October Title Tidbit by Robert P. Knapp III – Mulholland & Knapp, LLP

RPAPL § 1302-a: Standing is Forever.

RPAPL §1302-a, enacted and effective December 23, 2019, provides that “Notwithstanding the provisions of [CPLR 3211(e)], any objection or defense based on plaintiff’s lack of standing in a foreclosure proceeding related to a home loan [as defined in RPAPL 1304(6)(a)] shall not be waived if a defendant fails to raise the objection or defense in a responsive pleading or pre-answer motion to dismiss.” The statute further provides that “[a] defendant may not raise an objection or defense of lack of standing following a foreclosure sale, however, unless the judgment of foreclosure and sale was issued upon defendant’s default.”

A Statutory Cloud on Title

RPAPL §1302-a makes standing virtually unwaivable in a home loan foreclosure. “Where applicable, RPAPL 1302–a places the defense of standing on a footing comparable with the other defenses that are exempt from the waiver provisions of CPLR 3211(e), to wit, those defenses listed in subdivisions CPLR 3211(a)(2) [lack of subject matter jurisdiction], (7) [failure to state a cause of action], and (10) [absence of person who should be made a party], which may be raised by motion ‘at any time.’” GMAC Mortgage, LLC v. Coombs, 191 A.D.3d 37, 48 (2d Dept. 2020).

Accordingly, defendants in a home loan foreclosure can now raise the defense of plaintiff’s lack of standing “at any time,” including for the first time in opposition to a summary judgment motion, or on a motion to vacate a default judgment of foreclosure and sale pursuant to CPLR 317 or CPLR 5015. Defendants may raise the defense in actions that were pending when the new statute became effective and potentially even in actions where judgment had already become final before passage of the statute. But see Hogan v Kelly, 86 A.D.3d 590, 592 (2d Dept. 2011) (2008 amendments to adverse possession statute “cannot be retroactively applied to deprive a claimant of a property right which vested prior to their enactment.”) Defaulting defendants may even raise the standing defense after a foreclosure sale.

Such defense in perpetuity creates a cloud on default foreclosure titles, at least until the courts have more clearly defined the reach of RPAPL §1302-a. By the statute’s terms, “[a] defendant may … raise an objection or defense of lack of standing following a foreclosure sale [if] the judgment of foreclosure and sale was issued upon defendant’s default.” The statute does not say upon which defendant’s default. Potentially even a judgment entered on default as to a single, subordinate lienholder (but on the merits as to all the other defendants) would be subject to vacatur on the grounds of lack of standing, imperiling the title of the purchaser at the foreclosure sale.

Mitigating the Risk

Foreclosing mortgagees, purchasers at foreclosure sales and title insurers can mitigate this risk in several ways. First, verify whether the mortgage in question really is a “home loan” as defined in RPAPL §1304(6)(a): (i) the borrower is a natural person; (ii) the debt is incurred by the borrower primarily for personal, family, or household purposes; (iii) the loan is secured by a mortgage or deed of trust on real estate improved by a one to four family dwelling, or a condominium unit, in either case, used or occupied, or intended to be used or occupied wholly or partly, as the home or residence of one or more persons and which is or will be occupied by the borrower as the borrower’s principal dwelling; and (iv) the property is located in New York. If any one of these elements is missing, RPAPL §1302-a does not apply.

Second, make sure that the plaintiff did (or does) in fact have standing, whether that issue was litigated in the underlying foreclosure or not. Although “[t]here is no ‘checklist’ of required proof to establish standing,” plaintiff may “satisf[y] its burden through evidence that it possessed the note when it commenced this action, including a copy of the original note endorsed in blank, and other supporting material, including an affidavit of possession based on an employee’s review of plaintiff’s business records.” JPMorgan Chase Bank, N.A. v Caliguri, 36 N.Y.3d 953, 954 (2020), rearg. denied, 36 N.Y.3d 1085 (2021), cert. denied, October 4, 2021. Especially with a judgment of foreclosure and sale entered on default, title companies considering insuring the purchaser should make sure that all this proof is available in advance. The insured buyer will be in no position to prove that the prior mortgagee had possession of the original mortgage note when it commenced the foreclosure action.

Bona Fide Purchaser for Value

The buyer at foreclosure sale may qualify as bona fide purchaser whose title is protected by CPLR 317, 5015(d) and CPLR 5523 if the notice of pendency can be cancelled before the foreclosure sale. “A person whose conveyance or incumbrance is recorded after the filing of the notice [of pendency] is bound by all proceedings taken in the action after such filing to the same extent as a party.” CPLR 6501. But “in the absence of an outstanding valid notice of pendency, the owner’s ability to transfer clear title to the disputed property remains unimpaired.” Da Silva v Musso, 76 N.Y.2d 436, 438 (1990). The effect of CPLR 5523 “is to insulate the title of a person who purchased after entry of final judgment from the effects of an appellate reversal, at least in the absence of an outstanding notice of pendency.” Musso, 76 N.Y.2d at 441.

CPLR 5015(d) and 317 make the same rule applicable to vacatur of a judgment pursuant to those statutes. The prevailing mortgagor is limited to “monetary relief in cases where the owner has exercised his rights under the unstayed judgments and transferred the property to a ‘good faith’ purchaser for value.” Da Silva v Musso, 76 N.Y.2d at 441.

But it is not clear that CPLR 6514(a) would allow the plaintiff to cancel its own notice of pendency. That statute provides in pertinent part that “[t]he court, upon motion of any person aggrieved and upon such notice as it may require, shall direct any county clerk to cancel a notice of pendency … if the time to appeal from a final judgment against the plaintiff has expired; or if enforcement of a final judgment against the plaintiff has not been stayed pursuant to section 5519.” (Emphasis added.) Here, the plaintiff would be seeking to cancel its own notice of pendency on a judgment in favor of the plaintiff – a scenario not contemplated by the statute or the case law. Also unclear is whether foreclosing mortgagees could be persuaded to cancel their notices of pendency before the foreclosure sale, considering that such cancelation would render the mortgagee the sole means of recourse in the event of a successful RPAPL §1302-a motion. Where no defendant has appeared, the plaintiff can cancel the notice of pendency without a court order pursuant to CPLR 6514(e).

The Federal Option

Mortgagees should consider bringing their foreclosure actions in federal court whenever there is complete diversity of citizenship between plaintiffs and defendants and the amount in controversy exceeds $75,000. 28 U.S.C §1332. Where the Federal Rules of Civil Procedure answer the question in dispute, they control in federal court over contrary state law, unless the Federal Rule exceeds statutory authorization or Congress’s rulemaking power. Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 559 U.S. 393, 398 (2010). The Federal Rules of Civil Procedure have their own provisions concerning pleading of affirmative defenses, when and how defenses are presented, waiver of defenses and relief from a final judgment, FRCP 8(c)(1), 12 and 60(b), and these control over any contrary state law, including RPAPL §1302-a.

In particular, a defendant seeking to vacate a federal judgment of foreclosure and sale would have to meet the requirements of FRCP 60(b) and could not invoke RPAPL §1302-a to avoid the federal common law of res judicata. See Semtek v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001). Under federal law, “[a] judgment of a court having jurisdiction of the parties and of the subject matter operates as res judicata, in the absence of fraud or collusion, even if obtained upon a default.” (Citation and internal quotation marks omitted.) Morris v Jones, 329 U.S. 545, 550-51 (1947); Saud v Bank of New York, 929 F.2d 916, 919 (2d Cir. 1991). And although the state and federal courts have different concepts of standing, as a matter of New York law, “RPAPL 1302–a does not disturb the well-settled case law holding that ‘a party’s lack of standing does not constitute a jurisdictional defect.’” GMAC Mortgage, LLC v. Coombs, 191 A.D.3d 37, 47 (2d Dept. 2020).

Procedural Defenses

Finally, even where proof of standing may be problematic, RPAPL §1302-a is not self-executing. “Although the new statute provides that the defense of standing is not waived pursuant to CPLR 3211(e) by a defendant’s failure to raise it in a responsive pleading or motion to dismiss, it does not thereby absolve a defendant from actually raising the issue before it may properly be considered by a court.” GMAC Mortgage, LLC v. Coombs, 191 A.D.3d at 46. Defendants against whom a default judgment has already been entered would have to move for relief under CPLR 317 or 5015 and to meet the requirements for vacatur under those statutes, such as not personally receiving notice of the summons in time to defend and moving within one year of knowledge of entry of the judgment and no more than five years from entry of judgment under CPLR 317. Other potential defenses against a vacatur motion include laches and (after ten years) adverse possession. RPAPL §511; CPLR 212(a).

Conclusion

Almost two years after its passage, many questions remain as to RPAPL §1302-a, including its retroactivity, its effect on bona fide purchasers, and its applicability (if any) in federal foreclosures. Courts may be able to shed more light on these questions as home loan foreclosures pick up after expiration of New York’s COVID-19 foreclosure moratorium.