Real Property Law

AppDiv, Second Dept. (memorandum opinion)

In a mortgage foreclosure action, mortgagee bank appealed from Supreme Court's imposition of sanctions for failure to negotiate a loan modification in good faith. The Appellate Division modified, holding that Supreme Court was entitled to impose sanctions, but that Supreme Court had improvidently exercised its discretion by permanently barring any collection of interest or attorneys' fees without further court order.

The bank brought this foreclosure action after homeowner defaulted on his mortgage. When the homeowner submitted an application for a loan modification, the bank made numerous requests for additional documentation, including that which homeowner had already submitted. These requests spanned a period of 40 months, during which 24 separate court appearances were held, and during which the bank failed to comply with court directives requiring it to turn over documentation to the homeowner.

When the bank finally did transmit a modification offer to homeowner, the latter did not accept on the ground that the offer was unconscionable. The bank refused to consider homeowner's counteroffer, responding that it would not negotiate the terms of the loan modification. Homeowner then sought sanctions for failure to negotiate in good faith as required by CPLR 3408(f).

Supreme Court awarded sanctions, abating all interest, costs, and attorneys' fees that had accrued between Oct. 1, 2010 and April 12, 2014 (the date of Supreme Court's order). The court also barred the bank from collecting any interest, costs, or attorneys' fees in the future absent a further court order. The bank appealed.

In modifying, the Appellate Division started by noting that the homeowner's submissions demonstrated that the bank had engaged in dilatory tactics and had failed to negotiate in good faith. The court then noted that CPLR 3804(f) provides no specific remedy for a mortgagee's failure to negotiate in good faith, but held that Supreme Court had providently exercised its discretion in abating all interest, costs, and fees accruing up until the date of the court's order. The court held, however, that Supreme Court had improvidently exercised its discretion in abating future interest, costs and fees absent a court order.

COMMENT

In light of CPLR 3408(f)'s silence about the remedies that may be employed for violation of the statute's good-faith negotiation requirement, at least one court has required a mortgagee to continue settlement negotiations in an effort to coerce mortgagee into offering mortgagor a reasonable loan modification. In Bank of America, N.A. v. Rauscher, 43 Misc.3d 488, after finding that the mortgagee had failed to negotiate a loan modification in good faith, the court cancelled the interest and accrued fees back to the date of the first conference, scheduled a new settlement conference, and directed mortgagee to indicate whether it would provide a loan modification at the next conference. Further, the court held that if mortgagee denied mortgagor a loan modification, mortgagee must provide an explanation of the reason for denial.

A court may also impose a fine on a mortgagee for failing to negotiate in good faith. In One West Bank, FSB v. Greenhut, 36 Misc.3d 1205(A), the court ordered mortgagee to pay $1,000 to the New York Interest on Lawyers Account Fund when mortgagee violated its duty under CPLR 3408(c) to produce a representative with authority to dispose of the case during settlement negotiations. The court emphasized that mortgagee should have known after the first conference before the court that mortgagee must produce a representative with authority to settle

While courts may obligate mortgagee to continue settlement negotiations after finding mortgagee failed to proceed in good faith, a court may not require a mortgagee to accept a particular loan modification agreement. In Wells Fargo Bank, N.A. v. Meyers, 108 A.D.3d 9, the Second Department rejected the remedy employed by the Supreme Court, which compelled mortgagee bank to modify the loan agreement by adopting the terms of a trial modification offer mortgagee had earlier proposed.

After mortgagor contacted mortgagee seeking a loan modification, the latter offered mortgagor a trial modification where mortgagee promised that it would not foreclose during the trial period. Although mortgagee violated the terms of the trial period and commenced a foreclosure action against mortgagor, the Second Department held that Supreme Court had acted improperly in permanently binding the parties to what was supposed to be only a trial modification. According to the Second Department, Supreme Court's solution rewrote the parties' agreement in violation of CPLR 3408(f).

Courts may also impose sanctions on mortgagee's counsel in an effort to enforce the obligation to negotiate in good faith. In Deutsche Bank Trust Co. of Am. v. Davis, 32 Misc.3d 1210(A) (2011), when Supreme Court found mortgagee's inability to locate three of the five applications for a loan modification showed a lack of good faith, the court stayed the foreclosure action until mortgagee moved to resume negotiations in good faith, and sanctioned mortgagee's attorney 50% of interest from the date of the first negotiation, which was originally due to mortgagee by mortgagor.

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Court Approval Not Required for Sale By Religious Corporation

Vista Developers Corp. v. Board of Managers of the Diocesan Missionary and Church Extensions Society of the Protestant Episcopal Church

NYLJ 1/21/16, p. 23, col. 6

AppDiv, First Dept. (memorandum opinion)

In purchaser's action for return of a down payment, purchaser appealed from Supreme Court's award of summary judgment to seller. The Appellate Division affirmed, holding that court approval of the sale was not required, and failure to obtain court approval did not justify purchaser's failure to close.

Seller, a not-for-profit corporation created by a special act of the state legislature in 1912, contracted to sell a multifamily property to purchaser. Purchaser refused to close without prior court approval of the sale, and sought return of its down payment. Supreme Court awarded summary judgment to seller, and purchaser appealed.

In affirming, the Appellate Division noted that the special act creating seller limited seller's ability to purchaser real property, but imposed no limit on seller's ability to sell or otherwise dispose of real property. The court acknowledged that section 12 of the Religious Corporations Law generally required court approval of the sale of real property owned by religious corporations, but held that section 12 must yield to the provisions of a special act creating a particular religious corporation.

The court subsequently held that, assuming but not deciding that seller is a religious corporation, the act creating seller took the seller outside the mandates of section 12. The court then held that section 510 of the Not-for-Profit Corporations Law did not require court approval because the sale was not for all or substantially all of seller's assets. Finally, the court held that the sale contract did not require court approval. The contract provided that the sale was “contingent upon [seller] obtaining [court] approval, pursuant to the Religious Corporations Law and the Not-for-Profit Corporation Law ' if required.” Because neither statute required approval of the sale, the contract provision was inapplicable. As a result, the purchaser had no excuse for failure to close, and the seller was entitled to return the down payment as liquidated damages.

COMMENT

Generally, Religious Corporations Law ' 12 requires a religious organization to obtain court approval prior to any sale of real property. The statute applies where the religious corporation is created by a special act that does not expressly address the procedure by which the organization may dispose of its property. In Matter of Religious Corps.& Ass'n. Divestment of Prop., 2 Misc. 3d 1003(A), the court declined to approve a religious organization's intended sale of property, as the organization had not followed the proper procedure for obtaining court approval. Id. at *8. The special act that created the organization granted it the authority to dispose of property “for the use of the corporation” without making any mention of any procedural requirements. (L. 1926, ch. 680). The court held, therefore, that the corporation had to comply with Religious Corporations Law ' 12 would apply.

In contrast, if the language of the special act expressly allows the organization to sell property at its will, Religious Corporations Law ' 12 does not apply. In Bush v. Bush, 91 Misc. 2d 389, the court held that the special act creating the church, the same church involved in Vista Developers, authorized the church to sell property without obtaining prior court approval. The special act expressly permitted the church “to sell, mortgage, lease or otherwise dispose of the [property] at their will and pleasure.” Id. This was in contrast to the statute's grant of power to acquire property “subject to such other restrictions as from time to time shall be prescribed by law with regard to charitable corporations.” Id . The court held that, under principles of statutory interpretation, the general provisions of Religious Corporations Law must give way to the specific provisions of the special act which allowed the church to sell property at its “will and pleasure,” i.e., without any procedural restrictions. Id.

If the language of the special act places on the organization procedural requirements different from those in Religious Corporations Law ' 12, the special act governs and ' 12 does not apply. In Diocese of Buffalo, N.Y. v. McCarthy, 91 A.D.2d 1210, the court held that the pastor of a church under the Diocese of Buffalo could not lease property without first obtaining the Bishop's approval. Id. at 767. The special act reincorporating the Diocese of Buffalo in 1951 required the approval of the Bishop before any lease of Diocesan land. Id. at 766. The court held that the act dispensed with ' 12's requirement of court approval and replaced it with a requirement of obtaining the Bishop's approval. Id. at 767. Because the pastor of the church had not obtained the Bishop's approval prior to leasing Diocesan land, the court held the lease to be void ab initio. Id.

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