Scott E. Mollen

Foreclosures—U.S. Court of Appeals for the Second Circuit Certifies Questions to New York Court of Appeals—Issues Involved Whether the Lender Proved Compliance With RPAPL §§1304 and 1306's Pre-Foreclosure Notice and Filing Requirements—§1306 Does Not Specify Whether Each Borrower Must Be Named in a §1306 Notice to the Superintendent of Financial Services—Approximately One-Year Gap Between a Default and Notice of Default May Cast Doubt on Whether Lender Provided Adequate Proof of Standard Office Mailing Procedure

This decision by the U.S. Court of Appeals for the Second Circuit (court) involved an appeal from a trial court decision which granted summary judgment in favor of a lender in a foreclosure action against two defendants. The defendants argued that the lender "failed to prove compliance with pre-foreclosure notice requirements of New York Real Property Actions and Proceedings Law (RPAPL) §1304" (§1304) and "the pre-foreclosure filing requirements of RPAPL §1306" (§1306). Since the appeal "turn[s] on questions of New York law for which no controlling decisions of the New York Court of Appeals exist," the court certified two questions to the New York Court of Appeals.

The lender had commenced a foreclosure action against the two defendants and they had moved for summary judgment. The District Court had granted the lender's motion after adopting a "Report and Recommendation" by a magistrate judge. The defendants argued that the lender failed to prove compliance with §§1304 and 1306. With respect to §1304, they contended that the lender "failed to show that it followed standard mailing procedures to ensure that pre-foreclosure notices were properly addressed and mailed." They also argued that the lender failed to comply with §1306 because it failed to include information on its filing about one of the borrowers.

The borrower's wife had taken a loan secured by a note and mortgage given by the wife and her husband on their home. On the same day that the wife executed the note, the defendants both executed a "consolidation, extension and modification agreement," whereby they agreed to combine "into one set of rights and obligations all of the…agreements stated in the note and mortgage," and they agreed to "take over all of the obligations under the note and mortgage as consolidated and modified by this agreement as borrower." The mortgage was ultimately assigned to the plaintiff lender. Approximately six years later, the defendants executed a loan modification agreement, in which they were both listed as "borrower."

The defendants defaulted on their mortgage payments in 2014. The lender initiated this foreclosure action in October 2016. The lender had moved for summary judgment. The defendants argued that the lender failed to prove "compliance with the pre-foreclosure notice requirements of…§1304 and the pre-foreclosure filing requirements of…§1306." The District Court adopted a magistrate judge's recommendation and granted summary judgment to the lender. On appeal, the 2nd Circuit concluded that the issues turn on "questions of New York law for which no controlling decisions of the New York Court of Appeals exist."

The court explained that §1304(1) requires that "with regard to a home loan, at least ninety days before a lender,…commences legal action against the borrower, or borrowers at the property address and any other address of record, including mortgage foreclosure, such lender,…shall give notice to the borrower."

Section 1304(2) provides that such notice must be sent by "registered or certified mail and also by first-class mail to the last known address of the borrower, and to the residence that is the subject of the mortgage." "Proper service of…§1304 notice on the borrower or borrowers is a condition precedent to the commencement of a foreclosure action and the plaintiff has the burden of establishing satisfaction of this condition." Compliance with §1304 may be "established with proof of the actual mailings, such as affidavits of mailing or domestic return receipts with attendant signatures, or a proof of standard office mailing procedure designed to ensure that items are properly addressed and mailed, sworn to by someone with personal knowledge of the procedure." "[P]roof of a standard office mailing procedure gives rise to a presumption that a notice was received, although that presumption may be rebutted by 'a showing that the routine office practice was not followed or that was so careless that it would be unreasonable to assume that the notice was mailed.'"

The lender had submitted an affidavit from an employee (affidavit) who alleged that she had personal knowledge of the lender's standard office practice relating to the subject notices. The lender also submitted copies of §1304 notices addressed to each of the defendants dated Nov. 18, 2015 and marked as having been sent by first-class and certified mail.

The District Court found that the affidavit sufficiently demonstrated compliance with §1304. However, the defendants argued that the lender's witness "attested that the envelopes for mailing §1304 notices are purportedly created upon default." The subject "notices were dated and sent a year after the default." They also argued that the lender's witness "failed to attest to or describe any procedure regarding when or by what process these envelopes are ever mailed." The affidavit failed to attach copies of the §1304 notices described in the affidavit.

The court held that the defendants' latter two arguments failed to raise triable issues with respect to the lender's compliance with §1304. The court stated that although the affidavit did not describe the "exact process by which the notices are 'provided to the United States Post Office for mailing,'…such details are unnecessary to prove compliance." Although that the lender's witness failed to attach copies of the §1304 notices described in her affidavit, the defendants had not disputed that such copies "were included with (lender's) summary judgment motion," and that the defendants offered "no reason to question the authenticity of these copies."

However, the court "hesitated" to affirm the District Court's judgment since the defendants had argued that the §1304 notices were dated approximately a year after the defendants had defaulted. The court stated that the "nearly one-year gap is inconsistent with (lender's witness) statement …" that the lender's "§1304 notices 'are created upon default,'" and therefore the gap "casts doubt on whether (lender) offered adequate 'proof of a standard office mailing procedure designed to ensure that items are properly addressed and mailed.'"

The court stated that the "untimely creation of the §1304 notices suggests that (defendants) may have rebutted the presumption of receipt by 'showing that (lender's) routine office practice was not followed.'" The court "acknowledged" that the delay in creating the §1304 notices did not "necessarily imply that (lender) otherwise failed to follow its routine procedures for addressing and mailing notices." Furthermore, the delay could "be explained by its acquisition of the…mortgage after the defendants had defaulted."

However, the court was "unable to find any controlling decisions from the New York Court of Appeals,…that discuss whether the presumption of receipt is rebutted by any showing of a deviation from the assertedly routine office procedures for preparing and mailing §1304 notices, or whether instead the presumption is rebutted only by a showing of deviations directly related to the mailing process, rather than to other aspects of the asserted routine." The court could also not find any decisions from "the Appellate Division that indicate on how the Court of Appeals would likely resolve the issue."

Thus, the court certified to the New York Court of Appeals the following question: "Where a foreclosure plaintiff seeks to establish compliance with…§1304 through proof of a standard office mailing procedure, and the defendant both denies receipt and seeks to rebut the presumption of receipt by showing that the mailing procedure was not followed, what showing must the defendant make to render inadequate the plaintiff's proof of compliance with §1304?"

"Whereas…§1304 requires that a foreclosure plaintiff gives notice to the borrower,…§1306 requires that certain information be filed with the superintendent of financial services."

Section §1306(2) requires that "each filing delivered to the superintendent shall be on such form as the superintendent shall prescribe, and shall include at a minimum, the name, address, last known telephone number of the borrower, and the amount claimed as…owing on the mortgage, and such other information as will enable the superintendent to ascertain the type of loan at issue." The affidavit stated that the §1306 filing had been timely made. The §1306 filing listed the wife as the borrower, but did not list the husband. Section 1306(2) "does not specify whether the filings must include information about all borrowers on a given loan, or whether it is sufficient to include information only about one borrower."

The court noted that "New York courts have held §1304 requires strict compliance with respect to all borrowers on a loan." However, the court found "no decisions from the New York Court of Appeals or the Appellate Division which address whether §1306 imposes an analogous obligation."

The court opined that "[o]n the one hand, it seems logical to assume that §§1304 and 1306 have similar requirements, as the two provisions operate in tandem, with the mailing of a §1304 notice triggering the deadline to make a §1306 filing." Also, "the two provisions appear to have as shared purposes the protection of homeowners and the prevention of foreclosures." Thus, the court reasoned that it was "plausible that both provisions require compliance with respect to all borrowers on a single loan."

However, there was some evidence that §§1304 and 1306 "differ in relevant respects." A New York State trial court, after the District Court's ruling in this case, had held that §1306 "does not require compliance with respect to all borrowers on the loan because §1306, unlike §1304, was intended 'only to be a source of statistics for the state,' such that 'filing for either [borrower] would provide the state with the same statistical information it needed.'" Additionally, the superintendent of financial services has "declined to interpret the provision as requiring compliance with respect to all borrowers on a loan." The superintendent "has prescribed a filing form that provides for a maximum of two borrowers, even if there are more borrowers on a loan."

Given the foregoing "conflicting considerations and lack of guidance from either the Court of Appeals or the Appellate Division," the court certified to the Court of Appeals the question of "[w]here there are multiple borrowers on a single loan, does…§1306 require that a lender's filing include information about all borrowers, or does §1306 require only that a lender's filing include information about one borrower?"

CIT Bank N.A. v. Schiffman, U.S. Court of Appeals, 2nd Circuit, Case No. 18-3287, decided Jan. 28, 2020, Katzmann, Ch. J., Lynch, C.J., and Kaplan, D.J., all concur.

Scott E. Mollen is a partner at Herrick, Feinstein.