In Flagstar Bank, FSB v. Walker, 2016 N.Y. Slip Op. 26058 (N.Y. Sup. Ct. Jan. 29, 2016), the Supreme Court in Kings County, New York rejected a special referee’s recommendation that the Court conduct a hearing in a residential foreclosure action to determine whether the plaintiff, Flagstar Bank, negotiated in good faith at a mandatory settlement conference with the defendant borrower. The Court found that Flagstar negotiated in good faith and ordered the foreclosure action to continue.
In April 2011, Flagstar commenced a residential foreclosure action in Kings County, New York. Defendants Pamela Walker and Bevan Walker each filed a contesting answer with counterclaims against Flagstar. Pursuant to NYCPLR 3408, which requires a mandatory settlement conference in “every residential foreclosure action” involving a home loan “in which the defendant is a resident of the property subject to foreclosure,” Flagstar and Bevan Walker participated in settlement conferences in October 2011 and January and February 2012 before a special referee. The special referee determined that Flagstar did not negotiate in good faith at the settlement conferences as required under the CPLR and recommended that the Supreme Court in Kings County conduct a bad faith hearing.
In May 2012, the Court conducted a hearing and found that the note encumbering the property that was the subject of the foreclosure action was not eligible for modification under the federal Home Affordable Modification Program (“HAMP”). The Court nonetheless ordered Flagstar to reevaluate Bevan Walker for a loan modification by applying the HAMP guidelines and stayed all foreclosure proceedings pending the outcome of the reevaluation. Flagstar appealed the Supreme Court’s decision, and the Appellate Division reversed, finding that the loan was ineligible for modification under HAMP and that the relief granted by the Supreme Court was inappropriate.
Flagstar subsequently filed a motion to, among other things, reject the special referee’s directive for a bad faith hearing and allowing Flagstar to continue to prosecute the foreclosure. The Court found that Flagstar did not negotiate in bad faith at the settlement conferences and thus, rejected the special referee’s recommendation. The Court noted that Flagstar made several loan modification offers which were flatly rejected by Bevan Walker. The Court explained that although Flagstar may have refused to evaluate the subject loan using HAMP guidelines, its refusal to do so could did not constitute bad faith since Flagstar was under no obligation to consider the loan pursuant to HAMP. The Court further found that Flagstar’s loan modification offers were not unreasonable or in bad faith simply because the projected monthly payments were higher than what defendant wanted to pay or higher than what he could comfortably afford. Accordingly, the Court entered an Order finding that Flagstar negotiated in good faith and granting it leave to continue the foreclosure action.