Equitable Fairness: Court Denies Lender’s Routine Motion for Summary Judgment In Commercial Foreclosure Action Finding Issues of Fact In Favor of Borrower
In a recent decision, the Supreme Court in Queens County denied lender’s motion for summary judgment and appointment of a referee to compute in a foreclosure action, finding triable issues of fact, underscoring the importance of equitable relief. This outcome serves as a reminder that even seemingly straightforward motions require careful judicial consideration and reinforces the protections afforded to borrowers.
Background of the Case
Parties Involved and Procedural Case History
Our client, a New York limited liability company, held a conventional commercial mortgage loan. A hard money lender (“Lender”) took assignment of the mortgage loan, one month after maturity. Two years prior to loan maturity, the members of borrower were in litigation, and one member filed a dissolution action seeking, inter alia, dissolution of borrower and appointment of a receiver. A temporary receiver was appointed. Lender initiated a commercial foreclosure action against the borrower. Lender based its case on two events of default: (i) the loan’s maturity date in early 2021 and (ii) the filing of a motion to appointment a receiver in the earlier dissolution action. Prior to the foreclosure action, Receiver requested a payoff letter from Lender. Receiver noted egregious inaccuracies in the payoff letter including (i) incorrect principal balance due; (ii) incorrect default date and (ii) failure to credit Borrower with certain payments for taxes that had been paid. Borrower answered the foreclosure complaint and asserted counterclaims against lender for (i) judicial declaration of accurate payoff letter; (ii) an award of damages due to the Lender’s alleged breach of implied covenant of good faith and fair dealing; and (iii) temporary restraining order, preliminary injunction, and permanent injunction restraining Lender from proceeding with the foreclosure action until an accurate payoff letter for the Mortgage was issued. Lender moved for summary judgment and appointment of a referee to compute and borrower cross-moved for summary judgment on the counterclaims.
Key Issues
Default Date Dispute
It was undisputed that the loan matured. The key point of contention was the default date of the loan. Lender asserted that the default was triggered by the appointment of a receiver, which is an event of default under the mortgage, and which predated the loan maturity date by two years. Significantly, as a result, Lender sought to impose the 24% default rate of interest as of the date of the receiver appointment. Borrower challenged, with factual proof, that the assignor lender never declared the receiver appointment as a default and that the loan was current up until maturity. On behalf of Borrower we asserted that there were triable issues of fact as to (i) accurate date of default; (ii) accuracy of principal amount due; and (iii) lender’s breach of good faith and fair dealing, highlighting this as one of the rare cases where equity should intervene to blunt a lender’s right to foreclosure on a matured loan, as a result of its unconscionable conduct. Since the court recognized the factual dispute, it became central to the court’s decision. The court denied, without prejudice, Lender’s summary judgment motion, and the Borrower’s cross-motion, allowing for renewal after the referee's report is confirmed or rejected.
Equitable Considerations
The court emphasized that foreclosure is an equitable remedy, requiring careful consideration and fairness. Recognizing the factual dispute surrounding the default date and the corresponding amount owed, the court entered an order appointing a referee to compute to determine the accurate default date, calculate the correct amount due, and report his findings to the court. This decision underscores the court's commitment to ensuring a just and equitable outcome in foreclosure proceedings.
Takeaway for Lenders
To prevent similar outcomes, lenders must ensure that all events of default are promptly and accurately documented and communicated. They should further ensure that all statements and calculations are exact and transparent. By maintaining clear and consistent records, lenders can strengthen their position and reduce the risk of disputes in foreclosure proceedings.
Conclusion
This decision highlights that foreclosure, as an equitable relief, demands careful judicial scrutiny. Even when a lender presents what appears to be prima facie proof of default, courts do not automatically grant such motions. Instead, they diligently ensure that all factual disputes are thoroughly examined, emphasizing fairness and justice in the foreclosure process. This provides borrowers with an important layer of protection against potentially overreaching lender actions. For more details, you can view the full decision here.
DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.