Opinion
No. 101249/08.
03-09-2016
WELLS FARGO BANK, N.A., Plaintiff, v. Rose Marie RUSSO a/k/a Rosemarie Russo, New York City Environmental Control Board, New York City Transit Adjudication Bureau, Connie Russo Michael Russo, Defendants.
(P)Hogan Lovells, New York. (D)Nicholas Moccia, Staten Island.
(P)Hogan Lovells, New York.
(D)Nicholas Moccia, Staten Island.
PHILIP S. STRANIERE, J.
The following items were considered in the review of this Motion to Vacate, Cross Motion and Motion to Vacate:
Papers Numbered
Notice of Motion 1
Notice of Cross–Motion 2
Notice of Motion 3
Plaintiff's Memorandum in Opposition 4
Defendants' Affirmation in Opposition 5
Plaintiff's Reply Memorandum of Law 6
Exhibits Attached to Papers
Upon the foregoing cited papers, the Decision and Order on this Motion is as follows:
Plaintiff, Wells Fargo Bank, NA, commenced this residential foreclosure proceeding against the defendants, Rose Marie Russo a/k/a Rosemarie Russo, New York City Environmental Control Board, New York City Transit Adjudication Bureau, Connie Russo and Michael Russo. The defendants have never answered although they have participated in conferences in regard to this action at least since 2013. Plaintiff and the defendants Rosemarie Russo and Michael Russo are represented by counsel.
Currently before the court is plaintiff's motion to:
1. appoint a referee to ascertain the amount due plaintiff and to sell the parcels;
2. amend the caption to substitute Connie Russo and Michael Russo in place of the “John Doe” defendants; and
3. amend the caption to reflect the plaintiff to be Deutsche Bank National Trust Company, as Trustee for GSAA Home Equity Trust 20067–18 Asset–Backed Certificates, Series 2006–18 (Deutsche).
Defendant Rosemarie Russo, defendant Michael Caruso s/h/a Michael Russo have cross-moved to:
1. schedule a settlement conference;
2. stay plaintiff's motion in light of the Special Referee finding plaintiff negotiated in bad faith in violation or CPLR § 3408 ;
3. dismiss the complaint pursuant to CPLR § 3215(c) for plaintiff's failure to enter a judgment within one year of defendant's default; and
4. vacate defendant's default and permitting defendants to file an answer with counterclaims; and production of the original note.
There is a second motion by the plaintiff to vacate the findings of lack of good faith in negotiating modification of the loan by the referee including any financial penalties imposed. Defendants opposed the motion.
Background:
The records of the Richmond County Clerk reveal the following information.
On February 26, 2004, defendant Rose Marie Russo (Russo) purchased the subject premises 1276 Drumgoole Road East, Staten Island, New York for $572,400.00. The sellers were Richard Bonanno and Connie Bonanno, husband and wife. The premises is a legal two-family with a certificate of occupancy having been issued on October 29, 2002.
To finance the purchase Russo secured a mortgage from Berkshire Financial Group, Inc. with a 30 year term in the amount of $475,000.00. The mortgage document had the name “Michael Catanzaro” as an additional borrower. It did not identify what his legal relationship was to Russo or the property. Catanzaro's name was crossed-out on the mortgage and he did not execute the instrument.
In March 2005, Russo took a second mortgage with a 15 year term from The CIT Group/Consumer Finance, Inc. (N.Y.) in the amount of $106,000.00. The mortgage indicated her status as “married.” The name of the spouse is not disclosed on the instrument and the loan is only in her name.
On May 19, 2006 defendant Rose Marie Russo individually, borrowed $635,000.00 from Wells Fargo Bank, NA (Wells) and executed a promissory note in that amount which was secured by a mortgage which she also signed on that date. Neither document indicates her marital status. The proceeds of the Wells mortgage were used to satisfy both the Berkshire and the CIT Group loans. Satisfactions were filed for both debts in June 2006.
Russo defaulted on the terms of the Wells agreement in late 2007 and on January 7, 2008 Wells issued a notice of default to her. In March 2008 Wells commenced this litigation by filing a summons and complaint and notice of pendency. Russo neither appeared nor answered. In June 2008 Wells sought the appointment of a referee owing to the failure of any defendant to appear or answer. An application for judgment of foreclosure and sale was rejected by the court in February 2009.
Thereafter a tortured procedural history ensued with much of the problems arising because the original attorney of record was Steven J. Baum, PC, whose office practices were called into question by regulators and which resulted in a consent order being entered into with the New York Attorney General. Baum was forced to cease all foreclosure litigation representation. Thereafter, new counsel appeared for plaintiff Wells.
Observations:
1. If the mortgage industry had put in one-tenth of the time in screening borrowers and properties before making this and other loans as it does in having to litigate bad loans and negotiate foreclosure modifications, the court probably would not be involved at all. The financial services industry in the first decade of this century failed to adhere to the “Humpty Dumpty Rule” which is that all the sovereign's horses and all the sovereign's men couldn't put Humpty together again (the court has made the nursery rhyme gender neutral and notes that the obituary in the New York Times referred to Humpty either as Mr. or Ms. Dumpty as the case may be). Had lenders and the federal government focused on making sure that Humpty never got on top of the wall in the first place, the courts would not be buried in “eggs-crement.”
In fact the mortgage industry would have been better served by purchasing Snow White's wicked stepmother's magic mirror at her estate sale and asking it to pass on borrower's mortgage applications rather than relying on mortgage brokers. At least the mirror's response would be truthful.
2. The record establishes that Wells made this loan in 2006 to Russo without her having any source of income. This being the case, maybe Wells got exactly what it bargained for, a mortgagor who could not repay the loan. Based on this, why was Wells surprised it had to foreclose. Maybe the action should be barred because of Well's initial unwarranted optimism. On the other hand, even a murder of crows had to eat their words when they observed that an elephant could fly.
Perhaps the mortgage broker who structured this transaction should be put under oath to explain how this loan was supposed to be paid back. Unfortunately that might result in the court having to endure a modern version of “Pinocchio” as witnesses would have to relate the details of this transaction under oath. Parenthetically when the court inquired as to who and where the broker was, it got a shocked response from counsel similar to that of the first little pig (Fifer Pig in Disney's version) when his straw house was blown down by the Big Bad Wolf. Perhaps the answer is that the broker's name was Rumpelstiltskin and he disappeared when inquiry about or mention of his name is made.
The fact that some bureaucrat in the federal government thought it was a good idea to permit the financial services industry to create mortgage products where homeowners could borrow large sums of money without any source of income only reinforces the belief that “Fairy tales can come true. It can happen to you ... ” was the theme song of lender's marketing these loan products. Because neither party has produced Russo's application so as to permit the court the opportunity to rationally examine the origin of this defaulted loan, the court is forced to speculate as to how this happened. There are several possibilities as to how Wells believed repayment would be made.
“Young At Heart” music and lyrics by Johnny Richards and Carolyn Leigh.
A possible explanation is that Wells was convinced that Russo would repay the money from some magic beans she acquired which would permit her to ascend to the clouds and steal a giant's gold. Or maybe while other Staten Islanders were dodging turkeys Russo had found a goose that laid golden eggs. Another source of repayment might be if Russo had inherited a spinning wheel that turned straw into gold.
A more reasonable possibility might be that Russo was planning to “flip” the house within a short period of time and needed monies to make some repairs in order to increase its market value. Although this is pure speculation by the court, there may be some credence to this scenario because the prepayment clause of the note which provided for no prepayment penalty was amended by a rider permitting Wells to charge a 3% penalty for prepayment during the first year of the loan. A similar rider is attached to the mortgage. Why included such a clause unless Wells was under the impression that the loan would be repaid shortly and it would not generate all of the anticipated income over the loans thirty year term.
Based on how this transaction has turned out, Wells would have been better off with one of the “fairy tale” solutions. At least in some of them everyone “lives happily ever after.”
Legal Issues Presented:
A. Does the Defendant Have a Right to a Mandatory Settlement Conference?
Defendant Russo as well as the other individually named defendants defaulted in appearing and answering. Eventually defendant Russo and Caruso retained counsel and moved to vacate their default and file an answer. Defendant also sought a mandatory settlement conference pursuant Civil Practice Law & Rules § 3408. The current statute effective February 13, 2010 provides:
In any residential foreclosure action involving a home loan as such term is defined in section thirteen hundred four of the real property actions and proceedings law, in which the defendant is a resident of the property subject to foreclosure, plaintiff shall file proof of service within twenty days of such service, however service is made, and the court shall hold a mandatory conference within sixty days after the date when proof of such service upon such defendant is filed with the county clerk, or on such adjourned dates as has been agreed to by the parties, for the purpose of holding settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents, including, but not limited to determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to, and for whatever other purposes the court deems appropriate.
However, this action was commenced with the filing of summons and complaint on March 24, 2008 before the above statute went into effect. At that time CPLR § 3408 contained different language which limited the ability to have a mandatory settlement conference only to certain loans. It provided:
In any residential foreclosure action involving a high-cost home loan consummated between January first two thousand three and September first, two thousand eight, or a sub-prime or nontraditional loan, as those terms are defined under section thirteen hundred four of the real property actions and proceedings law, in which the defendant is a resident of the property subject to foreclosure, the court shall hold a mandatory conference within sixty days after the date when proof of service is filed with the county clerk, or such adjourned date as has been agreed to by the parties, for the purpose of holding settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents, including but not limited to determining whether the parties can reach a mutual agreeable resolution to help the defendant avoid losing his or her home and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workouts options may be agreed to, and whatever other purposes the court deem appropriate.
Case law has determined that the form of the statute in effect when the action was commenced governs the procedure to obtain a CPLR § 3408 mandatory settlement conference [Federal National Mortgage Association v. Anderson, 119 AD3d 892 (2014) ]. This means that in order for Russo to be entitled to a settlement conference the underlying loan must be either a “high-cost home loan,” or a “sub-prime or nontraditional loan.” There is nothing in the record by which the court could determine if defendant was entitled to a mandatory settlement conference when the action was commenced in 2008. Neither side has addressed this issue.
There are some conclusions in papers submitted by counsel for plaintiff in regard to prior motions where plaintiff's counsel unilaterally concludes that the defendants did not qualify for a mandatory settlement conference in 2008 because it was not either a high-cost, sub-prime or nontraditional loan. In fact, plaintiff's counsel alleged that the loan is not even a “home” loan under Banking Law § 6–l(1)(e)(i) which provides:
“Home loan” means a loan, ... (i) The principal amount of the loan at origination does not exceed the conforming loan size limit (including any applicable special limit for jumbo mortgages) for a comparable dwelling as established from time to time by the federal national mortgage association; ...
In an effort to substantiate this allegation, plaintiff submitted a chart showing the Fannie Mae Historical Conventional Loan Limits. In 2006 when the loan was made to Russo, the loan limit was $533,850.00. The Wells mortgage amount was $635,000.00. Absent a showing that this loan exceeded the appraisal value, it must be concluded it was a “jumbo mortgage” made within lending guidelines. The loan is 19% above the Fannie Mae limit in 2006. The interest rate of 7.85% may also reflect that it is a jumbo loan as that may be a higher rate than was being charged for conventional loans in 2006. Traditionally, jumbo loans have higher interest rates. The information provided by plaintiff is of no use in determining if the loan is either a high-cost, sub-prime or nontraditional loan under the Banking Law because none of the numbers needed to evaluate the loan in that regard have been provided. This makes plaintiff's representation unsubstantiated.
The record appears to reflect that in spite of the defendants' failure to appear or answer, once they did the parties treated the litigation as being subjected to the post 2010 criteria for a mandatory settlement conference. The parties did in fact conference the case with the court record disclosing numerous attempts to modify the loan. None of them were successful, but negotiations were ongoing between the parties over the last few years beginning in 2009. It should be noted that although not a party to the note and mortgage based on the transcript from the hearing in June 2014, Caruso apparently has participated in the settlement discussions even providing evidence of his financial status so as to be considered a contributor to the household income under modification guidelines.
The question must be asked, if the defendant had no right to a settlement conference under the statute, how can the plaintiff be held to have failed to negotiate in “good faith” as the court appointed referee found. Especially if the defendant defaulted in appearing and answering.
The Rules of the Supreme Court governing Residential Mortgage Foreclosure Actions; Settlement Conference [22 NYCRR § 202.12–a ] gives some guidance. Once again there is difference between the current law and that which existed in 2008. Both rules require a notice being sent promptly by the court after the filing of the Request for Judicial Intervention (RJI) to “all parties or their attorneys” scheduling a settlement conference within 60 days. The statute does not indicate whether “parties” refers to “named parties” or “answering parties.”
The RJI was filed on June 25, 2008. As the purpose of the statute is to prevent foreclosure on residential properties if possible, this would seem to give the defendants the right to participate in a settlement conference irrespective of their failure to appear and answer in the litigation. Why a defendant would opt to participate in settlement conferences without answering does not make sense. But apparently that is what happened in this case starting in 2013, although there is some indication that defendants may have retained counsel in 2011 and negotiations took place even at that time.
That being the case, there is a major difference between the current Rule 202.12–a and the one in effect in 2008 when a conference could have been requested. The Rule now in effect at section (c)(1) specifically makes the conference subject to CPLR § 3408 while the 2008 version does not contain that reference. There are other differences.
Paragraph (4) of the current Rule requires:
The parties shall engage in settlement discussions in good faith to reach a mutually agreeable resolution, including a loan modification if possible. The court shall ensure that each party fulfills its obligation to negotiate in good faith and shall see that the conferences not be unduly delayed or subject to dilatory tactics so that the rights of the parties may be adjudicated in a timely manner.
No such language exists in the Rule in effect in 2008. Which means that only the general common law duty to negotiate in good faith governed these conferences as opposed to the one now imposed in CPLR § 3408(f) and Rule 202.12–a.
On the one hand it could be argued that public policy and the desire to try to resolve residential foreclosures if at all possible so as to keep persons in their homes, dictates applying the current rule to the negotiations between the parties. But doing so places the plaintiff in a less favorable position then it would be in had the defendants either timely appeared and answered or even just showed up and requested as settlement conference. In fact, the current Rule warns against rewarding parties for “dilatory” practices. Defendants doing nothing for over five years, not providing a reasonable explanation for the delay and then seeking to negotiate at a time when there are new restrictions on the plaintiff, seems to be a delaying tactic that the Rule would want to discourage. To apply the “good faith” standard of the post–2010 Rule, would reward the defendants for their failure to take any steps to protect their rights.
It must be concluded that the defendants even if never appearing and answering had the right to a settlement conference in 2008 after the RJI was filed and they never took advantage of that opportunity at that time. Irrespective of their default, they eventually took some interest in the litigation, sometime in 2011 according to the referee, and have in fact negotiated with the plaintiff in an effort to settle the matter at various times since that date.
The facts reveal that the defendants have in fact had the advantage of participating in settlement conferences even though they remain in default.
B. What Are Defendants' Rights in this Matter?
It is uncontroverted that the action was commenced in March 2008 and that the defendants failed to appear and answer. Apparently in November 2013, defendants awoke from their five plus year slumber (beating Rip Van Winkle by fifteen years and Sleeping Beauty by ninety-five), retained counsel and sought to vacate their default and file an answer by submitting a motion to do so returnable in January 2014. Unfortunately there is nothing in the court record to indicate if this motion was granted or denied. Instead the matter was referred to a referee to “hear and report/determine” the issues of “whether interest should be decreased, whether 6000 should be deducted and all other arguments concerning mitigation of damages.”
In the current motions before the court, plaintiff asserts that the issue of whether the defendants could appear and answer was never ruled upon by Judge McMahon. Defendants do not challenge that and have resubmitted their motion to vacate their default and file an answer. This course of action leads to the conclusion the issue was not addressed and defendants are still technically in default.
The above being said, if the defendants are in default, and they have no statutory right to a mandatory settlement conference, then what was there to send to the referee to “hear and report/determine?” As noted above, the rule in effect in 2008 did not require statutorily imposed good faith negotiations, so how can the plaintiff be found to have been not in good faith when a serious question exists as to whether the defendants even had a right to a settlement conference at this point in the litigation. The referee should have applied the standards used for settlement conferences in 2008 and not as currently structured. Based on the language used in the report that is not what was done.
The referee in the “contentions of the parties” section of the report recites that the defendants argue that the plaintiff violated the “good faith” requirements of CPLR § 3408. As pointed out above, when this action was commenced, there was no “good faith” requirement imposed by the statute. The rules in effect in 2008 are those which govern this transaction. This being the case, the referee's conclusions must be rejected because the current standards were applied and not those in 2008. The analysis of good faith must be based on the common law standard and not the statutory standard of 2014 or the case law which developed over the period since “good faith” was added to the statute. It does not appear that this was the standard used.
The court record discloses that at least since 2013 when five settlement conferences took place, the parties have been engaged in modification or settlement negotiations, irrespective of defendants' lack of a right to compel participation in such a process. In fact, according to the record of the hearing, there were modification discussions since 2009. Just because the court did not order or supervise modification negotiations does not change the essential nature of the parties actions. Allegations that defendants' rights to settle this matter have somehow been impaired are not supported by the facts. The fact that the matter was not resolved on terms satisfactory to the defendants does not automatically rise to the level of lack of good faith on the part of the plaintiff.
The defendants' rights have not been violated. They have fully participated in settlement negotiations. The imposition of penalties by the referee for lack of good faith must be vacated.
C. Are Defendants Permitted to Vacate Their Default and Answer?
Currently before the court is defendants' motion to vacate their default and file a late answer. A previous cross-motion by defendants was made in January 2014 and remains in litigation limbo as there is no decision of the court specifically addressing that application. Defendants are seeking to vacate their default pursuant to CPLR § 317 and not CPLR § 5015 which also gives a defaulting defendant a remedy. CPLR § 317 provides:
Defense by person to whom summons not personally delivered.
A person served with a summons other than by personal delivery to him ..., who does not appear may be allowed to defend the action within in one year after he obtains knowledge of entry of the judgment, but in no event more than five years after such entry, upon a finding of the court that he did not personally receive notice of the summons in time to defend and has a meritorious defense.
Plaintiff's process server achieved service on defendants by conspicuous or “affix and mail” service pursuant to CPLR § 308(4). The notice was affixed on the door of the premises on April 8, 2008 and mailed on April 10, 2008 to defendants at 1276 Drumgoole Road East. Although this is considered “personal service” under the statute, it is not “personal delivery,” therefore defendants ostensibly qualify to assert this statute in an effort to vacate their default.
The argument that the process server affixed the summons and complaint to the neighbor's house is a complete misinterpretation of the affidavits of service. They clearly state that the pleadings were posted on the property address 1276 Drumgoole Road East and that the process server confirmed it as the defendants' address with the neighbor at 1272 Drumgoole Road East. As noted in plaintiff's opposition to defendants' motion, a mere denial of receipt of process generally is insufficient to invoke the protections of the statue so as to invalidate service.
Unfortunately, defendants have not met the second prong of the test so as permit vacating their default, that is, the existence of a meritorious defense. A claim that they were not properly served is not a “meritorious defense.” There is nothing contained in their proposed answer which challenges the essential allegations of the complaint that Russo borrowed the money and has failed to make payments as agreed.
On the other hand it appears that defendants' time to act may not have run as yet because plaintiff has not yet entered a judgment against the defendants. Plaintiff's original counsel sought an order of reference in July 2008, which was signed by Judge McMahon on July 22, 2008 and appointed a referee to compute and determine if the property may be sold. Thereafter plaintiff submitted an application for a Judgment of Foreclosure and Sale dated February 23, 2009, which allegedly was rejected by the court for formatting issues.
In November 2009, plaintiff submitted a new request for a Judgment of Foreclosure and Sale which was returnable on January 19, 2010. Plaintiff alleges that because it was processing a loan modification pursuant to the Home Affordable Modification Program (HAMP) which indicated that defendant Russo would qualify, they voluntarily withdrew the application for a Judgment of Foreclosure and Sale. If that information is correct, it means that the defendants were participating in the settlement conference procedure in 2010 even though they failed to appear or answer.
In August 2013, plaintiff voluntarily withdrew its Order of Reference existing from 2008 and sought a new Order of Reference in 2013. Plaintiff now has moved to file a new Order of Reference and entry of Judgment of Foreclosure and Sale.
This leads to the conclusion that there is no viable judgment in this action from which to trigger defendants' right to seek to vacate its default. There is no impediment to them filing an answer even at this late date. Therefore, defendants' motion to vacate their default and answer is not barred.
D. Should Plaintiff's Action be Dismissed for Failure to Enter a Judgment Within One Year?
Defendants allege that pursuant to CPLR § 3215(c) this action should be dismissed because of plaintiff's failure to enter a judgment against the defendants within one year of defendants default. The statute provides:
(c) Default not entered within one year. If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or motion, unless sufficient cause is shown why the complaint should not be dismissed. A motion by the defendant under this subdivision does not constitute an appearance in the action.
Plaintiff in opposition asserts that prior counsel did “take proceedings” for the entry of a judgment in that it sought and received an Order of Reference in July 2008. Plaintiff points out that a Judgment of Foreclosure was submitted in February 2009 but rejected by the court for formatting issues. Plaintiff asserts that this meets the criterion for taking steps to enter the judgment. Also based on the history of the litigation with its record of attempts to modify the mortgage with court supervision, it is clear that it was never abandoned.
Defendants gave evidence to the referee that since 2010 they have been negotiating with the plaintiff in an effort to modify the terms of the loan. Is it “good faith” by the defendants to assert the plaintiff's action should be deemed abandoned when the defendants have yet to appear and answer, while the parties negotiated modifications at various times over the last few years?
The court agrees with plaintiff. The history of this litigation establishes that there is “sufficient cause” to establish that this action has never been abandoned and the complaint should not be dismissed as permitted by the statute. Plaintiff may continue to pursue its right to foreclose once there is compliance with all statutory procedures.
E. May Plaintiff Amend the Caption and Complaint So As to Correct the Defendants' Names?
Plaintiff wants to amend the complaint to change the “John Doe” defendants to Michael Russo and Connie Russo. Why it would want to do so when even these names may not be correct makes no sense. It seems that Michael Russo's name is actually Michael Caruso and he is the husband of Russo and was at the time the mortgage was made. You would think the lender would have such information from Russo's application. But perhaps those documents disappeared with “Rumpelstiltskin” the mortgage broker. None of this information is disclosed in the mortgage documents currently before the court. It was revealed in the motion papers. Because Wells now has the correct name why would plaintiff want to amend the caption to the wrong name?
There is nothing submitted as to whether Connie Russo is her correct name or is it Caruso or something else. One of the persons selling the property to Russo in 2004 was “Connie Bonanno.” Is it a coincidence that the first name of the defendant is the same first name of the person who sold the property or does she still reside there as a tenant? There is no indication as to what is Connie Russo's connection to the premises. Is she a relative of Russo or a tenant or perhaps both?
The question must be asked how does plaintiff even have jurisdiction over persons sued with a name different than that of the actual persons residing at the premises especially when service of process was not made by personal delivery to the named defendants? Changing “John Doe” defendants to a named defendant with the wrong name in order to obtain a default judgment against them when the correct name is now known seems to raise a due process issue which even the Queen of Hearts might recognize as being a problem even though she was famous for ordering “off with their heads” for lesser infractions. The plaintiff cannot obtain personal jurisdiction over improperly named defendants served by conspicuous service whose true names are know and who may have occupancy rights in the premises.
Plaintiff has not obtained valid “affix and mail” service over any improperly named defendant. Had the process been personally delivered to the improperly named defendant, perhaps valid service been concluded. It would be hard for a party to claim the party was not served when process was actually delivered to that party when their actual name was unknown and they have some interest in the litigation requiring receipt of notice so as to meet due process requirements. How can conspicuous service over an improperly named defendant who fails to appear be valid? Plaintiff cannot be seriously arguing that personal jurisdiction was obtained over Caruso and Connie Russo in this manner. Because they have no ownership interest in the property nor are they obligated on the note and mortgage, perhaps there is no statute of limitations problem in serving them at this time. Although the parties have not specifically addressed this issue.
Plaintiff's motion to amend the caption and complaint is granted to the extent that they submit a new complaint with the proper names of Caruso and Connie Russo and their relationship to the premises. Like the Three Bear's House where there are two unacceptable bowls of porridge, plaintiff has not as yet become Goldilocks and found the bowl which is “just right.” Whether the court has jurisdiction over them is another issue not addressed by the parties in this action.
F. May Plaintiff Amend the Caption to the Name of the Current Note and Mortgage Holder?
Plaintiff seeks to amend the caption to change its name from Wells to Deutsche. Why Wells wants to amend the plaintiff's name to Deutsche when Deutsche did not become owner of the note and mortgage until September 14, 2011 three and one-half years after the litigation was commenced is anybody's guess. On the other hand, when some third party observer looks at this litigation and sees how messed up it is, it becomes apparent why Wells would not want to have its name being sullied by being linked to it. Especially if Deutsche was the owner of the debt in 2006.
CPLR § 1018 permits the litigation to continue in the name of the original parties whenever there is a change in interest during the pendency of the action. It provides:
Upon any transfer of interest, the action may be continued by or against the original parties unless the court directs the person to whom the interest is transferred to be substituted or joined in the action.
This raises another question. Why on earth would Deutsche purchase a mortgage loan in September 2011 which had been in default since late 2007 and was already in the court system as a foreclosure action? Did Deutsche believe you really do not get turned into a donkey on Pleasure Island? Or maybe the explanation is that the note with the undated endorsement to Deutsche was actually sold shortly after the loan was made in 2006 and the assignment of the mortgage did not take place until 2011. Which would mean that Wells did not own the debt when the foreclosure was commenced. The 2006 purchase date would seem to comport with the 2006–18 number assigned by Deutsche to both the Asset Backed Certificate Series as well as for the GSAA Home Equity Trust. It may be an assumption but it would seem if Deutsche bought the debt in a year other than 2006, the number assigned would be for that year.
In fact, the assignment of mortgage makes no reference to the note and is labeled a “Default Assignment.” It would seem to indicate that Deutsche already had possession of the promissory note and, pursuant to the agreement between Wells and Deutsche, now was the proud holder of the mortgage as well.
Plaintiff is permitted to amend its name in the caption to reflect that Deutsche is the current owner of the debt. It does not affect defendants' rights and obligations under the instruments. It does not change the fact that it is not Red Riding Hood's grandmother in the bed. It still is the wolf. Defendants may still raise the defense that Wells did not having standing to commence this action in 2008 because it did not own or hold the debt at that time.
G. Is the Referee's Report Valid?
Judge McMahon in March 2014 referred this matter Edward V. Corrigan, as Referee to “hear and determine” certain issues in this case. It is unclear whether the order was to hear and determine or hear and report as both words are underlined. However, the referee interpreted it as “hear and determine” and the parties participated in the process under that assumption.
Pursuant to CPLR § 4001 & CPLR § 4319 a reference to hear and determine becomes a finding of the court. The referee conducted a hearing over two days in June 2014 and must be applauded for his diligence in conducting the hearing and wading through the at times unexplainable history of this litigation.
Among the findings of the referee was one that plaintiff had acted not in good faith when it improperly calculated Michael Caruso's overtime in making an offer to modify the mortgage in an amount the defendants could not reasonably pay. According to HAMP guidelines a non-borrower household member can become a “contributor” for refinancing purposes. Interestingly, Michael Caruso s/h/a Michael Russo was not signator to either the note or mortgage in 2004 yet apparently was married to Russo at the time. Only in the world of mortgage foreclosures would a bank lend money to a borrower without a source of income and then deny a refinancing of the debt based on income from someone who has no obligation to them and to whom they never looked to originally to secure the debt. Although this court may not have held that to be a lack of good faith, the referee who conducted the hearing did. To rectify this, the referee imposed penalties on the plaintiff which tolled interest and fees on the loan from July 17, 2013 forward.
As pointed out above, the court must now reject the referee's findings as he applied the mortgage foreclosure rules in effect on the date of the hearing and not in effect when the action was commenced. Also, reviewing the submissions in regard to the motions and the transcripts of the hearings, it becomes apparent that plaintiff was not negotiating with a lack of “good faith.” There were numerous attempts to modify the mortgage. Plaintiff made legitimate business decisions based on HAMP guidelines. There is no showing that plaintiff violated those guidelines. The court feels on the merits the findings of the referee's report must be rejected. There was no lack of good faith on the part of the plaintiff and the penalties imposed were not justified and should be vacated.
In fact, there is just as much evidence that the defendants did not negotiate in good faith. Exhibits presented to the referee included copies of paychecks to Caruso as well as tax returns for both Russo and Caruso. What makes these documents interesting is that the checks were mailed to Caruso at a Freehold, New Jersey address. In addition, their federal tax return also has the New Jersey address as their “home address.” If their tax return is correct, then the Drumgoole Road address is not their home. If that is the case, they are not entitled to modify the mortgage and may be committing bank fraud in applying and may have done so if that was not Russo's address when she obtained the mortgage. If the tax return is wrong, then are they committing tax fraud? It also appears that they filed New Jersey resident returns. Defendants must explain this anomaly.
There is another disclosure in the hearing transcript which questions the defendant's good faith. There was testimony that the rental from the apartment was sporadic from the tenant implying that this contributed to their difficulty in paying the mortgage. If income from the apartment or apartments was considered by the lender in making the original mortgage, then defendants rather than giving the tenant a free ride leading to Russo defaulting on the mortgage, should have taken steps to evict the tenant, recover possession of the apartment, and put in a paying tenant. There is no indication that this was done by Russo.
At times it seems that HAMP should really be called HAMPER, because the rules impose guidelines which actually restrict the negotiation process. Foreclosure actions are litigation, and litigation gets settled. However, when the court's efforts to do so are encumbered by federal or state regulations imposed after the fact or the loan has been sold to some unknown investor who can dictate the terms of the settlement, rather than help the situation it makes the process more difficult to resolve. Hence, HAMPER. Home Affordable Modification Program Eliminating Resolution.
The record does not establish lack of “good faith” by the plaintiff. The referee's report is vacated along with the penalties imposed therein.
H. Why Was the Mortgage Document Changed by Hand?
The certificate of occupancy for the premises discloses that it is a legal two-family. Yet at the closing someone altered by hand the “one or two family” clause in the mortgage to state it is a “two or three family” home. Does this mean that Russo was collecting rent from one legal apartment and rent from an illegal one? Was rental income included when the loan was made? If yes, then from how many units? That information is not available. In spite of generating rent from one or two rental units Russo did not pay the mortgage nor has she apparently put aside any money to try to bring the loan current. A mortgage foreclosure is an equitable proceeding. Therefore the fact that Russo may have an illegal apartment may be a factor to consider in granting her relief in this proceeding as she may not have “clean hands.”
Defendants have to explain why the mortgage was altered, who is the tenant, and if the tenant does not pay rent, why no steps were taken to evict the tenant.
I. May the Court Allow the Correction of Defects?
Analysis of the issues and problems in the case at bar, and strict application of the law may lead to the action being dismissed owing to technical defects in plaintiff's pleadings with the results that the defendant gets a “free mortgage” with no obligation to repay the money borrowed. Unlike Hansel and Gretel who were able to enjoy the benefits of a gingerbread house and eventually escape the clutches of the wicked witch, people who borrow money do have an obligation to pay it back and not use the legal system to evade responsibility.
Likewise, in regard to the defendants, application of the law might result in negating the fact that for the last several years they have actively participated through retained counsel in an effort to reinstate a payment plan and that they have raised numerous issues which might constitute a legal defense to the proceeding. Defendants should have the opportunity to have the court determine if they have sprinkled enough of Tinkerbell's pixie dust over the litigation so as to transport their obligation to Never Never Land and negotiate a settlement or dismissal of the actions.
Article 20 of the CPLR gives the court discretionary power to address most of the procedural errors that have dogged this litigation since its inception.
Based on the forgoing the court is opting on the side of doing justice and will use its statutory and equitable powers to treat this action in the manner the court and the parties have over at least since 2013. Rather than continue to run around with a glass slipper looking for the foot on which it fits, the court is hopefully going directly to Cinderella's house with its decision. The parties will have the opportunity to participate in settlement negotiations and enforce their respective rights once they correct their procedural problems.
Conclusion:
Had we used our common sense.
Been worthy of our discontents.
We'd be happy....
To get the money, to save the house.
“Ever After” from “Into the Woods” music and lyrics by Stephen Sondheim.
It is therefore Ordered:
1. Plaintiff's motion in regard to the referee's report is granted. The referee's report is vacated and is a ity. All penalties imposed are lifted. There was no lack of good faith in the settlement negotiations between the parties.
2. Plaintiff's motion to amend the caption to properly name the defendants is granted on the condition that plaintiff actually amend the named defendants to their correct names.
3. Defendants are to provide and document the names of all persons occupying the premises and their relationship to the property and Russo within 15 days of the date of this decision.
4. Plaintiff's motion to amend the name of the plaintiff from Wells to Deutsche is granted. As to why they want to do this is anybody's guess, but apparently it is important to plaintiff and will make them feel better.
5. Plaintiff will serve and file an amended summons and complaint correcting the above mentioned defects and any others identified in the decision within 30 days of the date of this decision.
6. Plaintiff has not abandoned this action.
7. Defendants' motion to vacate its default and file an answer is granted. Defendants will serve and file an answer to the amended complaint within thirty days after the date of receipt of that pleading. However, any affirmative defense of lack of personal jurisdiction, procedural defects or the running of the statute of limitations is waived and cannot be raised by the defendants. Only substantive or statutory defenses will be entertained including the right to challenge the standing of Wells to be the plaintiff who commenced this action in 2008.
8. The parties will appear for a settlement conference on Monday, June 6, 2016 at 11:00 AM at the Courthouse, 927 Castleton Avenue, Staten Island, New York in Part 19 before Judge Straniere. Unless stipulated to by the parties, the rules governing settlements in 2008 when the action was commenced will govern the negotiations and not those currently in effect.
9. The parties will consider the following terms recommended by the Court as a possible outline for a settlement of this action.
a. Plaintiff is to repurchase the debt from the investor, keep the loan in its portfolio and negotiate a settlement as if this were litigation and not a transaction now subject to post closing rules and regulations imposed by investors or regulators non-existent at the time of the loan.
b. The parties will determine how much the defendants are able to pay each month for principal, interest, taxes and insurance including in the calculations income from Russo and Caruso and any other adults who may be able to contribute; make that amount the monthly payment at a current interest rate over a forty-year payout with a balloon payment at the end of the term.
c. Require that a new note and mortgage be executed to be signed by all persons whose income is being relied upon by the lender.
d. Any agreement will contain a clause that upon default in any payment, upon defendants' failure to cure within thirty days, plaintiff may apply in this action for an order of reference and judgment of foreclosure be issued forthwith.
The parties may also want to consider an alternative of entering a money judgment only against Russo on the note, entering into a plan to pay down the judgment and foregoing the mortgage foreclosure.
The foregoing constitutes the decision and order of the court.
The foregoing constitutes the order of the court.