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Tuesday, August 5, 2014

What Constitutes "Good Faith" Negotiation of a Foreclosure Action?

Ah, “good faith” – the jello mold of contract law.  What is “good faith”?  What does it mean to negotiate in “good faith”?   If a statute does not provide a definition, do common law notions of good faith apply?  In New York, a panel of the Appellate Division (Second Department) had occasion to define the parameters of “good faith” for purposes of the statutory requirements in mortgage foreclosure actions.

In 2009, in response to the foreclosure crisis, New York’s Civil Practice Law and Rules (“CPLR”) § 3408 was amended to require mandatory settlement conferences in mortgage foreclosure actions involving any home loan in which the defendant was residing in the property.  The statute further requires that both plaintiff and defendant negotiate in "good faith" to resolve the action, including, if possible, a loan modification.  The statute does not define “good faith.”

Plaintiff (bank) argued on appeal 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.”  Of course, plaintiff maintained 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).

The court rejected plaintiff's contention that a lack of good faith pursuant to CPLR 3408(f) requires a showing of gross disregard of, or conscious or knowing indifference to, another's rights.  Instead, the court held that a failure to negotiate in “good faith” under 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.”

The court reasoned that this definition aligned with the purpose of the good faith requirement, which is “to ensure that both plaintiff and defendant are prepared to participate in a meaningful effort at the settlement conference to reach resolution."

The court elaborated on what constitutes a failure to act in good faith:

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.

Applying the standard to this case, the court held that:

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 [defendant] on the subject loan. Although the plaintiff may ultimately be correct that [defendant] is not entitled to a . . . 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 [defendant] or the Supreme Court to rely upon the veracity of the grounds for the plaintiff's repeated denials of [defendant’s] application.

Can you nail that to the wall: what's a meaningful effort? 

U.S. Bank National Assoc v. Sarmiento, 11124/09 (N.Y. App. Div. 2d Dep't Aug 5. 2014). 

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