Opinion
No. 131889/09.
10-13-2015
ONEWEST BANK FSB As Successor In Interest to IndyMac Bank, Plaintiff, v. Giuseppe PRESTANO and Caterina Prestano, Defendants.
Hogan Lovells U.S. LLP New York, for Plaintiff. Nicholas M. Moccia, Esq Staten Island, for Defendant.
Hogan Lovells U.S. LLP New York, for Plaintiff.
Nicholas M. Moccia, Esq Staten Island, for Defendant.
PHILIP S. STRANIERE, J.
The following items were considered in the review of this motion for Summary Judgment, Cross Motion and Motion for protective order
Papers Numbered
Notice of Motion 1
Cross–Motion 2
Notice of Motion for Protective Order 3
Memorandum of Law 4
Affirmation in Support 5
Memorandum of Law 6
Affirmation in Support 7
Reply 8
Memorandum of Law 9
Exhibits Attached to Papers
Plaintiff, OneWest Bank FSB As Successor In Interest To IndyMac Bank, FSB, commenced this residential mortgage foreclosure action against the defendants, Giuseppe Prestano, Caterina Prestano, and "John Doe No.1" to "John Doe # 10" alleging that the defendants failed to make payments as agreed in a note and mortgage.
Currently before the court are three motions.
1. Plaintiff's motion for summary judgment and appointment of a referee to compute damages dated June 16, 2014.
2. Defendants' cross-motion dated September 16, 2014 to:
(a) disqualify counsel for plaintiff, Hogan Lovells U.S. LLP;
(b) compel plaintiff to comply with discovery requests;
(c) dismiss the complaint and toll interest because of plaintiff's bad faith and unconscionable conduct in defendants' attempt to renegotiate the loan;
(d) order a hearing on the issue of plaintiff's standing to initially commence the action.
3. Plaintiff's motion for a protective order in regard to defendants' request for depositions dated October 24, 2014.
Both counsels pursuant to the Civil Practice Law and Rules (CPLR), have each failed to delineate any papers submitted to the others motion as "opposition papers" [CPLR §§ 2214 & 2215 ]. There is a difference between filing a cross-motion and filing opposition to a motion. The rules require that papers be properly labeled in that regard. There is a document dated December 2, 2014 by defendants' counsel labeled "reply affirmation" which in its body counsel states is being submitted in opposition to plaintiff's motion, and in support of defendants' cross-motion and in opposition to plaintiff's motion for a protective order.
Owing to the fact that this litigation started in 2009, counsels' cooperation with each other in trying to chart a path to resolve this litigation, and the court's desire to save a few more trees from destruction, the court will deem each motion submitted and opposed by the other party.
Defendants' motion to disqualify Hogan Lovells as counsel for plaintiff, has been withdrawn as the matter has been transferred to Part 19 and a different judge for resolution.
Background:
Defendants Giuseppe Prestano and Caterina Prestano, purchased the premises 4 Fern Avenue, Staten Island, New York on October 29, 2001. Defendants allege that the original mortgage was only $100,000.00 of the $450,000.00 purchase price. The deed discloses that title was vested in the Prestano's as "H/W" common shorthand for "Husband and Wife." This designation meant they owned the property as tenants by the entirety with survivorship rights.
On August 17, 2005, in order to meet personal financial expenses, Giuseppe Prestano and Caterina Prestano, refinanced their home by entering into a mortgage agreement with Berkshire Financial Group, Inc. in the amount of $457,100.00. The loan term was for thirty years. It was an adjustable rate "negative amortization" loan, with an initial low monthly payment which each year would adjust to a new rate. Negative amortization means that because initial monthly payments are artificially low the unpaid interest charges may be added to the principal requiring the borrower to repay more money than the amount actually disbursed to the borrowers.
Documents provided in regard to the motions show that the lender processing the loan, Berkshire Financial Group, Inc. (Berkshire), appraised the property at $653,000.00 in August 2005, meaning the loan had a 70% loan-to-value (ltv) ratio. According to this appraisal, the property value had increased by about 50% in less than five years. A conclusion apparently not questioned by anyone.
Even though both Giuseppe Prestano and Caterina Prestano were in title, at the closing, only Giuseppe Prestano signed the Note. The mortgage, with its two riders (1–4 Family and Adjustable Rate), was signed by both Prestanos. The Prestano's were not represented by counsel during the loan process or at closing.
The defendants defaulted on making the payments in May 2009. At that time the loan either was being serviced or was owned by IndyMac Bank. At some point IndyMac Bank failed and the defendants' loan was assigned to the Federal Deposit Insurance Corporation (FDIC) and eventually to OneWest Bank.
Giuseppe Prestano committed suicide on September 15, 2009. Defendants allege that notice of his death was given to the lender at that time and prior to the commencement of the foreclosure action.
The summons and complaint commencing this action was filed with the clerk of the Supreme Court, Richmond County, on October 28, 2009. Service of process was made upon the defendants by substituted services on November 2, 2009 (CPLR § 308 –Personal Service upon a natural person).
On February 24, 2011, the Richmond County Surrogate, in the matter of the Estate of Giuseppe Prestano, (File # 2011–83) issued "limited letters of administration" to Caterina Prestano only for the purpose "to assume the mortgage on 4 Fern Avenue, Staten Island, New York in her name." There was no other proceeding in the Surrogates Court.
A review of the above fact situation reveals that there are certain problems which must be addressed.
Legal Issues Presented:
A. What was the Status of Title of the Property When the Foreclosure was Commenced?
When the Prestano's purchased the property in October 2001, they took title as "tenants by the entirety" which means that when Giuseppe Prestano died in September 2009, Caterina Prestano, as the surviving tenant by the entirety, had sole ownership of the property by operation of law. Had she not signed the mortgage instrument along with her husband, plaintiff would have a problem foreclosing on the property because the lien would only be enforceable against the deceased husband's interest in the property and not hers. Plaintiff would have to wait to be made whole until the sale of the property by the surviving tenant by the entirety or her death.
Fortunately for the plaintiff, someone at Berkshire had Caterina Prestano sign the mortgage document as a "borrower." So, as discussed in detail below, she is proper defendant in this action.
B. Was Service of Process Effectuated on Giuseppe Prestano?
Giuseppe Prestano, died on September 15, 2009. The litigation was commenced on October 28, 2009 by substituted service effectuated on both Prestano's on November 2, 2009. Service was made by delivery to a person of suitable age and discretion at the subject premises. Such service may be effective on Caterina Prestano, but the court is at a loss as to how service on a "dead" person can be made by substituted service. The person accepting service was neither the administrator nor executor of the Estate of Giuseppe Prestano. The process server delivered the documents to Frank Prestano, presumably his son. On the date of service, Frank Prestano lacked the legal ability to accept process for the decedent or his Estate as no fiduciary had been appointed.
When a person dies, they cease to exist as a legal entity and a new legal entity the "estate of" comes into existence. When plaintiff commenced this action, the legal entity to be served was the Estate of Giuseppe Prestano.
Service should have been made upon either the executor or administrator of the Estate Giuseppe Prestano or if no probate proceeding had been started at that point, service could be effectuated on the Public Administrator of Richmond County pursuant to Surrogates Court Procedure Act (SCPA) Article 11. Another option would have been for plaintiff to make an application to the Surrogate to have someone designated as an agent for service of process or as administrator to defend the foreclosure action on behalf of the deceased. Neither of these courses was followed.
This court also questions if consent of the Surrogate was needed to even commence an action against the decedent [SCPA Article 18] because he had passed away before the litigation was started. It does not appear that either party has addressed this issue.
A serious question exists as to whether this action has been properly commenced against Giuseppe Prestano or his estate. This court, absent any proof to the contrary must conclude it has not.
C. Is Caterina Prestano Authorized to Defend this Litigation on Behalf of Her Deceased Husband?
Caterina Prestano, received limited letters of administration authorizing her only to "assume the mortgage on 4 Fern Avenue." She is not authorized to defend the foreclosure suit brought against the decedent. She may have to apply to the Surrogate for the authority to defend Giuseppe Prestano's interest in the property. If, the service upon the decedent were valid, then the decedent is technically in default as no one was authorized to appear and answer for him. If the service on the decedent is not valid, then the issue to be addressed is whether this action against the Estate of Giuseppe Prestano is timed barred.
One of the parties in this litigation with the power and authority to do so, should apply to the Surrogate for permission to continue to prosecute or to defend the action against the decedent, as the case may be.
D. Does Caterina Prestano Have Any Personal Liability to Plaintiff?
For some reason known only to employees of Berkshire, this loan was structured in 2005 with Giuseppe Prestano and Caterina Prestano signing the Mortgage, the security instrument, and only Giuseppe Prestano signing the Note, the evidence of indebtedness. As a result, it appears that the Mortgage could be foreclosed against both parties, but no money judgment could be obtained against Caterina Prestano.
On the surface, that would seem to be the correct conclusion. However, examination of the documents signed by both defendants, leads to another conclusion. First, in the body of the Mortgage is the section labeled "Covenants." It provides:
I promise and I agree with Lender as follows:
1. Borrower's Promise to Pay. I will pay to Lender on time principal and interest due under the Note and any prepayment, late charges and other amounts under the Note....
Irrespective of whether Caterina Prestano has signed the Note, she signed the Mortgage as a "borrower" and agreed to pay the principal and interest due under the Note. This is a covenant creating an obligation to pay the principal and interest due the lender under the terms of the Note. Caterina Prestano in effect made herself personally liable to pay the Note in the event Giuseppe Prestano failed to do so.
One of the Riders to the Mortgage Document is the "Adjustable Rate Rider" which both Prestano's signed. A comparison of the language of the Note with the language of Adjustable Rate Rider leads to the conclusion that the Adjustable Rate Rider creates a promise to repay the money borrowed and is actually a promissory note. It may not be a "negotiable instrument" under the Uniform Commercial Code (UCC), but it does require the signatories to the instrument to repay the debt.
The Adjustable Rate Rider recites the same terms and conditions as contained in the Note in regard to the monthly payment, the interest rate, interest rate changes, calculation of the interest rate, time and place of payment. Further in support of the argument that it is a Note, the language of the Rider makes the following references in its terms and conditions (underlining added for emphasis):
A. Interest Rate and Monthly Payment Changes
I will make all payments under this Note in the form of cash, check or money order.
2. Interest
(A) Interest Rate.... I will pay interest .... The interest I will pay .... The interestrate ... of thisNote.
3. Payments
(A) Time and Place of Payments. I will pay principal and interest by makingpayments every month....I will make these payments ... under this Note. If ... I still owe amounts under this Note, I will pay....
Other paragraphs have the signatories of the Rider acknowledging these are "my monthly payments" and that the principal "I originally borrowed" may reach 110% of the amount originally borrowed.
As is obvious from the language of the Rider, it does not refer to "the Note" or the "evidence of indebtedness executed simultaneously with this Mortgage." It specifically says "this Note." Giving the language its plain and obvious meaning, the Adjustable Rate Rider is a Note.
The promises to pay contained in it are enforceable against the signatories to the Rider irrespective of them signing the Note. Because this is a standard, nationally used form generated by a government agency, it must be concluded that the intention of the creators of the document was to obtain this result. It makes the person signing the Adjustable Rate Rider equally responsible to repay the money borrowed as those individuals who signed the Note.
The only thing missing from the Adjustable Rate Rider is the amount borrowed from the lender. However, that amount, $457,100.00 is set forth on page one of the Mortgage to which the Rider is attached, into which it is incorporated, and which the borrower agreed to pay in the first Covenant of the mortgage document. Even if the amount due and owing is greater than this stated amount because of the negative amortization covenant in the loan, that negative amortization total is a relatively simple to calculate.
The language clearly puts the signatories to the document on notice as to an obligation to make payment of the money borrowed and has their agreement to make those payments to the lender as set forth in the Rider, irrespective of whether both borrowers signed the separate Note document. The Rider is evidence of a promise to repay, although, as pointed out above, it may not be a negotiable instrument under the UCC.
It should be observed that the document in question is the Multistate Adjustable Rate Rider, Form 30044/2000(0004), presumably used in thousands of closings in New York if not nationally. The above quoted section, is not labeled number "one," yet, it is followed by "2. (A) Interest Rate." Last time I checked in our counting system you need a "# 1" before you can have a "# 2," I guess people were too busy in giving out these loans to actually read what documents were being produced or signed. The Note document does not have that discrepancy as Paragraph 1 on the Note form is numbered and labeled "Borrower's Promise To Pay."
It appears that even though Caterina Prestano did not sign the Note, she has created an independent promise to repay the monies borrowed by signing the Mortgage and the Adjustable Rate Rider. Counsel for the parties may want to address the issue of whether she is a guarantor or a surety under the law.
E. Does Plaintiff Have Standing to Bring This Action?
Defendants allege in their answer that the plaintiff lacks standing to bring this action. There is a copy of the Note attached to the complaint as an exhibit presented as a true and accurate copy of the original document signed by Giuseppe Prestano on August 17, 2005 for Berkshire. Defendants contend there is no showing that the plaintiff is either the owner or in physical possession of the original Note and that the copy affixed to the complaint lacks any indication that it was negotiated to OneWest prior to commencement of the litigation.
As part of Exhibit A attached to plaintiff's motion for a summary judgment is a copy of the original Note evidencing the following placed on the document by a stamp:
Pay To The Order Of IndyMac Bank FSB
This 22 Day of August 2005
Without Recourse
Berkshire Financial Group, Inc.
Irene Genovese (signed)
Irene Genovese VP (printed)
Below this indorsement of the note is another indorsement by a stamp.
Pay To The Order Of
Without Recourse
IndyMac Bank, FSB
Brian P. Brouillard (signed)
Brian Brouillard (stamped)
First Vice President
This endorsement is neither dated nor made payable to any individual or entity. Under the UCC § 3–204 it a "blank indorsement" which makes it "bearer" paper capable of being negotiated by delivery alone until it is specifically indorsed. Plaintiff alleges the Note was transferred to the FDIC by IndyMac Bank when IndyMac Bank went into receivership.
Plaintiff also has provided a copy of an "Allonge to Note" which identifies the Prestano Note as the underlying document and purports to:
Pay To The Order Of OneWest Bank FSB Without Recourse
Federal Deposit Insurance Corporation as Receiver for IndyMac
Federal Bank, FSB successor to IndyMac Bank, FSB
By: Sandra Schneider (signed)
Name: Sandra Schneider (typed)
Title: Attorney–In–Fact
This indorsement also is not dated. Nor is there any indication as to how Sandra Schneider became the "attorney-in-fact" as there is neither a reference to a particular power of attorney nor a description as to the extent of her power to so act.
Also provided by plaintiff as an exhibit is another undated "Allonge to Note" referencing the Prestano Note. It duplicates the information in the Allonge described above, except that the payee is left blank and Sandra Schneider is now described as "Vice President, OneWest Bank, FSB." Because the payee is blank, this allonge returned the Note to "bearer paper" status.
Rather than clarify anything, this raises even more questions. How did Sandra Schneider go from an "attorney-in-fact" for the FDIC to the Vice President of OneWest, the plaintiff herein? This must be explained. Documentation establishing her authority to act must be produced.
There is no affidavit from Sandra Schneider. At a minimum one is needed if not her deposition. I know the court is trying to apply rules to an industry where, based on the number of foreclosures filed nationally in the last decade, it often seems the rule is there are no rules, but what transpired in this matter must be satisfactorily explained.
There are other documents submitted by plaintiff as exhibits which require further inquiry by the court. These include a copy of an "Assignment of Mortgage" dated October 4, 2011 whereby Berkshire assigned the Prestano's Mortgage to "OneWest Bank, FSB, a Successor to Federal Deposit Insurance Corporation as Receiver for IndyMac Federal Bank, FSB, Successor to IndyMac Bank, FSB, Assignee." It is signed by Frank Carone, President of Berkshire Financial Group, Inc.
Based on this document, OneWest did not own or have in its possession the Mortgage on October 28, 2009 when this litigation was commenced. Presumably the explanation is that IndyMac was servicing the Mortgage for Berkshire when the defendant's defaulted. There is no explanation as to what is meant by "servicing the mortgage." Does this mean accepting the monthly payments and making disbursements from the account or something else? The question then becomes does the plaintiff have to be the owner or in possession of the Mortgage in order commence this action? The answer in New York is that possession of the mortgage document is not necessary to commence a foreclosure action so long as the plaintiff has possession of the note.
The Court of Appeals held in Aurora Loan Services, LLC v. Taylor, 25 NY3d 355 (2015) :
The physical delivery of the note to the plaintiff from its owner prior to commencement of a foreclosure action may, in some circumstances, be sufficient to transfer the mortgage obligation and create standing to foreclose (citations omitted).... (T)o have standing, it is not necessary to have possession of the mortgage at the time the action is commenced. This conclusion follows from the fact that the note, and not the mortgage, is the dispositive instrument that conveys standing to foreclose under New Yorklaw.... A transfer in full of the obligation automatically transfers the mortgage as well unless the parties agree that the transferor is to retain the mortgage.... Once a note is transferred, however, "the mortgage passes as an incident to the note" (Bank of New York v. Silverberg, 86 AD3d 274 [2d Dept.2011] ) .... because the mortgage is not the dispositive document of title as to the mortgage loan; the holder of the note is deemed the owner of the underlying mortgage loan with standing to foreclose....
Based on the foregoing, it must be concluded that the fact that plaintiff did not have possession of the mortgage instrument on the date the action was commenced is not in and of itself grounds to dismiss the proceeding for the lack of standing if it can be established that the plaintiff owned or had possession of the note on the date the summons and complaint were filed. There is no evidence that the plaintiff was the holder of the Note on October 28, 2009 when the action was commenced. The negotiation of the Note to this plaintiff is undated and there is no affidavit from the person executing the indorsement of the Note to OneWest.
Neither the affidavit from Caryn Edwards nor that from Nicole Washington, both employees of OneWest, specifically address this issue, nor does either indicate what records each of them examined to determine OneWest had possession of the Note on the date in question. Neither does either of them in their affidavit describe the procedure OneWest maintained to log in either ownership or possession of mortgage notes in 2009.
Plaintiff needs to produce an affidavit from Sandra Schneider or someone with personal knowledge of this file in order to establish standing to bring this action with some certainty. This is an issue of fact to be addressed before this litigation may proceed.
F. Was Plaintiff Required to Serve a Real Property Actions and Proceedings Law (RPAPL) § 1304 Notice to Caterina Prestano?
RPAPL § 1304 provides:
Required prior notices.
1. Notwithstanding any other provision of the law, with regard to a home loan, at least ninety days before a lender, an assignee or a mortgage loan servicer commences legal action against the borrower, including mortgage foreclosure, such a lender assignee or mortgage loan servicer shall give notice to the borrower in at least fourteen-point type which shall include the following: ...
Defendants allege that the proceeding is defective because the plaintiff failed to give such notice to Caterina Prestano. Plaintiff provided a copy of the RPAPL § 1304 notice sent Giuseppe Prestano on April 13, 2009. Plaintiff in its papers asserts that because only Giuseppe Prestano was the borrower, there was no need to give Caterina Prestano any such notice. Plaintiff is operating under the misapprehension that Caterina Prestano is not a "borrower ."
There is no definition of who constitutes a "borrower" in this statute or any other affecting residential mortgage loans either in New York or federal law. Therefore, the court must give the word "borrower" its common and everyday meaning. As noted by the court in US Bank v. Hasan, 42 Misc.3d 1221(A) (2014), "logic dictates that a ‘borrower’ is someone, who at a minimum, either received something and/or is responsible to return it." Caterina Prestano may not have received the money, but she is a borrower because she has an independent obligation to return the proceeds not created by the Note but by the Mortgage.
Page one of the Mortgage which is being foreclosed lists as "Borrower" Giuseppe Prestano and Caterina Prestano. The signature page only has the term "Borrower," next to Giuseppe Prestano's name although both defendants signed the instrument. The two Riders to the Mortgage have the same notation of "borrower" only for Giuseppe Prestano next to his signature block even though both Prestanos signed the Riders.
The Note does not describe the "borrower" anywhere in the body of the instrument. Its first paragraph recites the "borrower's promise to pay" without naming the "borrower." The Note in this transaction is only signed by Giuseppe Prestano. Next to his name in the signature block is the designation "borrower."
The papers submitted by the parties contain many of the documents Berkshire issued prior to and at the closing of the loan. A review of them reveals that other than the Mortgage with its Riders, only two other documents listed Caterina Prestano as a co-borrower, the Negative Amortization Disclosure and the Credit Score Disclosure. However, neither of them was signed by Caterina Prestano and her name was deleted in the signature block on each of them.
On the other hand the Truth–in–Lending Disclosure issued for the closing on August 17, 2005 has only Giuseppe Prestano's name on the document but it is signed by both of them with the description "borrower" only next to his name. A document labeled "Itemization of Amount Financed" follows that same pattern (although the copy produced is unsigned by both parties).
The same is true for the Settlement Statement HUD–1A, which is an optional form on a refinance. Why it is an optional form is beyond comprehension especially because it summarizes all of the expenses of the transaction for the borrower. Unlike New York, where lawyers would traditionally represent borrowers and who would then provide a closing statement for their clients, someone in the federal government actually thought it was a good idea for unrepresented borrowers on refinances not to receive a summary of their closing costs and proceeds distribution.
The Settlement Statement confirms that this was a refinance as there is a payoff figure of in excess of $383,000.00 to what appears to be Independence Bank.
A document which would have been helpful in determining whether Caterina Prestano is a "borrower" would have been the "Right of Rescission" Notice required under federal law [15 USCA § 1635 ]. This document gives "the obligor" the "right to rescind the transaction until midnight of the third business day following the consummation of the transaction." If she is signatory of the Right of Rescission Notice, it would indicate whether the lender considered her an obligor. A more interesting question of course is there any legal difference between a "borrower" and an "obligor."
If there is an ambiguity in an instrumental to what is meant by the term "borrower", the law requires that it be construed against the drafter of the document. Here, Berkshire, plaintiff's predecessor in interest, prepared the document and therefore any ambiguity should be construed against the plaintiff. However, as further pointed out herein, there is no ambiguity as she is a "borrower" for the purposes of this litigation.
If plaintiff did not want to have Caterina Prestano declared a "borrower" it should have left her off the form mortgage document entirely and had her execute a "consent to mortgage" wherein she would indicate that she was an owner of the real property and she was consenting to have her spouse use it as security as against both their interests for a loan. By such a document she would declare she was not obligating herself either on the Note or Mortgage, but would acknowledge that should her spouse default on his obligations, the lender could institute a foreclosure proceeding against the entire premises. Berkshire could have had her sign the mortgage document in a manner similar to that used in US Bank v. Hasan, supra, where the co-owner of the property also did not sign the Note but signed the Mortgage as a "Non–Obligor Spouse Owner."
Presumably the Prestano's were not represented by counsel during this entire process and clearly not at the closing. Had they been represented, an attorney looking out for their interests, may have been able to negotiate language would have clearly delineated the extent Caterina Prestano's obligations, if any, under the Mortgage.
It seems that the inconsistent treatment of Caterina Prestano has created quite a dilemma for plaintiff. If she is a "borrower" then she was entitled to an RPAPL § 1304 Notice. There is case law that the failure to give such a notice to a borrower negates the foreclosure action because the notice is a "condition precedent" to commencing an action [Aurora Loan Services, LLC v. Weisblum, 85 AD3d 95 (2011) ] (Weisblum ). If she is not a borrower, then what interest does she have which can be foreclosed on by the plaintiff?
It seems clear that the inability to serve a § 1304 Notice is not a jurisdictional defect as the court has subject matter jurisdiction over the foreclosure action and it is not a failure to obtain personal jurisdiction over her, because she was validly served with process. It is a failure to comply with a condition precedent that would lead to a dismissal of the complaint without prejudice which may be corrected by plaintiff [Pritchard v. Curtis, 101 AD3d 1502 (2012) ].
If she is not a "borrower" then there was no obligation to serve her with the § 1304 Notice and the action would have been properly commenced. However, if she is not a "borrower" then her signature on the Mortgage and Riders is there merely to consent to Giuseppe Prestano mortgaging his interests in the property and her ownership interest in the real property cannot be foreclosed upon. Logic would seem to indicate that because she did not sign the Note, she should not be a "borrower," as she did not "borrow" any money. That conclusion is contradicted by her signing the Mortgage and Riders as a "borrower" and in those documents agreeing to pay the principal borrowed in the Note along with the interest accruing.
The court in Weisblum determined that Patti Weisblum, who like Caterina Prestano, did not sign the Note, was still a borrower entitled to the RPAPL § 1304 notice and that failure to serve her was fatal to any claim being asserted against her. As the facts of Weisblum are similar to those in Prestano, it must be concluded that plaintiff herein has not established compliance with the statute and the action against Caterina Prestano must be dismissed without prejudice. The court will not address the statute of limitations issue, if there is one.
As the financing or refinancing of a home mortgage is a consumer credit transaction of monumental proportions to most persons, and the § 1304 Notice is designed to advice the borrower of pending legal action, if a lender is unsure of whether to issue such a notice, it should err on the side of giving it. The need for such notice should not be optional. As the notice is designed to protect a consumer's interests and most persons refinancing mortgages are unrepresented by counsel, the failure to give such notice to all persons signing either the note or mortgage is fatal defect. It is failure to comply with a condition precedent.
G. Does the Failure to Have Caterina Prestano Classified as a Borrower on the Truth–in–Lending Disclosure Form Matter?
Plaintiff has apparently argued that there was no need to treat Caterina Prestano as a "borrower" for any notice purposes because she is not listed as a borrower on the Truth–in–Lending Disclosure Form. The court's first response is "who cares?" The Truth–in–Lending Disclosure has nothing to do with the rights and obligations of the parties under the terms and conditions set forth in the Mortgage and Note. It is a DISCLOSURE FORM (emphasis added), designed to clarify for borrowers how much the loan is actually costing them when there are points, origination fees and other charges from a lender. The idea is for the borrower to be able to compare for example, a no point loan at one interest rate with a two-point loan at a lower interest rate. The document has nothing to do with who is and who is not a borrower in any particular transaction. The Truth–in–Lending would be relevant if the terms and conditions in the Note materially differed from what was disclosed in the form, thereby creating a potential violation of the statute by the lender. But once the Note and Mortgage are signed, they are the documents relevant to the rights and obligations of the parties and not the Truth-in Lending form.
Plaintiff is also factually incorrect. Caterina Prestano did sign the Truth–in–Lending on August 17, 2005, the date of the closing. She is not listed as a "borrower" on the top of the form, nor is the word "borrower" typed in the signature block where she signed. But she did sign the form. Plaintiff is correct that a preliminary Truth–in–Lending Disclosure dated August 12, 2005 has Giuseppe Prestano as the "applicant" and is only signed by him. There are no issues in this litigation arising from the plaintiff's failure to abide by the representations in the Truth–in–Lending Disclosure or rights it created in the defendants. The document is irrelevant.
Plaintiff apparently rejected a loan modification request from Caterina Prestano asserting that the "Truth–in–Lending" prohibited an assumption of the loan. This too is ridiculous. The restriction on assumption of the mortgage applies only to a purchaser of the property. And the prohibition is against the assumption of the "mortgage on its original terms." Caterina Prestano is not a new purchaser. She has been in title since they purchased the premises in October 2001. In fact, she is not seeking to assume the Mortgage on its original terms. She is seeking to make payments on the Note on different terms than exist in the Note signed by her deceased husband and to have plaintiff continue to hold the Mortgage as the security instrument. Berkshire, in the initial transaction acknowledged her ownership interest in the property and made her a borrower on the Mortgage and Riders. Perhaps the authors of the Truth–in–Lending form should modify its language to clarify that the terms and conditions of the Note are not assumable as well. But at the time of this transaction the assumption language applies only to the Mortgage.
Defendants are asking that plaintiff restructure the loan on terms and conditions that she is able to pay owing to the fact that the prime borrower is deceased. This is not prohibited by any documents before the court. This is litigation. Litigation gets settled if possible. The fact that plaintiff is now subjected to additional governmental regulations in regard to foreclosure actions which did not exist when this loan was made, should not be a concern of the court. For instance, the parties could figure out how much the defendant can pay a month, make that the monthly payment at the current interest rate, over perhaps a forty year term, with a balloon payment at the end. The odds are that either the defendant will sell the property before the balloon payment is due or the economy will improve so that value of the property will increase and the lender made whole. In the worst case scenario, the plaintiff would have to foreclose in the future and by the time they would have been repaid a substantial amount of the loan.
H. Where Have All the Lawyers Gone?
Apparently there has been a concerted effort in the mortgage lending industry to follow the advice of Major Rufus Cobb who in the film "Jesse James" stated:
It's the lawyers-gol-dang it-it's the lawyers are messin' up the whole world! ...
If we are ever to have law and order in the West, the first thing we gotta do is take out all the lawyers and shoot ‘em down like dogs.
There seems to be one constant in all of the foreclosure litigation involving refinances and second mortgages-the conspicuous absence of legal counsel for borrowers. It is especially troubling because in places like New York, people will not open their eyes in the morning without first consulting an attorney, yet they enter into agreements without the benefit of legal counsel to use probably the biggest asset they own, their home, as collateral for a loan made by someone who is not in a fiduciary relationship with them and often benefits personally by having them take a particular type of loan.
Obviously these transactions have serious legal consequences because the lenders are all represented by counsel. Why do the lenders need counsel when they are making the loan but the person obligating themselves to repay the loan and be bound by the terms of the mortgage and note does not? In fact, in 2005 when this closing took place, the Code of Professional Responsibility governing the conduct of lawyers in New York, would have prevented counsel for the lender from answering questions by the borrowers about the terms and conditions of the documents and their legal importance. Disciplinary Rule 7–104 provided:
A. During the course of the representation of a client a lawyer shall not: ... 2. Give advice to a person who is not represented by a lawyer, other than the advice to secure counsel, if the interests of such person are or have a reasonable possibility of being in conflict with the interests of the lawyer's client.
The plain reading of this Rule makes it clear that the lawyer for the lender at a minimum should have been advising, if not actually directing or suggesting to unrepresented borrowers to obtain independent counsel because they have adverse interests. But if the first time the borrower is told that is at the closing what are the odds that the borrower would adjourn the closing and risk loss of the rate?
It has been apparent for many years that the practice of these lenders was to encourage borrowers not to use lawyers while some of them may have actually affirmatively discouraged such a path. Ask any lawyer who does residential real estate on a regular basis how often clients are convinced by real estate brokers and mortgage brokers to switch lawyers to someone who will not impede the closing when the lawyer begins to serve as an advisor to the client by pointing out the pitfalls and risks of proceeding in the transaction as structured.
Perhaps some advocacy group will do a comparison of the number of mortgages which are in foreclosure where the borrowers were represented by counsel against those where they were unrepresented. The existence of having three days to rescind the transaction is practically meaningless. If a person did not have counsel before hand, why would someone think they would consult an attorney after the fact, where all counsel could do at that point is kill the deal. This would mean the borrower would not get the money they obviously needed, or else why would they be refinancing. So this is not a viable option. It would also mean starting the process all over. If the borrower needed the money, this is an illusory choice.
Nowhere in the refinancing process are there any disclosures or notices to the borrowers that signing a note and mortgage has significant legal consequences and they should seriously consider hiring an attorney. With all the governmental oversight of the process, disclosures and forms, why are there none advocating obtaining legal counsel? Further, if using your home for mortgage financing is not such an activity with legal consequences, why was it necessary to put all of these programs and safe guards in place after the fact? We now have all these programs designed to prevent the foreclosure if possible and keep borrowers in their homes. Where was this concern when the loan process began?
It would not be too difficult for lenders to prepare a form advising that borrowers consult counsel and then have those borrowers sign a waiver of counsel form at closing.
This causes the court to wonder if the industry-wide practice of not advising borrowers that the transaction has serious legal consequences and suggesting that they contact an attorney amounts to a deceptive business practice under General Business Law § 349. Perhaps some ambitious advocacy group or attorney will pursue this in some future litigation.
Finally, many of the problems with these underwater loans could have been avoided by the legislature requiring mortgage brokers be classified as fiduciaries. They would then have to procure the best terms for their clients, the borrowers and not for themselves or the lender.
Conclusion:
The parties are directed to resolve the issues set forth above created by the death of Giuseppe Prestano and whether the court even has jurisdiction over him or his estate. As there is a serious issue as to when the plaintiff acquired the Note giving it standing to bring this action, that fact must be verified by some documentation beyond what has been produced to date. It seems clear that Caterina Prestano was a borrower and plaintiff was required to serve her with a RPAPL § 1304 Notice. If the action is dismissed against her the parties must address whether it can be recommenced or if it is time barred.
Plaintiff's motion for summary judgment is denied without prejudice to renew when the above defects in this proceeding are addressed and corrected.
Defendant's cross-motion is denied without prejudice to renew when the procedural issues cited above are addressed.
Plaintiff's motion for a protective order is denied without prejudice as being moot.
Because dismissal of the action might mean that the defendants get a free loan of $457,100.00, or perhaps higher by adding in the negative amortization figure, the court is reluctant to grant such relief at this time.
The parties will appear on Monday October 26, 2015 at 11:00 AM in Part 19, 927 Castleton Avenue, Staten Island, New York to address the above issues.
The foregoing constitutes the decision and order of the court.