The Scope of the 'Mandatory Settlement Conference' Requirement for Mortgage Foreclosures

In 2009, the legislature extended CPLR 3408, for a five-year period, to cover all actions involving “a home loan as such term is defined in section 1304 of the real property actions and proceedings law, in which the defendant is a resident of the property subject to foreclosure.” (L.2009, ch. 507, sec.25). No longer was the statutory protection limited to high-cost or subprime loans. But even during that five-year period, the definition of home loan in RPAPL 1304 remained subject to limits: 1) the borrower must be a natural person; 2) the borrower must have incurred the debt “primarily for personal, family, or household purposes”; and 3) the loan must be secured by a one to four family dwelling occupied wholly or partly as the principal residence of one of the borrowers. RPAPL 1304(5)(a).

The Case

The Valentine case tested those limits. Roselyn Valentine owned the home in which she lived. She also served as president of Roz-Valt Corp. In 2006, Roz-Valt borrowed $230,000 from Independence pursuant to a commercial term loan agreement. The loan was designed to fund start-up costs in operating a franchised Quiznos sandwich shop. The bank, however, required that Valentine herself serve as guarantor of the loan, and required her to deliver a mortgage on her home to secure her guarantee.

Roz-Valt defaulted on the loan, and Valentine defaulted on her personal guarantee. The bank then brought this action to foreclose the mortgage on Valentine's home. When the bank moved for summary judgment, Valentine opposed the motion, invoking the mandatory settlement conference provisions of CPLR 3408. Supreme Court granted the bank's motion, holding CPLR 3408 inapplicable to the mortgage on Valentine's home. Valentine appealed.

In affirming, the Appellate Division, in an opinion by Justice Jeffrey Cohen, emphasized the definition of home loan in RPAPL 1304. The court noted that the statute focuses on the identity of the borrower. In this case, the borrower was Roz-Valt, not Valentine. As a result, the loan did not satisfy the first requirement of RPAPL 1304: The borrower was not a natural person. The opinion went on to observe that the loan also did not satisfy the second requirement of the statute: Because the loan was used to finance a new business, the borrower did not incur the debt for “personal, family, or household purposes.” As a result, Valentine was not entitled to a mandatory settlement conference, and the bank was entitled to summary judgment.

Analysis

The court's decision is entirely consistent with the statute. To hold that Valentine was entitled to the protections of the statute because she was in danger of losing her home, the court would have to read the first two elements of the definition of “home loan” completely out of the statute. The statute requires a natural person borrower who has incurred debt for personal or family reasons in addition to the fact that the loan is secured by the personal residence of one of the borrowers. Moreover, the requirement that the borrower be a natural person provides a bright-line rule that is unlikely to raise many serious interpretation issues. And the borrower who knows enough to incorporate will not typically be the primary object of the legislature's concern.

On the other hand, the court's focus on the requirement that the loan be used “primarily for personal, family, or household purposes,” while consistent with the statutory language, may be more problematic as a matter of practice. Suppose, for instance, Roselyn Valentine had not borrowed money through her corporation, but instead had refinanced her home mortgage in her own name, taking out $50,000 in cash, and had then spent $40,000 in the process of opening a sandwich shop. Would the loan be one for “personal, family, or household purposes?”

First, because money is fungible, how would a court determine whether the money used to open a sandwich shop was the same money Valentine borrowed in the refinance process? Second, is earning a living a “family” purpose? Third, how would one determine whether the loan proceeds had been used “primarily” for the family purpose? For instance, if the total balance of the refinanced mortgage loan was $200,000, but the cash Valentine took out from the refinance was $50,000, has the loan been used primarily for personal or business purposes?

The court did not have to address any of these questions on the facts of the Valentine case, but they might well arise in a future case in which the borrower is not a corporate entity.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

In response to skyrocketing foreclosures in the wake of the 2008 financial crisis, the New York legislature mandated settlement conferences as a prerequisite to many residential foreclosures. Although statutory amendments have expanded the statute's reach, settlement conferences are not required for all residential mortgages. A recent Second Department case, Independence Bank v. Valentine, NYLJ 12/12/13, p. 31, col. 5, explores the statute's limits.

Background

In 2008, the state legislature enacted CPLR 3408 which, in conjunction with RPAPL section 1304, provided that once a mortgagee brings a residential foreclosure action involving a high-cost home loan or a subprime loan, the court is required to hold a mandatory settlement conference to see whether the parties can reach a resolution to help the defendant avoid losing his or her home. Among the resolutions the parties are to explore are adjustments in payment schedules or amounts.

In 2009, the legislature extended CPLR 3408, for a five-year period, to cover all actions involving “a home loan as such term is defined in section 1304 of the real property actions and proceedings law, in which the defendant is a resident of the property subject to foreclosure.” (L.2009, ch. 507, sec.25). No longer was the statutory protection limited to high-cost or subprime loans. But even during that five-year period, the definition of home loan in RPAPL 1304 remained subject to limits: 1) the borrower must be a natural person; 2) the borrower must have incurred the debt “primarily for personal, family, or household purposes”; and 3) the loan must be secured by a one to four family dwelling occupied wholly or partly as the principal residence of one of the borrowers. RPAPL 1304(5)(a).

The Case

The Valentine case tested those limits. Roselyn Valentine owned the home in which she lived. She also served as president of Roz-Valt Corp. In 2006, Roz-Valt borrowed $230,000 from Independence pursuant to a commercial term loan agreement. The loan was designed to fund start-up costs in operating a franchised Quiznos sandwich shop. The bank, however, required that Valentine herself serve as guarantor of the loan, and required her to deliver a mortgage on her home to secure her guarantee.

Roz-Valt defaulted on the loan, and Valentine defaulted on her personal guarantee. The bank then brought this action to foreclose the mortgage on Valentine's home. When the bank moved for summary judgment, Valentine opposed the motion, invoking the mandatory settlement conference provisions of CPLR 3408. Supreme Court granted the bank's motion, holding CPLR 3408 inapplicable to the mortgage on Valentine's home. Valentine appealed.

In affirming, the Appellate Division, in an opinion by Justice Jeffrey Cohen, emphasized the definition of home loan in RPAPL 1304. The court noted that the statute focuses on the identity of the borrower. In this case, the borrower was Roz-Valt, not Valentine. As a result, the loan did not satisfy the first requirement of RPAPL 1304: The borrower was not a natural person. The opinion went on to observe that the loan also did not satisfy the second requirement of the statute: Because the loan was used to finance a new business, the borrower did not incur the debt for “personal, family, or household purposes.” As a result, Valentine was not entitled to a mandatory settlement conference, and the bank was entitled to summary judgment.

Analysis

The court's decision is entirely consistent with the statute. To hold that Valentine was entitled to the protections of the statute because she was in danger of losing her home, the court would have to read the first two elements of the definition of “home loan” completely out of the statute. The statute requires a natural person borrower who has incurred debt for personal or family reasons in addition to the fact that the loan is secured by the personal residence of one of the borrowers. Moreover, the requirement that the borrower be a natural person provides a bright-line rule that is unlikely to raise many serious interpretation issues. And the borrower who knows enough to incorporate will not typically be the primary object of the legislature's concern.

On the other hand, the court's focus on the requirement that the loan be used “primarily for personal, family, or household purposes,” while consistent with the statutory language, may be more problematic as a matter of practice. Suppose, for instance, Roselyn Valentine had not borrowed money through her corporation, but instead had refinanced her home mortgage in her own name, taking out $50,000 in cash, and had then spent $40,000 in the process of opening a sandwich shop. Would the loan be one for “personal, family, or household purposes?”

First, because money is fungible, how would a court determine whether the money used to open a sandwich shop was the same money Valentine borrowed in the refinance process? Second, is earning a living a “family” purpose? Third, how would one determine whether the loan proceeds had been used “primarily” for the family purpose? For instance, if the total balance of the refinanced mortgage loan was $200,000, but the cash Valentine took out from the refinance was $50,000, has the loan been used primarily for personal or business purposes?

The court did not have to address any of these questions on the facts of the Valentine case, but they might well arise in a future case in which the borrower is not a corporate entity.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.