not establish lack of good faith by the plaintiff where the defendants did not submit evidence supporting their claimed rental income]; but see JP Morgan Chase Bank, N.A. v Ilardo, 36 Misc 3d at 366, 378-380 [the plaintiff’s conduct did not constitute a lack of good faith because an interim modification plan applied on a trial basis did not contractually obligate the plaintiff to provide a permanent HAMP loan modification to the defendants]). In addition, while we were not expressly called upon to decide the proper standard to apply in Wells Fargo Bank, N.A. v Myers (108 AD3d 9), in that case we determined that the record supported the Supreme Court’s finding that the mortgagee had failed to satisfy its obligation to negotiate in good faith without applying the common-law standard of bad faith.

The plaintiff nevertheless urges this Court to adopt the common-law standard of bad faith and hold that in determining whether a party failed to act in good faith during mandatory settlement negotiations pursuant to CPLR 3408, a court should consider only whether the party acted deliberately or recklessly in a manner that evinced gross disregard of, or conscious or knowing indifference to, another’s rights. This standard for bad faith conduct has been articulated in various contexts to determine issues such as whether an insurance carrier may be held liable for the alleged bad-faith failure to accept a settlement offer (see Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 453-454 [to establish a prima facie case of bad faith, the plaintiff must establish that the insurer’s conduct constituted a “gross disregard of the insured’s interests—that is, a deliberate or reckless failure to place on equal footing the interests of its insureds with its own interests when considering a settlement offer”]); whether a “no-damage-for delay” clause in a contract may be enforced for delays allegedly actuated by bad faith (see Kalisch-Jarcho, Inc. v City of New York, 58 NY2d 377, 384-385 [“no-damage-for delay” clause will not exempt a party from liability for willful or gross negligence, intentional wrongdoing, fraudulent or malicious conduct]); and whether allegedly stolen bonds were taken in bad faith (see Manufacturers & Traders Trust Co. v Sapowitch, 296 NY 226, 229 [bad faith is “nothing less than guilty knowledge or willful ignorance”]).

Were this Court to adopt the plaintiff’s proposed standard for determining whether a party failed to act in good faith, we would undermine the remedial purpose of CPLR 3408. The purpose of the statute is “to address the problem of mortgage foreclosures” by “help[ing] struggling homeowners without harming all consumers by inadvertently driving up the cost of credit or limiting the availability of legitimate credit” (Letter of Sen Farley, Bill Jacket, L 2008, ch 472, at 5), and “providing additional protections and foreclosure prevention opportunities for homeowners at risk of losing their homes” (Senate Introducer’s Mem in Support, Bill Jacket, L 2008, ch 472, at 7). To reiterate, “[t]he purpose of the good faith requirement [in CPLR 3408] is to ensure that both plaintiff and defendant are prepared to participate in a meaningful effort at the settlement conference to reach resolution” (2009 Mem of Governor’s Program Bill, Bill Jacket, L 2009, ch 507, at 11).

Therefore, we hold that the issue of whether a party failed to negotiate in “good faith” within the meaning of CPLR 3408(f) should be determined by considering whether the totality of the circumstances demonstrates that the party’s conduct did not constitute a meaningful effort at reaching a resolution. We reject the plaintiff’s contention that, in order to establish a party’s lack of good faith pursuant to CPLR 3408(f), there must be a showing of gross disregard of, or conscious or knowing indifference to, another’s rights. Such a determination would permit a party to obfuscate, delay, and prevent CPLR 3408 settlement negotiations by acting negligently, but just short of deliberately, e.g., by carelessly providing misinformation and contradictory responses to inquiries, and by losing documentation. Our determination is consistent with the purpose of the statute, which provides that parties must negotiate in “good faith” in an effort to resolve the action, and that such resolution could include, “if possible,” a loan modification (CPLR 3408[f]; see Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 11, 18, 20, 23; Wells Fargo Bank, N.A. v Van Dyke, 101 AD3d 638 [the defendants did not demonstrate that the plaintiff failed to act in good faith because nothing in CPLR 3408 requires a plaintiff to make the exact settlement offer desired by the defendants]; HSBC Bank USA v McKenna, 37 Misc 3d 885 [Sup Ct, Kings County] [the plaintiff failed to act in good faith based upon, inter alia, a referee’s finding that the plaintiff rejected an all-cash short sale offer]).

Where a plaintiff fails to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds, or, conversely, where a defendant fails to provide requested financial information or provides incomplete or misleading financial information, such conduct could constitute the failure to negotiate in good faith to reach a mutually agreeable resolution.

In this case, the totality of the circumstances supports the Supreme Court’s determination that the plaintiff failed to act in good faith, as the plaintiff thwarted any reasonable opportunities to settle the action, thus contravening the purpose and intent of CPLR 3408. Sarmiento submitted his initial HAMP application on October 29, 2009, and provided updated financial documentation on November 18, 2009. Beginning on December 1, 2009, at the direction of the Court Attorney Referee, Sarmiento began placing $2,000 per month in an escrow fund, in part to demonstrate his ability to make modified monthly payments. On January 2, 2010, six weeks after receiving Sarmiento’s complete HAMP application, the plaintiff denied the application on the erroneous ground that the property was not Sarmiento’s primary residence.

Another month passed without a proper HAMP determination. On February 2, 2010, the plaintiff indicated that it needed a BPO to conduct an NPV test, a representation which suggested that Sarmiento’s HAMP application had satisfied the five-step waterfall test. Nevertheless, two months later, on April 2, 2010, the plaintiff again denied Sarmiento’s HAMP application, apparently for failing to satisfy the waterfall test since the plaintiff claimed that modification could not result in a monthly payment equal to or less than 31% of Sarmiento’s gross monthly income. However, the plaintiff apparently reached this conclusion using incorrect income data.

At the request of the Court Attorney Referee, Sarmiento submitted a second HAMP application on April 26, 2010. On May 13, 2010, the plaintiff denied the application, this time on the ground that the property was “not affordable.” The plaintiff ignored Sarmiento’s ensuing request for a more specific reason for denial and for the data that the plaintiff had used in conducting the NPV test.

On June 8, 2010, after Sarmiento sought the assistance of the HAMP support center, he was told that his HAMP application had been denied because of the escrow fund he had created at the direction of the Court Attorney Referee. This rationale, presumably relayed to the HAMP support center by the plaintiff, was a new ground for denial, and was inexplicable since the plaintiff was aware that the escrow fund existed at the direction of the Court Attorney Referee.

Nevertheless, despite the apparent denial of May 13, 2010, the plaintiff indicated, on July 1, 2010, that it was still reviewing Sarmiento’s HAMP application. Despite having indicated in February 2010 that it would soon conduct an NPV test, the plaintiff stated that no NPV test had yet been conducted. On July 19, 2010, the plaintiff indicated that the defendant’s HAMP application had been denied because of the creation and existence of the escrow fund.

Two months later, the plaintiff indicated that it again needed a BPO so that it could conduct an NPV test. Notably, the plaintiff had made an identical representation eight months earlier, and did not explain why it had not conducted the NPV test in February 2010. On October 5, 2010, the plaintiff offered Sarmiento a non-HAMP loan modification, while simultaneously indicating that his HAMP application was still under review. On the following day, the plaintiff again denied Sarmiento’s HAMP application, this time on the ground that he was current on his mortgage. The record demonstrates that it was not until October 12, 2010, nearly one year after Sarmiento made his initial HAMP application, that the plaintiff finally conducted an NPV test, which was negative.

Any one of the plaintiff’s various delays and miscommunications, considered in isolation, does not rise to the level of a lack of good faith. Viewing the plaintiff’s conduct in totality, however, we conclude that its conduct evinces a disregard for the settlement negotiation process that delayed and prevented any possible resolution of the action and, among other consequences, substantially increased the balance owed by Sarmiento on the subject loan. Although the plaintiff may ultimately be correct that Sarmiento is not entitled to a HAMP modification, the plaintiff’s conduct during the settlement negotiation process makes it impossible to discern such a fact, as the plaintiff created an atmosphere of disorder and confusion that rendered it impossible for Sarmiento or the Supreme Court to rely upon the veracity of the grounds for the plaintiff’s repeated denials of Sarmiento’s HAMP application.

Therefore, the totality of the circumstances supports the Supreme Court’s determination that the plaintiff failed to negotiate in good faith, in violation of CPLR 3408(f) (see Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 17).

Sanction

The plaintiff further argues that, even if it failed to act in good faith, the Supreme Court lacked the authority to sanction it absent express statutory or regulatory authority. In the plaintiff’s view, CPLR 3408(f) and 22 NYCRR 202.12-a(c)(4) require the parties to negotiate in good faith, but provide no mechanism to enforce that requirement. In order to address this particular contention, we must first look to our recent holding in Wells Fargo Bank, N.A. v Meyers (108 AD3d 9).

In Meyers, the plaintiff in a foreclosure action had, among other things, commenced the action even though its loan modification proposal was pending, denied a permanent loan modification based on the defendants’ purported debt-to-income ratio without submitting evidence of its calculations, and provided conflicting information regarding its denials of requests for a loan modification. This Court observed that, upon finding that foreclosing plaintiffs failed to negotiate in good faith pursuant to CPLR 3408(f), the trial-level courts have imposed a variety of sanctions, including barring them from collecting interest, legal fees, and expenses, imposing exemplary damages against them, staying the proceedings, imposing a monetary sanction pursuant to 22 NYCRR part 130, and vacating the judgment of foreclosure and sale and cancelling the note and mortgage (see Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 20-21). We noted that, save for our determination in IndyMac Bank, F.S.B. v Yano-Haroski (78 AD3d 895), in which we reversed the severe sanction of cancellation of the note and mortgage, based on the plaintiff’s failure to negotiate in good faith as required by CPLR 3408(f), this Court had not otherwise reviewed the propriety of other means of enforcing the good-faith negotiation requirement of CPLR 3408(f).

In Meyers, this Court determined that there was no basis to disturb the Supreme Court’s finding, made after a hearing, that the plaintiff failed to negotiate in good faith, in violation of CPLR 3408(f). While acknowledging that CPLR 3408(f) does not set forth a specific remedy for a party’s failure to negotiate in good faith (see Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 19; Hon. Mark C. Dillon, The Newly-Enacted CPLR 3408 for Easing the Mortgage Foreclosure Crisis: Very Good Steps, but not Legislatively Perfect, 30 Pace L Rev 855, 875 [Spring 2010]), this Court found that the particular remedy imposed by the Supreme Court—compelling the plaintiff to permanently abide by the terms of a HAMP trial loan modification—was “unauthorized and inappropriate” (Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 21). This Court did not rule on the possibility of other remedies for a violation of the good-faith negotiation requirement set forth in CPLR 3408(f) and cautioned that the courts may not rewrite the loan agreements into which the parties freely entered merely upon finding that one party failed to satisfy its obligation to negotiate in good faith pursuant to CPLR 3408(f) (see id.).

Contrary to the plaintiff’s contention, the Supreme Court did not lack authority to impose a sanction for the plaintiff’s failure to negotiate in good faith pursuant to CPLR 3408(f). This Court has specifically held that the Supreme Court has “authority to impose a sanction or remedy in the event it determined . . . that [a] plaintiff had failed to negotiate in good faith in the mandatory foreclosure settlement conferences” (Bank of Am. v Lucido, 114 AD3d 714, 715, citing Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 11). Although CPLR 3408 is silent as to the sanctions or remedies that may be employed for violation of the good faith negotiation requirement, “[i]n the absence of a specifically authorized sanction or remedy in the statutory scheme, the courts must employ appropriate, permissible, and authorized remedies, tailored to the circumstances of each given case” (Wells Fargo Bank, N.A. v Meyers, 108 AD3d at 23).

Notably, unlike the borrower in Meyers (108 AD3d 9), Sarmiento specifically moved to impose the sanctions ultimately imposed by the Supreme Court, based upon the court’s finding that the plaintiff violated the good faith requirement of CPLR 3408(f). Therefore, the plaintiff was on notice that the Supreme Court would entertain such a remedy.

We also note that in contrast to Meyers, the plaintiff does not argue that the sanctions actually imposed in the instant case were excessive or improvident. Therefore, the propriety of the particular sanctions imposed herein is not before us. To the extent that the arguments raised in the plaintiff’s reply brief may be viewed as a challenge to the propriety of the sanction imposed by the Supreme Court in this case, these arguments are not properly before us since they are raised for the first time in a reply brief, to which Sarmiento had no opportunity to respond (see Monadnock Constr., Inc. v DiFama Concrete, Inc., 70 AD3d 906; Congel v Malfitano, 61 AD3d 809; Borbeck v Hercules Constr. Corp., 48 AD3d 498).

We are cognizant that, in a foreclosure action, “[t]he court’s role is limited to interpretation and enforcement of the terms agreed to by the parties, and the court may not rewrite the contract or impose additional terms which the parties failed to insert” (131 Heartland Blvd. Corp. v C.J. Jon Corp., 82 AD3d 1188, 1189; see Wells Fargo Bank, N.A. v Meyers, 108 AD3d 9; Maser Consulting, P.A. v Viola Park Realty, LLC, 91 AD3d 836, 837). Thus, in fashioning a remedy for a violation of the good-faith negotiation requirement set forth in CPLR 3408(f), courts should be mindful not to rewrite the contract at issue or impose contractual terms which were not agreed to by the parties. As the nature of the sanction in this case is unchallenged, our determination herein should not be construed as a deviation from the above-stated principle.

Accordingly, the order is affirmed insofar as appealed from.

RIVERA, J.P., SKELOS and LOTT, JJ., concur.

ORDERED that the order is affirmed insofar as appealed from, with costs.

[1] ACS/Wells was represented by the law firm of Steven J. Baum, P.C.

[2] HAMP is a federal program that is intended to help homeowners avoid foreclosure “by modifying loans to a level that is affordable for borrowers now and sustainable over the long term” (https://www.hmpadmin.com/portal/programs/hamp.jsp, last accessed July 16, 2014).

R

Decided on May 30, 2014
Supreme Court, Kings County

One West Bank, F.S.B., Plaintiff, – against-

against

Daniel Corrar a/k/a DANIEL CARRAZ a/k/a DANIEL COKRAR a/k/a DANIEL E. CORRAR, City of New York Environmental Control Board, Sea Gate Association, Manhattan Beer Distributors, “JOHN DOE”, “RICHARD ROE”, “JANE DOE”, “CORA COE”, “DICK MOE” and “RUBY POE”, the six, defendants last named in quotation marks being intended to designate tenants or occupants in possession of the herein described premises or portions thereof, if any there be, said names being fictitious, their true names being unknown to the plaintiff, Defendants.

19614/09

Attorney for Defendant Daniel Corrar
Baum & Bailey, P.C.
48 Wall Street, 11th Fl
New York, NY 10005

Attorney for Plaintiff
Stein, Weiner & Roth, LLP
One Old Country Road, Suite 113
Carle Place, NY 11514

Attorney for Defendant Sea Gate Association
Alan J. Wohlberg, Esq.
2805 Avenue N
Brooklyn, NY 11210

Attorney for Plaintiff
Ras Boriskin, LLC
900 Merchants Concourse, Suite LL-13
Westbury, NY 11590
Donald Scott Kurtz, J.

Recitation, as required by CPLR §2219(a), of the papers considered in the review of these motions:

PapersNumbered

Notice of Motion/Cross Motion/Attorneys’ affirmations

supplementing the motions……………………………………….1,2

Answering Affidavits/Affirmations……………………………3

Reply Affidavits/Affirmations/Memoranda of Law…….4Referee’s Report……………………………………………………….

Upon the foregoing cited papers, plaintiff’s motion for an Order of Reference and defendant Corrar’s cross-motion to dismiss plaintiff’s complaint pursuant to CPLR §3215(c), is decided as follows:

Plaintiff commenced this foreclosure action by the filing of a Summons and Verified Complaint on August 3, 2009. Defendant Daniel Corrar a/k/a Daniel Carraz a/k/a Daniel Cokrar a/k/a Daniel E. Corrar (hereinafter “defendant”) was allegedly served pursuant to CPLR §308(2) by delivery of the Summons and Verified Complaint to a co-tenant on August 6, 2009 and by the required mailing on August 11, 2009. Defendant failed to answer. A proposed Order of Reference was received by the Court on September 23, 2009. By letter dated October 13, 2010, plaintiff withdrew its proposed Order of Reference. On January 17, 2013, plaintiff filed a motion [*2]for an Order of Reference, noticed for February 6, 2013. On February 6, 2013, both plaintiff and defendant failed to appear and said motion was marked off. On September 27, 2013, plaintiff filed its second motion for an Order of Reference. On the return date, defendant appeared pro-se and the case was adjourned at his request to retain counsel. On January 29, 2014, defendant cross-moved for an order dismissing the complaint pursuant to CPLR §3215(c); cancelling any accrued interest from the date of defendant’s default including all fees and penalties; and, in the alternative, granting him an extension of time to serve an answer.Defendant maintains he never received the Summons and Verified Complaint. He submits an affidavit wherein he states he completed a trial modification in October 2008, prior to the action’s commencement. Thereafter, he was informed that IndyMac was no longer servicing his loan and he was unable to ascertain the identity of the new servicer. He maintains he does not know the co-tenant who was allegedly served with the Summons and Verified Complaint and that the first he learned of this action was when he received plaintiff’s second motion for an Order of Reference on September 24, 2013. Defendant argues that plaintiff failed to move for a default judgment within a year after defendant’s default and, therefore, pursuant to CPLR §3215(c), the action should be dismissed.

In opposition to defendant’s cross-motion, plaintiff argues that it made an application for entry of a default judgment within a year of defendant’s default, despite the application having been withdrawn. Plaintiff maintains that the threshold for satisfying CPLR §3215(c) is very low and merely an application for a default judgment is enough. Moreover, it argues that settlement discussions can constitute a reasonable excuse for plaintiff’s delay in entering a judgment and notes that on May 18, 2010, the case was calendered for a foreclosure pre-settlement conference.

CPLR §3215(c) states, in pertinent part, that if a plaintiff “fails to take proceedings for the entry of judgment within one year after the default, the Court shall…dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed.” This section “prevents a plaintiff from taking advantage of a defendant’s default where the plaintiff has also been guilty of inaction.” Myers v. Slutsky, 139 AD2d 709, 710 (2d Dept 1988). The legislative intent underlying CPLR §3215(c) was to “prevent the plaintiffs from unreasonably delaying the determination of an action…” and “to avoid inquests on stale claims (citations omitted).” Id., Giglio v. NTIMP, Inc., 86 AD3d 301, 307 (2d Dept 2011).

The Court does not agree with plaintiff’s contention that it made an application for entry of a default judgment within one year of defendant’s default. In fact, upon review of the papers, it is noted that plaintiff submitted an ex-parte application for an Order of Reference only, which was submitted directly to the court clerk. Therefore, this “application” could not have been a motion for a default judgment pursuant to CPLR §3215. Moreover, even if the Court considered plaintiff’s application to be a motion pursuant to CPLR §3215, said application or motion was withdrawn by plaintiff. “The effect of a withdrawal of a motion is to leave the record as it stood prior to its filing as though it had not been made.” Stoute v. City of New York, 91 AD2d 1043, [*3]app dismissed 59 NY2d 602, lv to app dismissed 59 NY2d 762 (1983). On January 17, 2013, approximately two and a half years after defendant’s alleged default, plaintiff filed its first motion for an Order of Reference. The Notice of Motion did not state plaintiff was seeking a default judgment. The motion was marked off on February 6, 2013. Plaintiff now makes its second motion for an Order of Reference. Again, upon review of the Notice of Motion, it still does not seek a default judgment, even though defendant’s alleged default occurred almost four years ago.

The Court finds plaintiff’s remaining argument that the May 18, 2010 foreclosure pre-settlement conference constitutes a reasonable excuse for plaintiff’s delay in entering a judgment to be without merit. Defendant did not appear and no conference was held. Moreover, the case was in that part only once, and after that one appearance, the case was immediately released to the IAS part for plaintiff to proceed.

In view of the foregoing, plaintiff’s application for an Order of Reference is hereby denied and defendant’s cross-motion to dismiss pursuant to CPLR §3215(c) is hereby granted.The foregoing shall constitute the Decision and Order of the Court.

DONALD SCOTT KURTZ
Justice, Supreme Court

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’ SECOND AMENDED COMPLAINT

[Re: ECF No. 11]

LAUREL BEELER, Magistrate Judge.

INTRODUCTION

Plaintiffs Manoj Rijhwani and Lisa Rijhwani (“Plaintiffs”) sued Wells Fargo Bank, N.A. (“Wells Fargo”)^[1] for its alleged misconduct in relation to Plaintiffs’ attempt to get a loan modification and the concurrent foreclosure proceedings on Plaintiffs’ property. See Second Amended Complaint (“SAC”), ECF No. 1-1 at 1-24.^[2] Wells Fargo moves to dismiss Plaintiffs’ Second Amended Complaint. See Motion, ECF No. 11. Pursuant to Civil Local Rule 7-1(b), the court found this matter suitable for determination without oral argument and vacated the February 20, 2014 hearing. 2/19/2014 Clerk’s Notice, ECF No. 16. Upon consideration of the Second Amended Complaint, the briefs submitted, and the applicable legal authority, the court GRANTS IN PART and DENIES IN PART Wells Fargo’s motion to dismiss.

STATEMENT^[3]

I. PLAINTIFFS’ LOANS

In or about July 5, 2007, Plaintiffs took out an equity line of credit with World Savings Bank, FSB (“World Savings”), a federal savings bank, on their home at 1044 Rudder Lane, Foster City, California (the “Property”). SAC, ECF 1-1 ¶ 11. As part of this transaction, Plaintiffs executed a promissory note that gave World Savings a security interest in the Property in the form of a deed of trust. See SAC, ECF No. 1-1 ¶ 11; RJN, Ex. A, ECF No. 12 at 5. For purposes of this order, this loan will be referred to as the “Second Loan.”

Plaintiffs’ prior loan history is a bit unclear from the pleadings and documents submitted. Although they do not explicitly describe it, Plaintiffs allege that at some point prior to 2007 they had entered into a mortgage loan transaction with World Savings and executed a promissory note that gave World Savings a security interest also in the Property in the form of a deed of trust. See SAC, ECF No. 1-1 ¶ 11 (“Plaintiffs entered into a consumer loan transaction with World Savings to refinance [the Property]”) (emphasis added); id. ¶ 12 & n.3 (alleging that the beneficial interest in the promissory notes underlying both Plaintiff’s first mortgage and second mortgage with World Savings had been sold to Wells Fargo in late January 2012); id. ¶ 13 (“Plaintiffs were in default under their first loan in 2011″) (emphasis added); id. ¶ 20 (“Plaintiffs [were] instructed not to make payments on either of their loans”) (emphasis added). For purposes of this order, this loan will be referred to as the “First Loan.”

On December 31, 2007, World Savings changed its name to Wachovia Mortgage, FSB (“Wachovia”), and remained a federal savings bank. In November 2009, Wachovia changed its name to Wells Fargo Bank Southwest, N.A., became a national association (and ceased being a federal savings bank), and immediately merged into Wells Fargo, which was and is a national association. See RJN, Exs. B-E, ECF No. 12 at 28-37. Plaintiffs allege that both of Plaintiffs’ “loans,” and/or the “beneficial interests in the [p]romissory [n]otes underlying” those loans, were “sold and/or transferred” to Wells Fargo in late January 2012. SAC, ECF No. 1-1 ¶ 12 & n.3.

II. PLAINTIFFS’ ATTEMPT TO MODIFY THE FIRST LOAN AND THE PURPORTED POSTPONEMENT OF FORECLOSURE PROCEEDINGS

In 2011, Plaintiffs defaulted on their First Loan, and, “in an earnest attempt to stave off an impending foreclosure” of the Property, Plaintiffs “decided to avail themselves of Wells Fargo’s available foreclosure avoidance programs.” Id. ¶ 13. In September of that year, Plaintiffs began a series of discussions with bank representatives about obtaining a loan modification on the first loan. Id. According to Plaintiffs, “Sean Martin, a Wachovia representative who apprised them of the upcoming transfer of their loans to Wells Fargo,” advised Plaintiffs that a new loan modification program was being instituted and that Plaintiffs should “refrain from paying toward their [S]econd [L]oan” and await enrollment information for the new program. Id. “No such enrollment information was forthcoming,” however, and after this “both Wachovia and Wells Fargo ceased sending Plaintiffs monthly statements with respect to either of their loans.” Id.

At some point, Plaintiffs defaulted on their Second Loan. Id. ¶ 14 (“Because their second loan’s regular monthly payment was between $200.00 and $300.00, Plaintiffs would have had no difficulty making it . . . Plaintiffs had already made numerous attempts with various Wells Fargo representatives to cure the [S]econd [L]oan’s arrearages, but because they were no longer receiving monthly statements, the exact amount in default was unknown”). Plaintiffs attempted to bring the Second Loan current, but bank representatives failed to provide Plaintiffs with “a straight answer” about the amount owed. Id.

On February 27, 2012, a Wells Fargo representative named “Armando” provided Plaintiffs with information regarding Wells Fargo’s pre-qualification process for a Home Affordable Modification Program (“HAMP”) loan modification. Id. Nevertheless, on the following day, February 28, 2012, Wells Fargo recorded and issued a Notice of Default with respect to Plaintiffs’ Second Loan, stating that the amount owed was $4,023.90. Id. ¶ 15; see RJN Ex. G, ECF No. 12 at 41.

On March 3, 2012, another Wells Fargo representative stated that Plaintiffs would need to pay $2,000.00 to bring the Second Loan current, but advised Plaintiffs to wait for the “specialist” who would ultimately be assigned to their case because he or she would be making the decisions as to the “next steps” in the process, including any issues regarding payment. SAC, ECF No. 1-1 ¶ 16.

On April 18, 2012, Plaintiffs were assigned a “Home Preservation Specialist” named Juan Teran. Id. ¶ 19. Despite Plaintiffs’ financial ability and willingness to continue paying toward the Second Loan and to bring it current, Mr. Teran instructed Plaintiffs not to make payments on either of their loans until he had a clear picture of Plaintiffs’ situation. Id. ¶ 20. On April 24, 2012, Mr. Teran reiterated his advice to not make payments because the principal amount on both loans would be reduced and that the two loans might ultimately be combined. Id. ¶ 21. He further told Plaintiffs that he would provide them with the necessary forms to submit their HAMP loan modification application. Id.

Plaintiffs, however, did not receive any forms, and they were not able to get a hold of any Wells Fargo representative until May 8, 2012. Id. ¶ 22. At that time, Mr. Teran assured Plaintiffs that no foreclosure sale would be conducted during the evaluation of Plaintiffs’ HAMP loan modification application. Id. A letter from Mr. Teran, dated May 15, 2012, reiterated this assurance. Id. Plaintiffs were informed in a later conversation on May 17, 2012 that they were indeed eligible for a HAMP loan modification and that the necessary forms to apply for it were forthcoming. Id.

To the contrary, on June 15, 2012, Plaintiffs discovered a Notice of Trustee’s Sale (based on their defaulting on the Second Loan) posted on their door; the sale was scheduled for June 20, 2012. Id. ¶ 23; see RJN Ex. H, ECF No. 12 at 45. On June 18, 2012, Plaintiffs contacted Mr. Teran to express their concern. SAC, ECF No. 1-1 ¶ 23. Mr. Teran told Plaintiffs not to worry because the sale would be postponed to August 7, 2012, and he instructed Plaintiffs not to make any payments because Wells Fargo could not decide how much these payments would be, in part because Plaintiffs’ modified interest rate had not yet been established. Id.

On June 20, 2012, Mr. Teran told Plaintiffs to ignore any further notices from Regional Trustee Services Corporation (“RTSC”), as this company was “just a formality from Wells Fargo,” that he, not the Trustee, was the “primary decision maker,” and that as long as they continued to work with him, “nothing [would] happen to [their] home.” Id. ¶ 24.

At Mr. Teran’s request, Plaintiffs faxed their most recent pay stubs, along with their 2011 federal tax statements on June 22, 2012; receipt of the documents was confirmed on June 25, 2012. Id. ¶ 25. The following week, Plaintiffs filled out and submitted electronic copies of the Request for Modification Affidavit (“RMA”) and IRS Form 4506-T (Request for Transcript of Tax Return); receipt of those documents was confirmed on July 15, 2012. Id.

On August 7, 2012, Mr. Teran stated that he was still reviewing Plaintiffs’ documents and that the previously rescheduled Trustee’s Sale had been postponed, a second time, to October 2012. Id. The next day, at Mr. Teran’s request, Plaintiffs again completed and submitted Wells Fargo’s previously-mailed versions of the RMA and Form 4506-T. Id. ¶ 26. In a subsequent phone conversation, Mr. Teran once again asked for Plaintiffs’ most recent pay stubs in order to “submit [their] application”; receipt of the documents was confirmed on August 27, 2012. Id.

In mid-September, Mr. Teran informed Plaintiffs that he “ha[d] all the information to submit [their] application,” that he would do so “in the next couple of weeks,” and that, based upon the underwriter’s results, he would follow up within four to six weeks with Wells Fargo’s determination. Id. ¶ 26. Plaintiffs were also informed that the Trustee’s Sale had been postponed, a third time, to December 2012. Id.

In December, Mr. Teran told Plaintiffs that he needed a Homeowners’ Association Statement in order to submit the application, and that the Trustee’s Sale had been postponed, a fourth time, to January 2013. Id. ¶ 28. Plaintiffs inquired as to why, despite their apparent eligibility for a loan modification, their home continued to be scheduled and rescheduled for sale. Id. Mr. Teran responded that this was “just part of [the Wells Fargo] process to put pressure on homeowners to work with the Home Preservation Specialist and move the application process forward.” Id.

Concerned about the status of their application and the upcoming Trustee’s Sale, Plaintiffs attempted to contact Mr. Teran, leaving detailed voicemail messages at his extension on January 10, 14, and 18, 2013. Id. ¶ 29. Mr. Teran eventually responded on January 18, 2013. Id. Yet again, Mr. Teran requested more documents—a resubmission of the RMA and Form 4506-T with January 2013 dates along with their most recent pay stubs—and stated that once these items were received, he would submit their application and postpone the Trustee’s Sale, a fifth time, to April 2013. Id. Mr. Teran also reminded Plaintiffs to ignore any notices from RTSC. Id.

Plaintiffs contacted Mr. Teran again on February 4, 2013 to confirm receipt of the requested documents and the rescheduled Trustee’s Sale date in April, 2013. Id. ¶ 30. Plaintiffs were told to expect a final determination on their application before the rescheduled sale date. Id. In order to confirm that their application had actually been submitted, Plaintiffs attempted to contact Mr. Teran on February 15, 19, and 21. Id. However, Plaintiffs were unable to leave any voicemail messages because Mr. Teran’s mailbox was full and could not accept new messages. Id.

Plaintiffs were finally able to speak to Mr. Teran again on March 1, 2013, when he informed Plaintiffs that there were “new versions” of the RMA and Form 4506-T that needed to be completed and submitted by fax, along with their most recent pay stubs and yet another Homeowners’ Association Statement. Id. ¶ 31. This same day, Plaintiffs discovered a Three Day Notice to Quit posted on their front door. Id. ¶ 32.

Plaintiff were not able to get a hold of Mr. Teran until March 5, 2013. Id. ¶ 33. When Plaintiffs informed him of the Three Day Notice to Quit, Mr. Teran expressed surprise, and assured them that he would follow up with Wells Fargo’s Foreclosure Department to “reverse the sale” of their home. Id. Upon Plaintiffs’ insistence, Mr. Teran transferred them to the Foreclosure Department, where Plaintiffs explained their plight to a Wells Fargo representative named “Maria Santiago.” Id. Ms. Santiago expressed her sympathy and asked Plaintiffs to send a letter to the Foreclosure Department, which would “open an inquiry into [this] wrongful foreclosure.” Id. Ms. Santiago then tried to contact Mr. Teran but was unable to do so. Id. Receipt of Plaintiffs’ letter was confirmed by another Wells Fargo representative on March 11, 2013. Id. ¶ 34. Plaintiffs have since had no contact with Mr. Teran or any other Wells Fargo representative to date. Id.

III. FORECLOSURE

Plaintiffs’ residence was sold for $231,600 to a third party buyer following a Trustee’s Sale conducted on March 1, 2013. Id. ¶ 34; see RJN Ex. I, ECF No. 12 at 49-51. As it turned out, the Trustee’s Sale had not, as Mr. Teran represented, been rescheduled for April 2013. SAC, ECF No. 1-1 ¶ 35. Had Plaintiffs known of the sale on March 1, 2013, they would have attended it, and because they were in a financial position to “place a competitive bid,” they might have been able to repurchase the property that day. Id.

It appears that Mr. Teran never submitted Plaintiffs’ HAMP loan modification application. Id. ¶ 36. Plaintiffs were never provided with a written denial, nor were they afforded any opportunity to appeal any decision on it, if a decision was ever made. Id. ¶ 38.

IV. PROCEDURAL HISTORY

Plaintiffs initiated this civil action on April 11, 2013 in San Mateo County Superior Court. See Notice of Removal Ex. A, ECF No. 1. On November 25, 2013, Plaintiffs filed the operative Second Amended Complaint in state court. SAC, ECF No. 1-1. It contains the following claims: (1) violation of the California Homeowners’ Bill of Rights (“HBOR”) for “dual tracking” the foreclosure process, failing to provide a written denial for a loan modification before recording a Notice of Default or conduct a Trustee’s Sale, and failing to provide a single point of contact throughout the foreclosure proceedings; (2) promissory estoppel; and (3) negligence. See id. ¶¶ 39-69.

Wells Fargo did not answer the Second Amended Complaint. Instead, on December 19, 2013, Wells Fargo removed the action to this court on diversity of citizenship grounds. Notice of Removal, ECF No. 1 at 2. On January 9, 2014, Wells Fargo moved to dismiss Plaintiffs’ Second Amended Complaint under Federal Rule of Civil Procedure 12(b)(6). Motion, ECF No. 11. Plaintiffs opposed the motion on January 23, 2014. Opposition, ECF No. 13. Wells Fargo filed a reply on January 29, 2014. Reply, ECF No. 14.

ANALYSIS

I. LEGAL STANDARD

A court may dismiss a complaint under Federal Rule of Civil Procedure 12(b)(6) when it does not contain enough facts to state a claim to relief that is plausible on its face. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). “The plausibility standard is not akin to a `probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S. at 557.). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to provide the `grounds’ of his `entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555 (internal citations and parentheticals omitted).

In considering a motion to dismiss, a court must accept all of the plaintiff’s allegations as true and construe them in the light most favorable to the plaintiff. See id. at 550; Erickson v. Pardus, 551 U.S. 89, 93-94 (2007); Vasquez v. Los Angeles County, 487 F.3d 1246, 1249 (9th Cir. 2007).

If the court dismisses the complaint, it should grant leave to amend even if no request to amend is made “unless it determines that the pleading could not possibly be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (quoting Cook, Perkiss and Liehe, Inc. v. Northern California Collection Serv. Inc., 911 F.2d 242, 247 (9th Cir. 1990)). But when a party repeatedly fails to cure deficiencies, the court may order dismissal without leave to amend. See Ferdik v. Bonzelet, 963 F.2d 1258, 1261 (9th Cir. 1992) (affirming dismissal with prejudice where district court had instructed pro se plaintiff regarding deficiencies in prior order dismissing claim with leave to amend).

II. DISCUSSION

A. Plaintiffs’ Claims Are Not Preempted by the Home Owners’ Loan Act

Wells Fargo first argues that all of Plaintiffs’ claims are preempted by the Home Owners’ Loan Act (“HOLA”), 12 U.S.C. § 1461 et seq. See Motion, ECF No. 11 at 10-17. HOLA regulates federal savings associations (and federal savings banks) and imposes rules on such associations according to nationwide “best practices.”^[4] See Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1004 (9th Cir. 2008); see also 12 U.S.C. §§ 1462, 1464. Congress enacted HOLA to centrally regulate federal savings associations “at a time when record numbers of homes were in default and a staggering number of state-chartered savings associations were insolvent.” Id. Congress also created the Office of Thrift Supervision (“OTS”) to administer the statute, and “it provided the OTS with `plenary authority’ to promulgate regulations involving the operation of federal savings associations.” State Farm Bank v. Reardon, 539 F.3d 336, 342 (6th Cir. 2008). Under one of those regulations, 12 C.F.R. § 560.2, OTS makes clear that it “occupies the entire field of lending regulation for federal savings associations,” leaving no room for conflicting state laws.

The initial question, then, is whether HOLA even applies to Wells Fargo, given that Wells Fargo is not a federal savings association. Wells Fargo addresses this issue in a single footnote in its motion, which states simply that “HOLA still applies even though [Wells Fargo] is no longer chartered as a federal savings bank.” Motion, ECF No. 11 at 10 n.1. Wells Fargo then string cites seven^[5] opinions, most of which are unhelpful for the reasons explained below. Id. (citing In re Ocwen Loan Servicing, LLC Mortgage Servicing Litig., 491 F.3d 638, 642 (7th Cir. 2007); Terrazas v. Wells Fargo Bank, N.A., No. 13-cv-00133-BEN-MDD, 2013 WL 5774120, at *3 (S.D. Cal. Oct. 24, 2013); Pratap v. Wells Fargo Bank, N.A., No. C 12-06378 MEJ, 2013 WL 5487474, at *3-5 (N.D. Cal. Oct. 1, 2013); Marquez v. Wells Fargo Bank, N.A., No. C 13-2819 PJH, 2013 WL 5141689, at *4 (N.D. Cal. Sept. 13, 2013); Taguinod v. World Savings Bank, FSB, 755 F. Supp. 2d 1064, 1068-69 (C.D. Cal. 2010); Guerrero v. Wells Fargo Bank, N.A., No. CV 10-5095-VBF(AJWx), 2010 WL 8971769, at *3 (C.D. Cal. Sept. 14, 2010); DeLeon v. Wells Fargo Bank, N.A., 729 F. Supp. 2d 1119, 1126 (N.D. Cal. 2010)).

The Ninth Circuit Court of Appeals has not addressed this issue. The district court opinions that Wells Fargo cites generally support the proposition that a successor to a federal savings association or bank (even if the successor itself is not a federal savings association or bank) may assert HOLA preemption if the loan at issue was originated by a federal savings association or bank. And it is true that a number of courts in this district (including this one), have held that the status of the originator of the loan determines the applicability of HOLA to a particular loan, but in nearly all of those cases, the plaintiffs either failed to argue otherwise or conceded the issue, the upshot being that the courts never had to grapple with it; instead, the courts simply concluded, without much analysis, that HOLA preemption applied. See, e.g., Pratap, 2013 WL 5487474, at *3-5; Graybill v. Wells Fargo Bank, N.A., 953 F. Supp. 2d 1091, 1109 (N.D. Cal. 2013); Preciado v. Wells Fargo Home Mortgage, No. 13-00382 LB, 2013 WL 1899929, at *3-4 (N.D. Cal. May 7, 2013); Plastino v. Wells Fargo Bank, 873 F. Supp. 2d 1179, 1184 n.3 (N.D. Cal. 2012); Appling v. Wachovia Mortg., FSB, 745 F. Supp. 2d 961, 971 (N.D. Cal. 2010); DeLeon, 729 F. Supp. 2d at 1126. Indeed, one court has observed that courts so holding generally “cite either (a) nothing, (b) each other, or (c) generic statements of law about corporations succeeding to the rights of the entities they acquire.” Gerber v. Wells Fargo Bank, N.A., Civ. No. 11-01083-PHX-NVW, 2012 WL 413997, at *4 (D. Ariz. Feb. 9, 2012).

Other district courts have more recently questioned the logic of allowing a successor party such as Wells Fargo to assert HOLA preemption, especially when the wrongful conduct alleged was done after the federal savings association or bank ceased to exist. See, e.g., Cerezo v. Wells Fargo Bank, No. 13-1540 PSG, 2013 WL 4029274, at *2-4 (N.D. Cal. Aug. 6, 2013); Leghorn v. Wells Fargo Bank, N.A., 950 F. Supp. 2d 1093, 1107-08 (N.D. Cal. 2013); Hopkins v. Wells Fargo Bank, N.A., CIV. 2:13-00444 WBS, 2013 WL 2253837, at *3 (E.D. Cal. May 22, 2013); Rhue v. Wells Fargo Home Mortgage, Inc., No. CV 12-05394 DMG (VBKx), 2012 WL 8303189, at *2-3 (C.D. Cal. Nov. 27, 2012); Rodriguez v. U.S. Bank Nat. Ass’n, Civ. No. 12-00989 WHA, 2012 WL 1996929, at *7 (N.D. Cal. June 4, 2012); Albizo v. Wachovia Mortgage, No. 2:11-cv-02991 KJN, 2012 WL 1413996, at *15-16 (E.D. Cal. Apr. 20, 2012); Scott v. Wells Fargo Bank, N.A., No. 10-3368 (MJD/SER), 2011 WL 3837077, at *4-5 (D. Minn. Aug. 29, 2011); Gerber, 2012 WL 413997, at *4; Valtierra v. Wells Fargo Bank, N.A., Civ. No. 1:10-0849, 2011 WL 590596, *4 (E.D. Cal. Feb. 10, 2011). Those courts usually have applied HOLA preemption only to conduct occurring before the loan changed hands from the federal savings association or bank to the entity not governed by HOLA. See, e.g., Leghorn, 950 F. Supp. 2d at 1107-08 (N.D. Cal. 2013); Hopkins, 2013 WL 2253837, at *3; Rhue, 2012 WL 8303189, at *2-3; Rodriguez, 2012 WL 1996929, at *7; Scott, 2011 WL 3837077, at *4-5; Gerber, 2012 WL 413997, at *4; Valtierra, 2011 WL 590596, *4. This is because “preemption is not some sort of asset that can be bargained, sold, or transferred. . . .” Gerber, 2012 WL 413997, at *4. Rather, as the court in Rhea explained:

The important consideration is the nature of the alleged claims that are the subject of the suit. The governing laws would be those applicable to [World Savings Bank] at the time the alleged misconduct occurred. Wells Fargo, being the successor corporation to Wachovia Mortgage and thus [World Savings Bank], succeeds to those liabilities, whatever the governing law at that time may be. Therefore, [World Savings Bank’s] conduct before its merger with Wells Fargo on November 1, 2009 would be governed by HOLA where appropriate, while Wells Fargo’s own conduct after that date would not.

2012 WL 8303189, at *3.

The court finds this reasoning persuasive, and in light of there being no binding Ninth Circuit authority, the court applies it to this action. Here, all of the wrongful conduct alleged by Plaintiffs was done by Wells Fargo and occurred from 2011 to 2013, well after Wachovia merged into Wells Fargo. This means that Wells Fargo, which is not a federal savings association or bank, may not assert HOLA preemption in this particular action.^[6]

B. The Merits of Plaintiffs’ Claims

With the preemption issue out of the way, the court now addresses Wells Fargo’s arguments regarding the merits of Plaintiffs’ claims.

1. Plaintiffs’ HBOR Claim

In their first claim, Plaintiffs allege that Wells Fargo violated several requirements of HBOR.^[7] See SAC, ECF No. 1-1 ¶¶ 39-50. Generally speaking, HBOR is a California state law that provides protections for homeowners facing foreclosure and reforms some aspects of the foreclosure process. Its purpose is to ensure that homeowners are considered for, and have a meaningful opportunity to obtain, available loss mitigation options such as loan modifications or other alternatives to foreclosure. HBOR provides a private right of action against loan servicers and trustees for their conduct during foreclosure, as well as during the loan modification application submission and review processes.

Plaintiffs allege that Wells Fargo violated HBOR in three ways. First, Plaintiffs allege that Wells Fargo violated HBOR’s prohibition of “dual track foreclosure,” see California Civil Code § 2923.6(c), which provides in relevant part that “[i]f a borrower submits a complete application for a first lien loan modification offered by, or through, the borrower’s mortgage servicer, a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent shall not record a notice of default or notice of sale, or conduct a trustee’s sale, while the complete first lien loan modification application is pending.” See SAC, ECF No. 1-1 ¶¶ 39-50. Plaintiffs assert that Wells Fargo advanced the foreclosure process while Mr. Teran was concurrently preparing Plaintiffs’ HAMP loan modification application. From September 2011 through March 2013 Plaintiffs were repeatedly advised to refrain from paying toward either their First Loan or Second Loan and to submit numerous documents so that Mr. Teran could submit a HAMP loan modification application with respect to their First Loan, yet they received a Notice of Default on February 28, 2012, a Notice of Trustee’s Sale on June 15, 2012, and a three-day Notice to Quit on March 1, 2013, and they ultimately lost the Property in a Trustee’s Sale.

Second, Plaintiffs allege that Wells Fargo violated California Civil Code § 2923.6(c)(1) and (d), which together prevent a lender from initiating foreclosure proceedings before it has made a written determination that the borrower is not eligible for a first-lien loan modification and the 30-day appeal period has expired.^[8] See SAC, ECF No. 1-1 ¶¶ 39-50. Plaintiffs allege that they never received a written decision denying their loan modification application before Wells Fargo recorded a Notice of Default on February 28, 2012 and a Notice of Trustee’s Sale on June 15, 2012, and subsequently conducted a Trustee’s Sale of the Property on March 1, 2013.

Third, Plaintiffs allege that Wells Fargo violated California Civil Code § 2923.7(a), which provides that “[u]pon request from a borrower who requests a foreclosure prevention alternative, the mortgage servicer shall promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact.” See SAC, ECF No. 1-1 ¶¶ 39-50. On April 18, 2012, Wells Fargo assigned Mr. Teran to serve as Plaintiffs’ “Home Preservation Specialist” and single point of contact in their case. Plaintiffs allege that Mr. Teran’s consistent unavailability at critical times throughout the process falls short of this requirement. They allege that he was routinely unavailable when Plaintiffs attempted to contact him to inquire about the status of their application on multiple occasions in the months leading up to the Trustee’s Sale.

Wells Fargo makes three arguments in favor of dismissal of Plaintiffs’ HBOR claims. First, it argues that because it is a signatory to the National Mortgage Settlement (“NMS”) and in compliance with the NMS’s terms, it is insulated from liability for alleged HBOR violations. Motion, ECF No. 11 at 18. The NMS is a consent judgment reached in United States v. Bank of America Corp., No. 1:12-cv00361 RMC (D.D.C. Apr. 4, 2012) and to which Wells Fargo indeed is a signatory. See RJN, Ex. J, ECF No. 12 at 53-59; see also Winterbower v. Wells Fargo Bank, N.A., SA CV 13-0360-DOC, 2013 WL 1232997, at *3 (C.D. Cal. Mar. 27, 2013) (describing the NMS). Under California Civil Code § 2924.12, a signatory to the NMS “shall have no liability for a violation of §§ 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11 or 2924.17” as long as the signatory is in compliance with the relevant terms from the Settlement Term Sheet. See also Winterbower, 2013 WL 1232997, at *3. Wells Fargo’s argument fails at the motion to dismiss stage, however, because this safe harbor, so to speak, appears to be an affirmative defense to be raised on summary judgment and for which Wells Fargo has the burden of proof. The court found no authority to support its argument that the safe harbor’s lack of applicability is an element of Plaintiffs’ HBOR claim that they must allege to survive a motion to dismiss, and the opinion that Wells Fargo cites does not say that it is, either. See id. That opinion discusses this defense in the context of a court’s decision whether to grant a plaintiff’s request for a temporary restraining order, but that decision is based on an entirely different legal standard (i.e., the likelihood of success on the merits versus the sufficiency of allegations). See id. This does not mean that this argument—if supported by evidence—ultimately is not a winner for Wells Fargo; it just means that now is not the appropriate time to try to make it.

Second, Wells Fargo argues that Plaintiffs’ HBOR claims are based on conduct taken in relation to the Second Loan only and points out that HBOR does not apply to a foreclosure based on a junior lien. Motion, ECF No. 11 at 18-19. California Civil Code § 2924.15(a) does, in fact, state that Sections 2923.6 (the basis for Plaintiffs’ “dual tracking” and no-written-loan-modification-determination claims) and 2923.7 (the basis for Plaintiffs’ “single point of contact” claim) of HBOR “shall only apply to first lien mortgages or deeds of trust.” And it is true that the Notice of Default and Notice of Trustee’s Sale recorded, and the Trustee’s Sale itself, all related to Plaintiff’s Second Loan, and not their First Loan. But this dooms only Plaintiffs’ claim that Wells Fargo recorded these notices and conducted the Trustee’s Sale before providing a written denial of their HAMP loan modification application, because that claim is based on Wells Fargo’s foreclosure under the Second Loan. Plaintiffs’ other claims, however, are based on Wells Fargo’s conduct with respect to their First Loan as well as their Second Loan. Their allegations clearly show that they were in contact with Wells Fargo employees, including Mr. Teran, about both of their loans, yet Wells Fargo foreclosed under the second deed of trust while their application to modify their First Loan was still pending (or at least they had not been told that it either had not been submitted or been denied). Wells Fargo’s view of the situation fails to account for how Plaintiffs’ two loans were intertwined during the loan modification process and Plaintiffs’ conversations with Wells Fargo’s employees.

Third, Wells Fargo argues that Plaintiffs’ HBOR claims fail because the Notice of Default and Notice of Trustee’s Sale were recorded in 2012, but HBOR did not take effect until January 1, 2013 and is not retroactive. Motion, ECF No. 11 at 19. It is true that those documents were recorded in 2012 and that HBOR did not take effect until 2013. See RJN, Exs. G, H, ECF No. 12 at 41-47; Rockridge Trust v. Wells Fargo, N.A., C-13-01457 JCS, 2013 WL 5428722, at *28 (N.D. Cal. Sept. 25, 2013) (HBOR took effect on January 1, 2013 and is not retroactive) (citations omitted); Michael J. Weber Living Trust v. Wells Fargo Bank, N.A., No. 13-cv-00542-JST, 2013 WL 1196959, at *4 (N.D. Cal. Mar. 25, 2013) (same). The problem with Wells Fargo’s argument, however, is that not all of the conduct alleged occurred prior to January 1, 2013. Plaintiffs clearly allege that they were still attempting to contact Mr. Teran during January and February 2013, and, when he actually called them back, he still told them to continue submitting documents in support of their HAMP loan modification application and that they need not worry about the impending foreclosure. In addition, the foreclosure sale did not even occur until March 1, 2013. See RJN Ex. I, ECF No. 12 at 49-51. Wells Fargo addresses none of these allegations and events when making its argument.

In sum, the court finds that Plaintiffs’ HBOR claim fails and must be dismissed with prejudice to the extent that it is based on Wells Fargo’s institution of foreclosure proceedings before making a written determination that Plaintiffs were not eligible for a first lien loan modification, but that their HBOR claim survives to the extent that it is based on Wells Fargo’s “dual tracking” and failure to provide a “single point of contact.”

2. Plaintiffs’ Promissory Estoppel Claim

Plaintiffs also allege a claim for promissory estoppel. SAC, ECF No. 1-1 ¶¶ 51-56. They allege that they reasonably relied on Mr. Teran’s “numerous assurances that he would submit their [loan modification] application for review, that[,] in light of their clear eligibility, a loan modification would be forthcoming[,] and that no foreclosure sale would take place during their evaluation.” Id. ¶ 52. Assurances to this effect were made on 10 separate occasions from April 2012 through March 2013. See id. ¶¶ 19-31, 52. “Taken together, these assurances constituted continuing promises to submit and consider [their] application” and “to refrain from pursuing foreclosure while their application was under review and pending approval.” Id. ¶ 53. Plaintiffs additionally allege that they reasonably relied on these representations “by completing countless forms and timely submitting all requested documentation” and did not instead avail themselves of “viable” “alternative courses of action” to prevent foreclosure, such as refinancing again, filing a petition under Chapter 13 of the United States Bankruptcy Code, independently enlisting the assistance of a loan modification company, or retaining counsel. Id. ¶ 55. Further, Plaintiffs assert that if they were aware of the March 1, 2013 Trustee’s Sale, they would have attended and placed a “competitive bid” to repurchase the Property. Id. ¶ 35.

Under California law, “[a] promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.” See Kajima/Ray Wilson v. Los Angeles Cnty. Metro. Transp. Auth., 23 Cal. 4th 305, 310 (2000). Promissory estoppel is an equitable doctrine whose remedy may be limited “as justice so requires.” See id. The elements of promissory estoppel are: “(1) a clear promise; (2) reasonable and foreseeable reliance by the party to whom the promise is made; (3) injury (meaning, substantial detriment); and (4) damages `measured by the extent of the obligation assumed and not performed.'” See Errico v. Pacific Capital Bank, N.A., 753 F. Supp. 2d 1034, 1048 (N.D. Cal. 2010) (citing and quoting Poway Royal Mobilehome Owners Ass’n. v. City of Poway, 149 Cal. App. 4th 1460, 1470 (2007)).

Wells Fargo first argues that Plaintiffs’ claim fails because they do not sufficiently allege a clear promise, reasonable and foreseeable reliance, or injury. See Motion, ECF No. 11 at 19-22. As for the “clear promise” element, Wells Fargo points out that “Plaintiffs do not allege that they were ever promised that the [Second Loan] would be modified, nor do they allege that they were ever told what the terms of a modified loan might look like, if they did qualify.” Id. at 19. True enough, but Plaintiffs’ claim is not entirely based on a promise to give them a loan modification. Rather, their claim is based on a promise “to submit and consider [their] application” and “to refrain from pursuing foreclosure while their application was under review and pending approval.” SAC, ECF No. 1-1 ¶ 53. In other words, Plaintiffs appear to be alleging that (1) Mr. Teran promised to submit their loan modification application, (2) Wells Fargo promised to consider their loan modification application, (3) Wells Fargo promised not to foreclose on their Property while it was considering their loan modification application, and (4) Wells Fargo promised to give them a loan modification. Wells Fargo’s argument that Plaintiffs failed to allege the terms of a loan modification relates only to the fourth promise listed in the previous sentence, although the argument is well-taken; to the extent that Plaintiffs allege that Wells Fargo promised to give them a loan modification, the promise is not clear and defined.

The other promises that Plaintiffs allege, however, are sufficiently clear. In its reply, Wells Fargo cites Brennan v. Wells Fargo & Co., to argue that Plaintiffs have not sufficiently alleged a promise by Wells Fargo “to postpone the trustee’s sale,” but that opinion does not help Wells Fargo. See Reply, ECF No. 14 at 10 (citing Brennan v. Wells Fargo & Co., No. 5:11-cv-00921 JF (PSG), 2011 WL 2550839 (N.D. Cal. June 27, 2011). In that case, the plaintiff applied for a loan modification. Id. at *1. The plaintiff alleged that during the application process Wells Fargo representatives told him orally that he had “pre-qualified” for a loan modification and that foreclosure proceedings would be postponed. Id. The court found this allegation to be insufficient to support the plaintiff’s promissory estoppel claim. Id. at *2. It found that “Wells Fargo’s alleged oral representation that [the plaintiff] had `pre-qualified’ for a loan modification cannot reasonably be viewed as a promise that [the plaintiff] in fact would receive a loan modification.” Id. This was because “pre-qualification indicates only that an applicant has met certain prerequisites for the application process.” Id. This holding, however, has nothing to do with an alleged promise to postpone a trustee’s sale; it relates only to an alleged promise to modify a loan (and as the court explained above, Plaintiffs do not allege a clear and defined promise to do that). In fact, the Brennan court goes on to make statements that actually support Plaintiff. The court stated: “More facts also are needed with respect to Wells Fargo’s alleged promise to postpone foreclosure proceedings. If in fact such a promise was made, it appears to have been limited to postponement of proceedings during the period in which [the plaintiff’] application was under review.” Id. This statement suggests that, had the facts supported it, a promise by Wells Fargo to postpone foreclosure proceedings while the plaintiff’s loan modification application was being considered could have supported a promissory estoppel claim. See id.; see also Edwards v. Fed. Home Loan Mortgage Corp., No. 12-cv-04868-JST, 2013 WL 2355445, at *3 (N.D. Cal. May 29, 2013) (“A promise not to foreclose while a loan modification is pending satisfies the requirement of a clear promise.”) (citation omitted).

As for the “reasonable and foreseeable reliance” element, Wells Fargo first argues that Plaintiffs “do not allege that Wells Fargo ever offered any particular terms.” Motion, ECF No. 11 ¶ 20. “Therefore,” Wells Fargo argues, “[P]laintiffs could not have known what, if any, difference a modification would have made to them,” “nor is that there any indication that [P]laintiffs would have accepted the terms of a loan modification, had one been offered.” Id. This is true, but this argument (and the opinion^[9] cited to support it, see Nong v. Wells Fargo Bank, N.A., No. SACV 10-1538 JVS (MLGx), 2010 U.S. Dist. LEXIS 136464, at *8-9 (C.D. Cal. Dec. 6, 2010) (plaintiff’s reliance on Wells Fargo’s statement that “she met the qualifications for a HAMP modification” was not reasonable because qualification for HAMP does not entitle a borrower to a loan modification)) bears upon the analysis only with respect to Wells Fargo’s alleged promise to modify Plaintiffs’ loan; it says nothing about the reasonableness of Plaintiffs’ reliance on Mr. Teran’s promise to submit their HAMP loan modification application or Wells Fargo’s alleged promises to consider their loan modification application and to not foreclose on their Property while it was considering it. Citing Nong, 2010 U.S. Dist. LEXIS 136464, at *8-9, and Guerrero v. Wells Fargo Bank, N.A., No. CV 10-5095-VBF(AJWx), 2010 WL 8971769, at *5 (C.D. Cal. Sept. 14, 2010), Wells Fargo also argues that Plaintiffs’ allegation that they relied on its representations “by completing countless forms and timely submitting all requested documentation” and did not instead avail themselves of “viable” “alternative courses of action” to prevent foreclosure is “conclusory” and “meaningless.” Motion, ECF No. 11 at 21; Reply, ECF No. 14 at 10-11. The court disagrees. In Nong, the court dismissed the plaintiff’s promissory estoppel claim because her allegation of reliance was insufficient. Id. at *8. The court stated:

[The plaintiff] alleges that she relied on Wachnovia’s statements “by not pursuing other strategies” to avoid foreclosure. However, where a plaintiff does not “allege facts that could establish that [she] would have been successful in delaying the foreclosure sale, renegotiating her loan, and retaining possession of her home,” dismissal is proper because the Complaint lacks “a connection between her reliance on the alleged promise and losing her home to sustain her claim for estoppel.”

Id. at *8-9 (quoting Newgent v. Wells Fargo Bank, N.A., No. 09cv1525WQH(WMC), 2010 WL 761236, at *7 (S.D. Cal. Mar. 2, 2010)). Simialrly, in Guerrero, the plaintiffs alleged in support of their promissory estoppel claim only that they would have reinstated their loan prior to expiration of the reinstatement period had they been informed by the defendant that a trustee’s sale would proceed. The court rejected the plaintiffs’ claim, stating in full:

The Court GRANTS the Motion to Dismiss Plaintiffs’ Fifth Cause of Action for Estoppel. Detrimental reliance is an essential feature of promissory estoppel. Plaintiffs allege that they detrimentally relied on Defendant’s promise to postpone the foreclosure sale. However, as Defendant asserts, these allegations are conclusory and even if interpreted in Plaintiffs’ favor, do not sufficiently state detrimental reliance. For example, Plaintiffs fail to allege facts that could establish that Plaintiffs would have been successful in renegotiating their loan and retaining possession of the Property.

Id. These rulings, however, do not go very far. They merely stand for the uncontroversial proposition that a plaintiff must allege some facts to support an allegation that the plaintiff would have done something. Here, Plaintiffs did just that. As the court recounted above, not only do Plaintiffs allege that they completed “countless forms,” timely submitted all requested documentation, and did not instead avail themselves of “viable” “alternative courses of action” to prevent foreclosure, they also allege that had they been aware of the March 1, 2013 Trustee’s Sale, they would have attended and placed a “competitive” bid to repurchase the Property. It is the court’s view that Plaintiffs have alleged more facts in support of their reliance than did the plaintiffs in Nong and Guerrero, and their allegations more strongly suggest a connection between the promises to consider their loan modification application and to not foreclose while doing so and their losing their home. Indeed, were it not for Wells Fargo’s alleged promises, at the very least they would have gone to the Trustee’s Sale and made a “competitive” bid on their home. See Meadows v. First Am. Tr. Servicing Solutions, LLC, No. 11-CV-5754 YGR, 2012 WL 3945491, at *4 (N.D. Cal. Sept. 10, 2012) (“allegations that the plaintiff undertook new obligations or forewent other options can establish reliance for purposes of a promissory estoppel claim”); see also West v. JPMorgan Chase Bank, N.A., 214 Cal. App. 4th 780, 805 (Cal. Ct. App. 2013) (allowing a promissory estoppel claim to survive where the plaintiff specified what “other options” she would have pursued, such as “possibly selling her home, retaining counsel earlier, and/or finding a cosigner to save her home”).

As for the “injury” element, Wells Fargo argues in its motion that Plaintiffs do not allege any harm stemming from Wells Fargo’s alleged promise to modify their loan, but as explained above, Plaintiffs also allege that Mr. Teran promised to submit their loan modification application and that Wells Fargo promised to consider their loan modification application and to not foreclose on their Property while it was considering it. Wells Fargo ignores those alleged promises.

Wells Fargo also challenges Plaintiffs’ claim by arguing simply that “[a]ny oral agreement to modify the [Second Loan] is barred by the statute of frauds.” Motion, ECF No. 11 at 22. The statute of frauds, which renders a contract invalid if it is not written and signed, applies to an agreement to pay a debt secured by a mortgage or deed of trust on real property and extends to agreements modifying the loan. California Civil Code § 1624(a)(7); Secrest v. Sec. Nat. Mortgage Loan Trust 2002-2, 167 Cal. App. 4th 544, 553 (2008) (“An agreement to modify a contract that is subject to the statute of frauds is also subject to the statute of frauds.”). Wells Fargo relies primarily on Secrest. In that case, the court held that “an agreement by which a lender agreed to forbear from exercising the right of foreclosure under a deed of trust securing an interest in real property comes within the statute of frauds.” Id. at 547. The plaintiffs in the Secrest case challenged a judgment that declared a notice of default, and the election to sell under the deed of trust, to be valid by relying on a forbearance agreement. The court concluded the forbearance agreement modified the note and deed of trust by, among other things, altering the lender’s ability to exercise its right of foreclosure and, thus, concluded it fell within the statute of frauds.

Secrest is distinguishable, however, in the context of an adequately alleged promissory estoppel claim. As one district court has explained:

In Secrest, the Court of Appeals expressly found that the plaintiffs “do not assert they changed their position in reliance on the January 2002 Forbearance Agreement in any way other than by making the downpayment.” 167 Cal. App. 4th at 556, 84 Cal. Rptr. 3d 275. According to the court, this was insufficient for purposes of promissory estoppel. Id. at 555-56, 84 Cal. Rptr. 3d 275. In contrast, Vissuet asserts that she changed her position in reliance on OneWest’s promise by completing and submitting the application, as well as by foregoing an opportunity to pursue alternate measures for avoiding the foreclosure. (See FAC ¶¶ 10, 22-25.) This alleged reliance is based on more than a mere payment of money and is sufficient to take the contract out of the Statute of Frauds. See Sutherland v. Barclays Am. / Mortgage Corp., 53 Cal. App. 4th 299, 312, 61 Cal. Rptr. 2d 614 (1997) (concluding that Plaintiff could proceed with her cause of action for breach of contract where she detrimentally relied on the defendant’s statement that she could postpone three mortgage payments). Sutherland v. Barclays Am. / Mortgage Corp., 53 Cal. App. 4th 299, 312, 61 Cal. Rptr. 2d 614 (1997) (concluding that Plaintiff could proceed with her cause of action for breach of contract where she detrimentally relied on the defendant’s statement that she could postpone three mortgage payments).

Vissuet v. Indymac Mortgage Servs., No. 09-CV-2321-IEG (CAB), 2010 WL 1031013, at *4 n.7 (S.D. Cal. Mar. 19, 2010); see also Caceres v. Bank of America, N.A., No. SACV 13-542-JLS (RNBx), 2013 WL 7098635, at *7 (C.D. Cal. Oct. 28, 2013) (declining to dismiss the promissory estoppel claim on statute of frauds grounds); Edwards v. Fed. Home Loan Mortgage Corp., No. C 12-04868 JSW, 2012 WL 5503532, at *4 (N.D. Cal. Nov. 13, 2012) (noting that the doctrine of promissory estoppel operates as an exception to the statute of frauds under California law and finding that to the extent that a plaintiff is able to allege sufficient facts to state a claim for promissory estoppel, such a claim would not be barred by the statute of frauds); Solomon v. Aurora Loan Servs., No. CIV. 2:12-209 WBS KJN, 2012 WL 2577559, at *6 (E.D. Cal. July 3, 2012) (finding the statute of frauds not to bar the plaintiff’s promissory estoppel claim because “[a] party is estopped to assert the statute of frauds as a defense where the party, by words or conduct, represents that he will stand by his oral agreement, and the other party, in reliance upon that representation, changes his position, to his detriment.”) (quoting Garcia v. World Savings, FSB, 183 Cal. App. 4th 1031, 1041 (Cal. Ct. App. 2010)). In other words, “the principle of estoppel—including promissory estoppel—operates as an exception to the statute of frauds under California law.” Peterson v. Bank of America, No. 09cv2570-WQH-CAB, 2010 WL 1881070, at *6 (S.D. Cal. May 10, 2010) (citing Cal. Civ. Code § 1698(d) and Garcia, 183 Cal. App. 4th at 1040 n.10). Wells Fargo’s statute of frauds argument fails.

In sum, the court agrees with Wells Fargo that Plaintiffs’ promissory estoppel claim fails to the extent it is based on a promise to modify their loan. Because Plaintiffs do not allege what the modified terms were to be, Plaintiffs do not allege a clear promise. Plaintiffs’ claim survives, however, to the extent that it is based on Mr. Teran’s promise to submit their loan modification application and Wells Fargo’s promises to consider their loan modification application and to not foreclose on their Property while it was considering it. Plaintiffs have sufficiently alleged that they reasonably and foreseeably relied on these promises and were harmed by them.

3. Plaintiff’s Negligence Claim

Plaintiffs’ final claim is for negligence. See SAC, ECF No. 1-1 ¶¶ 57-69. The elements of a negligence cause of action are (1) the existence of a duty to exercise due care, (2) breach of that duty, (3) causation, and (4) damages. See Merrill v. Navegar, Inc., 26 Cal. 4th 465, 500 (2001). Under California law, as Wells Fargo points out, lenders generally do not owe borrowers a duty of care unless their involvement in the loan transaction exceeds the scope of their “conventional role as a mere lender of money.” See Nymark v. Heart Fed. Savings & Loan Ass’n, 231 Cal. App. 3d 1089, 1095-96 (1991) (citations omitted). To determine “whether a financial institution owes a duty of care to a borrower-client,” courts must balance the following non-exhaustive factors:

[1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant’s conduct and the injury suffered, [5] the moral blame attached to the defendant’s conduct, and [6] the policy of preventing future harm. Id. at 1098 (quotation marks and citations omitted).

Wells Fargo argues that Plaintiffs’ allegations do not support the conclusion that it exceeded this “conventional role as a lender of money.” Motion, ECF No. 11 at 23-25. It argues that it was under no duty to provide a loan modification or even to accept their application for one. Id. at 24. In support^[10], it cites California appellate court opinions that stand for the propositions that a lender “owes no duty of care to [plaintiffs] in approving their loan[s],” Wagner v. Benson, 101 Cal. App. 3d 27, 35 (Cal. Ct. App. 1980) (court rejected the plaintiffs’ negligence claim that was based on their allegation that the lender was negligent “in loaning money to them, as inexperienced investors, for a risky venture over which the [lender] exercised influence and control”), that “[a] lender is under no duty `to determine the borrower’s ability to repay the loan,'” Perlas v. GMAC Mortgage, LLC, 187 Cal. App. 4th 429, 436 (Cal. Ct. App. 2010) (court rejected the plaintiffs’ attempt to allege a fraudulent misrepresentation claim where they essentially contended that “they were entitled to rely upon [the lender’s] determination that they qualified for the loans in order to decide if they could afford the loans”), and that a lender owes “no duty of care to [a] plaintiff in the preparation of [a] property appraisal,” Nymark, 231 Cal. App. 3d at 1096-97 (court found that a lender owed the plaintiff no duty because the lender performed an appraisal of the plaintiff’s property “in the usual course and scope of its loan processing procedures to protect [the lender’s] interest by satisfying [itself] that the property provided adequate security for the loan”).^[11]

In their opposition, the only California appellate court opinion cited by Plaintiffs is Jolley v. Chase Home Finance, LLC, 213 Cal. App. 4th 872 (Cal. Ct. App. 2013), which they urge the court not to ignore.^[12] Opposition, ECF No. 13 at 22-23. That case, however, involved a construction loan with ongoing distributions of the proceeds over time and is distinguishable on this basis. See Sterling Sav. Bank v. Poulsen, No. C-12-01454 EDL, 2013 WL 3945989, at *21-22 (N.D. Cal. July 29, 2013); Makreas v. First Nat’l Bank of N. Cal., No. 11-cv-02234-JST, 2013 WL 2436589, at *14 (N.D. Cal. June 4, 2013).

With the California authority exhausted, Wells Fargo cites several federal district court opinions going its way, and Plaintiffs cite others going theirs. Compare Motion, ECF No. 11 at 24-25 (citing Argueta v. J.P. Morgan Chase, No. CIV. 2:11-441 WBS GGH, 2011 WL 2619060, at *4-5 (E.D. Cal. June 30, 2011); Coppes v. Wachovia Mortgage Corp., No. 2:10-cv-01689, 2011 WL 1402878, at *7 (E.D. Cal. Apr. 13, 2011); Dooms v. Fed. Home Loan Mortgage Corp., No. CV F 11-0352 LJO DLB, 2011 WL 1232989, at *11-12 (E.D. Cal. Mar. 31, 2011); DeLeon v. Wells Fargo Bank, N.A., No. 10-CV-01390-LHK, 2010 WL 4285006, at *4 (N.D. Cal. Oct. 22, 2010)), and Reply, ECF No. 14 at 13-15 (citing Deschaine v. Indymac Mortgage Servs., No. CIV. 2:13-1991 WBS CKD, 2013 WL 6054456, at *6-7 (E.D. Cal. Nov. 15, 2013); Rosenfeld v. Nationstar Mortgage, LLC, No. CV 13-4830 CAS (CWx), 2013 WL 4479008, at *6 (C.D. Cal. Aug. 19, 2013); Dinh v. Citibank, N.A., No. SA CV 12-1502-DOC (RNBx), 2013 WL 80150, at *5 (C.D. Cal. Jan. 7, 2013); Armstrong v. Chevy Chase Bank, FSB, No. 5:11-cv-05664, 2012 WL 4747165, at *4 (N.D. Cal. Oct. 3, 2012)) with Opposition, ECF No. 13 at 22-24 (citing Susilo v. Wells Fargo Bank, N.A., 796 F. Supp. 2d 1177, 1187-88 (C.D. Cal. 2011); Ansanelli v. J.P. Morgan Chase Bank, N.A., No. C 10-03892, 2011 WL 1134451, at *7 (N.D. Cal. Mar. 28, 2011); Garcia v. Ocwen Loan Servicing, LLC, No. C 10-0290 PVT, 2010 WL 1881098, at *2-3 (N.D. Cal. May 10, 2010); Osei v. Countrywide Home Loans, 692 F. Supp. 2d 1240, 1249-50 (E.D. Cal. 2010); Gardner v. American Home Mortgage Servicing, Inc., 691 F. Supp. 2d 1192, 1199 (E.D. Cal. 2010)).

Indeed, the federal district courts sitting in California are divided on the question of when lenders owe a duty of care to borrowers in the context of the submission of and negotiations related to loan modification applications and foreclosure proceedings. One court in this District has recently summarized the situation:

In the absence of controlling authority, several courts have concluded that, upon accepting an application for a loan modification, a financial institution has exceeded its role as a money lender and is subject to a standard of reasonable care in handling the application. See Garcia, 2010 WL 1881098, at *3; Trant v. Wells Fargo Bank, N.A., No. 12-cv-164-JM-WMC, 2012 WL 2871642, at *6*7 (S.D. Cal. July 12, 2012); Ansanelli, 2011 WL 1134451, at *7; Avila v. Wells Fargo Bank, No. C 12-01237 WHA, 2012 WL 2953117, at *12-*14 (N.D. Cal. July 19, 2012); Chancellor v. One West Bank, No. C 12-01068 LB, 2012 WL 1868750, at *13-*14 (N.D. Cal. May 22, 2012). But see Roussel v. Wells Fargo Bank, No. C 12-04057 CRB, 2013 WL 146370, at *6 (N.D. Cal. Jan. 14, 2013) (Plaintiff did not state a claim for negligence where the underlying claim was not that Defendant was sloppy in routing his application materials, but that Defendant would have granted his application had it undertaken a legitimate review).

The rationale underlying these decisions is: (1) the loan modification review is intended to affect the plaintiff’s ability to stay in her home; (2) the result of mishandling the application is foreseeable, the plaintiff will be denied the opportunity to keep her home regardless of whether the modification would actually be granted; (3) the plaintiff will certainly be denied the opportunity to keep her home; (4) the defendant’s failure to process the application is closely connected to the plaintiff’s lost opportunity; and (5) recent statutory enactments demonstrate the public policy of preventing future harm to loan borrowers. See Garcia, 2010 WL 1881098, at *3 (citing Cal. Civ. Code § 2923.6 for California policy in favor of providing loan modifications); see also Trant, 2012 WL 2871642 at *7 (relying only on the first four considerations).

On the other hand, a number of decisions have decided, relying on Nymark, that a financial institution does not owe a borrower a duty of care because the loan modification process is a traditional money lending activity. See Settle v. World Sav. Bank, F.S.B., No. ED CV 11-00800 MMM (DTBx), 2012 WL 1026103, at *8 (C.D. Cal. Jan. 11, 2012) (compiling cases); DeLeon v. Wells Fargo Bank N.A., No. 10-CV-01390-LHK, 2011 WL 311376 (N.D. Cal. Jan. 28, 2011); Ottolini v. Bank of America, No. C-11-0477 EMC, 2011 WL 3652501, at *7 (N.D. Cal. Aug. 19, 2011) (finding that the six factors in Nymark weighed against finding a duty where (1) the extent to which the transaction was intended to affect Plaintiff was remote as the loan modification application, provided by Defendants and submitted by Plaintiff, was never acted on; (2) any harm to Plaintiff was not particularly foreseeable because there was no indication that loan modification would actually be approved; (3) the degree of certainty that Plaintiff suffered injury was likewise minimal for the same reason; (4) the closeness of the connection between Defendants’ conduct and the injury suffered was remote absent a likelihood that the modification would have been approved; (5) there was no allegation that Defendants willfully mishandled Plaintiff’s application or engaged in any other conduct to which moral blame would attach; and (6) as a matter of policy, imposing negligence liability may dissuade lenders from ever offering modification); Coppes v. Wachovia Mortg. Corp., No. 2:10-cv-01689-GEB-DAD, 2011 WL 1402878, at *7 (E.D. Cal. Apr. 13, 2011) (Plaintiff’s contradictory allegations that Defendant denied a loan modification application and that Defendant granted a loan modification that caused Plaintiff injury did not establish a duty because they did not plausibly suggest that Defendant actively participated in the financed enterprise beyond the domain of the usual money lender).

Reiydelle v. J.P. Morgan Chase Bank, N.A., No. 12-cv-06543-JCS, 2014 WL 312348, at *18 (N.D. Cal. Jan. 28, 2014).

Upon review and consideration of these opinions, the court finds Garcia—an opinion cited by Plaintiffs—to be persuasive and instructive. In that case, the borrower plaintiff applied to the lender defendant for loan modification. Garcia, 2010 WL 1881098 at *1. On at least two occasions prior to the sale of the home, the defendant had cancelled the trustee’s sale to allow time for processing the plaintiff’s application. Id. The defendant asked the plaintiff to submit various documents in connection with the loan modification request. Id. The plaintiff did so, but upon receiving the documents, the defendant routed them to the wrong department. Id. Later, the plaintiff’s agent received a recorded message indicating documents were missing, but the message did not identify which ones were missing. Id. at *2. For the next several weeks, the plaintiff’s agent repeatedly tried to contact the defendant to determine which documents were missing, but he was unable to speak with any of the defendant’s employees. Id. The plaintiff’s agent was finally able to actually speak with one of the defendant’s employees, but it was too late. Id. The employee informed the plaintiff’s agent that the home had been sold at a trustee’s sale the day before. Id.

The court concluded that at least five of the six factors cited above weighed in favor of finding that the defendant owed the plaintiff a duty of care in processing the plaintiff’s loan modification application. Id. at *3-4. It explained that:

The transaction was unquestionably intended to affect Plaintiff. The decision on Plaintiff’s loan modification application would determine whether or not he could keep his home.

The potential harm to Plaintiff from mishandling the application processing was readily foreseeable: the loss of an opportunity to keep his home was the inevitable outcome. Although there was no guarantee the modification would be granted had the loan been properly processed, the mishandling of the documents deprived Plaintiff of the possibility of obtaining the requested relief.

The injury to Plaintiff is certain, in that he lost the opportunity of obtaining a loan modification and application his home was sold.

There is a close connection between Defendant’s conduct and any injury actually suffered, because, to the extent Plaintiff otherwise qualified and would have been granted a modification, Defendant’s conduct in misdirecting the papers submitted by Plaintiff directly precluded the loan modification application from being timely processed.

The existence of a public policy of preventing future harm to home loan borrowers is shown by recent actions taken by both the state and federal government to help homeowners caught in the home foreclosure crisis. See, e.g., CAL.CIV.CODE § 2923.6 (encouraging lenders to offer loan modifications to borrowers in appropriate circumstances); see also Press Release at http:// gov.ca.gov/press-release/14871 (“Gov. Schwarzenegger Signs Legislation to Provide Greater Assistance to California Homeowners”), and MakingHomeAffordable.gov (describing the federal “Making Home Affordable Program”).

Whether or not moral blame attaches to this Defendant’s specific conduct is not clear at this stage of the proceedings. [Footnote omitted.] However, in light of the other factors weighing in favor of finding a duty of care, the uncertainty regarding this factor is insufficient to tip the balance away from the finding of a duty of care.

Id. at *3.

The facts alleged in this case are nearly as egregious as those alleged in Garcia, and the court finds that Plaintiffs have sufficiently alleged this claim. The loan modification was intended to affect them (e.g., the loan modification would have reduced their monthly mortgage payments), the harm from mishandling their application was foreseeable (e.g., Plaintiffs applied for a loan modification (or at least tried to apply for one) to avoid foreclosure), their injury was certain to occur (e.g., Plaintiffs’ application allegedly was never even submitted by the so-called “single point of contact,” and obviously this means that it would not be granted), the connection between Wells Fargo’s conduct and Plaintiffs’ loss of their home is close (e.g., Plaintiffs relied on Wells Fargo’s representation that the foreclosure would not occur while their application was pending, so their failure to appear at the trustee’s sale was not surprising), Wells Fargo’s alleged role in this debacle would subject them to moral blame (e.g., Plaintiffs allege that Wells Fargo tricked them into defaulting on the Second Loan so that Wells Fargo could string them along with respect to the loan modification on the First Loan so it could foreclose under the Second Loan), and the same public policy considerations cited in Garcia apply here as well. While a lender may not have a duty to modify the loan of any borrower who applies for a loan modification, a lender surely has a duty to submit a borrower’s loan modification application once the lender has told the borrower that it will submit it, as well as a duty to not foreclose upon a borrower’s home while the borrower’s loan modification is being considered once the lender has told the borrower that it won’t foreclose during this time and to ignore all foreclosure-related notices. In short, taking Plaintiffs’ allegations as true at this stage, the court fails to see, even in a cynical world, how Wells Fargo’s role could possibly be described as a “conventional” one that relates to the “mere” lending of money. Its role went beyond that. The court rejects Wells Fargo’s argument that it had no duty to Plaintiffs in this situation.

CONCLUSION

For the foregoing reasons, the court GRANTS IN PART and DENIES IN PART Wells Fargo’s motion to dismiss. Plaintiff’s HBOR claim is DISMISSED WITH PREJUDICE to the extent that it is based on Wells Fargo’s institution of foreclosure proceedings before making a written determination that Plaintiffs were not eligible for a first lien loan modification. Plaintiffs’ promissory estoppel claim is DISMISSED WITH PREJUDICE to the extent that it is based on Wells Fargo’s promise to modify their loan. Their remaining claims—namely, their HBOR claim to the extent it is based on Wells Fargo’s “dual tracking” and failure to provide a “single point of contact; their promissory estoppel claim to it is based on Mr. Teran’s promise to submit their loan modification application and Wells Fargo’s promises to consider their loan modification application and to not foreclose on their Property while it was considering it; and their negligence claim—SURVIVE.

Wells Fargo shall answer Plaintiffs’ Second Amended Complaint within 14 days from the date of this order. See Fed. R. Civ. P. 12(a)(4)(A).

This disposes of ECF No. 11.

IT IS SO ORDERED.

[1] Plaintiffs erroneously sued Wells Fargo as “Wells Fargo Home Mortgage, Inc.”

[2] Citations are to the Electronic Case File (“ECF”) with pin cites to the electronically-generated page number at the top of the document.

[3] The facts are taken from the Second Amended Complaint, its attachments, and the documents submitted by Wells Fargo that are subject to judicial notice. Wells Fargo asks the court to take judicial notice of the following documents: (1) an Open End Deed of Trust, dated July 2, 2007, that was recorded in the Official Records of the San Mateo County Recorder’s Office as document number XXXX-XXXXXX on July 11, 2007; (2) a Certificate of Corporate Existence, dated April 21, 2006, that was issued by the Office of Thrift Supervision, Department of the Treasury (“OTS”), certifying that World Savings Bank, FSB (“World Savings”), was a federal savings bank; (3) a letter from OTS, dated November 19, 2007, authorizing a name change from World Savings Bank, FSB, to Wachovia Mortgage, FSB (“Wachovia”); (4) the Charter for Wachovia, effective December 31, 2007, which is signed by the Director of OTS and reflects that Wachovia was subject to the Home Owner’s Loan Act, (“HOLA”) 12 U.S.C. § 1461 et seq. and OTS; (5) an Official Certification of the Comptroller of the Currency (“OCC”) stating that effective November 1, 2009, Wachovia converted to Wells Fargo Bank Southwest, N.A., a national association, which then merged with and into Wells Fargo Bank, N.A., also a national association; (6) a printout from the website of the Federal Deposit Insurance Corporation, dated October 23, 2012, documenting the name changes and corporate entity status changes mentioned above; (7) a Notice of Default, dated February 24, 2012 and which relates to Plaintiffs’ 2007 loan, that was recorded in the Official Records of the San Mateo County Recorder’s Office as document number XXXX-XXXXXX on February 28, 2012; (8) a Notice of Trustee’s Sale, dated May 17, 2012 and which relates to Plaintiffs’ 2007 loan, that was recorded in the Official Records of the San Mateo County Recorder’s Office as document number XXXX-XXXXXX on May 30, 2012; (9) a Trustee’s Deed Upon Sale, dated March 4, 2013, that was recorded in the Official Records of the San Mateo County Recorder’s Office as document number XXXX-XXXXXX on March 15, 2013; and (10) the National Mortgage Settlement Consent Judgment, filed on April 4, 2012 in United States v. Bank of America Corp., No. 1:12-cv00361 RMC (D.D.C. Apr. 4, 2012). See Defendants’ Request for Judicial Notice (“RJN”), Exs. A-J, ECF No. 12.

The court may take judicial notice of matters of public record. Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001). Because the documents listed above are public records, the court may take judicial notice of the undisputed facts contained in them. See Fed. R. Evid. 201(b); Hotel Employees & Rest. Employees Local 2 v. Vista Inn Mgmt. Co., 393 F. Supp. 2d 972, 978 (N.D. Cal. 2005); see also Fontenot v. Wells Fargo Bank, N.A., 198 Cal. App. 4th 256, 264-67 (2011). Plaintiffs have not objected to the court’s consideration of these documents or challenged any of the facts in them. See generally Opposition, ECF No. 13. Accordingly, the court takes judicial notice of Exhibits A though J (numbered 1-10 above) attached to Defendants’ request.

[4] The term “federal savings association” means a federal savings association or a federal savings bank chartered under 12 U.S.C. § 1464. See 12 U.S.C. § 1462.

[5] The string citation actually lists nine opinions, but two of the opinions (Pratap v. Wells Fargo Bank, N.A., No. C 12-06378 MEJ, 2013 WL 5487474 (N.D. Cal. Oct. 1, 2013), and Marquez v. Wells Fargo Bank, N.A., No. C 13-2819 PJH, 2013 WL 5141689 (N.D. Cal. Sept. 13, 2013)) are listed twice.

[6] Even if HOLA did apply, none of the cases Wells Fargo cited address the new preemption analysis for it. Following the recent mortgage crisis, Congress significantly altered the preemption landscape. As one court in this District recently has explained, “[t]he Dodd-Frank Wall Street Reform Act and Consumer Protection Act of 2010 (“Dodd-Frank”), 12 U.S.C. § 5412, provides that HOLA no longer occupies the field in any area of state law and that preemption under HOLA is governed by the conflict preemption standards applicable to national banks.” Quintero v. Wells Fargo Bank, N.A., C-13-04937 JSC, 2014 WL 202755, at *3 (N.D. Cal. Jan. 17, 2014); see also Haggarty v. Wells Fargo Bank, N.A., C 10-02416 CRB, 2012 WL 4742815, at *3 n.2 (N.D. Cal. Oct. 3, 2012). As in Quintero, “the parties do not discuss Dodd-Frank and the impact, if any, it may have on the preemption analysis in this case.” Quintero, 2014 WL 202755, at *6. The court also notes that the majority of the wrongful conduct alleged in the Second Amended Complaint occurred after July 2011—the when Dodd-Frank fully took effect.

[7] HBOR is codified generally in Civil Code §§ 2923.5, 2923.55, 2923.6, 2923.7, 2924.11.

[8] California Civil Code § 2923.6(c) does allow a lender to initiate foreclosure proceedings if the borrower does not accept an offered first-lien loan modification within 14 days of the offer or accepts a written first-lien loan modification, but defaults on, or otherwise breaches the borrower’s obligations under, the first-lien loan modification, see Cal. Civ. Code § 2923.6(c)(2) & (3), but neither situation is present here.

[9] Wells Fargo also cites Escobedo vs. Countrywide Home Loans, Inc., No. 09cv1557 BTM(BLM), 2009 WL 4981618, at *2 (S.D. Cal. Dec. 15, 2009), for the point that Plaintiffs cannot show reasonable reliance in these circumstances, see Motion, ECF No. 11 at 20, but the portion of the opinion cited discusses when a party may be a third-party beneficiary to a contract; in fact, the case does not even involve a promissory estoppel claim.

[10] In its reply brief, Wells Fargo also cites Aspiras v. Wells Fargo Bank, N.A., 162 Cal. Rptr.3d 230 (Cal. Ct. App. 2013). While that opinion previously had been published in the Official Appellate Reports, see 219 Cal. App. 4th 948, the California Supreme Court ordered the opinion depublished on January 15, 2014, see 2014 Cal. LEXIS 399, which means the opinion is not to be cited after that date (except under limited circumstances not present here), see Cal. Rules of Ct. 8.1115(a) & (b). See also Cal. Rules of Ct. 8.1105, 8.1110, 8.1115, 8.1120 & 8.1125 (providing the rules for the publication and depublication of opinions and when those opinions may be cited). The court notes that Wells Fargo filed its reply on January 29, 2014—two weeks after Aspiras was depublished—meaning that Wells Fargo never should have cited it. There is a red “flag” attached to the opinion on Westlaw and a red “stop sign” attached to it on Lexis, and there are clear notations in both databases that the opinion had been depublished. Because the opinion has been depublished and should not have been cited at all, the court ignores both it and the cited authority that relies exclusively on it, see Robinson v. Bank of America, N.A., No. 12-cv-00494-JST, 2014 WL 60969, at *4-5 (N.D. Cal. Jan. 7, 2014) (citing and relying upon Aspiras before it was depublished).)

[11] Wells Fargo also cites Hellbaum v. Lytton Sav. & Loan Ass’n of N. Cal., 274 Cal. App. 2d 456, 459-60 (Cal. Ct. App. 1969), disapproved and overruled on other grounds by 21 Cal. 3d 943 (1978)—even though Wells Fargo erroneously cited it as being reported in “Cal. App. 3d”—and provides a block quotation that purports to come from that opinion. Motion, ECF No. 11 at 23. The court provides the actual quotation below:

[W]e find no support for appellants’ contention that the lender is subject to tort liability for negligence in the processing of the application for assumption by the proposed buyers. Respondent was under no duty to permit any assumption at all, and was not liable in tort for failure to act upon the application in any particular way.

Hellbaum, 274 Cal. App. 2d at 459-60 (emphasis added). The underlined words of the quotation are the words that Wells Fargo omitted from its block quotation without using ellipses to indicate that they were omitted. Rather, Wells Fargo joined the two sentences with a comma that was not in brackets. And this is just one of several errors in Wells Fargo’s papers. See also, e.g., Motion, ECF No. 11 at 20 (citing incorrect paragraph numbers from the Second Amended Complaint; failing to include a Westlaw or Lexis unique identifier in the citation for Cabanilla v. Wachovia Mortgage; mispelling the Cabanilla case as “Cabanillas”), 22 (misspelling the plaintiff’s name in the Blatt opinion as “Vlat”). The court asks Wells Fargo to ensure that all quotations and citations are accurate going forward.

[12] Plaintiffs also cite Nymark, but only for its statement of the general rule mentioned above. See Opposition, ECF No. 13 at 22.

NEW YORK SUPREME COURT – QUEENS COUNTY

ONEWEST BANK, FSB,
Plaintiff,

-against-

YVONNE G. DEWER, ET AL.,
Defendants.

Plaintiff commenced this action on September 10, 2010 to reform and foreclose a
mortgage encumbering the real property known as 119-22 Inwood Street, Jamaica, New York
given by defendants Dewer as security for the payment of a note, evidencing an obligation
in the principal amount of $403,750.00 plus interest. The mortgage names IndyMac Bank,
F.S.B. (IndyMac), as the lender and Mortgage Electronic Registration Systems, Inc. (MERS),
as the nominee for the lender and the lender’s successors and assigns, and as the mortgagee
of record for the purpose of recording the mortgage. Plaintiff alleged in its complaint that
it is the holder of the note and subject mortgage, and that defendants Dewer defaulted under
the terms of the mortgage and note, and as a consequence, it elected to accelerate the entire
mortgage debt. It also alleged that, due to a clerical error, the mortgage was recorded without
a legal description included, and the legal description corresponding to the address of the
property should be incorporated into the mortgage nunc pro tunc.

Defendants Dewer served a combined answer, asserting various affirmative defenses,
including lack of standing, and interposing counterclaims. Plaintiff served a reply to the
counterclaims. Plaintiff did not cause defendants “John Doe” and “Jane Doe” to be served
with process because plaintiff determined that they are unnecessary party defendants.
That branch of the motion by plaintiff for leave to amend the caption deleting
reference to defendants “John Doe” and “Jane Doe” is granted.

It is ORDERED that the caption shall read as follows:

SUPREME COURT OF THE STATE OF NEW YORK
QUEENS COUNTY
—————————————————————
ONEWEST BANK, FSB, Index No. 23000 2010
Plaintiff,

-against-

YVONNE G. DEWER, BRIAN K. DEWER, and
ELIZABETH DEWER,
Defendants.
—————————————————————-

It is well established that the proponent of a summary judgment motion “must make
a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient
evidence to demonstrate the absence of any material issues of fact” (Alvarez v
Prospect Hosp., 68 NY2d 320, 324 [1986]; Zuckerman v City of New York,
49 NY2d 557 [1980]). To establish a prima facie case in an action to foreclose a mortgage,
the plaintiff must produce the mortgage, the unpaid note, bond or obligation and evidence
of default (see Baron Assoc., LLC v Garcia Group Enters., Inc., 96 AD3d 793 [2d Dept
2012]; Citibank, N.A. v Van Brunt Props., LLC, 95 AD3d 1158 [2d Dept 2012]). Where
standing is put into issue by the defendant, the plaintiff must prove its standing in order to
be entitled to relief (see Deutsche Bank Nat. Trust Co. v Haller, 100 AD3d 680 [2d Dept
2012]; U.S. Bank, N.A. v Collymore, 68 AD3d 752, 753 [2d Dept 2009]; Wells Fargo Bank
Minn., N.A. v Mastropaolo, 42 AD3d 239, 242 [2d Dept 2007]). A plaintiff establishes its
standing in a mortgage foreclosure action by demonstrating that it is both the holder or
assignee of the subject mortgage and the holder or assignee of the underlying note at the time
the action is commenced (see Deutsche Bank Natl. Trust Co. v Rivas, 95 AD3d 1061,
1061-1062 [2d Dept 2012]; Bank of N.Y. v Silverberg, 86 AD3d 274, 279 [2d Dept 2011];
see Homecomings Fin., LLC v Guldi, 108 AD3d 506 [2d Dept 2013]; US Bank N.A. v Cange,
96 AD3d 825, 826 [2d Dept 2012]; U.S. Bank, N.A. v Collymore, 68 AD3d at 753-754;
Countrywide Home Loans, Inc. v Gress, 68 AD3d 709 [2d Dept 2009]). “Either a written
assignment of the underlying note or the physical delivery of the note prior to the
commencement of the foreclosure action is sufficient to transfer the obligation, and the
mortgage passes with the debt as an inseparable incident” (U.S. Bank, N.A. v Collymore,
68 AD3d at 754; see HSBC Bank USA v Hernandez, 92 AD3d 843 [2d Dept 2012]; see
Aurora Loan Servs., LLC v Weisblum, 85 AD3d 95, 108 [2d Dept 2011]).

In support of that branch of the motion for summary judgment, plaintiff offers, among
other things, a copy of the pleadings, affidavits of service upon defendants Dewer, an
affirmation of regularity by its counsel, a copy of the subject mortgage, underlying note, an
assignment dated August 26, 2010, and the bill of sale providing for the sale of certain assets
of IndyMac by the Federal Deposit Insurance Company (FDIC), as the receiver for IndyMac
to plaintiff, and an affidavit dated June 21, 2013 of Charles Boyle, an officer of plaintiff. In
his affidavit, Mr. Boyle states plaintiff is the holder and in possession of the original note,
and that plaintiff is the assignee of the “security instrument” for the loan, and defendants
Dewer defaulted in paying the monthly mortgage installment due under the mortgage on
June 1, 2009 and thereafter. The copy of the note presented includes an undated endorsement
in blank, without recourse, by Vincent Dombrowski, as the vice president of IndyMac.

Defendants Dewer oppose the motion, asserting that plaintiff has failed to make a
prima facie showing of standing to commence this action.

To the extent plaintiff contends it is the assignee of the mortgage and note by virtue
of an assignment executed by MERS, plaintiff has failed to show MERS had been the holder
of the note and mortgage, or that MERS had been given an interest in the underlying note by
the lender or specifically authorized to assign the subject note (see Bank of N.Y. v Silverberg,
86 AD3d at 283). In addition, although Mr. Boyle makes reference to the possession of the
note by plaintiff, his affidavit does not give any factual details of a physical delivery of the
note and when the note was endorsed in blank (see Homecomings Fin., LLC v Guldi,
108 AD3d 506 [2d Dept 2013]; HSBC Bank USA v Hernandez, 92 AD3d 843). The
affirmation of plaintiff’s counsel dated July 10, 2013, furthermore, does not indicate it is
based upon personal knowledge and lacks detail as to when the note was endorsed and
physically came into possession by plaintiff. That a copy of the note with the endorsement
was annexed as an exhibit to the complaint filed with the summons does not, without more,
establish that the original note with the endorsement was in physical possession of plaintiff
or its counsel at the time of the institution of the action. To the extent plaintiff additionally
relies upon the bill of sale to demonstrate it had standing to bring this action, the court
declines its invitation to search the internet to verify that the subject mortgage was part of the
assets sold by the FDIC to plaintiff. More importantly, the copy of the bill 1 of sale does not
itself establish that plaintiff was the holder or assignee of the subject mortgage and note or
had physical possession of the note endorsed in blank at the time of the transfer of the assets
by the FDIC to plaintiff or the time of the commencement of this action (cf. JP Morgan
Chase Bank Nat. Assn. v Miodownik, 91 AD3d 546 [1st Dept 2012], lv to appeal dismissed
19 NY3d 1017 [2012]; JP Morgan Chase Bank, N.A. v Shapiro, 104 AD3d 411, 412
[1st Dept 2013]). Under such circumstances, plaintiff has failed to show how or when it
became the lawful holder of the note either by delivery or valid assignment of the note to it
(see Citimortgage, Inc. v Stosel, 89 AD3d 887, 888 [2d Dept 2011]; Bank of N.Y. v
Silverberg, 86 AD3d at 283). As such, that branch of the motion by plaintiff for summary
judgment against defendants Dewer is denied.

With respect to that branch of the motion by plaintiff to strike the affirmative defenses
asserted by defendants Dewer in their answer, plaintiff bears the burden of demonstrating
that the defenses are without merit as a matter of law (see Butler v Catinella, 58 AD3d 145,
157-148 [2d Dept 2008]; Vita v New York Waste Servs., LLC, 34 AD3d 559, 559 [2d Dept
2006]).

With respect to the first affirmative defense and the first counterclaim asserted by
defendants Dewer in their answer, defendants Dewer assert they are entitled to rescind the
loan agreement pursuant the Federal Truth in Lending Act (15 USC § 1601 et seq.) (TILA),
and the TILA implementing regulations (found in Federal Reserve Board Regulation Z
[Regulation Z] at 12 CFR 226), and seek to recover actual and statutory damages for
violations of TILA, in addition to rescission. Defendants Dewer also seek as a second and
third counterclaim a judgment declaring the subject mortgage to be void. Plaintiff offers
evidence that the subject loan transaction was exempt from the requirements of TILA at the
time of the making of the loan because the non-exempt total points and fees charged in
relation to the loan did not exceed 8% of the entire principal loan amount (see
former 15 USC § 1602 [aa] [1] [B]; see also 15 USC § 1605 [e]; 12 CFR 226.4). In addition,
plaintiff offers evidence that it provided the required material disclosures to defendants
Dewer in compliance with TILA at the closing and, therefore, any right to rescind was not
extended to three years after the date of the consummation of the transaction
(see 15 USC § 1635 [f]). Defendants Dewer have failed to come forward with any proof to
show TILA was applicable to the subject loan at the time of its making, or that any material
written representations or disclosures made to them were in conflict with the terms of the
subject mortgage and note. Under such circumstances, that branch of the motion by plaintiff
to dismiss the first affirmative defense and the counterclaims asserted by defendants Dewer
is granted.

That branch of the motion by plaintiff to dismiss the second affirmative defense
asserted by defendants Dewer in their answer based upon failure to state a cause of action is
granted. On its face, the complaint states causes of action for foreclosure and reformation
of the mortgage.

That branch of the motion by plaintiff to dismiss the third, fourth, fifth, twelfth,
thirteenth, nineteenth, and twentieth affirmative defenses based upon unjust enrichment,
estoppel, “condonation and ratification,” the doctrine of unclean hands, waiver, “consent to
Defendants’ conduct,” and participation in wrongdoing, respectively, is granted. They have
failed to allege or prove any facts supporting these conclusions of law (see Moran
Enterprises, Inc. v Hurst, 96 AD3d 914 [2d Dept 2012]; Glenesk v Guidance Realty Corp.,
36 AD2d 852 [2d Dept 1971], abrogated on other grounds by Butler v Catinella,
58 AD3d 145; MacIver v George Braziller, Inc., 32 Misc 2d 477 [Sup Ct, NY County 1961];
CPLR 3018 [b]).

That branch of the motion by plaintiff to dismiss the seventh, eighth, ninth and
eighteenth affirmative defenses of defendants Dewer based upon negligence and assumption
of risk, culpable conduct of third parties and plaintiff, and lack of proximate cause,
respectively, is granted. The concepts of negligence, assumption of risk, culpable conduct
and proximate cause are related to tort. The claims asserted by plaintiff herein relate to a
default under the mortgage and reformation of the mortgage, as opposed to tortious conduct
and thus, any affirmative defense based upon a notion of culpable or tortious conduct
is unavailable herein (see CPLR 1401; Pilweski v Solymosy, 266 AD2d 83 [1st Dept 1999];
Nastro Contracting Inc. v Agusta, 217 AD2d 874 [3d Dept 1995]; Schmidt’s Wholesale, Inc.
v Miller & Lehman Const., Inc., 173 AD2d 1004 [3d Dept 1991]; Castleton Holding Corp.
v Forde, 15 Misc 3d 1111[A] [Sup Ct, Kings County 2007]).

The branch of the motion by plaintiff to dismiss the sixth, fifteenth, sixteenth and
seventeenth affirmative defenses asserted by defendants Dewer is granted. These defenses
are based upon allegations that plaintiff failed to exercise good business judgment,
unjustifiably relied on representations and misrepresentations, and failed to perform due
diligence and make proper inquiry. Such allegations, without more, do not constitute a
defense to a foreclosure action. The legal relationship between a borrower and a lending
bank is normally one of debtor and creditor (see Trustco Bank, Nat. Assn. v Cannon Bldg.
of Troy Assocs., 246 AD2d 797 [3d Dept 1998]), and defendants Dewer have failed to allege
any facts which would demonstrate that a duty of care was owed to them by the lender in the
origination of the loan.

That branch of the motion by plaintiff to dismiss the tenth and fourteenth affirmative
defenses asserted by defendants Dewer based upon failure to mitigate damages and lack of
damages is granted. Mitigation of damages is not an affirmative defense to an action to
foreclose a mortgage. Any dispute as to the exact amount owed plaintiff pursuant to the
mortgage and note, may be resolved after a reference pursuant to RPAPL § 1321 (see
Crest/Good Mfg. Co, v Baumann, 160 AD2d 831 [2d Dept 1990]).

Defendants Dewer assert as an eleventh affirmative defense that plaintiff is guilty of
laches in bringing this action. Laches is not a defense to a mortgage foreclosure proceeding
where, as here, the action was commenced within the statute of limitations (CPLR 213 [4];
see New York State Mtge. Loan Enforcement & Admin. Corp. v North Town Phase II Houses,
Inc., 191 AD2d 151 [1st Dept 1993]; Schmidt’s Wholesale, Inc. v Miller & Lehman Const.,
Inc., 173 AD2d 1004 [3d Dept 1991]). Even if the defense was available here, defendants
Dewer have not shown that they changed their position, or failed to take some action to their
prejudice as a result of the alleged delay.

The allegation that plaintiff suffered no damage because it was insolvent does not
constitute an affirmative defense to a foreclosure action. That branch of the motion by
plaintiff to dismiss the twenty-first affirmative defense asserted by defendants Dewer is
granted.

That branch of the motion by plaintiff to dismiss the twenty-second affirmative
defense asserted by defendants Dewer based upon lack of standing is denied (supra at 3-4).

Accordingly, the branch of plaintiff’s motion for an order amending the caption is
granted, as ordered, supra. The branch of the motion for an order granting plaintiff summary
judgment is denied. Those branches of the motion for an order dismissing the first, second,
third, fourth, fifth, sixth, seventh, eighth, ninth, tenth, eleventh, twelfth, thirteenth,
fourteenth, fifteenth, sixteenth, seventeenth, eighteenth, nineteenth, twentieth, and twentyfirst
affirmative defenses, and all counterclaims are granted.

Dated: February 6, 2014
J.S.C.

BANK OF AMERICA NATIONAL ASSOCIATION AS SUCCESSOR BY MERGER TO LASALLE BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR MORGAN STANLEY LOAN TRUST 2006-2 3476 Stateview Boulevard Ft. Mill, SC 29715, Plaintiff,
v.
CHAU T. LAM, YAH RONG TING, ALAN CHILUNG WONG A/K/A ALAN CHI LUNG WONG, ADAMAR OF NEW JERSEY INC., BOARD OF MANAGERS OF EIGHT EAST TWELFTH CONDOMINIUM, HSBC BANK USA, NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY PARKING VIOLATIONS BUREAU, NEW YORK CITY TRANSIT ADJUDICATION BUREAU, JOHN DOE (said name being fictitious, it being the intention of Plaintiff to designate any and all occupants of premises being foreclosed herein, and any parties, corporations or entities, if any, having or claiming an interest or lien upon the mortgaged premises, Defendants.

ALICE SCHLESINGER, Judge.

It is ordered that this motion and cross-motion are determined in accordance with the accompanying memorandum decision.

This is an action to foreclose a mortgage on a condominium apartment located at 8 East 12th Street, Unit # 2, New York, New York 10003. Plaintiff Bank of America National Association, as successor by merger to LaSalle Bank National Association, as Trustee for Morgan Stanley Loan Trust 2006-2 moves, pursuant to CPLR 3212, for summary judgment of foreclosure and sale, and for dismissal of the defenses asserted in the answers of defendants Chau T. Lam (“Lam”), Yah Rong Ting (“Ting”) and the Board of Managers of Eight East Twelfth Condominium (“Board of Managers”), pursuant to CPLR 3211(b). Plaintiff also requests the following additional relief: (I) that all answering defendants’ cross claims be severed or that the cross claims be ordered separately tried pursuant to CPLR 603; (ii) that “John Doe” be dropped as a party defendant in this action; (iii) that plaintiffs name be amended to reflect the succession of Bank America National Association (“Bank of America”) by U.S. Bank National Association (“U.S. Bank”) as trustee, and that the caption be amended accordingly; (iv) that the address of the plaintiff be deleted from the caption, and the caption be amended accordingly; (v) that all non-appearing defendants “be deemed in default, and the defaults fixed and determined; and (vi) “for such other and further relief as to the Court may deem just and proper.” Notice of Motion, at 2.

Defendants Lam and Alan Chi-Lung Wong a/k/a Alan Chi Lung Wong (“Wong”) cross-move, pursuant to CPLR 3212, for summary judgment dismissing plaintiff’s complaint with prejudice on the ground that plaintiff lacks standing. Defendant Ting, by way of her attorney’s affirmation, supports the plaintiff’s motion and the Board of Managers, too, offers no opposition to the motion.

FACTUAL ALLEGATIONS

On September 1, 2005, defendant Lam borrowed $900,000 from nonparty Lynx Mortgage Bank LLC (“Lynx”). The loan was evidenced by a promissory note (the “Note”) signed by Lam, and secured by a mortgage on the condominium, also dated September 1, 2005 (the “Mortgage”). The Mortgage was executed by Lam, and her husband, defendant Wong. Defendant Ting, who is alleged to be a 50% owner of the condominium apartment,^[1] is also a signatory.

In support of plaintiffs motion, plaintiff submits an Assignment of Mortgage that is dated October 6, 2009 (the “Assignment”). This document purports to assign the Mortgage to plaintiff. Weinert Affirm., Ex. E. The Assignment identifies the assignor as the Mortgage Electronic Registration Systems, Inc. (“MERS”), as nominee for Lynx. In this regard, the Mortgage provides in a section entitled “Borrower’s Transfer to Lender of Rights in the Property”:

“I mortgage, grant and convey the Property to MERS (solely as nominee for Lender and Lender’s successors in interest) and its successors in interest subject to the terms of this Security Instrument. This means that, by signing this Security Instrument, I am giving Lender those rights that are stated in this Security Instrument and also those rights that Applicable Law gives to lenders who hold mortgage on real property. I am giving Lender these rights to protect Lender from possible losses that might result if I fail to [comply with certain obligations under the Security Instrument and accompanying Note.]

I understand and agree that MERS holds only legal title to the rights granted by me in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right:

(A) To exercise any or all of those rights, including, but not limited to, the right to foreclose and sell the Property; and

(B) To take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.”

Weinert Affirm., Ex. D: Mortgage, at 3. The Assignment is executed by Elpiniki M. Bechaka, identified as an assistant secretary and vice president of MERS.

Plaintiff also submits an affidavit of merit from Laresea T. Jett sworn to on May 24, 2013. Ms. Jett avers that she is:

“Vice President Loan Documentation of Wells Fargo Bank, N.A. DBA America’s Servicing Company, (hereinafter “Wells Fargo”) the servicer for U.S. Bank National Association, as Trustee, successor in interest to Bank of America, National Association, as Trustee, successor by merger to LaSalle Bank National Association, as Trustee for Morgan Stanley Mortgage Loan Trust 2006-2, Mortgage Pass-Through Certificates, Series 2006.”

Jett Aff., ¶ 1. Ms. Jett avers that “Plaintiff is the mortgagee of record and was in possession of the note prior to the commencement of this action.” Id., ¶ 3. She then contends that

“U.S. Bank National Association, As Trustee, successor in interest to Bank of America, National Association, as Trustee successor by merger to LaSalle Bank National Association, as Trustee for Morgan Stanley Mortgage Loan Trust 2006-2, Mortgage Pass-Through Certificates, Series 2006-2 is in possession of the Promissory Note. The Promissory Note was executed in blank.”

Id., ¶ 3. Thus, according to Ms. Jett, the trustee of the entity that owns the Mortgage and Note changed from LaSalle Bank National Association, to Bank of America as a result of a merger, and then to U.S. Bank at some time after this action was commenced. Plaintiff’s counsel submits a copy of an affidavit sworn to in April 2012, both by a vice-president of Bank of America and a vice-president of U.S. Bank, who aver that substantially all of Bank of America’s corporate trust business was sold to US Bank pursuant to a purchase agreement dated November 11, 2010. See Weinert Affirm., Ex. R. According to the Schedule A attached thereto, one of the assets sold to U.S. Bank was the “Morgan Stanley Mtg Loan Trust 2006-2,” with a succession date of June 10, 2011. Id. Plaintiff requests that the caption be amended to reflect that U.S. Bank is now the trustee of this mortgage-backed security.

Ms. Jett avers that, from her review of the records kept by Wells Fargo, defendants defaulted on the loan by failing to make the payment due on June 1, 2009. As of the date of the complaint, there was due and owing an unpaid principal balance of $856,079.00, plus interest at the rate of 5.75% from May 1, 2009. As of May 23, 2013, Ms. Jett avers that the loan remains in default and that the total amount due plaintiff on the Note is $1,107,596.48. Jett Aff., ¶¶ 8-9.

This action was commenced by plaintiff on October 26, 2009. The unverified complaint alleges that “Plaintiff is . . . the owner and holder of a note and mortgage being foreclosed.” Complaint, ¶ First. Defendant Lam, appearing pro se, answered the complaint on or about November 27, 2009, contending, inter alia, that plaintiff lacked standing to bring the action. Defendant Wong, also appearing pro se, served an answer to the complaint on November 16, 2009 and filed his answer with the County Clerk on December 7, 2009. Wong’s answer is identical to the answer filed by Lam, and thus he, too, has raised plaintiffs lack of standing as an affirmative defense. The settlement conference required by CPLR 3408 was held by the court on May 5, 2010. On or about December 15, 2011, a new law firm was substituted as counsel for plaintiff in place and stead of Stephen J. Baum, P.C. (the Baum firm), the law firm that commenced the action.

DISCUSSION

Wong’s Alleged Default

As an initial matter, I deny plaintiffs motion to the extent that it seeks a default judgment against defendant Wong. This defendant served and filed his answer to the complaint back in 2009, and a copy of that pleading is easily found on SCROLL (“The Supreme Court Records On-Line Library”). On reply, plaintiffs counsel explains that Wong’s answer was not in the file transmitted from prior counsel, the Baum firm, but argues that since his answer is identical to the answer filed by defendant Lam and he is now represented by an attorney who has briefed the merits of plaintiffs summary judgment motion, plaintiff’s motion should be treated as one for summary judgment against both Lam and Wong.

It is well settled that a movant cannot introduce new arguments in support of, or new grounds for relief, in reply papers (Schultz v 400 Coop. Corp., 292 AD2d 16, 21-22 [1st Dep’t 2002]), and it is equally well settled that a notice of motion must specify the relief demanded (CPLR 2214[a]). However, where a notice of motion contains a general relief clause, i.e., “for such other and further relief as the Court may deem just and proper,” as is the case herein, the court has discretion “to grant relief that is not too dramatically unlike that which is actually sought, as long as the relief is supported by proof in the papers and the court is satisfied that no party is prejudiced.” Tirado v Miller, 75 AD3d 153, 158 (2nd Dep’t 2010).

The relief sought herein is foreclosure, and I find that there is no prejudice to Wong if I treat the plaintiffs motion as seeking summary judgment pursuant to CPLR 3212. Wong and Lam are now both represented by legal counsel who has thoroughly briefed their defenses and defense counsel has cross-moved, on behalf of both defendants, for dismissal of the complaint for lack of standing.

Plaintiffs Standing

In opposition to this motion, defendant Lam submits an affidavit in which she contends that plaintiff has not submitted any evidence demonstrating that it held the Note and Mortgage at the time this action was commenced on October 26, 2009. Defendant Lam further contends that Elpiniki M. Bechaka, the person who executed the Assignment from Lynx to plaintiff on October 6, 2009, is or was an attorney with the Baum firm and is a “robosigner,”^[2] and that less than one month after the Mortgage was assigned, her law firm commenced this foreclosure action. Wong, too, asserts plaintiff’s lack of standing as a defense to this action. Counsel for defendants Lam and Wong argue that, although the Assignment purports to assign the Mortgage, it does not assign the Note. He further points out that: (1) no copy of the Note was attached to the complaint at the time the action was commenced; (2) the signature of the Lynx representative who endorsed the Note in blank is illegible and undated; (3) the Jett affidavit claims that plaintiff was in possession of the Note prior to the commencement of this action, but Ms. Jett does not explain when or how Bank of America came into possession of the Note; (4) Ms. Jett is an employee of Wells Fargo, and plaintiff has not established that Wells Fargo has authority to act on behalf of the plaintiff in this case; and (5) none of the documents allegedly relied upon by Ms. Jett are attached as exhibits to plaintiff’s motion.

Where standing is put into issue by a defendant, the plaintiff must prove its standing in order to be entitled to relief. See US Bank N.A. v Madero, 80 AD3d 751, 752 (2nd Dep’t 2011); U.S. Bank, N.A. v Collymore, 68 AD3d 752, 753 (2nd Dep’t 2009); Wells Fargo Bank Minn., N.A. v Mastropaolo, 42 AD3d 239, 242 (2nd Dep’t 2007). “`In a mortgage foreclosure action, a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced.'” Homecomings Fin., LLC v Guldi, 108 AD3d 506, 507-508 (2nd Dep’t 2013), quoting Bank of N.Y. v Silverberg, 86 AD3d 274, 279 (2nd Dep’t 2011); see also Bank of N.Y. Mellon Trust Co. NA v Sachar, 95 AD3d 695, 695 (1st Dep’t 2012). “`Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation.'” HSBC Bank USA v Hernandez, 92 AD3d 843, 844 (2nd Dep’t 2012), quoting U.S. Bank, N.A. v Collymore, 68 AD3d at 754.^[3]

Assignment of the Mortgage

Defendants Lam and Wong attack the validity of the Assignment of the Mortgage on two grounds. First, defendants argue that where the plaintiff in a foreclosure action receives its interest in the mortgage from MERS acting as the “nominee” of the original lender, plaintiff must submit documents showing that the original lender consented to the assignment of the mortgage. Defendants rely on Bank of N.Y. v Cepeda, 39 Misc 3d 1221(A), 2013 NY Slip Op 50686(U) (Sup Ct, Kings County 2013) (Schack, J.); Bank of N.Y. v Mulligan, 28 Misc 3d 1226(A), 2010 NY Slip Op 51509(U) (Sup Ct, Kings County 2010) (Schack, J.); Bank of N.Y. v Alderazi, 28 Misc 3d 376 (Sup Ct, Kings County 2010) (Saitta, J.); HSBC Bank USA, N.A. v Yeasmin, 27 Misc 3d 1227(A), 2010 NY Slip Op 50927(U) (Sup Ct, Kings County 2010) (Schack, J.). The gist of these decisions is that, as a mere nominee, MERS possesses few or no legally enforceable rights beyond what its principal, the lender, gives it and that the language of the mortgages at issue therein were not sufficient to bestow any authority on MERS to assign the mortgage.

Notably, defense counsel does not cite to US Bank N.A. v Flynn, 27 Misc 3d 802 (Sup Ct, Suffolk County 2010) (Whelan, J.), which reached a contrary result. In the Flynn case, the bank had successfully argued that the language of the mortgage indenture itself, which names MERS as mortgagee of record and nominee of the lender, its successors and assigns, and confers upon it broad authority to act with respect to the mortgage in all ways that the original lender, its successors and assigns could act, including the right to foreclose, and to take any action required of the lender, including, but not limited, to releasing or discharging the mortgage, was sufficient to confer authority upon MERS to effect a valid assignment of the mortgage. Both the First and Second Departments have adopted this reasoning, and rejected the argument that MERS lacks authority to assign a mortgage.

In Bank of New York v Silverberg, 86 AD3d 274, the Second Department specifically recognized that a mortgage consolidation agreement, identical in all respects to the Mortgage at issue herein, “gave MERS the right to assign the mortgages themselves.” Id. at 281. The borrowers had argued in that case that MERS could not assign the consolidated mortgage, because the clauses in the mortgages delegating to MERS the powers to act as the original lender’s nominee had no force and effect without a power of attorney from the original lender to MERS. Brief for Plaintiff-Respondent in Bank of N. Y. v Silverberg, available at 2010 WL 9583720, at *12. The bank, however, argued that the underlying mortgages specifically provided in the section titled “Borrower’s Transfer To Lender Of Rights in The Property” that MERS, as the original lender’s nominee, had the right “to exercise any and all of those rights, including, but not limited to, the right to foreclose and sell the Property.” The bank further argued that the borrowers had granted the lender “those rights that are stated in this Security Instrument,” and that one of these rights, set forth in paragraph 20 of the mortgage, was that the “Note, or an Interest in the Note, together with this Security Instrument, may be sold one or more times.” Thus, the bank argued that MERS was expressly authorized to sell or transfer the mortgages, as it did pursuant to the written assignment it executed. Id., at *12-13. The First Department has also ruled that where the mortgage contract confers broad powers upon MERS as nominee to act on the original lender’s behalf, MERS has the authority to assign the mortgage. See Bank of N. Y. Mellon Trust Co. NA v Sachar, 95 AD3d at 696.

The Mortgage at issue herein is the same “Fannie Mae/Freddie Mac Uniform Security Instrument” at issue in the Silverberg and Sachar cases and contains the same paragraph 20, which provides that the “Note, or an Interest in the Note, together with this Security Instrument, may be sold one or more times.” See Weinert Affirm., Ex. D: Mortgage, ¶ 20, at 12. Accordingly, I reject the argument that plaintiff must submit documents showing that Lynx specifically consented to the Assignment.

Defendants Lam and Wong also argue that plaintiff should be barred from relying on the Assignment, because the Baum firm, through its employee Ms. Bechakas, served as both assignor of the Mortgage and plaintiffs counsel at the commencement of this action, and that this presents an impermissible conflict of interest. Defendants rely on U.S. Bank, N.A. v Guichardo, 22 Misc 3d 1116(A), 2009 NY Slip Op 50151(U) (Sup Ct, Kings County 2009) (Schack, J.) and Bank of N.Y. Mellon v Martinez, 33 Misc 3d 1215 (A), 2011 NY Slip Op 51937(U) (Sup Ct, Queens County 2011) (Flug, J.).

In the Guichardo case, Justice Schack merely required the Baum firm to submit proof that the bank and MERS consented to the simultaneous representation, and his later sua sponte dismissal of the foreclosure action was reversed by the Appellate Division. See U.S. Bank, N.A. v Guichardo, 90 AD3d 1032 (2nd Dep’t 2001). In the Martinez case, Justice Flug held only that:

“These actions undoubtedly raise the appearance of impropriety. Indeed, these practices were the subject of the October 6, 2011 settlement agreement between Steven J. Baum and the United States Attorney’s Office for the Southern District of New York. Nevertheless, defendant has failed to establish that these actions breached a specific duty to plaintiff and require a dismissal of the action as a matter of law.”

33 Misc 3d 1215(a) at 2. In response to this challenge to the Assignment, plaintiff submits a copy of Opinion 847, dated December 21, 2010, issued by the New York State Bar Association’s Committee on Professional Ethics, which reached the conclusion that a lawyer may concurrently serve as an officer of MERS, for the purpose of executing a mortgage assignment to the beneficial owner and prosecuting a mortgage foreclosure action in the assignee’s name. See Bundt Affirm., Ex. J. Plaintiff has presented documentary proof that Ms. Bechakas held the position of assistant secretary and vice president of MERS as of July 19, 2007, and was authorized to execute mortgage assignments on behalf of MERS. Bundt Affirm., Ex. I. In any event, since the Baum firm no longer represents the plaintiff, any conflict of interest no longer exists, and I find that this is not an independent basis to hold the Assignment invalid.

Ownership of the Note

Although I am not persuaded by the defendants’ challenges to the Assignment, plaintiff has not proved that it owned the Note at the time this action was commenced. Although the Mortgage was properly assigned by MERS as the nominee of the original mortgagee, Lynx, to Bank of America, the transfer of a mortgage without a note is a nullity and insufficient to confer standing to foreclose. U.S. Bank N.A. v Dellarmo, 94 AD3d 746, 748 (2nd Dep’t 2012); Deutsche Bank Natl. Trust Co. v Barnett, 88 AD3d 636, 637 (2nd Dep’t 2011); Bank of N.Y. v Silverberg, 86 AD3d at 280. Here, MERS purportedly assigned the Mortgage to Bank of America without the Note. See Weinert Affirm., Ex. E.

Plaintiff argues that it acquired standing based upon a physical transfer of the indorsed Note prior to the commencement of the action. This claim is based entirely on the Jett affidavit, which states that plaintiff “was in possession of the note prior to the commencement of this action.” Jett Aff., ¶ 3. The Appellate Division has held that the affidavit of the plaintiff’s servicing agent must give “factual details as to the physical delivery of the note.” Homecomings Fin., LLC v Guldi, 108 AD3d at 509, citing Deutsche Bank Natl. Trust Co. v Haller, 100 AD3d 680, 682 (2nd Dep’t 2012); HSBC Bank USA v Hernandez, 92 AD3d at 844; Aurora Loan Servs., LLC v Weisblum, 85 AD3d 95, 109 (2nd Dep’t 2011) (conclusory statement by loan servicing officer that his company was the holder of the mortgage by delivery without a written assignment was insufficient to establish standing to commence action).

In addition to the lack of any detail, the affiant, Laresea Jett, does not purport to have any personal knowledge of the delivery of the Note to Bank of America. Nor does she attach or describe any of Wells Fargo’s books and records upon which she relies. “Where an officer’s knowledge has been obtained either from unnamed, and unsworn employees or unidentified and unproduced work records, the affidavit lacks any probative value . . .” Dempsey v Intercontinental Hotel Corp., 126 AD2d 477, 479 (1st Dep’t 1987). What makes matters worse is that Ms. Jett admits that her affidavit is based, in part, on the unverified complaint drafted by the Baum firm.

In addition, Ms. Jett is an employee of nonparty Wells Fargo, and no proof of its authority to act on behalf of the plaintiff was submitted with plaintiff’s moving papers. Even plaintiff’s counsel admits, on reply, that an affidavit of merit must be executed either by an officer of the plaintiff or a person with a valid power of attorney. Plaintiff attempts to rectify this omission by submitting a document entitled “Limited Power of Attorney,” executed by Bank of America on August 27, 2009, and purporting to name Wells Fargo as its loan servicer. However, the power itself states that it is “given pursuant to a certain Servicing Agreement and solely with respect to the assets serviced pursuant to such an agreement . . . dated July 1, 2006. . . .” Bundt Affirm., Ex. L. Plaintiff has not submitted a copy of this Servicing Agreement nor established that the Note and Mortgage at issue in this lawsuit are serviced pursuant to this agreement.

Accordingly, I find that plaintiff failed to demonstrate its prima facie entitlement to judgment as a matter of law, because it did not establish that the Note was physically delivered to Bank of America prior to the commencement of the action. An issue of fact exists as to who was in possession of the Note on October 26, 2009, which cannot be resolved on these papers. Accordingly, plaintiff’s motion for summary judgment must be denied, and the cross motion of defendants Lam and Wong also denied since the latter have not proven, as a matter of law, that plaintiff lacks standing. Deutsche Bank Natl. Trust Co. v Spanos, 102 AD3d 909, 912 (2nd Dep’t 2013); Deutsche Bank Natl. Trust Co. v Haller, 100 AD3d at 683-684; HSBC Bank USA v Hernandez, 92 AD3d at 844; US Bank N.A. v Madero, 80 AD3d at 753; but see Homecomings Fin., LLC v Guldi,

CONCLUSION and ORDER

For the foregoing reasons, plaintiff’s motion for summary judgment of foreclosure and sale against defendants Lam, Wong and Ting is denied, as is the plaintiff’s initial request for a declaration that defendant Wong is in default. That portion of plaintiff’s motion requesting that “John Doe” be dropped as a party defendant in this action, that plaintiff’s name be amended to reflect the succession of U.S. Bank, as trustee, for Bank of America, that the address of the plaintiff be deleted from the caption, and the caption be amended accordingly, is granted without opposition. The remaining portion of the plaintiff’s motion seeking to declare all non-appearing defendants in default is also granted, without opposition. The cross motion of defendants Lam and Wong for dismissal of the complaint based on plaintiff’s lack of standing is denied. Thus, it is hereby

ORDERED that plaintiff’s motion for summary judgment of foreclosure and sale is denied; and it is further

ORDERED that plaintiff’s motion to amend the caption is granted, and that the caption shall now read as follows:

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE, SUCCESSOR IN INTEREST TO BANK OF AMERICA, NATIONAL ASSOCIATION, AS TRUSTEE, SUCCESSOR BY MERGER TO LASALLE BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR MORGAN STANLEY LOAN TRUST 2006-2, Plaintiff, – against – Index No. 115035/09 CHAU T. LAM, YAH RONG TING, ALAN CHLUNG WONG A/K/A ALAN CHI LUNG WONG, ADAMAR OF NEW JERSEY INC., BOARD OF MANAGERS OF EIGHT EAST TWELFTH CONDOMINIUM, HSBC BANK USA, NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY PARKING VIOLATIONS BUREAU, and NEW YORK CITY TRANSIT ADJUDICATION BUREAU, Defendants.

;and it is further

ORDERED that plaintiffs counsel shall serve a copy of this order with notice of entry on the Trial Support Office and the County Clerk, who are directed to mark the court’s records to reflect the change in the caption herein; and it is further

ORDERED that plaintiffs motion to declare all non-appearing defendants in default is granted, and that defendants New York City Transit Adjudication Bureau, New York City Parking Violations Bureau, New York City Environmental Control Board, Adamar of New Jersey Inc., and HSBC Bank USA have not appeared or answered the complaint and are deemed in default; and it is further

ORDERED that the cross motion by defendants Chau T. Lam and Alan Chi-Lung Wong a/k/a Alan Chi Lung Wong for summary judgment dismissing plaintiff’s complaint is denied.

[1] According to the Board of Manager’s answer, defendants Lam and Wong acquired title to the condominium by deed dated September 1, 2005 and recorded on September 23, 2005. Amended Answer and Cross-Claims of Defendant Board of Managers of Eight East Twelfth Condominium, dated March 23, 2010, ¶ 25.

[2] “Robosigning” refers to the fraudulent practice wherein an affiant signs, in a short time frame, numerous affidavits and legal documents asserting the lender’s right to foreclose, despite having no personal knowledge of the facts contained in them. See generally Ohio v GMAC Mtge., LLC, 760 F Supp 2d 741, 743 (ND Ohio 2011).

[3] Delivery of the note during the pendency of the action is insufficient. Homecomings Fin., LLC v Guldi, 108 AD3d at 508-509; Wells Fargo Bank, N.A. v Marchione, 69 AD3d 204, 210 (2nd Dep’t 2009).

Decided on November 29, 2013

3234/12

Plaintiff Attorney: McCabe, Weisberg & Conway, P.C., 145 Huguenot Street, Ste., 210, New Rochelle, NY 10801

Defendant Attorney: Jon A. Lefkowitz, Esq., 1222 Avenue M, Suite 204, Brooklyn, NY 11230

David I. Schmidt, J.

Upon the foregoing papers in this foreclosure action, U.S. Bank National Association as trustee for Morgan Stanley Mortgage Loan Trust 2006-17XS (2006-17XS) (Morgan Stanley [*2]Mortgage Trust) moves for an order (1) granting summary judgment, pursuant to CPLR 3212, against defendants Becalel Steinberg and Frida Steinberg f/k/a Frida Genuth (the Steinberg defendants or the Steinbergs) and striking the Steinberg defendants’ answer; (2) granting the Morgan Stanley Mortgage Trust a default judgment, pursuant to CPLR 3215, against the non-appearing defendants; (3) appointing a referee to compute the sum due and owing to Morgan Stanley Mortgage Trust; and (4) amending the caption to substitute Sol Steinberg in place of “John Doe #1”, and striking the names of defendants sued herein as “John Doe #2” through “John Doe No.10.”

The Steinberg Note And Mortgage

On July 19, 2006 the Steinbergs refinanced their home at 1814 58th Street in Brooklyn by executing a mortgage and a promissory note in the principal amount of $495,000.00 (Steinberg Note) in favor of Hemisphere National Bank.^[FN1] Becalel Steinberg executed the Steinberg Note and mortgage, while his wife, Frida Steinberg, is a signatory to the mortgage.The Steinberg Note states that it was made “to the order of the Lender,” Hemisphere National Bank, the originator of the Steinberg’s home loan. The Steinberg Note states that “Borrower” “understand[s] that the Lender [Hemisphere National Bank] may transfer this Note. The Lender or anyone who takes this Note by transfer and who is entitled to receive payments under this Note is called the Note Holder.'” A copy of the Steinberg Note in the record reflects an undated indorsement in blank from Hemisphere National Bank.

The mortgage specifically names Mortgage Electronic Registration Systems, Inc. (MERS), as “nominee for Lender [Hemisphere National Bank]” and provides that “FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.” The record reflects that the mortgage was recorded in the New York City Register’s office, Department of Finance on July 31, 2006.

Defendant Becalel Steinberg allegedly defaulted under the Steinberg Note by failing to pay monthly principal and interest payments on April 1, 2010, and each month thereafter.

The MERS Mortgage Assignment

The mortgage recording documents in the record reflect that MERS “AS NOMINEE FOR HEMISPHERE NATIONAL BANK” purported to assign the mortgage to the Morgan Stanley Mortgage Trust by assignment dated May 18, 2011 (MERS Mortgage Assignment). The MERS Mortgage Assignment provides that it “ASSIGN[S] AND TRANSFER[S] . . . all right, title and interest in and to that certain Mortgage . . .” The MERS Mortgage Assignment also states that MERS “caused this instrument to be signed by its Assistant Secretary,” and reflects that “Pat Labelle” executed the document as “Assistant Secretary” on May 18, 2011 in Palm Beach, Florida. The MERS Mortgage Assignment in the record is not accompanied by any evidence of Labelle’s authority to act on behalf of MERS.

The MERS Mortgage Assignment was apparently prepared and recorded in preparation for foreclosure litigation, since it states that “[w]hen recorded mail to” the attention of plaintiff’s counsel at McCabe, Weisberg and Conway, P.C.

The Instant Foreclosure Action

The Morgan Stanley Mortgage Trust commenced this foreclosure action against the Steinbergs and others on February 8, 2012, nearly two years after defendants’ alleged payment default.Plaintiff’s unverified complaint contains a single allegation regarding its standing to [*3]maintain this foreclosure action, alleging that “[p]laintiff is the holder of said note and mortgage [which] was indorsed by blank indorsement and delivered to Plaintiff prior to commencement of this action” (emphasis added). Plaintiff’s complaint presents a purported copy of the original Steinberg Note bearing an indorsement in blank from Hemisphere National Bank, which reflects that Marta Elias signed the document as “Assistant Secretary” of Hemisphere National Bank on an unspecified date.

Regarding the MERS Mortgage Assignment, plaintiff’s complaint further alleges that “[s]aid mortgage w[as] assigned from [MERS], as nominee for Hemisphere National Bank, NA to [Morgan Stanley Mortgage Trust], [p]laintiff, by Assignment of Mortgage dated May 18, 2011 to be recorded in the Office of the County Clerk of Kings County.”

The Steinberg defendants answered the complaint on or about February 27, 2012, denying the material allegations therein and asserting seven affirmative defenses, including that plaintiff “has no standing to bring this action.”

Plaintiff’s Summary Judgment Motion

The Morgan Stanley Mortgage Trust now seeks, amongst other relief, summary judgment against the Steinberg defendants. The Morgan Stanley Mortgage Trust’s moving papers consist of attorney affirmations and a May 16, 2013 affidavit from Patricia A. Labelle in her capacity as “Servicer and Attorney in Fact” of the Morgan Stanley Mortgage Trust (Labelle Moving Affidavit). The Labelle Moving Affidavit is, presumably, from the same “Pat Labelle” who executed the MERS Mortgage Assignment as “Assistant Secretary” of MERS, yet conspicuously absent from the Labelle Moving Affidavit is any reference to the MERS Mortgage Assignment.

The Labelle Moving Affidavit represents that it is based on Labelle’s familiarity with “records maintained by 1st United Bank as servicer for [the Morgan Stanley Mortgage Trust] for purpose of servicing mortgage loans.” Labelle also avers that “[i]n connection with making this affidavit, I have personally examined these business records reflecting data and information as of May 16 , 2013.” While the Labelle Moving Affidavit states that Labelle’s personal knowledge is limited to her review of 1st United Bank’s mortgage servicing business records, Labelle fails to identify, describe or annex the particular business records upon which her limited knowledge is based.

Significantly, the Labelle Moving Affidavit makes the conclusory representation that “[p]laintiff has been in continuous possession of the note and mortgage since prior to the commencement of this action,” without providing any factual details, or the source of Labelle’s knowledge. In addition to a lack of foundation, the Labelle Moving Affidavit fails to provide evidence that the originating lender, Hemisphere National Bank, indorsed and physically delivered the Steinberg Note to the Morgan Stanley Mortgage Trust.

The Steinberg defendants oppose plaintiff’s motion on the ground that the Morgan Stanley Mortgage Trust lacks standing to foreclose, citing the Appellate Division, Second Department’s holding in Bank of NY v Silverberg (86 AD3d 274 [2011]). Specifically, defendants contend that Labelle lacked actual authority to execute the MERS Mortgage Assignment.

In response to defendants’ standing challenge, the Morgan Stanley Mortgage Trust contends that “a Limited Power of Attorney was executed which granted [p]laintiff the right to assign the mortgage.” Plaintiff’s reply papers include a copy of the limited power of attorney from U.S. Bank National Association (US Bank), pursuant to which 1st United Bank was appointed “Attorney-in-Fact” for US Bank to, among other things:

“execute and acknowledge in writing or by facsimile stamp all documents customarily and reasonably necessary and appropriate [to] . . .

“4.[e]xecute bonds, notes, mortgages, deeds of trust and other contracts, agreements and instruments regarding the Borrowers and/or the Property, including but not limited to the execution of releases, satisfactions, assignments, loan modification agreements, loan assumption agreements, subordination agreements, property adjustment agreements, and other instruments pertaining to mortgages or deeds of trust, and execution of deeds and associated instruments, if any, conveying the Property, in the interest of [US Bank], as [*4]Trustee.”

While the limited power of attorney between US Bank and 1st United Bank states that it was “issued in connection with [1st United Bank’s] responsibilities to servicecertain mortgage loans (the Loans’) held by U.S. Bank in its capacity as Trustee,” plaintiff provides no evidence that the Steinberg’s loan was amongst the “Loans” referenced therein. Regardless, plaintiff’s production of the limited power of attorney regarding 1st United Bank’s servicing rights does not obviate the need for plaintiff to produce admissible testimonial and/or documentary evidence proving that Hemisphere National Bank physically delivered the Steinberg Note to the Morgan Stanley Mortgage Trust prior to commencement.

Summary judgment is a drastic remedy that should only be granted when no triable issues of fact exist (see Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986]). The moving party bears the initial burden of establishing its prima facie entitlement to summary judgment, as a matter of law, with admissible evidence demonstrating the absence of material facts (see CPLR 3212 [b]; Giuffrida v Citibank Corp., 100 NY2d 72 [2003]). Failing to make that showing requires denying the motion regardless of the adequacy of the opposition (see Vega v Restani Constr. Corp., 18 NY3d 499, 502 [2012]; Ayotte v Gervasio, 81 NY2d 1062 [1993]). “The court’s function on a motion for summary judgment is to determine whether material factual issues exist, not resolve such issues” (Ruiz v Griffin, 71 AD3d 1112, 1115 [2010] [internal quotation marks omitted]). Thus, issue-finding and not issue-determination is key in deciding a summary judgment motion (see Sillman v Twentieth Century-Fox Film Corp., 3 NY2d 395, 404, [1957], rearg denied 3 NY2d 941 [1957]).

(2)

Plaintiff’s Standing To Foreclose

Plaintiff is not entitled to the relief it seeks because it has failed to proffer any evidence of its standing to foreclose under the Steinberg Note at the time of commencement. As discussed below, there are triable issues of fact regarding delivery of the Steinberg Note from the originating lender and indorser, Hemisphere National Bank, to the Morgan Stanley Mortgage Trust, requiring denial of the instant motion in its entirety.

“To establish a prima facie case in an action to foreclose a mortgage, the plaintiff must establish the existence of the mortgage and the mortgage note, ownership of the mortgage, and the defendant’s default in payment” (Campaign v Barba, 23 AD3d 327, 327 [2005] [emphasis added]). Where, as here, standing to commence a foreclosure action is raised by the defendant as an affirmative defense to the complaint, the burden shifts to the foreclosing party and “it is incumbent upon the plaintiff to establish its standing to be entitled to relief” (Deutsche Bank Natl. Trust Co. v Rivas, 95 AD3d 1061, 1061 [2012]; see also Citimortgage, Inc. v Stosel, 89 AD3d 887, 888 [2011] [same]; U.S. Bank, N.A. v Collymore, 68 AD3d 752, 753 [2009] [holding “(w)here, as here, standing is put into issue by the defendant, the plaintiff must prove its standing in order to be entitled to relief”]).

The Court of Appeals has held that “[s]tanding to sue is critical to the proper functioning of the judicial system. It is a threshold issue. If standing is denied, the pathway to the courthouse is blocked. “The plaintiff who has standing, however, may cross the threshold and seek judicial redress” (Saratoga County Chamber of Commerce v Pataki, 100 NY2d 801, 812 [2003], cert denied 540 US 1017 [2003]). In Caprer v Nussbaum (36 AD3d 176, 182 [2006]), the Appellate Division, Second Department explicitly held that “[s]tanding to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request.” Similarly, the Appellate Division, First Department has held that “standing is an element of the larger question of justiciability and is designed to ensure that a party seeking relief has a sufficiently cognizable stake in the outcome so as to present a court with a dispute that is [*5]capable of judicial resolution” (Security Pac. Natl. v Evans, 31 AD3d 278, 279 [2006]).

In GRP Loan, LLC v Taylor (95 AD3d 1172 [2012]), the Appellate Division, Second Department summarized the threshold evidentiary showing that is necessary in order to establish a foreclosing party’s standing:

“[a] plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note prior to commencement of the action with the filing of the complaint . . . Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident” (id. at 1173[internal quotation marks and citations omitted] [emphasis added]).

The standard set forth in the Taylor case is premised on the court’s prior holdings that “a promissory note [is] a negotiable instrument within the meaning of the [New York] Uniform Commercial Code [UCC]” (Mortgage Elec. Registration Sys., Inc. v Coakley, 41 AD3d 674, 674 [2007]). In Slutsky v Blooming Grove Inn (147 AD2d 208 [1989]), the court confirmed that Article 3 of the UCC is applicable to foreclosure actions, wherein the Second Department specifically held:

“[t]he note secured by the mortgage is a negotiable instrument (see, UCC 3-104) which requires indorsement on the instrument itself or on a paper so firmly affixed thereto as to become a part thereof’ (UCC 3-202[2]) in order to effectuate a valid assignment’ of the entire instrument (cf., UCC 3-202 [3], [4])” (id. at 212).

UCC § 3-202 (1) provides, in pertinent part, that “[i]f the instrument is payable to order it is negotiated by delivery with any necessary indorsement” (emphasis added). UCC § 3-204 (2) further provides that “[a]n indorsement in blank specifies no particular indorsee and may consist of a mere signature. A note payable to order and indorsed in blank becomes payable to bearer and may be negotiated by delivery alone until specially indorsed” (UCC § 3-204 [2] [emphasis added]).

In sum, a party has standing to foreclose under a “pay to the order” promissory note that was indorsed in blank — like the Steinberg Note at issue here — by evidencing that the note was negotiated by the indorser’s physical delivery of the note to the foreclosing party. A party cannot prove prima facie standing to foreclose by claiming mere possession of a note, since UCC “holder” status and standing to foreclose is premised on negotiation by means of the lender’s (or prior note holder’s) indorsement and physical delivery of the negotiable instrument (see Bank of NY Mellon v Deane, 41 Misc 3d 494 [Sup Ct, Kings County 2013] [discussing application of the UCC and the foreclosing plaintiff’s “misunderstanding of the general law of negotiable instruments in its equation of the status as holder’ to mere possession of the instrument”]).

Delivery Of The Steinberg Note

Plaintiff’s reliance on the conclusory statement in the Labelle Moving Affidavit that plaintiff has had “continuous possession” of the Steinberg Note to establish the Morgan Stanley Mortgage Trust’s standing is misplaced. Plaintiff’s unverified complaint similarly alleges, in conclusory fashion, that “[p]laintiff is the holder of said note and mortgage [which] was indorsed by blank indorsement and delivered to [p]laintiff prior to commencement of this action” (emphasis added). Plaintiff’s attempt to equate “possession” of the note with the UCC’s requisite delivery is unavailing.

Plaintiff has failed to establish that it became a “holder” of the Steinberg Note, within the meaning of the UCC, by evidencing the physical delivery of the Steinberg Note from Hemisphere National Bank to the Morgan Stanley Mortgage Trust. The Labelle Moving Affidavit is patently insufficient to establish plaintiff’s standing because it contains no specific factual details (i.e., when, who, what, where and how) evidencing Hemisphere National Bank’s delivery of the Steinberg Note to the Morgan Stanley Mortgage Trust.

In addition, the Labelle Moving Affidavit fails to describe or provide any evidence of the [*6]scope or nature of Labelle’s authority, if any, to act or speak on plaintiff’s behalf. Significantly, the Labelle Moving Affidavit does not identify Labelle’s actual employer or Labelle’s affiliation, if any, with the Morgan Stanley Mortgage Trust. Instead, Labelle vaguely represents that “[i]n the regular performance of my job functions, I am familiar with business records maintained by 1st United Bank as servicer for [the Morgan Stanley Mortgage Trust] for the purpose of servicing mortgage loans.” While the Labelle Moving Affidavit seemingly implies that Labelle is currently employed, in some capacity, by 1st United Bank, US Bank’s mortgage servicing agent, Labelle also executed the MERS Mortgage Assignment as the “Assistant Secretary” of MERS. Therefore, Labelle wears at least two hats in the context of this foreclosure action, neither of which is that of the foreclosing party here.

Also, the Labelle Moving Affidavit avers that “[i]n connection with making this affidavit, I have personally examined [1st United Bank’s] business records[,]” yet Labelle fails to identify, describe or annex the records upon which her limited knowledge is based. Regardless, Labelle’s review of mortgage servicing records is entirely irrelevant to the factual circumstances under which the Steinberg Note was delivered from the lender, Hemisphere National Bank, to the Morgan Stanley Mortgage Trust prior to commencement.

In Homecomings Fin., LLC v Guldi (108 AD3d 506[2013]), an analogous case, the Second Department reversed an order granting the plaintiff summary judgment because Homecomings failed to establish its prima facie standing to foreclose. In that case, Homecomings failed to submit probative evidence of the Note’s physical delivery prior to commencement of the action. The only proof of physical delivery of the note submitted by Homecomings was an affidavit from its servicing agent, claiming that the note was delivered to the servicer as custodian of Homecoming’s business records.

The Second Department held that Homecoming’s submission of the mortgage servicer’s affidavit was “insufficient to establish that the plaintiff had physical possession of the note at any time” because it “did not give factual details as to the physical delivery of the note” (id. at 508-09; see also HSBC Bank USA v Hernandez, 92 AD3d 843, 844 [2012] [holding that “(t)he affidavit from the plaintiff’s servicing agent did not give any factual details of a physical delivery of the note and, thus, failed to establish that the plaintiff had physical possession of the note prior to commencing this action”]; Deutsche Bank Natl. Trust Co. v Barnett, 88 AD3d 636, 638 [2011] [holding that affidavit of plaintiff’s servicing agent without any factual details failed to establish that the note was physically delivered to plaintiff prior to commencement]).

Here, as in Homecomings, the Morgan Stanley Mortgage Trust has failed to satisfy its burden of establishing that it had the requisite standing to commence this foreclosure action. The Labelle Moving Affidavit does not establish that the Steinberg Note was duly negotiated within the meaning of the UCC. While the Labelle Moving Affidavit makes the conclusory assertion that plaintiff has been in “continuous possession” of the Steinberg Note, Labelle fails to address the physical delivery of the Steinberg Note from Hemisphere National Bank to the Morgan Stanley Mortgage Trust. Further, the Labelle Moving Affidavit is admittedly based on Labelle’s general review of 1st United Bank’s mortgage servicing business records, rather than her own personal knowledge. Accordingly, plaintiff’s conclusory assertions that the Morgan Stanley Mortgage Trust is the “holder” or in “possession” of the Steinberg Note without producing any probative, admissible evidence of delivery is insufficient, as a matter of law.

The MERS Mortgage Assignment

Plaintiff’s reliance on the MERS Mortgage Assignment executed by “Pat Labelle” as evidentiary proof of Morgan Stanley Mortgage Trust’s standing to foreclose is similarly misplaced, since MERS was merely a “nominee” of the originating lender, Hemisphere National Bank, for purposes of recording the mortgage instrument. MERS was never a “holder” of the Steinberg Note, and thus, could not confer any interest in the Steinberg Note to plaintiff.

Contrary to plaintiff’s contentions, it failed to demonstrate its prima facie entitlement to [*7]judgment, as a matter of law, because “it did not submit sufficient evidence to demonstrate its standing as the lawful holder or assignee of the subject note on the date it commenced this action” (see Collymore, 68 AD3d at 754). In the seminal Silverberg case, the Second Department rejected a MERS mortgage assignment as evidence of standing, holding that “MERS was without authority to assign the power to foreclose to the plaintiff” since “MERS was never the lawful holder or assignee of the notes” (86 AD3d at 283).

Furthermore, the Second Department has repeatedly and consistently held that “[a]n assignment of a mortgage without assignment of the underlying note or bond is a nullity, and no interest is acquired by it” (HSBC Bank USA v Hernandez, 92 AD3d 843, 843 [2012]; see also Collymore, 68 AD3d at 754[holding that “[w]here a mortgage is represented by a bond or other instrument, an assignment of the mortgage without assignment of the underlying note or bond is a nullity”]; Kluge v Fugazy, 145 AD2d 537, 538 [1988] [holding that “foreclosure of a mortgage may not be brought by one who has no title to it and absent transfer of the debt, the assignment of the mortgage is a nullity”]). Consequently, the MERS Mortgage Assignment does not constitute evidence of the Morgan Stanley Mortgage Trust’s prima facie standing to foreclose, as a matter of law. Accordingly, it is

ORDERED that plaintiff’s motion is denied in its entirety.

This constitutes the decision and order of the court.

E N T E R,

__________________________

J. S. C.

Footnote 1:In February 2007, Hemisphere National Bank changed its name to Republic Federal Bank. Republic Federal Bank was subsequently closed by the Office of the Comptroller of the Currency (OCC) and put into receivership on December 11, 2009. The OCC appointed the Federal Insurance Deposit Company (FDIC) as receiver (see http://www.fdic.gov/news/news/press/2009/pr09225.html; http://www.occ.gov/news-issuances/news-releases/2009/nr-occ-2009-155.html).

US BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR JP MORGAN MORTGAGE ACQUISITION CORP. JPMAC 2006-FREI 10790 Rancho Bernardo Road San Diego CA 92127, Plaintiff,
v.
YOLANDE NICHOLSON, “JOHN DOE”, NANCY ENGELHARDT, Defendants.

 Docket No. 17679-2008, Mtn. Seq. No. 005 & 006.

 Supreme Court, Suffolk County.

 Submit August 14, 2013.

 Motion June 19, 2013.

 November 12, 2013.

 McCabe, Weisberg & Conway, P.C. By Jose O. Hasbun, Esq. 145 Huguenot Street, Suite 210 New Rochelle, NY 10801 Attorneys for Plaintiff.

Alice A. Nicholson, Esq. 26 Court Street, Suite 603 Brooklyn, NY 11242 Attorney for Defendant Nicholson

JOHN J.J. JONES, Jr., Judge.

ORDERED that the motion by the plaintiff, US Bank National Association, as Trustee for JP Morgan Mortgage Acquisition Corp. JPMAC 2006-FRE1 10790 Rancho Bernardo Road San Diego CA 92127 [“the plaintiff’], for an order vacating the Order of Reference dated December 18, 2009, granting a Second Order of Reference and permitting the plaintiff to proceed with foreclosure (motion sequence 005), and the cross motion by the defendant Yolande Nicholson for an Order compelling the acceptance of the Answer previously served upon the plaintiff, dismissing the complaint for the failure to comply with REAL PROPERTY ACTIONS AND PROCEEDINGS LAW [“RPAPL”] § 1303, and denying the plaintiffs motion for a judgment of foreclosure and granting the defendant summary judgment dismissing the complaint (motion sequence 006), are decided together; and it is further

ORDERED that so much of the plaintiffs motion seeking an order vacating the Order of Reference dated December 18, 2009, is granted; and it is further

ORDERED that so much of the plaintiffs motion seeking a Second Order of Reference and permitting the plaintiff to proceed with foreclosure is denied; and it is further

ORDERED that so much of the cross motion by the defendant Yolande Nicholson [“the defendant” or “Nicholson”] for an Order compelling the acceptance of the Answer previously served upon the plaintiff, is granted, and the cross motion is otherwise denied.

 Plaintiff’s Motion for a New Order of Reference

This foreclosure action involves a loan made by Fremont Investment & Loan [“Fremont”] to the defendant on October 14, 2005, in the amount of $632,000.00, secured by a mortgage executed by the defendant on that same date. The mortgage indicates that for purposes of recording Mortgage Electronic Recording Systems, Inc., [“MERS”], is the mortgagee of record. The instant action to foreclose the mortgage was commenced on behalf of the plaintiff on May 8, 2008, by the now-defunct law firm of Steven J. Baum, P.C. It was not until ten days later, on May 18, 2008, that the mortgage was purportedly assigned by MERS as nominee for Fremont to the plaintiff

On two prior occasions the plaintiff sought an Order Appointing a Referee and to Compute. The plaintiff withdrew the first application submitted on December 3, 2008. The second application was submitted on September 30, 2009; the resulting Order of Reference which the plaintiff now seeks to vacate was granted on December 18, 2009. In addition, the plaintiff withdrew a previous motion for a Judgment of Foreclosure and Sale on October 18, 2010.

According to the plaintiffs moving papers, the current law firm representing the plaintiff attempted to comply with the Office of Court Administration’s memorandum dated October 20, 2010, as supplemented, requiring counsel to consult with a representative of the lender and confirm the factual accuracy of the allegations set forth in the complaint and any supporting affidavits or affirmations filed with the Court, as well as the accuracy of the notarizations contained in the supporting documents. Counsel consulted with its client and was advised that the plaintiff could not confirm the accuracy with regard to execution and/or notarization of the prior Affidavit of Fact dated April 21, 2009. Thus, the plaintiff now seeks an order vacating the December, 2009, Order of Reference that was based on the April, 2009 affidavit, and granting a new Order of Reference in order to move forward with the foreclosure.

In support of the plaintiffs application it submitted, inter alia, an “Attorney Statement” dated May 13, 2013, contending that the “subject [n]ote was transferred via indorsement in blank”, referring to an Exhibit attached to the moving papers. The Exhibit consisted of a copy of the note signed by the defendant, and a separate undated page containing no identifying information connecting it with the subject note. Rather, the only writing on the page is a stamp that purports to be a blank indorsement with a signature of one “Michael Koch”, identified as “Fremont Investment & Loan, Vice President”.

The plaintiff contends that the effect of the blank indorsement was to make the note payable to bearer pursuant to UCC § 1-201(5), which may be negotiated by transfer of possession alone relying on UCC §§ 3-204[2] and 3-202 [1]. The “Attorney Statement” contends that under UCC § 9-203 (9) (g), the assignment or transfer by the seller of a security interest in the note automatically transfers a corresponding interest in the mortgage to the assignee, thereby rendering an actual assignment unnecessary. The argument is obviously intended to remedy the fact that the plaintiff was not assigned the mortgage until ten days after it commenced the action to foreclose (see generally Bank of New York v. Silverberg, 86 A.D.3d 274, 926 N.Y.S.2d 532 [2d Dept. 2011] [“In a mortgage foreclosure action, a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced”]).

The “Attorney Statement” relies on the affidavit of Carrie S. Patridge, dated April 15, 2013, as support for the statement that the plaintiff has been in “continuous possession of the Note (and Mortgage) since the commencement of the action”. Patridge is described as the Vice President of the loan servicer authorized to act on the plaintiff’s behalf. The Patridge affidavit states that the defendant defaulted on December 1, 2007, the default has not been cured, and that a notice of default was sent to the defendant on February 11, 2008.

Although the Patridge affidavit states that the plaintiff is the holder of the note, conspicuously absent from the affidavit or anywhere else in the moving papers is evidence that the plaintiff was the holder of the note and mortgage when the action was commenced on May 8, 2008. The “Attorney Statement” does not provide proof when, if ever, Fremont indorsed the subject note to the plaintiff or transferred possession of it. It merely references the Patridge affidavit for the proposition that the plaintiff is in possession of the note, and the UCC for the further proposition that transfer of possession of the note to the plaintiff automatically transferred possession of the mortgage.

The “Attorney Statement” also chronicles that the indorsement of the note was “later memorialized” by the assignment of mortgage dated May 18, 2008, which was later recorded. Anecdotally, although the assignment is dated May 18, 2008, the notary on the assignment is dated May 1, 2008.

Regarding the statutory notice required by RPAPL § 1303, the Attorney Statement states that counsel for the plaintiff provided the process server with the summons and complaint, printed on white paper, together with the notice required by RPAPL § 1303 (a), referring to the attached “Exhibit G”. That exhibit contains a two-page yellow notice with language required by § 1303 by an amendment to the statute that did not take effect until August 5, 2008 (L. 2008, c. 472, §1, eff. August 5. 2008). The action was commenced on May 8, 2008.

The affidavit of service indicates that service of the summons and complaint and § 1303 notice was made by serving a person of suitable age and discretion, one Nancy Engelhardt. Engelhardt is described in the affidavit of service as a co-occupant female, approximately 31 to 39 years of age, 5’4″ to 5′ 7″ tall, 125 to 149 pounds with red hair. The Attorney Statement claims that none of the defendants answered the complaint with the exception of Nicholson, who appeared and requested notice of the application. Based on the foregoing, the plaintiff seeks a new Order of Reference.

Defendant’s Opposition and Cross Motion

The cross motion seeks an Order compelling the acceptance of the Answer previously served upon the plaintiff, dismissing the complaint for the failure to comply with RPAPL § 1303, and denying the plaintiffs motion for a judgment of foreclosure and granting the defendant summary judgment dismissing the complaint. Two grounds for the relief sought include the failure to fulfill a condition precedent to suit, i.e., the service of a § 1303 notice, and the plaintiff’s lack of standing to commence the action.

According to the attorney for Nicholson, even before the defendant’s default, she has been pursuing a loan modification and has provided a voluminous number of documents toward that goal. The defendant denies that the summons and complaint with the required § 1303 notice was ever properly served upon her. In an affidavit dated August 1, 2013, Nicholson denied that she ever received the notice and challenges that the pleadings and the required notice were ever served on Engelhardt who she describes as 5′ 2″ or less, middle-aged, and very thin, weighing much less than the 125-149 pounds as reported by the process server in the affidavit of service. Nicholson also denied that she ever received the required § 1303 notice with any of the copies of the summonses and complaints that were subsequently mailed or left at her home.

Nicholson also attested that the § 1303 notice accompanying the judgment of foreclosure that was ultimately withdrawn on October 18, 2010, is not the same § 1303 notice that is attached as an Exhibit to the instant motion for a new Order of Reference. A review of the plaintiffs withdrawn motion for a Judgment of Foreclosure and Sale confirms this. The “Attorney Statement in Reply/Opposition to Cross-Motion”, dismisses the discrepancy in the § 1303 notices attached to the withdrawn Judgment of Foreclosure and the pending motion for a new Order of Reference, respectively.

The affidavit of service indicates that service on Nicholson was complete on May 20, 2008. By email to Tracy Fourtner of the Baum law firm on July 11, 2008, defense counsel requested an extension of time to answer the complaint until August 15, 2008. Defense counsel affirms that Tracy Fourtner of the Baum law firm told her that the law firm was considering discontinuing the action because the parties were entering into an agreement. Eventually Kathleen Bartkus of the Baum law firm responded by email to defense counsel’s request for an extension to answer: “please be advised our file is on hold due to your client has entered into a forbearance plan. Please advise if you still intend on answering the complaint. Also please forward a signed Notice of Appearance.” Although defense counsel filed a Notice of Appearance, the defendant claims never to have received a forbearance agreement.

By Order to Show Cause signed by this Court dated November 12, 2009, the defendant requested that the Court grant leave to file an Answer pursuant to CPLR 3012(d), vacate any order or judgment previously granted, and order a settlement conference pursuant to CPLR 3408. A proposed Verified Answer was annexed to the Order to Show Cause. The defendant’s Order to Show Cause was submitted at a time when the second motion for an Order of Reference was pending. According to the Court’s internal case management system, it appears that the movant failed to file the signed Order to Show Cause with Special Term. The defendant disputes this and provides proof of filing and service on the cross motion. In any event, the defendant’s motion for leave to file an Answer and schedule a settlement conference, was never marked fully submitted for a decision. The plaintiff was granted an Order of Reference on December 18, 2009. Some time after the Order of Reference was granted, at the defendant’s request, the Court scheduled a settlement conference for April 15, 2010.

At that point, defense counsel asserts that plaintiff’s counsel agreed to accept the Answer that was originally annexed to the November, 2009 Order to Show Cause. The Answer was mailed to the Baum law firm on April 15, 2010, the same day as the first settlement conference. In the Answer, the defendant asserted the affirmative defense of lack of standing and the plaintiff’s failure to provide the statutory notice required by RPAPL § 1303, among other defenses. According to the information maintained by the Court’s computerized database, foreclosure settlement conferences were held in this Court’s Specialized Mortgage Foreclosure Conference Part on April 15, 2010, June 16, 2010, and November 17, 2010.

The plaintiff moved for a judgment of foreclosure and sale on August 10, 2010. It is undisputed that the plaintiff moved for a judgment of foreclosure while the defendant was submitting documents to the plaintiff for review of a loan modification. Although the plaintiff sought a default judgment, the attorney fee application in the proposed judgment of foreclosure sought fees based on its attorneys’ appearance at settlement conferences and for “Review of answer”. By Order dated October 26, 2010, the plaintiff withdrew the motion for a Judgment of Foreclosure.

From October 26, 2010, until recently, this matter remained on the Court’s “shadow docket”^[1]. By Order dated May 17, 2013, the Court directed the plaintiff to either proceed with the action or discontinue it. The Order provided that upon the plaintiff’s failure to act within ninety days, the Court “may” dismiss the action; the Order did not make a dismissal automatic upon the expiration of the ninety day period. In any event, by Notice of Motion dated May 13, 2013, the plaintiff moved for a new Order of Reference.

Defendant’s Excuse for the Default Reasonable

With respect to so much of the plaintiff’s motion for a new Order of Reference, the motion is denied. In an action to foreclose a mortgage, the plaintiff must establish its prima facie entitlement to judgment as a matter of law by producing the mortgage, the unpaid note, and evidence of default (see Deutsche Bank Nat. Trust Co. v. Whalen, 107 A.D.3d 931, 969 N.Y.S.2d 82 [2d Dept. 2013], citing GRP Loan, LLC v. Taylor, 95 A.D.3d 1172, 1173, 945 N.Y.S.2d 336; Deutsche Bank Natl. Trust Co. v. Posner, 89 A.D.3d 674, 674-675, 933 N.Y.S.2d 52). Where standing is put into issue by the defendant, “the plaintiff must prove its standing in order to be entitled to relief” (U.S. Bank, N.A. v. Collymore, 68 A.D.3d 752, 753, 890 N.Y.S.2d 578; see Wells Fargo Bank Minn., N.A. v. Mastropaolo. 42 A.D.3d 239, 242, 837 N.Y.S.2d 247).

“In a mortgage foreclosure action, a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced” (Bank of N.Y. v. Silverberg, 86 A.D.3d 274, 279, 926 N.Y.S.2d 532; see Deutsche Bank Natl. Trust Co. v. Spanos, 102 A.D.3d 909, 911, 961 N.Y.S.2d 200; U.S. Bank, N.A. v. Collymore, 68 A.D.3d at 753, 890 N.Y.S.2d 578). “Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation” (Deutsche Bank Natl. Trust Co. v. Spanos, 102 A.D.3d at 912, 961 N.Y.S.2d 200 [internal quotation marks and citations omitted]; see HSBC Bank USA v. Hernandez, 92 A.D.3d 843, 844, 939 N.Y.S.2d 120; Bank of N.Y. v. Silverberg, 86 A.D.3d at 281, 926 N.Y.S.2d 532; U.S. Bank, N.A. v. Collymore, 68 A.D.3d at 754, 890 N.Y.S.2d 578).

The plaintiff maintains that the defendant’s failure to raise its alleged lack of standing as an affirmative defense in an answer or in a timely motion to dismiss the complaint constituted a waiver of the defense (see generally EM>Wells Fargo Bank Minn., N.A. v. Mastropaolo, 42 A.D.3d at 250). otably, the plaintiff submitted an “Attorney Statement in Reply/Opposition to the Cross-Motion” dated August 7, 2013, [“the Reply Statement”], rather than an attorney’s affirmation. Plaintiff’s attorney submitted no evidence controverting defense counsel’s assertion in her affirmation that in response to counsel’s request for an extension of time to answer in July of 2008, 1) Tracy Fourtner of the Baum law firm told counsel that the Baum law firm was considering discontinuing the action because the parties were entering into an agreement, and 2) on the day of the first settlement conference on April 15, 2010, plaintiff’s counsel accepted the defendant’s Answer that had first been provided as an attachment to the November, 2009 Order to Show Cause to compel acceptance of the Answer.

Counsel’s unsworn and conclusory “Reply Statement” asserting that defense counsel’s affirmation is bald and self-serving, and fails to demonstrate an agreement to accept a late Answer, is not based on personal knowledge, lacks evidentiary value, and is insufficient to support the plaintiff’s motion for a new Order of Reference or to defeat the defendant’s cross motion (Zuckerman v City of New York, 49 N.Y.2d 557, 427 N.Y.S.2d 595, 404 N.E.2d 718 [1980]; Assets Recovery 26 LLC v Rivera, 39 Misc.3d 1240(A), 2013 WL 2996135 [N.Y. Sup.]; see also LaSalle Bank, NA v. Pace, 100 A.D.3d 970, 970-971, 955 N.Y.S.2d 161 [2d Dept. 2012] [stating that attorney affirmation filed in compliance with Administrative Order 548-10, as supplemented by Administrative Order 431-11, is not itself substantive evidence supporting summary judgment] ).

The Reply Statement simply dismisses its predecessor law firm’s emails referring to the fact that the “tile [wa]s on hold” and that the parties were “enter[ing] into a forebearance plan”. It bears repeating that plaintiff’s attorney’s Reply Statement is not affirmed, is not based on counsel’s personal knowledge, and relies on no evidence whatsoever to refute the defendant’s assertions.

Under the circumstances, the Court concludes that even assuming that the defendant defaulted in answering the complaint, under the circumstances as outlined above, the defendant has established a reasonable excuse for a default in answering (Braynin v. Dunleavy, 109 A.D.3d 571, 970 N.Y.S.2d 611 [2d Dept. 2013]). Thus, the issue of the plaintiffs standing to commence the action is properly before the Court (Homecomings Financial, LLC v Guldi, 108 A.D.3d 506, 508, 969 N.Y.S.2d 470 [2d Dept. 2013]).

This case is distinguishable from those cases where a borrower relies on an unsubstantiated loan modification to excuse a default (compare Deutsche Bank Nat. Trust Co. v. Gutierrez, 102 A.D.3d 825, 958 N.Y.S.2d 472 [2d Dept. 2013]). Here, no evidence has been produced to refute the defendant’s assertions that the parties were working toward a loan modification at least until the last foreclosure settlement conference in November of 2010. Thereafter, there was no further action on the part of the plaintiff until the Court sua sponte calendared the matter for a status conference in May of this year and essentially insisted that the plaintiff “fish or cut bait”. It is also telling, and uncontradicted, that in the plaintiffs fee application that was part of the withdrawn Judgment of Foreclosure, the plaintiffs attorney included charges for attending the 2010 settlement conferences and for “Review of answer”. Thus, all the direct and circumstantial evidence supports the defendant’s version of what transpired and in the exercise of this Court’s discretion constitutes a reasonable excuse for the defendant’s default in answering the complaint. (cf. Maspeth Federal Savings & Loan Ass’n, 77 A.D.3d 889, 909 N.Y.S.2d 403 [2d Dept. 2010]).

Defendant’s Meritorious Defense

Where standing is put into issue by the defendant, “the plaintiff must prove its standing in order to be entitled to relief’ (U.S. Bank, N.A. v. Collymore, 68 A.D.3d 752, 753, 890 N.Y.S.2d 578; see Wells Fargo Bank Minn., N.A. v. Mastropaolo, 42 A.D.3d 239, 242, 837 N.Y.S.2d 247). The plaintiff has failed to demonstrate that it had standing when it commenced the action because there is no proof that the plaintiff was in possession of the subject note when the action was commenced. The “Attorney Statement” refers to the Patridge affidavit to establish the plaintiff’s possession but this bootstrapping argument fails. Patridge, a Vice President for the loan servicer, states “[t]he plaintiff is the holder of the note and Chase is the servicer of the loan and is authorized to act on behalf of the holder of the Note.”

The Patridge affidavit does not say that the plaintiff was the holder of the note when the action was commenced. The affidavit also lacks any information about the promissory note’s delivery to the plaintiff (see HSBC Bank USA v Hernandez, 92 A.D.3d 843, 939 N.Y.S.2d 120 [2d Dept. 2012]; Homecomings Financial, LLC v. Guldi, 108 A.D.3d 506, 508-509, 969 N.Y.S.2d 470 [2d Dept. 2013] ). In any event, the Patridge affidavit did not give factual details as to the physical delivery of the note and, thus, was insufficient to establish that the plaintiff had physical possession of the note at any time (Id. at 509, citing Deutsche Bank Natl. Trust Co. v. Haller, 100 A.D.3d 680, 954 N. Y. S.2d 551; HSBC Bank USA v. Hernandez, supra; Aurora Loan Servs., LLC v. Weisblum, 85 A.D.3d 95, 109, 923 N.Y.S.2d 609).

Moreover, the critical proposition upon which the plaintiffs entire argument rests is not without doubt. The mostly blank and undated piece of paper with nothing but a purported signature of “Michael Koch” as Vice President, attached as movant’s Exhibit B, does not demonstrate that the plaintiff was the holder of the subject note when the action was commenced (Assets Recovery 26 LLC v Rivera, 39 Misc.3d 1240(A), 2013 WI, 2996135 [N.Y. Sup.] Deutsche Bank National Trust Co. v Haller, 100 A.D.3d 680, 954 N.Y.S.2d 551 [2d Dept. 2012]).

Thus, even assuming that the previous counsel for the plaintiff did riot agree to accept the defendant’s late Answer on April 15, 2010, the Court concludes that the Answer is deemed served on the plaintiff as of that date as the defendant has established both a reasonable excuse for the failure to Answer and a meritorious defense (see Equicredit Corp. of America v. Campbell, 73 A.D.3d 1119, 900 N.Y.S.2d 907 [2d Dept. 2010]).

RPAPL § 1303

In First National Bank of Chicago v. Silver, (73 A.D.3d 162, 899 N.Y.S.2d 256 [2d Dept 2010] ), the Appellate Division Second Department found that compliance with RPAPL § 1303, which mandates notice to a mortgagor under the Home Equity Theft Prevention Act (REAL PROPERTY LAW § 265-a “HETPA”), is a mandatory condition precedent to foreclosure, compliance with which must be established by plaintiff. The failure to demonstrate compliance is not an affirmative defense, but may be raised at any time. Id. at 166. The Silver Court held that plaintiffs failure to demonstrate compliance with the notice requirement mandates dismissal of the action (73 A.D.3d at 169, 899 N.Y.S.2d 256; see also Aurora Loan Services, LLC v. Weisblum, 85 A.D.3d 95, 102-103, 923 N.Y.S.2d 609 [2d Dept. 2011]).

Here, the defendant denies that she was ever served with the statutorily required notice. Unlike the defendant in Aurora Loan Services, LLC v. Weisblum, supra, Nicholson’s is not a bare and unsubstantiated denial of receipt which is admittedly insufficient to rebut the presumption of proper service created by an affidavit of service (see Deutsche Bank Nat. Trust Co. v. White, ___ N.Y.S.2d ___. 2013 WL 5539360 [2d Dept. 2013]).

Where a defendant submits a sworn denial of receipt of papers that allegedly were served, which contains specific facts to rebut the statements in the process server’s affidavit, it is generally sufficient to rebut the presumption of proper service, and necessitates an evidentiary hearing (see Engel v. Boymelgreen, 80 A.D.3d 653, 654, 915 N.Y.S.2d 596; Tikvah Enters., LLC v. Neuman, 80 A.D.3d at 749, 915 N.Y.S.2d 508; City of New York v. Miller, 72 A.D.3d at 727, 898 N.Y.S.2d 643).

Contrary to plaintiffs attorney’s “Reply Statement”, Nicholson provided an affidavit dated August 1, 2013, with a description of the individual purportedly served pursuant to CPLR 308 (2) that is substantially at odds with the process server’s description of the person served in the affidavit of service (Emigrant Mortg. Co., Inc. v. Westervelt, 105 A.D.3d 896, 964 N.Y.S.2d 543 [2d Dept. 2013]).

In addition, the plaintiff makes little or no attempt to address the defendant’s proof that the copy of the § 1303 notice that supported the withdrawn judgment of foreclosure and sale is not the same notice as the one annexed to the moving papers for a new Order of Reference. As discussed in detail in a scholarly article authored by Mark C. Dillon, Associate Justice of the Appellate Division of the New York State Supreme Court, Second Judicial Department, the RPAPL portion of HETPA, RPAPL § 1303 was enacted in 2006, originally effective as of February 1, 2007, and underwent some tweaking by amendments enacted in 2007, 2008, 2009, 2010, and 2011 (see “Unsettled Times Make Well-Settled Law: Recent Developments in New York State’s Residential Mortgage Foreclosure Statutes and Case Law, 76 Albany Law Review 1085, 1114 [2012-2013]). The plaintiff has failed to establish that it satisfied the statutory-specific notice to the defendant with the service of the summons and complaint that was in effect at the time the action was commenced. For that reason alone, the plaintiff’s motion for a new Order of Reference is denied.

Cross Motion for Summary Judgment

So much of the defendant’s motion to dismiss the complaint pursuant to CPLR 3211, or alternatively for summary judgment, is denied. As discussed above, questions of fact exist as to whether the note was physically delivered to the plaintiff prior to the commencement of the action and when, if at all, the note was endorsed (Deutsche Bank National Trust Co. v Haller, 100 A.D.3d 680, 954 N.Y.S.2d 551 [2d Dept. 2012], citing Deutsche Bank National Trust Co. v Rivas, 95 A.D.3d 1061, 945 N.Y.S.2d 328). Questions of fact also exist as to whether the plaintiff complied with RPAPL § 1303 that was in effect when the action was commenced (First National Bank of Chicago v Silver, 73 A.D.3d 162, 899 N.Y.S.2d 256 [2d Dept. 2010]). Although the Court concludes that the notice annexed to the plaintiff’s motion did not comply, the notice annexed to the withdrawn Judgment of Foreclosure may have. Finally, an issue of fact also exists as to whether the plaintiff failed to provide the defendant with thirty days written notice of the defendant’s default under the mortgage precluding summary judgment (G.E. Capital Mort. Services Inc. v Mittleman, 238 A.D.2d 471, 656 N.Y.S.2d 645 [2d Dept. 1997]).

[1] See Andrew Keshner, Advocates Seek to Eliminate Foreclosure `Shadow Docket’, N.Y.L.J., Mar. 27, 2012, at 1.

147 A.D.2d 208 (1989)

Leonard Slutsky, Respondent,
v.
Blooming Grove Inn, Inc., Appellant, et al., Defendants

Appellate Division of the Supreme Court of the State of New York, Second Department.

June 19, 1989

Sichol & Hicks, P. C. (Brian M. Gibson of counsel), for appellant.

Ferraro Rogers Dranoff Greenbaum Goldstein & Miller (Thomas C. Yatto of counsel), for respondent.

MANGANO, J. P., BROWN and SULLIVAN, JJ., concur.

HARWOOD, J.

We are called upon by the appeal from the final judgment herein to determine, among other things, whether a vacatur of a notice of pendency because of the invalidity of the underlying service of process (see, Dashew v Cantor, 85 A.D.2d 619) would preclude entry of a judgment in the plaintiff’s favor in an action to foreclose a mortgage where such invalidity was subsequently “cured”. While we conclude that it does, we also hold that, for purposes of establishing a foreclosure cause of action pursuant to RPAPL article 13, a plaintiff may file successive notices of pendency. We therefore reverse the judgment and remit the matter to the Supreme Court for the making of such factual findings as are necessary to properly determine whether judgment in the plaintiff’s favor can be supported by the notice of pendency filed at the outset of the litigation.

It is not disputed that on November 28, 1983, the plaintiff and Blooming Grove Inn executed a mortgage pertaining to specified realty to secure Blooming Grove Inn’s obligation on a $165,000 note payable in 60 monthly installments with, according to both the mortgage and contemporaneously executed note, annual interest of 16% “on the unpaid principal balance”. It is also undisputed that, several years before final payment was to have been made, Blooming Grove Inn defaulted in payment of monthly installments and certain taxes required by the mortgage, whereupon the plaintiff, as was his contractual right, effectively declared the entire debt due. On July 12, 1985, shortly after he purportedly assigned his “interest in the Note” while retaining to himself the obligation to collect the moneys due, the plaintiff commenced this action to foreclose the mortgage by service of the summons and complaint, both dated July 10, 1985, on the defendant Carpenter & Smith, Inc. Service was also allegedly made on July 12, 1985, on Blooming Grove Inn. However, the validity of the service upon Blooming Grove Inn is disputed. On July 18, 1985, the plaintiff filed a notice of pendency (see, CPLR article 65; see also, RPAPL 1331).

The plaintiff moved for summary judgment. Contending that service was improperly effectuated and that, because of the purported assignment of the note, the plaintiff had no standing to maintain the action, Blooming Grove Inn cross-moved for summary judgment dismissing the complaint. By order dated March 7, 1986, from which no appeal was taken, the Supreme Court denied the motion and the cross motion on the ground that the issues of the propriety of service and of the plaintiff’s standing presented issues of fact. As a result of that order, on April 11, 1986, the plaintiff “re-served” Blooming Grove Inn by delivery of two copies of the summons and complaint to the Secretary of State (see, Business Corporation Law § 306). It is unclear whether Blooming Grove Inn formally responded to the “re-served” summons and complaint, but there is no contention in any of the papers included in the appendices before us that the “re-service” was invalid.

The plaintiff thereafter again sought summary judgment. Blooming Grove Inn opposed by a general assertion of reliance on the arguments on the prior motion. It also cross-moved for sanctions pursuant to CPLR article 31 and for vacatur of the notice of pendency filed on July 18, 1985, at the outset of the litigation. With respect to the latter branch of its motion, Blooming Grove Inn reasserted its claim that the first service of the summons and complaint was invalid and that valid service was not made within 30 days of the filing of the notice of pendency (see, CPLR 6512; see also, CPLR 6514 [a]). By order entered April 6, 1987, the Supreme Court granted the plaintiff’s motion on the condition that the note underlying the mortgage be reassigned to the plaintiff and denied Blooming Grove Inn’s cross motion in its entirety.

Following a reference to compute the amount due, the plaintiff moved to confirm the Referee’s report and for a judgment of foreclosure and sale. In support of the motion, the plaintiff contended, inter alia, that the note had been “orally reassigned to him”. Blooming Grove Inn opposed, asserting, inter alia, that the plaintiff failed to properly obtain reassignment of the note and that the Referee improperly computed the interest, both because of an arithmetical error and by applying the wrong rate. Blooming Grove Inn urged, inter alia, that the note and mortgage provided for annual interest of 16% only with regard to the monthly payments, that no provision was made for payment of interest after maturity, that the debt matured when the plaintiff elected to accelerate it, and that, after maturity, the plaintiff was entitled only to statutory interest of 9% (see, CPLR 5004). It also cross-moved for leave to reargue its earlier motion for vacatur of the notice of pendency and for sanctions pursuant to CPLR article 31. By order dated September 28, 1987, the Supreme Court granted the plaintiff’s motion and denied Blooming Grove Inn’s cross motion. The separate judgment of foreclosure and sale from which Blooming Grove Inn also appeals was issued simultaneously with the order.

Blooming Grove Inn’s present contention that the plaintiff is without standing to maintain this action (cf., Merritt v Bartholick, 36 N.Y. 44; Kluge v Fugazy, 145 A.D.2d 537) is without merit (cf., Allen v Brown, 44 N.Y. 228; Gellens v 11 W. 42nd St., 259 App Div 435). The note secured by the mortgage is a negotiable instrument (see, UCC 3-104) which requires indorsement on the instrument itself “or on a paper so firmly affixed thereto as to become a part thereof” (UCC 3-202 [2]) in order to effectuate a valid “assignment” of the entire instrument (cf., UCC 3-202 [3], [4]). No such indorsement is included with the note as reproduced in Blooming Grove Inn’s appendix and it thus appears that the note was never validly transferred from the plaintiff.

We now turn to Blooming Grove Inn’s contentions that the Supreme Court erred when it denied the motion for vacatur of the notice of pendency and when it granted the plaintiff summary judgment. We conclude that the Supreme Court lacked an adequate basis for making those determinations and therefore remit the matter for further proceedings.

Courts have consistently required strict compliance with the procedures set forth in CPLR article 65 for the filing of a notice of pendency, including the requirement that, where it is filed before commencement of the action, the defendant must be served with the summons within 30 days after the filing if the notice is to be effective (CPLR 6512; see, 5303 Realty Corp. v O & Y Equity Corp., 64 N.Y.2d 313, 320; Lanzoff v Bader, 13 A.D.2d 995). Courts have determined that, in multidefendant cases, service on one defendant is sufficient to commence the action for the purposes of CPLR article 65 as long as the defendant has an ownership interest in the premises which are the subject of the litigation (see, Vogel v Meixner, 119 A.D.2d 877; cf., Schwartz v Certified Mgt. Corp., 78 A.D.2d 823). If properly filed pursuant to CPLR article 65, a notice of pendency is a powerful tool for a plaintiff (see, 5303 Realty Corp. v O & Y Equity Corp., supra). If a notice of pendency is vacated or if its initial three-year life is not timely extended (see, CPLR 6513, 6514), successive notices may not be filed for the purposes of CPLR article 65 and the plaintiff loses the special privilege afforded by that article (see, Holiday Investors Corp. v Breger & Co., 112 A.D.2d 979; see also, Robbins v Goldstein, 32 A.D.2d 1047, appeal dismissed 26 N.Y.2d 749).

The requirement that, in a foreclosure action brought pursuant to RPAPL article 13, a notice of pendency be filed at least 20 days before entry of final judgment (see, RPAPL 1331) is, in effect an element of the plaintiff’s cause of action (see, Robbins v Goldstein, 36 A.D.2d 730; see also, Isaias v Fisohoff, 37 A.D.2d 934). Failure to comply with the filing requirement precludes entry of final judgment. However, while vacatur of a notice precludes future refiling for the purposes of CPLR article 65, successive notices may be filed for purposes of prosecuting to final judgment a foreclosure action (see, Robbins v Goldstein, supra; see also, Isaias v Fischoff, supra).

The papers before us, including an affidavit of service contained in the plaintiff’s appendix, demonstrate the existence of issues of fact as to whether Blooming Grove Inn was validly served on July 12, 1985. Moreover, the nature of the relationship of the codefendant, Carpenter & Smith, Inc., which was validly served, to the mortgaged premises is unclear. It is, therefore, presently impossible to determine whether a notice of pendency supporting the final judgment was validly filed. Consequently, the Supreme Court should not have denied the application by Blooming Grove Inn for vacatur of the notice of pendency and should not have granted the plaintiff summary judgment without first conducting such further proceedings as would be necessary for making the requisite factual determinations. We therefore remit the matter, but note that, should the Supreme Court determine that the notice of pendency is ineffective, the plaintiff may file a new notice, provided he does so at least 20 days before entry of final judgment (RPAPL 1331).

Finally, we discern no error in the Referee’s calculations as to the amount due for interest from February 1985 the date of the last payment. Moreover, since Blooming Grove Inn agreed to pay annual interest of 16% “on the unpaid principal balance”, the contract rate of interest rather than the statutory rate of interest governs after maturity and until judgment, at which time the statutory rate will govern (see, e.g., O’Brien v Young, 95 N.Y. 428; Schwall v Bergstol, 97 A.D.2d 540, lv denied 61 N.Y.2d 605, appeal dismissed 62 N.Y.2d 804). As the judgment is hereby reversed, the contract rate will prevail until a new judgment is entered.

Accordingly, the appeals from the intermediate orders are dismissed (see, Matter of Aho, 39 N.Y.2d 241, 242), the judgment is reversed, and the matter is remitted to the Supreme Court, Orange County, for a determination in accordance herewith.

Ordered that the appeals from the order entered April 6, 1987 and the order dated September 28, 1987, are dismissed, without costs or disbursements; and it is further,

Ordered that the judgment dated September 28, 1987, is reversed, without costs or disbursements, and the matter is remitted to the Supreme Court, Orange County, for a determination in accordance herewith.

By Susan Chana Lask, Esq.

Recently a bank’s new foreclosure attorney complained to me about the now defunct Baum Foreclosure Mills files as so slovenly that, and I quote, ““The way they coded, you have no idea what this file looks like, it makes no rhyme or reason, conference-note, conference-note aom…” The documents do not exist to support the foreclosure complaints Baum filed years before that remain on the courts’ dockets. The latest set of attorneys representing the bank’s with those slovenly files apparently have marching orders to do whatever it takes, even fabricate facts, to keep the shadow docket alive. Their present attorneys defending the banks position now file affidavits attesting that they know the Bank has the Note because….well, ummm,…embarrassingly…not because the attorneys have personal knowledge but just because they are attorneys? Here’s what such an attorney’s affidavit looks like in opposition to a homeowners motion for summary judgment filed that the banks has no standing to sue:

“the Note and the Mortgage was subsequently transferred to Plaintiff (the bank) prior to the commencement of the foreclosure action pursuant to the Pooling and
Servicing Agreement…”, “…your affirmant has personal knowledge that the original endorsed Note does exist.”,” “Plaintiff is in possession of the Note…prior to and at the time of commencement of the subject Action (sic)”,“…there is no question concerning Plaintiff’s possession of the original Note and the original Mortgage” and “Plaintiff is in possession of the original endorsed Note and has been since the inception of the PSA…”

The law holds an attorney’s affirmation is improper and fatal to oppose a summary judgment motion. Giaccio v. Kiamesha Concord, Inc., 22 A.D.2d 723, 253 N.Y.S.2d 168 (3d Dep’t 1964), Zuckerman v. City of New York, 49 N.Y.2d 557, 563, 427 N.Y.S.2d 595, 404 N.E.2d 718. There is a high evidentiary standard needed to oppose and someone with personal knowledge of the facts is needed, to wit:

“While, as we have held, the affidavit need not be made by the plaintiff (Sznukowski v. B. F. Goodrich Company, 18 A.D.2d 861, 236 N.Y.S.2d 413), it must be by a person having knowledge of the facts and must be as good as the kind of affidavit which could defeat a motion for summary judgment on the ground that there is no issue of fact (Sortino v. Fisher, 20 A.D.2d 25, 32, 245 N.Y.S.2d 186, 195). The only affidavit which has been submitted is the obviously hearsay affidavit of counsel. Such an affidavit is insufficient (Keating v. Smith, 20 A.D.2d 141, 245 N.Y.S.2d 909.).”

An attorney’s affidavit is accorded no probative value unless accompanied by documentary evidence that constitutes admissible proof. Zuckerman.

You will also note that the attorney affidavit example above does not assert any personal knowledge of delivery to, or possession by, either the plaintiff bank or any of the other many entities involved. What about the entities involved in the PSA, the trusts, the servicers, and the in between banks and investors, including the FDIC that acts as administrator when the original bank lenders fail. Just where did the Note pass from entity to entity and how? Or were they all transferring air when they decided the mandates of the UCC regarding proper endorsements and transfers did not exist anymore? The above affidavit does not attach nor describe any of the many entities, including the plaintiff bank’s, “regularly maintained records” nor render them admissible as evidence. JP Morgan Chase, N.A. v. RADS Group, Inc., 88 A.D.3d 766, 767, 930 N.Y.S.2d 899 [2d Dept. 2011]; HSBC Bank USA, N.A. v. Betts, 67 A.D.3d 735, 736, 888 N.Y.S.2d 203 [2d Dept. 2009]; Unifund CCR Partners v. Youngman, 89 A.D.3d 1377, 1377–78, 932 N.Y.S.2d 609 [4th Dept. 2011]; Reiss v. Roadhouse Rest., 70 A.D.3d 1021, 1024, 897 N.Y.S.2d 450 [2d Dept. 2010]; Lodato v. Greyhawk North America, LLC, 39 A.D.3d 494, 495, 834 N.Y.S.2d 239 [2d Dept. 2007]; Whitfield v. City of New York, 16 Misc.3d 1115[A], 2007 N.Y. Slip Op. 51433 [U], 2007 WL 2142300 [Sup. Ct., Kings County 2007]; aff’d 48 A.D.3d 798, 853 N.Y.S.2d 117 [2d Dept. 2008].) The affidavit does not state that any “regularly maintained records” show delivery of the Note from anyone. There is no evidence that the plaintiff bank ever had possession of the Note except for the attorney trying to win the case for his bank client saying so because,…ummm, embarrassingly, because he is an attorney so we should believe whatever he says to events that he never was present at, was never a party to and he has absolutely no personal knowledge about

The days when an attorney’s word or even a handshake were good are long gone. The practice of law has become a childish game of who can fool the court the longest based on fabricating facts and misrepresenting the law. Now attorneys’ stooping so low to testify for the very clients they represent by their own conclusory hearsay makes the practice of law just junk.

By Susan Chana Lask, Esq.

Susan Chana Lask is an author, lecturer and accomplished attorney litigating in State and Federal Courts, including the United States Supreme Court for the past 25 years. She is named by the media as “New York’s High Profile Attorney” who consistently makes headlines worldwide and changes history with her controversial dogged lawsuits. Her 2010 lawsuit shut down the country’s most notorious Foreclosure Mill in New York State for the benefit of the public suffering from fraudulent foreclosure filings. In 2011 she appeared before the Supreme Court of the United States with the support of five Attorneys General where she obtained a historical decision that strip searching non-criminal offenders is unacceptable unless they are in the general population. Her 2006 lawsuit against the makers of Ambien resulted in the FDA complying with her demands to change prescription drug warnings to protect some 26 Million consumers. Her cases are monumental and have changed history.

Follow Ms. Lask on twitter @SusanChanaLask

This article is for informational purposes only. It is not legal advice. You should seek counsel from a licensed attorney if you have legal questions.

Andrew M. Cuomo
Governor

Benjamin M. Lawsky
Superintendent

October 18, 2013

Hon. A. Gail Prudenti
Chief Administrative Judge of the Courts
25 Beaver Street, 11th Floor
New York, NY 10004

Re: Proposed rules for the use of statewide forms in consumer credit actions seeking award of a default judgment.

Dear Judge Prudenti:

The New York State Department of Financial Services (the “Department”) appreciates the opportunity to comment on the proposed court rules requiring the use of standardized affidavits in consumer credit actions seeking default judgments. The Department is deeply engaged in fighting abusive and deceptive debt collection activity in New York. On July 25, 2013, the Department proposed a regulation that would address the most egregious pre-litigation collection abuses. The Department believes that reform of debt collectors’ litigation abuses are also critical – and while the Court’s proposed rules are a positive first step – we believe bolder reform is necessary. These reforms, as described further below, could include the following:

• Stronger affidavits to stop “robo-signing” and ensure debt collectors actually review a consumer’s file
• Require debt collectors to include important information about these debts in the affidavit
• Require debt collectors to include documentation evidencing the debt with the complaint
• Requiring debt collectors to send consumers a pre-complaint notice before commencing a collection lawsuit
• Demanding demonstrable proof of service when a debt collector moves for a default judgment
• Provide consumers an opportunity to vacate a default judgment if a debt collector violates the Court’s rules

In 2011, the former New York State Banking and Insurance Departments were merged to create a more modern and efficient regulator, and to fill regulatory gaps that would protect consumers of financial products and services. The Financial Services Law created the new Department and empowered it with regulatory authority over financial products and services previously unsupervised by the predecessor departments. The Department’s first major initiative pursuant to its “gap” authority was the August announcement of a proposed debt collection regulation.

The Department’s proposed rules regulate pre-litigation collection activities. The principal ideas addressed are:

• Raise the requirements for information that must be provided to a consumer before collection activities can begin. Collectors of a charged off debt will need to provide a breakdown of each charge and fee added to the debt and each payment made after charge off.
• Provide greater protections to consumers when they dispute the validity of the alleged debt. Anytime a consumer disputes the validity of the debt, even on the phone, debt collectors will need to provide documentation proving that the debt is valid, such as a copy of the signed contract or documents evidencing the transaction resulting in the indebtedness, the final account statement, and a statement explaining the “chain-of-title” of the debt.
• Disclose to consumers their rights under the Exempt Income Protection Act so that consumers will know that some sources of income are protected from garnishment.
• If a debt collector tries to collect on a debt after the statute of limitations has expired, the collector will need to inform the alleged debtor of this fact and that this is an affirmative defense in the event of a suit. This is important since many alleged debtors are not represented by counsel and are surprised when collectors unearth very old debts that have gone uncollected for years.
• Provide consumers written confirmation of any debt settlement agreement to ensure that creditors honor any settlement agreements, including those made with debt buyers earlier in the chain-of-title.

While I am confident that this proposed regulation is an important step to rein in unscrupulous debt collectors and ensure safe and fair credit practices in New York, reforming how creditors collect debt in the New York courts is an important next step. We are encouraged to see that the Office of Court Administration is eager to reform debt collection litigation practices in New York. The Department believes, however, that the proposed rules could go much further to address the significant debt collection litigation abuses that have a profound impact on New Yorkers and the state court system.

Studies abound documenting the endemic abuses in debt collection litigation1. This research and the Department’s consumer complaints show that debt collectors often file collection lawsuits with little to no information supporting their claims. This is especially problematic in the rapidly growing debt buying market, where debts are sold off for pennies on the dollar and debt buyers aggressively work to get consumers to pay. To keeps costs low, debt buyers typically purchase debts with little if any documentation as to ownership and amount owed. Due to the lack of records, consumers frequently complain that collectors are pursuing the wrong person or for the wrong amount of money. When a collector chooses to pursue litigation, collectors rarely provide, or can even access evidence of the debt beyond a few fields of data on a spreadsheet. Unscrupulous collectors have also been found to engage in “sewer service.” This all explains the collection industry’s litigation strategy, which relies on consumers failing to appear in court or if they do appear, being unrepresented by counsel. Should a consumer contest the action, debt collectors typically opt to drop the case completely. These practices are unacceptable. The Department believes that businesses should have the right to fairly collect their debts, and consumers should pay what they owe, but it is intolerable for professional collection companies to abuse the justice system and use the courts as a tool for collecting unverifiable debts from consumers who never had a fair opportunity to contest them.

The Court’s proposed rules expand statewide current New York City Civil Court requirements for prescribed affidavits when filing for a default judgment in a consumer credit action. A study by the New Economy Project in 2013, reviewed the effect of these requirements, and found that none of the sampled default judgment applications complied with the directives, even though default judgments were granted in 97% of these cases2. The New Economy Report also found that, among other problems, it was unclear who attested to the facts or who the affiant worked for, and affiants only attested to facts based “on information and belief,” not personal knowledge. The study raises significant concerns, particularly where in 2011, alone, 82,000 default judgments were granted in debt collection cases in New York. Accordingly, the Department respectfully submits that the proposed affidavits should not only require affiants to attest to “personal knowledge” of the plaintiff’s books and records, but should require affiants to specifically have personal knowledge of the alleged debtor’s records. Further, debt collectors should also allege important facts in the proposed affidavits, such as the date of charge off and the date of last payment, which are necessary to evaluate whether the statute of limitations on a debt has run.

Moreover, the Department urges the Office of Court Administration to adopt further reforms to protect consumers and New York’s justice system. Important reforms could include the following: Debt collectors should send consumers a pre-complaint notice, informing them of impending collection litigation, as well as disclosure of the consumer’s rights and basic information identifying the debt. This would provide an opportunity to the alleged debtor to request more information if needed to evaluate options, such as settling or hiring an attorney. Courts should require enhanced service standards for these consumer credit cases, where service has historically been poor and consumers have typically been unrepresented. If filing for a default judgment in a debt collection case, plaintiffs should provide demonstrable evidence of service, such as a GPS report or time-stamped pictures. Debt collectors should include some documentation evidencing the debt with a complaint, including a final statement sent to the consumer, and, where available, the signed contract or other terms and conditions attached to the debt. Pursuant to the Department’s proposed regulation, these documents will be provided to consumers who request verification of a debt. Also, requiring these documents with a complaint is a logical extension of the regulation’s pre-litigation requirement that would not add significant burden to creditors. Consumers should be provided an adequate opportunity to vacate a default judgment if a debt collector does not comply with the Court’s rules.

The Department would welcome further discussion on these suggestions. The Department believes that its proposed regulation of pre-litigation debt collection activities can complement and strengthen the Court’s efforts in this important area. Please feel free to contact Executive Deputy Superintendent Joy Feigenbaum at (212) 480-6082 to discuss this further.

Very truly yours,
Benjamin M. Lawsky
Superintendent of Financial Services

cc:
John W. McConnell, Esq.
Counsel
Office of Court Administration
25 Beaver Street, 11th Floor
New York, NY 10004

 .
1 Federal Trade Commission, Collecting Consumer Debts: The Challenges of Change (February 2009); The Legal Aid Society et al., Debt Deception: How Debt Buyers Abused the Legal System to Prey on Lower-Income New Yorkers (May 2010); National Consumer Law Center, The Debt Machine: How The Collection Industry Hounds Consumers and Overwhelms Courts (July 2010); Federal Trade Commission, Repairing a Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration (July 2010); Consumer Financial Protection Board, Fair Debt Collection Practices Act: CFOB Annual Report 2013 (March 2013).

2 New Economy Project, The Debt Collection Racket in New York (June 2013).

Decided on August 22, 2013

11647/12

Plaintiff Attorney: Tyne Modica, Esq., Rosicki, Rosicki & Assoicated, P.C., 51 E. Bethpage Road, Plainview, NY 11803

Defendant Attorney: Steven Alexander Biolsi, 7101 Austin Street, Suite 201B, Forest Hills, NY 11375

David I. Schmidt, J.

The following papers numbered 1 to 11 read herein:Papers Numbered

Notice of Motion/Order to Show Cause/

Petition/Cross Motion and

Affidavits (Affirmations) Annexed1-3

Opposing Affidavit (Affirmation)4-5

Reply Affidavit (Affirmation)6

Sur-Reply Affidavit8-9

Other PapersDecember 7, 2012 Order7

July 3, 2013 Letters10-11 [*2]

Upon the foregoing papers, defendant Paula Guy (Guy) moves for an order (1) dismissing the complaint of plaintiff U.S. Bank National Association, as trustee, on behalf of the holders of the adjustable rate mortgage trust 2007-1, adjustable rate mortgage-backed pass through certificates, series 2007-1 (US Bank Trust), pursuant to CPLR 3211(a), and (2) granting defendant Guy the full costs of this motion, including an award of counsel fees and expenses in the sum of at least three thousand dollars, assessed against plaintiff.

Background Facts and Procedural History

On October 26, 2006, defendant Guy, as both borrower and mortgagor, executed a promissory note and an adjustable rate mortgage, with an initial interest rate of 8.375%, in the principal amount of $520,000.00. The promissory note named Credit Suisse Financial Corporation (Credit Suisse), the originator of the loan, as the lender/payee. The mortgage named Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Credit Suisse, as mortgagee. The mortgage was duly recorded in the Office of the New York City Register, Department of Finance, on November 15, 2006, under file number 2006000634899, covering the residential premises located at 947 Liberty Ave., Brooklyn, New York.

The complaint alleges that the mortgage was thereafter assigned to DLJ Mortgage Capital, Inc. (DLJ) on May 18, 2007, and that the mortgage was subsequently assigned to plaintiff US Bank Trust on October 4, 2011. The mortgage recording documents on the Automated City Register Information System (“ACRIS”) website of the Office of the City Register, New York City Department of Finance, are consistent with those allegations.^[FN1]

The “Corporate Assignment of Mortgage” between DLJ and plaintiff reflects that Select Portfolio Services, Inc. (SPS), the mortgage servicer of defendant’s home loan, played a dual role in the assignment process by acting as agent for both “Assignor” and “Assignee.” The assignment reflects that SPS executed the mortgage assignment on October 4, 2011, on behalf of DLJ in its capacity as DLJ’s “Attorney-in-Fact,” in care of itself, and accepted the mortgage assignment in favor of US Bank Trust in care of itself. Bill Koch, Document Control Officer at SPS, executed the mortgage assignment from DLJ to US Bank Trust, which was recorded February 14, 2012..

Shortly thereafter, US Bank Trust commenced this foreclosure action against defendant Guy on June 5, 2012, alleging that it “is the holder of the subject note an[d] [sic] mortgage, or has been delegated the authority to institute a mortgage foreclosure action by the owner and holder of the subject mortgage and note ….” The complaint alleges that defendant Guy defaulted upon her monthly payment obligations under a December 20, 2010 loan modification under the Home Affordable Modification Program (HAMP) as of February 1, 2012, and seeks to foreclose on the above-referenced mortgage.

Defendant’s Motion to Dismiss

On July 11, 2012, defendant Guy moved, pursuant to CPLR 3211(a), to dismiss the complaint for lack of standing on the ground that the allegations in the complaint reflect that “[p]laintiff may not have received a proper assignment or delivery, actual or otherwise, of [the] note allegedly giving rise to this action.” Defendant Guy’s moving papers include the affidavit of Paula Guy,^[FN2] and an attorney affirmation from Steven Biolosi, Esq., dated July 9, 2012 and July 11, 2012, respectively. [*3]

US Bank Trust opposed defendant’s dismissal motion with an attorney affirmation from Robert King, Esq., and an affidavit from Gary Cloward of SPS, US Bank Trust’s alleged document custodian and the servicer of defendant’s mortgage, both dated September 26, 2012. Plaintiff claims that defendant’s standing argument is without merit since “a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced” (see US Bank v Silverberg, 86 AD3d 274, 279-280 [2011]). Without providing any factual details how plaintiff US Bank Trust derived an interest in the underlying note, plaintiff’s counsel claims that an allonge “affixed to and a permanent part of the note … contain[ing] an endorsement in blank signed by the attorney-in-fact for Credit Suisse” conclusively demonstrates plaintiff’s standing to bring this action.

The Cloward opposing affidavit contends that both the note and mortgage were delivered to SPS on US Bank Trust’s behalf on or about October 26, 2006, the note’s origination date, based on Cloward’s alleged review of US Bank Trust’s business records in SPS’ custody. Other than the alleged delivery date, the Cloward opposing affidavit provides no specific factual details (i.e., who, what, where, how) regarding the circumstances of the note’s delivery to either plaintiff US Bank Trust or to SPS, as US Bank Trust’s document custodian.

The Conditional Order of Dismissal

Because US Bank Trust failed to submit any probative documentary or testimonial evidence from someone with personal knowledge of the note’s delivery to US Bank Trust, and its opposition papers seemingly conflict with the complaint’s allegation regarding the note’s delivery on October 26, 2006,^[FN3] this court conditionally granted defendant Guy’s motion to dismiss the complaint, by order dated December 7, 2012, “unless, on or before January 14, 2013, plaintiff provides sufficient and proper documentation to establish plaintiff’s standing in this case” (December 7th Order).

Plaintiff’s Sur-Reply Submission

Prior to the court-imposed deadline for further submissions in the December 7th Order, US Bank Trust submitted another affirmation from Robert King as a sur-reply in further opposition to defendant’s dismissal motion based on “the file maintained in this action.” The King sur-reply affirmation attached a copy of the limited power of attorney from U.S. Bank National Association (US Bank) appointing SPS “Attorney-in-Fact” to, among other things, “execute and acknowledge in writing or by facsimile stamp all documents customarily and reasonably necessary and appropriate [to] . . . [t]ransact business of any kind regarding the Loans, and obtain an interest therein and/or in any building securing payments thereof, as U.S. Bank’s act and deed, to contact for, purchase, receive and take possession and evidence of title in and to the property and/or to secure payment of a promissory note . . . “

While the limited power of attorney between US Bank and SPS expressly provides that it “is being issued in connection with [SPS’s] responsibilities to service certain mortgage loans (the “Loans”) held by U.S. Bank in its capacity as Trustee,” plaintiff failed to submit a schedule reflecting that defendant’s loan is included in the “Loans” referenced therein. Instead, King’s sur-reply affirmation made the conclusory representation that SPS, in its capacities as servicer of “the pooled loans,” and the document custodian and attorney-in-fact for US Bank Trust, “maintains possession of the note on behalf of [US Bank Trust]” as one of its “responsibilities” and “did own and hold the note and mortgage at issue prior to commencement of the action.”

Plaintiff also submitted a sur-reply affidavit from Cloward of SPS, which claims that the note was delivered to SPS “as plaintiff’s attorney-in-fact and document custodian” on November 6, 2006, based on his review of “the subject loan records.” Mr. Cloward’s sur-reply affidavit does not describe or attach the business records upon which his knowledge is based, nor does the affidavit describe any [*4]of the factual details regarding the alleged delivery of the note to SPS on US Bank Trust’s behalf on November 6, 2006.

Importantly, plaintiff’s sur-reply does not explain why: (1) Cloward’s previously submitted “Possession Affidavit” inconsistently averred that the note was delivered to SPS in its capacity as US Bank Trust’s document custodian on or about October 26, 2006; (2) the complaint alleges that defendant Guy delivered the note to Credit Suisse on the October 26, 2006 origination date of the loan; and (3) DLJ, by SPS, assigned the mortgage to US Bank Trust, in care of SPS, on October 4, 2011, nearly five years after the October 26, 2006 origination date of the loan.

Discussion

A motion to dismiss under CPLR 3211 requires a determination whether the complaint states a cause of action, but “[i]f the court considers evidentiary material, the criterion then becomes whether the proponent of the pleading has a cause of action” (Sokol v Leader, 74 AD3d 1180, 1181-82 [2010] [emphasis added], quoting Guggenheimer v Ginzburg, 43 NY2d 268, 275 [1977]). Dismissal results only if the movant demonstrates conclusively that no cause of action is pled, or that “a material fact as claimed by the pleader to be one is not a fact at all” (Sokol, 74 AD3d at 1182, quoting Guggenheimer, 43 NY2d at 275; see also Lawrence v Graubard Miller, 11 NY3d 588, 595 [2008]). In considering a motion to dismiss for failure to state a claim, all factual allegations are accepted as true (Sokol, 74 AD3d at 1181). Legal conclusions and factual claims flatly contradicted by the evidence, however, will not be presumed true (Sweeney v Sweeney, 71 AD3d 989, 991 [2010]; Meyer v Guinta, 262 AD2d 463, 464 [1999]).

Defendant Guy seeks dismissal of US Bank Trust’s complaint on the ground that the allegations contained therein reflect that US Bank Trust “may not have received a proper assignment or delivery, actual or otherwise, of [the] note allegedly giving rise to this action.” Upon defendant Guy’s assertion of the defense of lack of standing, the burden shifted to plaintiff US Bank Trust to demonstrate that it had standing to commence and prosecute this action (US Bank, NA v Collymore, 68 AD3d 752, 753 [2009]). As discussed below, plaintiff US Bank Trust failed to satisfy its burden of proving that the note was duly delivered to it prior to June 5, 2012, the commencement date of this foreclosure action.

In addition to an attorney affirmation, which makes the conclusory assertion that “plaintiff currently holds the note and mortgage as of October 26, 2006,” plaintiff opposed defendant’s motion to dismiss the complaint with a “Possession Affidavit” by Gary Cloward, the document control officer of SPS. While Cloward’s opposing affidavit claims that the note and mortgage were delivered to SPS as plaintiff’s alleged document custodian on October 26, 2006, that assertion is not based on Cloward’s personal knowledge, since his affidavit explicitly states that it is based on his “review and examination of the subject loan records” that SPS maintains as document custodian for US Bank Trust.

Moreover, Cloward’s assertion that the note and mortgage were delivered to US Bank Trust on October 26, 2006, is inconsistent with the complaint, wherein US Bank Trust alleges that: (1) defendant Guy executed and delivered the note to Credit Suisse on October 26, 2006, and (2) the mortgage was “thereafter” assigned to US Bank Trust on October 4, 2011.

Plaintiff’s reliance on “an Allonge [to the note] which contains an endorsement in blank signed by the attorneys-in-fact for Credit Suisse” to establish US Bank Trust’s standing is misplaced. It is well-established that “[t]he note secured by the mortgage is a negotiable instrument (see UCC 3-104), which requires indorsement on the instrument itself or on a paper so firmly affixed thereto as to become a part thereof’ (UCC 3-202 [2]) in order to effectuate a valid assignment of the entire instrument” (Slutsky v Blooming Grove Inn, Inc., 147 AD2d 208, 212 [1989]). The five-page note at issue here is numbered “Page 1 of 5 Pages,” “Page 2 of 5 Pages,” “Page 3 of 5 Pages,” “Page 4 of 5 Pages,” and “Page 5 of 5 Pages.” Although there was sufficient space for an endorsement on the last page of the note, plaintiff submitted an “ALLONGE TO NOTE” on a separate unnumbered page, which is not firmly affixed to the promissory note, as is explicitly required under the UCC. In [*5]addition, the court notes that as the subject allonge is undated, there is no indication as to when such document was prepared.

Plaintiff’s contention that “defendant ratified plaintiff’s ownership and authority to modify the terms of the note and mortgage” when defendant accepted a HAMP modification is similarly unavailing. Plaintiff fails to support this assertion with any legal authority whatsoever, and ignores the fact that the mortgage was assigned to US Bank Trust on October 4, 2011, nearly one year after SPS claims to have modified defendant’s mortgage under HAMP in December 2010. Furthermore, defendant could not have ratified US Bank Trust’s ownership of the note upon acceptance of the HAMP modification if defendant never “receive[d] proper notice that any debt due to the original lender was ever assigned to the Plaintiff,” as the defense claims here.

Recognizing that US Bank Trust’s opposition to defendant’s motion was insufficient to establish prima facie standing, this Court issued the December 7th Order, granting defendant Guy’s motion to dismiss “unless … plaintiff provides sufficient and proper documentation to establish plaintiff’s standing in this case.” After this Court issued the December 7th Order, US Bank Trust timely submitted a sur-reply in further opposition to the motion, which consisted of another attorney affirmation and another affidavit from Cloward of SPS. For the reasons discussed below, plaintiff’s sur-reply submission, like its opposition papers, fail to establish plaintiff’s prima facie standing to maintain this action, as a matter of law.

The Court of Appeals has clearly stated that “[s]tanding to sue is critical to the proper functioning of the judicial system. It is a threshold issue. If standing is denied, the pathway to the courthouse is blocked. The plaintiff who has standing, however, may cross the threshold and seek judicial redress.” (Saratoga Co. Chamber of Commerce v Pataki, 100 NY2d 801, 812 [2003], cert denied 540 US 1017 [2003]). In Caprer v Nussbaum (36 AD3d 176, 181 [2006]), the Second Department held that “[s]tanding to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request.”

Under New York law, it is axiomatic that a plaintiff has standing to commence a mortgage foreclosure action “where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced” (Homecomings Fin., LLC v Guldi, 108 AD3d 506, 2013 NY Slip Op 05048, *2 [July 3, 2013]). “An assignment of a mortgage without assignment of the underlying note or bond is a nullity, and no interest is acquired by it” (HSBC Bank USA v Hernandez, 92 AD3d 843, 843 [2012]; see also Kluge v Fugazy, 145 AD2d 537, 538 [1988] [holding that “foreclosure of a mortgage may not be brought by one who has no title to it and absent transfer of the debt, the assignment of the mortgage is a nullity”]).

In Homecomings (108 AD3d at 506), a factually analogous case, the Second Department recently reversed an order granting the plaintiff summary judgment because Homecomings failed to establish prima facie standing to foreclose. In that case, Homecomings failed to submit probative evidence that the note was physically delivered or duly assigned to it prior to commencement of the foreclosure action. Like plaintiff’s submissions in this case, the only proof of physical delivery of the note submitted by Homecomings was an affidavit from its servicing agent, claiming that the note was duly delivered to its “custodian of records.” The court held that an affidavit from plaintiff’s servicer regarding delivery to plaintiff’s custodian of records was “insufficient to demonstrate that the party commencing the action … had standing to do so at the time of the filing of the summons and complaint.” The court further held that the affidavit was “insufficient to establish that the plaintiff had physical possession of the note at any time” because it “did not give factual details as to the physical delivery of the note” (Id. at * 3).

Here, as in Homecomings, plaintiff’s submissions of attorney affirmations and affidavits from SPS, plaintiff’s alleged document custodian, fail to establish that the note was either assigned to US Bank Trust or was physically delivered to US Bank Trust prior to the commencement of this foreclosure action. Furthermore, Cloward’s affidavits, like those submitted in Homecoming, failed to provide any factual details regarding the physical delivery of the note to US Bank Trust and were [*6]not based on personal knowledge. Consequently, dismissal of this action is appropriate.

Finally, an award of attorneys fees to defendant is unwarranted here, since defendant has failed to identify any contractual provision entitling it to such an award. “The general rule is that [a]n attorney’s fee is merely an incident of litigation and is not recoverable absent a specific contractual provision or statutory authority'” (Gorman v Fowkes, 97AD3d 726, 727 [2012] [citations omitted]). Here, defendant’s request for an award of costs is similarly denied as unwarranted.

Accordingly, it is

ORDERED that the branch of defendant Guy’s motion to dismiss plaintiff’s complaint is granted; and it is further

ORDERED that the complaint against defendant Guy is dismissed with prejudice; and it is further

ORDERED that the branch of Guy’s motion for costs of this motion, including an award of counsel fees and expenses in the sum of three thousand dollars, is denied.

This constitutes the decision, order and judgment of the court.

E N T E R,

J. S. C.

Footnote 1:This court properly takes judicial notice of the mortgage recording documents on ACRIS (see Des Fosses v. Rastelli, 283 AD 1069, 1070 [1954] [“[t]his court has taken judicial notice of the deed in the foreclosure action from the Referee, to the respondents, dated April 6, 1953, and recorded April 15, 1953”).

Footnote 2:Defendant Guy’s three-page affidavit is included in, and considered on, this record, although the first two pages of the Guy affidavit were inadvertently omitted from defendant’s moving submission. Because the missing affidavit pages do not raise new factual issues, consideration of the affidavit in its entirety is not prejudicial to a fair adjudication of this motion.

Footnote 3:Plaintiff’s complaint alleges that “[o]n or about October 26, 2006, PAULA GUY executed and delivered to CREDIT SUISSE FINANCIAL CORPORATION, a certain note bearing date that day … .” There is no allegation in US Bank Trust’s complaint regarding the delivery of the note to US Bank Trust or to SPS on US Bank Trust’s behalf on October 26, 2006.

Decided on July 5, 2013

7054/09

Plaintiff Attorney: Robin L. Muir, Esq., Hogan Lovells, US, LLP, 875 Third Avenue, New York, NY 10022

Defendant Attorney: Pavita Krishnaswamy, Esq., Brooklyn Legal Services, 105 Court Street, 4th Fl., Brooklyn, NY 11201

David I. Schmidt, J.

Upon the foregoing papers, defendant Lydia R. Thomas moves for an order, pursuant to 22 NYCRR § 202.44, confirming the report and recommendation of Referee Deborah Goldstein dated November 14, 2011.

Plaintiff U.S. Bank National Association, as Trustee for the Structured Asset Investment Loan Trust 2005-6 commenced this action to foreclose a mortgage executed by defendant on April 4, 2005. The mortgage secures an adjustable rate note in the amount of $260,000.00. Following a significant upward adjustment of the interest rate, defendant encountered difficulties making payments under the mortgage and note, resulting in a default in December 2008. According to defendant, in May 2009, the servicer for plaintiff, ASC/Wells, which was obligated to follow the guidelines of the Home Affordable Modification Program (HAMP), offered defendant a modification with terms that were significantly less favorable than those which would be required under HAMP. In June 2009, [*2]defendant sent correspondence to ASC/Wells wherein she rejected the modification offer on the basis that it was not affordable and further requested that she be reviewed for a modification under HAMP.

Pursuant to CPLR 3408, this matter action was referred to the Foreclosure Settlement Conference Part (FSCP) for mandatory settlement conferences. Several conferences were thereafter held beginning on August 6, 2009, with ASC/Wells represented by the law firm of Steven J. Baum, P.C. (Baum). According to the report of Referee Goldstein, defendant reported at the initial conference that she had previously submitted modification workout packages to ASC/Wells seeking a HAMP review, but rather than conducting a HAMP review, ASC/Wells reviewed defendant for an in-house modification, erroneously claiming that a borrower must specifically request to be reviewed under HAMP. In subsequent conferences, ASC/Wells requested more documents from defendant and an extension of time to conduct a HAMP review. Instead of completing a HAMP review, ASC/Wells offered defendant a forbearance agreement. The referee states in her report that when she inquired about the details of the modification review that was being conducted, it was discovered that ASC/Wells was using incorrect income information. The referee directed defendant to clarify the income issue by submitting an updated workout package.

At a conference held on March 8, 2010, the appearing attorney from Baum reported that defendant was denied under HAMP as the result of a negative Net Present Value (NPV). According to the referee, ASC/Wells failed to provide defendant with a denial letter specifically stating the basis for denial, along with the inputs used for the NPV test as required by HAMP guideline 09-08. Additionally, the Baum attorney was unable to reach a representative of ASC/Wells with authority to settle and who had knowledge of the HAMP review conducted.

In her report, the referee states that ASC/Wells requested an entirely new workout application from defendant as the result of ASC/Wells’ misplacement of documents and the fact that other documents previously submitted by defendant had become “stale.” The referee instructed defendant to resubmit and update the modification package and instructed Baum and ASC/Wells to expedite a new HAMP review. However, due to apparent law office failure, the modification package was not forwarded by Baum to ASC/Wells when the parties met for the next settlement conference on August 11, 2010. The referee directed Baum to escalate and expedite the HAMP review and to appear at the next settlement conference with the results.

A conference was subsequently held on October 21, 2010. According to the referee, the Baum attorney reported that the modification review was in “the final stages” and that ASC/Wells required no further documentation. Nonetheless, the failure of ASC/Wells to present at the conference a finalized modification, as it was instructed, prompted the referee to issue a directive stating the following:

“Plaintiff/ASC has failed to comply w[ith] federal HAMP guidelines, and failed to complete its modification review despite the fact that defendant [*3]submitted an application for loss mitigation back in 6/09. Although ASC escalated’ the review and conceded that all necessary documents were received from defendant, the review has not been completed. ASC is directed to complete its modification review and provide defense w[ith] a proposal for loss mitigation on or before 10/26/10.”

The referee further directed ASC/Wells “to appear in person by a knowledgeable and authorized representative on 10/26/10 to address the inexplicable delays and blatant failure to adhere to federal guidelines, the good faith requirements under CPLR 3408 amongst other things.”

Despite the directive, ASC/Wells appeared at the October 26, 2010 by Carol Orozco, who admitted that she lacked personal knowledge of the loan and the long history of the HAMP review. Moreover, the referee noted in her report that ASC/Wells failed to complete its HAMP review in accordance with its representations at the prior conference.

At the final settlement conference on November 19, 2010, the referee was advised that ASC/Wells hired the firm of Hogan Lovells to appear with Baum as co-counsel. The referee states in her report that the ASC/Wells attorneys did not address the prior delays in conferencing, but rather took the position that defendant was reviewed and denied under HAMP “a long time ago” for negative NPV. The referee stated that contrary to previous representations, ASC/Wells “had no intention of reviewing Defendant’s recently submitted workout submissions under HAMP or substantiating the basis for the prior NPV denial (that was based on the wrong income).” The referee further stated:

“Throughout the conferencing process, absolutely no progress was made toward the evaluation of Defendant Thomas for a loan modification or the resolution of this foreclosure action. The lack of progress is wholly attributable to the Foreclosing Parties’ dilatory conduct, which has wasted judicial time and resources, and has required Defendant to re-submit documents that were seemingly ignored. For several months, the Baum Law Firm and Servicer ASC/Wells stalled the modification review process by requesting additional and duplicative documents, while interest continued to accrue at the original annual percentage rate of 8.5%, which increased the payoff substantially.

Instead of conducting a timely review, the Foreclosing Parties and/or their counsel made several overlapping document demands; lost track of or failed to examine documents that Defendant submitted, resulting in duplicative requests; have allowed documents that were timely when submitted to become out-dated, thus providing a pretext for demanding multiple submissions of the same documents; denied Defendant’s applications for loss mitigation without complying with federal HAMP guideline 09-08; and have apparently made no effort to evaluate the fundamental financial information that Defendant submitted more than two years ago in order to determine an affordable monthly payment upon which a modification could be structured. This conduct – which would continue ad infinitum if not [*4]checked – demonstrates the Foreclosing Parties’ failure to participate in good faith in the foreclosure settlement conferencing process.

The Foreclosing Parties have prolonged and ultimately frustrated the workout process, inflated Defendant’s original loan, caused the defense to attend successive conferences during which Servicer ASC/Wells and the Baum Law Firm conducted a protracted modification review, and wasted significant judicial resources. Because the Foreclosing Parties come to this Court of equity with unclean hands, having failed to negotiate an affordable loan modification in good faith, or to comply with HAMP guidelines and this Referee’s directives, appropriate sanctions are recommended.”

The matter was thereafter referred to this Part, where additional conferences were held with the parties. Oral argument on the instant motion to confirm the referee’s report and recommendation was heard on April 4, 2013.

CPLR 3408, as amended in 2009, provides that “[b]oth the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible” (CPLR 3408 [f]). The procedures and rules for CPLR 3408 settlement conferences promulgated by the Chief Administrator of the Courts are set forth in 22 NYCRR 202.12—a. With regard to the obligation of the parties to negotiate in good faith imposed by CPLR 3408 (f), these rules provide,

“The parties shall engage in settlement discussions in good faith to reach a mutually agreeable resolution, including a loan modification if possible. The court shall ensure that each party fulfills its obligation to negotiate in good faith and shall see that conferences not be 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] ).

Courts have found that lenders failed to negotiate in good faith under varied circumstances. In Wells Fargo Bank, N.A. v Hughes (27 Misc 3d 628 [2010]), the court dismissed the subject foreclosure action without prejudice where the lender, contrary to the directives of the court, presented a modification proposal which included an adjustable rate component. “Bad faith” was found where, despite defendants making all required payments under a trial modification, plaintiff denied defendants’ request for a permanent modification based on their debt to income ratio without any evidence to support this determination (Wells Fargo Bank, N.A. v Meyers, 30 Misc 3d 697 [2010]). In the Meyers case, the court ordered that plaintiff execute a final modification based on the terms of the trial modification and dismissed the underlying foreclosure action. In Household Finance Realty Corporation of New York v Philbrick (Sup Ct, Chautauqua County, March 31, 2011, Dillon, J., index No. K1-2010-1354), the court dismissed the action where the lender refused to consider any settlement proposal unless the borrower paid forty percent of the arrears, which was clearly beyond her financial ability. [*5]

In BAC Home Loans Servicing v Westervelt (29 Misc 3d 1224[A], 2010 NY Slip Op 51992[U] [2010]), the court barred plaintiff from collecting certain arrears, interest and fees due to plaintiff’s default in appearing at a settlement conference, its failure to communicate with the referee, its refusal to re-examine defendan”s income pursuant to HAMP directives and its refusal to work toward a modification with a borrower who is gainfully employed. In One West Bank, FSB v Greenhut (36 Misc 3d 1205[A], 2012 NY Slip Op 51197[U] [2012]), the court assessed a $1,000.00 sanction against plaintiff, finding that plaintiff’s failure to produce at a settlement conference a representative with authority to fully dispose of the case demonstrated a failure to proceed in good faith.

In Emigrant Mortgage Co. Inc. v Corcione (28 Misc 3d 161 [2010]), plaintiff’s delay in responding to defendants’ entreaties toward resolution, plaintiff’s offer to defendant of a shockingly unconscionable loan modification agreement and plaintiff’s misrepresentations as to the amount of taxes it advanced, led the court to find that plaintiff failed to act in good faith. As a result, the court barred and prohibited collection of interest accrued, legal fees and expenses for a certain period, fixed principal at a certain amount and awarded exemplary damages of $100,000.00.

Recently, the Appellate Division, First Department advised that “[w]hile the aspirational goal of CPLR 3408 negotiations is that the parties reach a mutually agreeable resolution to help the defendant avoid losing his or her home’ (CPLR 3408 [a]), the statute requires only that the parties enter into and conduct negotiations in good faith (see subd [f]). . .there are situations in which the statutory goal is simply not financially feasible for either party” (Wells Fargo Bank, N.A. v Van Dyke, 101 AD3d 638, 638 [2012]). The court stated that “the mere fact that plaintiff refused to consider a reduction in principal or interest rate does not establish that it was not negotiating in good faith. Nothing in CPLR 3408 requires plaintiff to make the exact offer desired by defendants, and plaintiff’s failure to make that offer cannot be interpreted as a lack of good faith” (id.). Nonetheless, the court pronounced that “merely by proving the absence of fraud or malice on the part of the lender” does not establish compliance with the good faith requirement of CPLR 3408 and that “[a]ny determination of good faith must be based on the totality of the circumstances” (id. at 638-639).

On two occasions, the Appellate Division, Second Department determined that certain remedies, ordered by lower courts for violation of the good faith requirement of CPLR 3408, are not appropriate or authorized under the statute. In IndyMac Bank F.S.B. v Yano-Horoski, 78 AD3d 895 [2010], the court stated that “the severe sanction imposed by the Supreme Court of cancelling the mortgage and note was not authorized by any statute or rule, nor was the plaintiff given fair warning that such a sanction was even under consideration” (IndyMac Bank F.S.B., 78 AD3d at 896 [citation omitted]). Recently, in Wells Fargo Bank, N.A. v Meyers ( ___ AD3d ___ , 2013 NY Slip Op 03085), the court held that the lower court’s remedy of compelling the execution of a final modification based on the terms trial modification was unauthorized and inappropriate, as it had the effect of enforcing a contract [*6]to which the parties never freely agreed and deprived plaintiff of due process since it was not given notice that such remedy would be applied. While holding that the compulsion of a modification under the circumstances was beyond the scope of the court’s power under CPLR 3408, the court stated in conclusion:

“[I]t is beyond dispute that CPLR 3408 is silent as to sanctions or the remedy to be employed where a party violates its obligation to negotiate in good faith. In amending CPLR 3408 to add subdivision (f), the Legislature declined to authorize or set forth any particular sanction or penalty to impose upon a party found to have failed to satisfy its obligation under CPLR 3408(f) to negotiate in good faith. Unless the Legislature chooses to specify appropriate sanctions or remedies to be employed in such circumstances, the courts will continue to endeavor to enforce the mandate of CPLR 3408(f) as best they can in the absence of a sanctioning provision”

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“In the absence of a specifically authorized sanction or remedy in the statutory scheme, the courts must employ appropriate, permissible, and authorized remedies, tailored to the circumstances of each given case. What may prove appropriate recourse in one case may be inappropriate or unauthorized under the circumstances presented in another.” Accordingly, in the absence of further guidance from the Legislature or the Chief Administrator of the Courts, the courts must prudently and carefully select among available and authorized remedies, tailoring their application to the circumstances of the case. (Wells Fargo Bank, N.A. v Meyers, ___ AD3d ___ , 2013 NY Slip Op 03085).

As a general rule, courts will not disturb the findings of a referee as long as they are substantially supported by the record and the referee has clearly defined the issues and resolved matters of credibility (Last Time Beverage Corp. v F & V Distribution Co., LLC, 98 AD3d 947, 950 [2012]). A referee’s credibility determinations are entitled to great weight because, as the trier of fact, he or she has the opportunity to see and hear the witnesses and to observe their demeanor (id.; see Galasso, Langione & Botter, LLP v Galasso, 89 AD3d 897, 898 [2011]). The record here supports the referee’s findings that ASC/Wells and its counsel did not negotiate in good faith from the outset of the conferences by, among other acts and omissions, their failure to follow HAMP directives, their needless delaying of the workout process, their misrepresentations that a modification offer would be finalized by certain times and their violation of the referee’s directive of October 21, 2010.

In its decision, the Meyers court noted that several courts, upon finding that foreclosing plaintiffs failed to negotiate in good faith, barred them from collecting interest, legal fees and expenses (see Bank of Am. N.A. v Lucido, 35 Misc 3d 1211[A], 2012 NY Slip Op 50655[U] [2012]; BAC Home Loans Servicing v Westervelt, 29 Misc 3d 1224[A], 2010 NY Slip Op 51992[U] [2010]; Emigrant Mtge. Co. Inc. v Corcione, 28 Misc 3d 161 [2010]; Wells Fargo Bank, N.A. v Hughes, 27 Misc 3d 628 [2010]). The Meyers court gave no clear indication as to whether such remedies were [*7]permissible or not, stating that “[w]hile we do not rule out the possibility of other permissible remedies, we conclude that the one employed here-imposition of the terms of the so-called original modification agreement proposed by the plaintiff and accepted by the defendants’. . . as the new, binding terms of the agreement between the defendants and Freddie Mac- was unauthorized and inappropriate” (Emphasis added). In addition to the aforesaid cases, there have been other instances where lower courts have cancelled interest as a remedy for a violation of CPLR 3408 (Wells Fargo Bank, N.A. v Ruggiero, 39 Misc 3d 1233[A], 2013 NY Slip Op 50871[U] [2013]; HSBC Bank USA, N.A. v McKenna, 37 Misc 3d 885 [2012]; U.S. Bank N.A. v Green, Sup Ct, Kings County, March 25, 2013, Kurtz, J., index No. 9220/09).

The primary argument of plaintiff against the cancellation of interest is that the court does not have the authority to alter the contractual rights of the parties, particularly in light the Meyers. However, the Meyers court, while holding that a court cannot compel a plaintiff to offer a modification with specific terms, did not explicitly hold that cancellation or tolling of interest cannot constitute an appropriate remedy under certain circumstances. The instant action for foreclosure is equitable in nature (see Notey v Darien Constr. Corp., 41 NY2d 1055 [1977]; Mtge. Elec. Registration Sys., Inc. v Horkan, 68 AD3d 948 [ 2009] ). “Once equity is invoked, the court’s power is as broad as equity and justice require” (Mtge. Elec. Registration Sys., Inc, 68 AD3d at 948, quoting Norstar Bank v Morabito, 201 AD2d 545 [1994]). “In an action of an equitable nature, the recovery of interest is within the court’s discretion” (Dayan v York, 51 AD3d 964, 965 [2008]; see CPLR 5001 [a]; Deutsche Bank Trust Co., Ams. v Stathakis, 90 AD3d 983, 984 [2011]). In an appropriate case, equity requires the cancellation of any interest awarded on the unpaid principal balance of the mortgage (Norwest Bank Minn., NA v E.M.V. Realty Corp., 94 AD3d 835 [2012]). Insofar as the lack of good faith of plaintiff’s servicer resulted in the accumulation of interest during the protracted period of settlement negotiations, the court finds that the cancellation of interest and late fees on the principal balance of the mortgage from August 9, 2009, as recommended by the referee, is the appropriate sanction. In fact, it has been expressed by defendant’s counsel during conferences with this court that such reduction of the indebtedness may result in a feasible modification under recent amendments to HAMP income requirements. Such a result would clearly serve the salutary purpose of CPLR 3408, which is to help defaulting mortgagors remain in their homes.

Of course, there may be a time when the Appellate Division directly addresses the issue of whether cancellation of interest is an authorized and appropriate under CPLR 3408, or when the Legislature or Chief Administrator of the Courts chooses to specify appropriate sanctions or remedies, which may or may not include the cancellation of interest. If plaintiff so elects, this court will issue an order staying this action until such time as the issue is settled. Otherwise, defendant’s motion is granted to the extent that the report and recommendation of the referee is confirmed and that all interest and late fees on the underlying indebtedness are forfeited from August 6, 2009 until the date the parties agree to a modification.

The foregoing constitutes the decision and order of the court.

E N T E R,

J. S. C. [*8]