Second Department Erodes “Willful Neglect” Standard in Reforeclosures Causing Confusion and Consternation

October 12, 2021

On October 6, 2021, the Appellate Division, Second Department broke with prior precedent in redefining the “willful neglect” standard in reforeclosure cases.  Prior to the Second Department’s decision, a lender could demonstrate, prima facie, the absence of “willful neglect” in failing to name a necessary party to a foreclosure action by showing that it was negligent and/or relied on a faulty title search.  However, such a showing is no longer sufficient.  In an unprecedented decision with great repercussions for mortgage servicers and title insurers alike, the Second Department effectively eroded the “willful neglect” standard to encompass simple negligence.  In moving the negligence needle, the Appellate Division has introduced confusion and uncertainty to an area of the law that most observers believed was settled.  Lenders must take heed of this development or potentially find their mortgages deemed unenforceable.

In U.S Bank N.A. v. Lomuto, 2021 NY Slip Op 05363, the plaintiff commenced a foreclosure action in January 2009 naming the mortgagor and owner as a defendant, but not the property’s co-owner.  The plaintiff obtained a judgment of foreclosure and sale and purchased the property at auction.  Following the sale, the plaintiff/purchaser commenced a reforeclosure action under RPAPL 1503 and 1523 against the co-owner that was omitted from the original foreclosure.  The defendant/co-owner answered the complaint, and plaintiff moved for summary judgment.  The lower court granted the motion and directed defendant to advise plaintiff of whether she intended to redeem the property within 10 days and to redeem within 30 days thereafter.  Rather than redeem, she appealed.

The Second Department began its analysis by reviewing the necessary parties to a foreclosure action under RPAPL 1311.  A foreclosing plaintiff is required to join as a party defendant any person whose interest is claimed to be subordinate to the plaintiff’s lien.  The failure to name such a party leaves that party’s rights unaffected by the judgment and sale, and the action is void as to the omitted party.

The Appellate Division explained that in such a case, the purchaser of the foreclosed property has two options: (1) commencement of a strict foreclosure action under RPAPL 1352 or (2) a reforeclosure action under RPAPL 1503.  One significant difference between the two is that RPAPL 1503 permits a reforeclosure action to be maintained even where, as in the case at bar, a strict foreclosure action would be time barred.

To prevail in a reforeclosure case, the plaintiff has the burden under RPAPL 1523 to show that the defect in the original foreclosure action was not due to fraud or willful neglect and that the omitted party was not prejudiced by the defect.

In applying the law to the facts, the Second Department found that an issue of fact existed as to whether plaintiff’s failure to name the co-owner as a defendant was the result of willful neglect.   The Appellate Division reasoned that although plaintiff reasonably relied on a pre-foreclosure title search and mortgage foreclosure certificate, which missed the quitclaim deed to the co-owner, an issue of fact existed because the co-owner was named as a defendant in a prior foreclosure.  In further support of its holding, the Second Department noted that the co-owner claimed to have submitted financial information and documents to the mortgage servicer, which remained the servicer, as part of the mortgagor’s loan modification applications.  Based on its findings, the Second Department reversed the trial court’s decision.

Prior to the Second Department’s decision, most observers believed that reliance on an erroneous pre-foreclosure title report demonstrated, prima facie, the absence of willful neglect by a lender in failing to name a necessary party.  Indeed, although cited and quoted extensively by the Second Department in its decision, the Third Department held on similar facts in HSBC Bank USA, N.A. v. Guardian Preserv. LLC, 160 A.D.3d 1236 (3d Dep’t 2018) that there was “simply no reason why plaintiff would willfully omit a necessary party” and that plaintiff demonstrated the absence of willful neglect by showing that it relied on a pre-foreclosure title search that failed to uncover a quitclaim deed to the omitted defendant.  The Third Department further noted that even though a more recent title search, one less than 6 months old, could have been ordered by the plaintiff before commencing the action, the failure to do so constituted an omission, not willful neglect. 

The Second Department’s citation to McWhite v. I&I Realty Group, LLC, 2019 NY Slip Op 31552(U) (Sup. Ct. Kings County 2017) fares no better.  Although the McWhite court found that an issue of fact existed, the case is factually distinguishable from the case at bar and the court applied a different standard for “willful neglect,” which it defined as “a knowing, conscious and voluntary act and not a simply neglectful one.”  In applying this definition, the trial court found that an issue of fact existed because the foreclosing plaintiff, which named all necessary parties, submitted an erroneous judgment that included the record owner’s name in the caption even though he had been dismissed from the case previously.  Needless to say, potential fraud on the court is very different from reliance on an erroneous title search

Based on the Second Department’s decision, lenders should exercise even greater diligence when commencing foreclosure actions.  Reliance on a pre-foreclosure title search is no longer sufficient, at least in the Second Department, to demonstrate the absence of willful neglect by a lender in failing to name a necessary party.  Vigilant lenders should heed the Second Department’s warning and make it a point to review any prior foreclosure actions and loss mitigation applications in addition to a pre-foreclosure title search before commencing an action to ensure all necessary parties are named.  The failure to exercise such diligence could result in a lender’s mortgage being deemed unenforceable.

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This Legal Update is intended to keep readers current on developments in the law, and is not intended to be legal advice. If you have any questions, please contact Morgan R. McCord at 914.286.2630 or, or any other attorney at Eckert Seamans with whom you have been working.

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