HSBC Bank USA v. McKenna
37 Misc 3d 885 (2012)
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Rule of Law:
A mortgagee's failure to negotiate in good faith during a mandatory foreclosure settlement conference, as required by CPLR 3408(f), constitutes wrongful conduct that can warrant equitable remedies, such as barring the collection of interest on the loan from the date of the mortgagor's default.
Facts:
- In March 2007, John T. McKenna, Jr. obtained a mortgage for a three-unit residential property in Brooklyn, intending to occupy one of the units after the existing tenants left.
- After gaining possession and making extensive repairs, McKenna moved into the first-floor unit in January 2009, prior to the commencement of the foreclosure action.
- Following the initiation of foreclosure, McKenna received a short-sale offer in July 2009, which the plaintiff bank rejected, counteroffering with a demand for a $340,000 sale price.
- In December 2009, McKenna presented the bank with an all-cash short-sale contract from a different buyer for $340,000, meeting the bank's express demand.
- Over the next year, the bank delayed the approval process, demanded multiple new appraisals that showed increasing property values, and ultimately raised its demand to a net of $468,000, causing the $340,000 sale to fail.
- McKenna moved out of the property in December 2010 after reconciling with his wife and moving back to her home.
Procedural Posture:
- HSBC Bank USA, N.A. commenced a foreclosure action against John T. McKenna, Jr. in New York Supreme Court, Kings County (a trial court) on March 11, 2009.
- The case was referred to the Mandatory Foreclosure Conference Part, where numerous settlement conferences were held over two years.
- After the conferences failed, a Special Referee recommended that the court find that HSBC had failed to negotiate in good faith as required by statute.
- HSBC objected to the recommendation, arguing the statute did not apply because it claimed McKenna was not a resident of the property.
- The court referred the residency issue back to the Special Referee, who issued a supplemental report finding that McKenna was a resident when the action commenced.
- The matter came before the Supreme Court to confirm or reject the Special Referee's findings and recommendations regarding bad faith and the appropriate remedy.
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Issue:
Does a mortgagee's failure to promptly approve a short sale at its own demanded price, coupled with unnecessary delays and increasing demands during a mandatory foreclosure settlement conference, constitute a breach of the duty to negotiate in good faith under CPLR 3408(f) that warrants barring the collection of interest on the loan?
Opinions:
Majority - Jack M. Battaglia, J.
Yes. A mortgagee's failure to promptly approve a short sale at its own demanded price, followed by unnecessary delays and escalating demands, breaches the statutory duty to negotiate in good faith under CPLR 3408(f) and warrants the equitable remedy of barring the collection of interest. The court first affirmed the Special Referee's finding that CPLR 3408 applied because McKenna was a resident of the property when the action was commenced; his subsequent departure did not negate the obligation that had already attached. The court then found that the plaintiff bank breached its duty to make a 'meaningful effort' to reach a resolution. After McKenna procured a buyer at the bank's demanded price, the bank's subsequent conduct—prolonging the review, demanding successive appraisals without justification, and then increasing its demands based on those appraisals—was inconsistent with dealing 'honestly, fairly, and openly.' As foreclosure is an equitable action, the court has the discretion to fashion a remedy for such wrongful conduct, and determined that barring the collection of interest from the date of default was an appropriate sanction tailored to the bank's breach.
Analysis:
This decision provides a crucial interpretation of the 'good faith' negotiation requirement in New York's residential foreclosure statute, CPLR 3408. It establishes that 'good faith' is not merely a procedural requirement but has a substantive component, allowing courts to scrutinize a lender's reasons for rejecting workout alternatives like a short sale. By defining bad faith to include unreasonable delays and escalating demands after a borrower meets the lender's own terms, the case gives significant enforcement power to the statute. This precedent pressures lenders to engage more meaningfully in settlement conferences and provides a powerful equitable remedy—the cancellation of interest—that can significantly impact a lender's recovery in a foreclosure action.
