Summary
In Rossrock Fund II LP v. Arroyo, 34 Misc.3d 1211(A), 2012 WL 127444 (N.Y. Sup.) a forbearance agreement in a foreclosure action was rescinded on the grounds of unconscionability.
Summary of this case from Brenner v. Gen. Plumbing Corp.Opinion
10287/09
01-09-2012
Rossrock Fund II LP, Plaintiff, v. Jaime v. Arroyo, et. al., Defendants.
Attorney for Plaintiff: Jaspan Schlesinger LLP. Attorney for Defendant Jaime V. Arroyo: Sara L. McManaugh, Esq., South Brooklyn Legal Services .
Attorney for Plaintiff: Jaspan Schlesinger LLP.
Attorney for Defendant Jaime V. Arroyo: Sara L. McManaugh, Esq., South Brooklyn Legal Services.
Marsha L. Steinhardt, J.
Plaintiff Rossrock Fund II LP moves for an order, pursuant to Real Property Actions and Proceedings Law (RPAPL) § 1321, appointing a referee to compute the amount due under the subject mortgage and amending the caption to substitute certain individuals in place of the "John Doe" defendants. Defendant Jaime V. Arroyo moves for an order, pursuant to CPLR 3012 (d), granting Arroyo an extension of time to serve and file an answer. By a separate motion, Arroyo moves for an order a) declaring void and unenforceable "a purported forbearance agreement," b) reinstating the preexisting mortgage loan, c) following the reinstatement of the mortgage, directing the parties to negotiate in good faith in the Foreclosure Settlement Conference Part (FSCP) toward a permanent affordable modification of the reinstated mortgage, d) tolling the interest on the subject loan as of April 28, 2009, e) excluding attorneys' fees, legal costs and late fees accrued or incurred against Arroyo as of April 28, 2009 to date and f) granting attorneys' fees to Arroyo's counsel, South Brooklyn Legal Services (SBLS).
Plaintiff commenced this action to foreclose a mortgage encumbering the subject property at 238 Wilson Avenue in Brooklyn. The mortgage was executed by Arroyo on March 6, 2007 to secure an adjustable rate note in favor of Flushing Savings Bank, FSB (Flushing) in the amount of $440,000.00. Under the terms of the note, monthly installments of principal and interest of $3,114.29 were payable on the first of each month from May 1, 2007 until April 1, 2010, at which time the initial annual interest rate of 7.625% would be adjusted every three years as set forth therein. According to an assignment instrument dated June 27, 2008 and recorded on August 29, 2008, the subject mortgage "TOGETHER with the bond or note or obligation described in said mortgage" were assigned from Flushing to plaintiff.
On April 28, 2009, plaintiff commenced this action by filing a summons and complaint wherein plaintiff alleges that Arroyo defaulted under the mortgage and note by failing to make the monthly payment due on February 1, 2008 and each month thereafter. According to the affidavit of plaintiff's process server, Arroyo was served with the summons and complaint by the delivery of same on May 22, 2009 to his son, Jamel Arroyo, at Arroyo's dwelling house/usual place of abode at 203 Boerum Street No.2B, Brooklyn, NY and the mailing of process to said address on the following day.
The affidavit also states that the summons and complaint included an additional notice pursuant to Real Property Actions and Proceedings Law (RPAPL) § 1303.
On June 1, 2009, Arroyo signed a "forbearance agreement" prepared by plaintiff's attorneys. The agreement stated that Arroyo "has acknowledged that [he does] not have sufficient funds to cure the arrears at this time or to satisfy the loan" and that plaintiff "is willing to extend to [Arroyo] the opportunity to satisfy the mortgage in accordance with the terms and conditions set forth herein." Under the agreement, Arroyo agreed to make a payment of $3,429.29 on or before June 8, 2009 and make monthly payments of $3,429.29 for twenty-nine (29) months from July 1, 2009 through November 1, 2011. Upon the compliance of this payment schedule, Arroyo was then required to make a balloon payment of $498,167.55 by December 1, 2011. Under the agreement, plaintiff agreed to reduce the rate of default interest from 24% to 12% and further waive the assessment of a prepayment penalty, thereby reducing by $69,929.59 the amount payable to satisfy the mortgage. During the term of the agreement, plaintiff retained the right to proceed with the foreclosure action as usual, but would forbear from scheduling a foreclosure auction provided that Arroyo was in full compliance with his payment obligations. Significantly, Arroyo agreed to waive all defenses to the foreclosure action and not to contest the action (i.e. file an answer).
On January 14, 2010, plaintiff brought the instant motion for an order of reference. On March 19, 2010, Arroyo brought a motion for leave to serve a late answer. In his proposed verified answer, Arroyo states the following:
I contacted Flushing Savings Bank in 2008 alerting the bank that I was having a personal financial hardship and I asked for the amount to bring my monthly mortgage up to date. I was informed that it was more than $12,000.00. I informed them that I will take a pension loan from my employer to bring my mortgage current. Flushing Savings Bank informed me that they would only accept a lump payment so I proceeded to take a pension loan from my job & contacted Flushing Savings Bank. My pension loan in which I withdrew money was for more than $12,000.00. I contacted Flushing Savings as requested by the bank in order to make a wire transfer. Flushing Bank stated no payment will be accepted & that the mortgage has been sold to Rossrock Fund. I immediately contacted Rossrock Fund who then accepted payments only by me signing a forbearance agreement. Until this date I have been making timely mortgage payments to Rossrock as agreed. I think that it is unfair that Flushing Savings Bank would not allow me to bring my mortgage current & I think it's unfair that Rossrock is attempting to take my home while I am still making payments as agreed to date.
In his affidavit in support of his motion for leave to serve a late answer, Arroyo avers that Rossrock's counsel told him that he "didn't need to answer the complaint because they would work out a repayment plan with [him]" and that if he retained an attorney to represent him in this case, he would not only have to pay his own attorney but "would also have to cover the additional legal fees that Rossrock would incur." Arroyo states that because he "had neither legal training nor any understanding of the legal claims and defenses that can be raised in a foreclosure action, because [he] did not have money to pay legal fees, and because [he] was persuaded by the words of Rossrock's lawyer, [he] did not attempt to answer the complaint."
On April 19, 2010, Arroyo appeared at a settlement conference in the FSCP with the assistance of SBLS. Special Referee Paul Nuccio directed the parties to submit papers supporting their positions discussed at the conference as to whether the forbearance agreement is an unconscionable contract of adhesion and whether this case qualifies for a mandatory settlement conference. On June 8, 2010, Special Referee Nuccio issued a directive stating that the instant action "meets the criteria of the Residential Foreclosure Program," denying plaintiff's application to remove the action from the FSCP and referring the case to this court for the limited purpose of determining whether the forbearance agreement should be declared unconscionable. By order dated March 9, 2011, this court referred the matter back to the FSCP as Arroyo did not make the motion to void the agreement within the 60 day period directed by Special Referee Nuccio. However, insofar as neither Arroyo nor SBLS received a copy of the directive until April 21, 2011, Special Referee Nuccio referred the matter back to this court on May 4, 2011, permitting Arroyo to make the motion to void the agreement within sixty days of the date of the directive. The motion was thereafter brought by Arroyo on July 5, 2011.
"In general, an unconscionable contract has been defined as one which is so grossly unreasonable as to be un enforcible because of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party" (King v Fox, 7 NY3d 181, 191 [2006]; see Gillman v Chase Manhattan Bank, 73 NY2d 1, 10 [1988]). "This definition reveals two major elements which have been labeled by commentators, procedural and substantive unconscionability" (State of New York v Wolowitz, 96 AD2d 47, 67 [1983]). "The procedural element of unconscionability concerns the contract formation process and the alleged lack of meaningful choice; the substantive element looks to the content of the contract, per se" (State of New York v Wolowitz, 96 AD2d at 67; see Lawrence v Graubard Miller, 11 NY3d 588, 595 [2008]). Examples of procedural unconscionability "include, but are certainly not limited to, high pressure commercial tactics, inequality of bargaining power, deceptive practices and language in the contract, and an imbalance in the understanding and acumen of the parties" (State of New York v Wolowitz, 96 AD2d at 67). "Examples of unreasonably favorable contractual provisions are virtually limitless but include inflated prices, unfair termination clauses, unfair limitations on consequential damages and improper disclaimers of warranty" (id. at 67-68).
"A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made" (Gillman, 73 NY2d at 10). However, "procedural and substantive unconscionability operate on a sliding scale'; the more questionable the meaningfulness of choice, the less imbalance in a contract's terms should be tolerated and vice versa" (State of New York v Wolowitz, 96 AD2d at 68; see Master Lease Corp. v Manhattan Limousine, 177 AD2d 85, 89 [1992]). "The determination of unconscionability is a matter of law for the court to decide" (Industralease Automated & Scientific Equip. Corp. v R. M. E. Enters., 58 AD2d 482, 488 [1977]; see Laidlaw Transp. v Helena Chem. Co., 255 AD2d 869, 870 [1998]).
It is not in dispute that the terms of the agreement were drafted entirely by plaintiff and/or its counsel and there is no indication that Arroyo negotiated any terms set forth therein. It is further not in dispute that the subject agreement was the only one offered to Arroyo and that Arroyo was required to sign and return the agreement within a relatively short period of time. While the parties dispute whether Arroyo was counseled by plaintiff to not seek legal assistance, there is no dispute that Arroyo was not represented by an attorney at the time he executed the agreement. An examination of the terms of the agreement and the circumstances of its execution reveal a transaction which is ostensibly designed to ease the foreclosure process in favor of plaintiff while affording virtually no benefit to Arroyo. The reduction of the default rate of interest and the waiver of the prepayment penalty, while amounting to a reduction of indebtedness of nearly $70,000.00, appears in the long run to provide little, if any benefit to Arroyo, while the agreement of Arroyo to waive all defenses and not contest the action would be of significant benefit to plaintiff, who may then proceed to an inevitable judgment of foreclosure and likely auction of the property in an expedited manner. While plaintiff agreed to not schedule an auction so long as Arroyo complied with all terms of the agreement, such amounts to an illusory benefit as an order of reference, referee's hearing, referee's report and judgment of foreclosure would in all likelihood not be attained within the period Arroyo was required to complete the final balloon payment. Further, this court is skeptical as to whether Arroyo would realistically obtain the refinancing necessary to make the balloon payment in light of the fact that he was declared in default of the instant mortgage. In the mean time, Arroyo was required to continue to make monthly payments to plaintiff even while the foreclosure process continued unabated. Under the circumstances, the court finds that the subject agreement is unconscionable and employs its equitable powers to rescind the agreement.
CPLR 3408 created mandatory settlement conferences in residential foreclosure actions. The statute explicitly requires the parties to "negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible." Furthermore, the Uniform Civil Rules for the Supreme and County Courts provide that settlement conferences shall include settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents, including determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to. The Court may use the conference for whatever other purposes the court deems appropriate (UCR 202.12—a).
Arroyo avers in his affidavit dated July 3, 2011 that he occupies the subject premises, which consists of a four family residence with a vacant commercial space. Special Referee Nuccio has previously indicated in his June 8, 2010 directive that the case meets the criteria of the Residential Foreclosure Program, citing RPAPL § 1304 (5)(a) and Kings County Local Rules, Part F (7). Plaintiff has not submitted any compelling proof to the contrary. In the absence of such proof, the court declines to remove this matter from the FSCP.
This rule provides:
Every affidavit for an exemption from a conference made pursuant to CPLR 3408 and RPAPL 1304 must specify the grounds for same and provide supporting documentation and affidavits from persons with direct knowledge. Where the claim is that the borrower is not living in the subject house, then an affidavit of investigation substantiating this allegation must be appended which states inter alia that the borrower is not living in the house and that no action by the mortgagee or its agents procured same. This affidavit shall be included in the motion for a Judgment of Foreclosure and Sale.
As a result, Arroyo's motion is granted to the following extent: The forbearance agreement dated May 27, 2009 and executed by Arroyo on June 1, 2009 is hereby rescinded. Plaintiff is directed to refund to Arroyo any and all payments made under the agreement from June 1, 2009. This matter shall be referred to the FSCP for good faith negotiations as to a potential loan modification. The remainder of Arroyo's motion is denied.
CPLR 3012 (d) provides that "[u]pon the application of a party, the court may extend the time to appear or plead, or compel the acceptance of a pleading untimely served, upon such terms as may be just and upon a showing of reasonable excuse for delay or default." To "compel the plaintiff to accept an untimely answer as timely, a defendant must provide a reasonable excuse for the delay and demonstrate a potentially meritorious defense to the action" (Ryan v Breezy Point Coop., Inc., 76 AD3d 523, 524 [2010]). The determination of what constitutes a reasonable excuse lies within the sound discretion of the Supreme Court (Maspeth Fed. Sav. & Loan Assn. v McGown, 77 AD3d 889 [2010]). Unfortunately, even if this court were to find that Arroyo has a reasonable excuse for his delay in answering, there is no showing that he possesses a potentially meritorious defense to the action.
Accordingly, Arroyo's motion for leave to serve a late answer is denied, and
plaintiff's motion for an order of reference and for amendment of the caption is granted.The foregoing constitutes the decision and order of the court.
ENTER,
J. S. C.