Last week, a Justice of New York State's Supreme Court issued a decision of enormous benefit to all homeowners facing foreclosure in New York State. The decision signifies the dangers that banks face if they refuse to consider alternatives to foreclosure. The decision also underscores how vitally important it is for property owners in New York to file answers and raise affirmative defenses if they are served with a foreclosure summons.

Bronx County Supreme Court Justice Yvonne Lewis' decision, which was issued on May 29, 2013, in a residential foreclosure case styled, Wells Fargo v. Ruggiero, sets forth a scathing critique of Wells Fargo's misconduct in its dealings with the defendant homeowners. Justice Lewis imposed harsh sanctions on Wells Fargo for "wanton and flagrant" bad faith conduct in a residential foreclosure action. The Judge ruled that the bank must forfeit all interest accrued on the underlying loan since 2009 and pay the mortgage borrower's attorney fees.

According to the decision, Wells Fargo repeatedly frustrated the efforts of the borrowers, brothers Frances and Michael Ruggiero, to obtain a loan modification by demanding more and more financial information.

The sanctions issued against Wells Fargo stem from the bank's failure to comply with New York foreclosure law, which requires plaintiffs in residential foreclosure cases to engage in good faith negotiations with the defendant homeowners. Specifically, New York Statute, CPLR § 3408, requires, in relevant part, that "[b]oth the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible."

In her decision, Judge Lewis notes that under the CPLR, the "parties to mandatory settlement conferencing are required to come to the Court in good faith, and they are required "to negotiate in good faith towards creation of a mutually satisfactory modification agreement … It is the obligation of the parties to negotiate with an effort that would prevent the defendant from losing his, her, or their home.” The decision against Wells Fargo lists a variety of actions and omissions on the part of Wells Fargo, and the bank's attorneys, that led court to conclude that they were not exercising good faith, including: (a) refusing to make a loss mitigation offer to the defendant homeowners; (b) refusing to make an offer of a permanent workout despite the homeowners' successful completion of a trial payment period; (c) misrepresenting in court documents that the homeowners' had failed to submit required financial documents; and (d) repeatedly demanding duplicative financial documents from the homeowners.

Based on Judge Lewis' determination that Wells Fargo did not exercise good faith efforts to prevent the loss of the defendants' home, she imposed financial penalties against the bank. The decision is a decisive victory for residential foreclosure defendants throughout New York State, and demonstrates the serious penalties that banks face for disregarding procedural safeguards enacted by the New York legislature to protect homeowners.

Marc A. Rapaport, Esq.
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