by Megan McNamara, Esq.

and Hillary Prada, Esq.

Berkman, Henoch, Peterson, Peddy & Fenchel, PC

USFN Member (NY)

On February 14, 2023, the New York Court of Appeals issued its much-anticipated ruling on Bank of America v. Kessler (N.Y. Feb. 14, 2023), wherein the Court reversed the Second Department and held that the inclusion of additional information with the RPAPL 1304 notice did not invalidate the notice. This ruling constitutes a significant departure from the prior ruling of the Second Department and will have a dramatic effect on New York foreclosure matters.

In New York, the 90-day pre-foreclosure notice is governed by RPAPL 1304 and is a condition precedent to the commencement of a foreclosure action. Further, the failure to demonstrate strict compliance with RPAPL 1304 is a basis for dismissal of a foreclosure action. As you may recall, on December 15, 2021, the Second Department issued its decision in Bank of America, N.A. v. Kessler, 202 A.D.3d 10, 160 N.Y.S.3d 277 (2d Dept. 2021), holding that at the “inclusion of any material in the separate envelope sent to the borrower under RPAPL 1304 that is not expressly delineated in these provisions constitutes a violation of the separate envelope requirement of RPAPL 1304(2).” As such, any additional materials included in the envelope with the notice as well as any extraneous information on the notice itself was deemed to not be in compliance with RPAPL 1304.

The Second Department’s holding in Kessler had an immediate and detrimental impact on lenders as it spurred a host of additional decisions issued by the Second Department as well as the lower courts. Specifically, Kessler was responsible for the dismissal of countless cases, many of which were already stalled for almost two years as a result of the COVID-19 pandemic.

The Court of Appeals specifically looked to the intent of RPAPL 1304, which was in part to enable communication between the borrower and lender, prevent unnecessary foreclosures, and inform borrowers of their rights. The Court of Appeals held that the “accurate statements that further the underlying statutory purpose of providing information to borrowers that is or may become relevant to avoiding foreclosure do not constitute an ‘other notice.’” Additionally, the Court noted that a bright-line rule could conflict with federal law, such as the FDCPA mini-Miranda language and bankruptcy protection disclaimer.

Specifically, in rejecting the Second Department’s “bright-line rule,” the Court of Appeals held that “to the extent that there is any ambiguity about how to interpret the statute, application of a bright-line rule would contravene the legislative purpose. RPAPL 1304 is a remedial statute that should be read broadly to help borrowers avoid foreclosure.” In evaluating its decision, the Court held that unlike its ruling in Freedom Mortgage Corp. v. Engel, 37 N.Y.3d 1, 169 N.E.3d 912 (2021), a bright-line rule would not be appropriate as “[d]etermining whether additional language in a section 1304 notice is permissible requires no examination of intent or extrinsic evidence, but rather an objective facial determination of the language’s relevance, truth, falsity, or potential to mislead or confuse.” The Court rather relied on the “workable rule” standard as set forth in CIT Bank v. Schiffman, 36 N.Y.3d 550, 168 N.E.3d 1138 (2021). The Court noted in its decision that a bright-line rule would defeat the intent of the statute and would punish lenders who are attempting to comply with federal disclosure requirements or are providing additional information intended to further assist borrowers to avoid foreclosure.

On December 30, 2022, the New York Foreclosure Abuse Prevention Act (“FAPA”) was enacted as a direct result of the Court of Appeals decision in Engel. The intent of FAPA was to render the holding with respect to acceleration in Engel ineffective and ultimately moot. FAPA has the potential to be extremely detrimental to both pending and future foreclosure actions and is likely to face numerous challenges to its enforceability from lenders seeking to foreclose. As a result of the legislature’s immediate response to the Engel decision, it is possible there will be a similar action taken in response to the Court of Appeals holding in Kessler. The Court of Appeals even noted in its opinion in Kessler that “Engel was recently legislatively overruled.”

It is expected that the Court of Appeals decision in Kessler will have a dramatic impact on pending foreclosure actions. Specifically, in cases that have motions and appeals pending premised on the Second Department’s holding, lenders can reasonably expect a favorable ruling as long as the additional language or information included within the notice was not false, misleading, or unrelated. Additionally, to prevent any potential ramifications of FAPA, lenders are likely to appeal or move to vacate dismissals that were premised on the Second Department’s holding. This decision is certainly a welcome relief for many lenders who were faced with the difficult decision as to whether to recommence due to issues with the pre-foreclosure notice, or worse, had cases dismissed.

USFN is extremely proud to have participated in the Kessler case as an amicus and is gratified to see arguments it advanced be accepted by the Court. We look forward to keeping you apprised with the impact of the Kessler decision in New York.

Read the full Court of Appeals decision in Kessler here.

Copyright @2023

USFNews - Feb. 22