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NY App. Court Holds Strict Compliance Required for ‘Separate Envelope’ for Pre-Foreclosure Notice

envelope requirementThe New York Appellate Division, Second Department, recently affirmed a lower court’s order granting summary judgment in favor of a borrower in a foreclosure action due to the mortgagee’s failure to comply with the “separate envelope” requirement of New York’s Real Property Actions and Proceedings Law 1304(2).

In so ruling, the Court held that strict compliance with the “separate envelope” provision of RPAPL 1304(2) is required in mortgage foreclosure actions.

A copy of the opinion in Bank of America, N.A. v. Kessler is available at:  Link to Opinion.

This appeal arose out of a foreclosure action brought by the owner and holder of a note and mortgage (“Mortgagee”) against a defaulting borrower (“Borrower”). 

Mortgagee moved for summary judgment on the complaint as asserted against Borrower, summary judgment in favor of Mortgagee Borrower’s affirmative defenses, and for an order of reference. Borrower opposed the motion and cross-moved for summary judgment against Mortgagee for failure to comply with RPAPL 1304. 

The trial court denied Mortgagee’s motion and granted Borrower’s cross-motion. Mortgagee appealed.

On appeal, the Appellate Division determined how to construe the “separate envelope” requirement of RPAPL 1304(2).  As you may recall, this provision mandates that “notices required by this section shall be sent…in a separate envelope from any other mailing or notice.”

The Appellate Court found that the language of the status was clear, precise and unambiguous. The Court continued that RPAPL 1304 “contains specific, mandatory language in keeping with the underlying purpose of [the Home Equity Theft Prevention Act] to afford greater protections to homeowners confronted with foreclosure” (Aurora Loan Servs., LLC v. Weisblum, 85 AD3d 95, 103), and the language in RPAPL 1304(2) with regard to the manner of service of the required notices “in a separate envelope from any other mailing or notice” “is equally precise” (Aurora Loan Servs., LLC v. Weisblum, 85 AD3d at 104.

As RPAPL 1304(2) requires the notice must be sent “in a separate envelope from any other mailing or notice,” the Appellate Court held that the inclusion of any material in the separate envelope sent to the borrower under RPAPL 1304 that is not expressly delineated in the provisions constituted a violation of the separate envelope requirement.

The Appellate Court reasoned that a strict approach precluding any additional material in the same envelope as the requisite notices both comported with the statutory language and also provide clarity as a bright-line rule to plaintiff lenders and “promote[d] stability and predictability” (Freedom Mtge. Corp. v. Engel, 37 NY3d 1, 20) in foreclosure proceedings. 

The Court further noted that strict interpretation of the “separate envelope” requirement was consistent with the Legislature’s intent. 

The statute, originally enacted in 2008, was amended in 2009 to include a new sentence to RPAPL 1304(2) to include the requirement that the requisite notices shall be sent in “a separate envelope from any other mailing or notice.” (§ 1304[2]; see L 2009, ch 507, § 1-a [eff Jan. 14, 2010]). The “separate envelope” requirement is exclusive to that section and not found in the other notice provisions applicable to mortgage foreclosure proceedings.  See e.g. RPAPL 1303, 1305; see also UCC 9-611). 

Though RPAPL 1304 has been amended since its adoption, the “separate envelope” provision has consistently remained. (see e.g. L 2009, ch 507, § 1-a [eff Jan. 14, 2010]; L 2011, ch 62, part A, § 104 [eff Oct. 3, 2011]; L 2012, ch 155, § 84 [eff July 18, 2012]; L 2012, ch 155, § 85; L 2016, ch 73, part Q, §§ 6, 7 [eff Dec. 20, 2016]; L 2017, ch 58 part FF, § 1 [eff Dec. 20, 2016]; L 2018, ch 58, part HH, §§ 1, 5 [eff Apr. 12, 2018, deemed eff Apr. 20, 2017]; L 2018, ch 58, part HH, §§ 3, 4 [eff May 12, 2018]). 

Mortgagee argued that the Court should enact a flexible standard, evaluating whether the additional material obtained in the envelope prejudiced or assisted the borrower when ascertaining the lender’s compliance with the “separate envelope” requirement. See e.g. Deutsche Bank Natl. Trust Co. v. Delisser, Sup Ct, Suffolk County, Sept. 14, 2017, Heckman, J., Index No. 8685/13 [no violation of RPAPL 1304 where defendant failed to show prejudice from lender’s inclusion of notice to veterans and notice regarding consumer rights]. 

Mortgagee further argued that the Court should follow the determination of some trial courts and conclude that the inclusion of additional notice in the envelope is a de minimis deviation from the requirements of the statute and therefore, didn’t constitute a failure to comply with the separate envelope requirement. 

Finally, the dissent argued that “clarifying language” that a plaintiff includes in the envelope with the requisite notice, falls within the prescriptions of RPAPL 1304 and does not require a separate envelope.

However, the majority of the Appellate Court justices found that such approaches could vitiate the unambiguous requirement imposed by the Legislature of a “separate envelope” for the purposes of mailing the requisite notices or could place the burden on defendant to show a lack of prejudice or that the information was not relevant to the mandated notices. 

The Court further held that these types of analysis would require courts to engage in the type of judicial scrutiny that New York’s highest court recently rejected in mortgage foreclosure cases. (see Freedom Mtge. Corp. v. Engel, 37 NY3d at 30-31). 

In Freedom Mtge. Corp. v. Engel, the Court of Appeals determined that an exploration of the lender’s intent and scrutinization of “the course of the parties’ post-discontinuance conduct and correspondence” was “unworkable from a practical standpoint” and would require a court to engage in an “exhaustive examination” of the parties’ conduct (id. at 30). The Court found that determining if the additional information included in the envelope constituted information relevant, helpful, or prejudicial to the borrower would be the same sort of unworkable exercise.

As Mortgagee acknowledged that the envelope it sent to Borrower which contained the requisite notices, and also included other information in two notices.  Thus, the Appellate Court held, Mortgagee failed to establish, prima facia, that it strictly complied with the requirements of RPAPL 1304 and the lower court properly denied Mortgagee’s motion for summary judgment. The Court further held that Borrower established prima facie his entitlement to judgment as a matter of law dismissing the complaint showing that Mortgagee failed to comply with RPAPL 1304.

Therefore, the Appellate Court affirmed the trial court’s ruling.

 

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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