Reduced title insurance coverage for properties sold through foreclosure
Because so many mortgage foreclosure actions are defended with particular zeal, and because legal proceedings (especially for home loans) are fraught with pitfalls, securities companies have always been skeptical about the insurance of these claims. securities. Lawyers dealing with foreclosure lawyers and bidders can easily attest to this. But the adoption of a recent law creates a New obstacle to title insurance for home mortgages resulting from a foreclosure sale.
This new law (RPAPL §1302-a, entered into force on December 23, 2019) provides, in essence, that the defense of lack of quality is (more) likely to be waived when the mortgage is classified as a mortgage. [the definition of a home loans is found at RPAPL 1304(6)(a)], even if a defendant has failed to raise the defense in a motion to dismiss before the answer or in an admissible argument. If a defendant has appeared, his ability to raise the defense continues until the time the hammer falls at the foreclosure auction.
If, however, a defendant has apparently defaulted, then the ability to sue the defense survives the foreclosure sale, hiding to attack the foreclosure sale title for a potentially uncertain length of time. However, the authority of the court of first instance significantly clarifies that an excuse for the delay in the intervention of the defense is still necessary. [JP Morgan Chase Bank, N.A. v. Carducci, 67 Misc.3d, 124 N.Y.S.3d 642 (Sup. Ct. West. Co. 2020).] It is primarily this unpredictable exposure that naturally makes securities companies more than timid to insure, and which does not incidentally create problems for lenders and foreclosure sale bidders.
Break with existing standards
If revolutionary is perhaps too strong a word to apply to the new statute, it is in any case a drastic modification of what litigants – and securities companies – have understood from as far back as the ‘we remember.
First, standing has long been a defense which could be waived under the law (CPLR §3211 (3)) if it was not invoked in a motion to dismiss. If it was not presented in this form, it had to be pleaded in a response, lest it be waived, again under the law: RPAPL §1302. These laws are sufficiently clear and a wealth of case law has supported them. [US Bank N.A. v. Nelson, 169 A.D.3d 110, 93 N.Y.S.3d 138 (2d Dept. 2019); Wells Fargo Bank v. Halberstam, 166 A.D.3d 710, 87 N.Y.S.3d 328 (2d Dept. 2018). For much more extensive citation see 2 Bergman On New York Mortgage Foreclosures §19.07, LexisNexis Matthew Bender (rev. 2020).]Indeed, the Court of Appeal recently addressed the issue, clearly confirming the waiver of the permanent defense, albeit on events that occurred before the effective date of the new law. [US Bank National Association v. Nelson, ____ N.E.3d ____ 2020 WL 7390873 (Mem.), 2020 N.Y. Slip Op. 07661).] The law was promulgated during the appeal period and in this regard, the Court said that it had not come to the question of whether RPAPL 1302-a offered the possibility of invoking standing to act in the stage where the plaintiff had requested a judgment of foreclosure and sale. . On the contrary, it considered that the defendants were free to apply to the court of first instance for possible remedies under the law.
While there were occasional nuances in the wording of the waiver, it was minor enough that it did not change the basic principle. In any event, the laws (and case law) enacting the waiver lose their effect in mortgage foreclosure actions.
Another fundamental principle was the finality of the foreclosure and sale judgment. Once this was entered, all of the defense issues that were – or could have been significantly argued in the foreclosure action – were considered concluded. [See, inter alia, Chapman Steamer Collective, LLC v. Keybank National Association, 163 A.D.3d 760, 81 N.Y.S.3d 501 (2d Dept. 2018); Ciraldo v. JP Morgan Chase Bank, N.A., 140 A.D.3d 912, 34 N.Y.S.3d 113 (2016); Feiber Realty Corp. v. Abel, 265 N.Y. 94, 191 N.E. 847 (1934).] Thus, a failing part was “blocked”; what they could have argued but did not do (for our purposes, standing) has been concluded.
The securities companies, of course, have relied on this reliable state of affairs. Unless standing is part of an ongoing appeal, when the action ended with the foreclosure sale, a defendant suddenly hoping to increase standing was not a factor. Whatever other concerns the securities companies have about the strength of the security, a permanent default was not among them.
It is evident to mortgage foreclosure litigants that the defense of lack of standing has been commonplace for a number of years. The mortgage business frequently gives rise to assignments of mortgage-backed securities, so problems involving proper assignments or endorsement of notes can easily arise. And the foreclosure must have been in possession of the mortgage note at the start of its foreclosure.
While most often the seized plaintiff does indeed have standing, there is room to stumble and therefore the defense is often interposed. In practice, then, the problem (if there ever was one) will sometimes be resolved in the foreclosure action; that is, it will have been raised, dealt with and resolved (with the exception of an appeal, which is not relevant to this discussion).
Recalling that one of the main concerns of the new law is that a permanent defense survives as a threat even after a foreclosure sale, the peril only prevails when a defendant has defaulted. Can a defendant who has responded and argued the permanent defense pursue the claim after the foreclosure sale? They could (anyone can, of course, try anything), but the vast majority there would be no basis for that. If the defendant sues him in federal court, the Rooker-Feldman doctrine prohibits it. [See, inter alia, Hachamovitch v. DeBuono, 159 F.3d 687 (2d Cir. 1998); Dockery v. Cullen & Dykman, 90 F. Supp. 2d 233 (E.D.N.Y. 2000); 1 Bergman On New York Mortgage Foreclosures 2.23, LexisNexis Matthew Bender (rev. 2020).] If the defendant renews the argument under the existing legend, it would be prohibited by law from the doctrine of jurisprudence. [See, inter alia, Weiss v. Phillips, 157 A.D.3d 1, 65 N.Y.S.3d 147 (1st Dept. 2017); 2 Bergman On New York Mortgage Foreclosures §21.01 , LexisNexis Matthew Bender (rev. 2020). And if a separate action in a state court is brought, the doctrine of res judicata should defeat it. [See, inter alia, Chapman Steamer Collective, LLC v. Keybank National Association, 163 A.D.3d 760, 81 N.Y.S.3d 501 (2d Dept. 2018); Dupps v. Betancourt, 121 A.D.3d 746, 994 N.Y.S.2d 633 (2d Dept. 2014); 3 Bergman On New York Foreclosures §27.02, LexisNexis Matthew Bender (rev. 2020).]
This still leaves a significant portion of mortgage foreclosures deleteriously affected by the new law: cases where a defendant who strength wanting to challenge the quality of an applicant was lacking in the action. Because it is no longer possible to waive the standing defense by neglecting to invoke it in a motion or response, a defaulting defendant remains a suspected risk (if not a threat of criminal harassment) on the verge of death. ‘suddenly emerge after the sale with an attack on the action and the title derivative through it. This is ultimately what creates the problem with title insurance.
How long the after-sales attack lurks
That the possibility of a stealthy assault after foreclosure sale exists can easily be understood as a basis for some title insurers to avoid risk, either with an exception for defense arising, or an absolute declination to insure. While the securities firm may find that the standing was unassailable, even an unfounded claim incurs litigation costs (ie.
The dilemma is exacerbated by uncertainty over how long a hidden defendant can remain in hiding until he emerges. Certainly, cowards have proven to be a defense against an aftermarket offensive.
Time limits may be invoked to prevent redress where the action of one party has caused prejudice to another party, thereby rendering the award of redress unfair. [First Nationwide Bank v. Calano, 223 A.D.2d 524, 636 N.Y.S.2d 122 (2d Dept. 1966).] Examples of delays that could lead to failures: one year [Id.] or eighteen months. [Chase Manhattan Mort. Corporation v. Anatian, 22 A.D.3d 625, 802 N.Y.S.2d 743 (2d Dept. 2005).] As useful as they are, the factors involving failures can vary too much to provide predictability – in any case, the time that a securities firm could be left to think about seems to at least be long.
The statutes could in theory provide more precision, but a review of those that might apply — CPLR §2003, RPAPL §231, CPLR §317, CPLR §5015 (a) (1) and CPLR 5010 (a) ( 3) —not quite connect to the dictates of the new RPAPL §1302-a. They too are uncertain. A discussion about them here would be long and obscure, and not easily bring to a conclusion. Readers may wish to review them for an independent assessment.
The dangers posed by RPAPL §1302-a are such that title insurers now require the inclusion of an exception for all applicable policies for (the possible) interposition of a permanent defense. As a result, the bidder bears both the cost of defending such a claim and the risk of loss of title. As a result, the usefulness of a title policy in certain situations may now become questionable. The end result can be a cooling off on the bidding process as more risk is involved. (It can also be used to devalue properties subject to home loans sold through foreclosures).
That said, most title insurers omit the exception if a standing review confirms that the plaintiff clearly had standing at the start of the action. Others, however, will feel compelled to issue policies except for what ongoing analysis may reveal. Perhaps not unexpectedly, a title insurer has concluded that the risk associated with RPAPL §1302-a is so great that it will no longer insure any securities conveyed by foreclosures. There are definitely some concerns here and extra diligence is required to keep your title insurer happy.
Jason C. Bergman is Vice President and Senior Underwriting Advisor at Benchmark Title Agency. He is also a real estate advisor and chair of the American Bar Association’s Real Estate Litigation, Convictions and Trust Subcommittee on Mortgages and Foreclosures.