Soon, we will witness a tsunami of home foreclosures, it is what predicts the pundits of real estate market. An alert attorney should be able to do a lot for distressed borrowers wanting to keep their houses and or reinstate their mortgage. Nothing like a frustrated lender enmeshed in a legalese of foreclosure proceedings for a borrower—cannot blame the borrower, for most of them are slapped with various penalties and fines and including the draconian default interest rates. New York thankfully has a judicial foreclosure system. What it means is that the bank or the note holder will have to file a lawsuit to foreclose the ownership of real property to auction it. And these proceedings in New York are governed by New York Real Property Action & Proceedings Law (RPAPL). RPAPL § 101, et, seq. There are several steps that needs to be taken before the lender formally files this action (RPAPL 1303, et. seq.). One first is a 90 days’ notice. When added initially in 2008, it was meant for high-cost, subprime or nontraditional loan between January 1, 2003, and September 1, 2008. However, since 2009, it applies to all home loans. The relevant provision mandates:
Notwithstanding any other provision of law, with regard to a home loan, at least ninety days before a lender, an assignee or a mortgage loan servicer commences legal action against the borrower, or borrowers at the property address and any other address of record, including mortgage foreclosure, such lender, assignee or mortgage loan servicer shall give notice to the borrower in at least fourteen-point type which shall include the following.. . . .
Section 1304 notice is mandatory. Also, “the notices required by this section shall be sent by the lender, assignee or mortgage loan servicer in a separate envelope from any other mailing or notice.” This article deals with that aspect of the provision. Courts have had different approach to this requirement depending on the court dealing with the foreclosure. New York state courts tends to require strict compliance, but it is tricky, for a lender has to comply with both the state and federal laws. And when both cannot be satisfied, it is fatal. This needs further clarification by the courts.
Notice to be sent by Registered or Certified Mail and by First class Mail
Real Property laws of New York state directs a foreclosing lender to serve a pre-foreclosure information notice on the borrower at least ninety days before commencing a judicial foreclosure proceeding. RPAPL 1304. There is strict statutory requirement for the notice content, its mailing and content of the envelop itself. The courts are clear that this is a condition precedent for commencement of the foreclosure. The courts have considered these requirements as emanating from the underlying contract and or statutorily imposed by the states. Moet II Inc. v. McCarthy, 646 N.Y.S.2d 64 (N.Y. App. Div. 1996) (noncompliance as per mortgage agreement notice requirement precludes judgment). Thus, a good attorney must also plead prejudice for lack of compliance to be on the safe side. See Amresco New England II v. Denino, 725 N.Y.S.2d 78 (N.Y. App. Div. 2001) (must aver prejudice to set aside completed judicial foreclosure based on claim of defective notice, otherwise it is a mere irregularity with notice of sale under RPAPL § 231 not prejudicial). Also, if not pleaded well in the answer, one could lose the defense. Pritchard v. Curtis, 957 N.Y.S.2d 440 (N.Y. App. Div. 2012) (noncompliance with RPAPL § 1304 is an affirmative defense to judicial foreclosure, not a bar to a court’s subject matter jurisdiction). However, the courts are now increasingly demanding strict compliance with RPAPL 1304.
Section 1304 notice must be sent either by registered or certified mail and by first class mail. H & R Block Bank v. Liles, 130 N.Y.S.3d 521, 525 (N.Y. App. Div. 2020) (reversing summary judgment for bank where bank’s supporting papers did not include records of mailing of ninety-day pre-foreclosure notice required by N.Y. Real Prop. Acts. Law § 1304 or evidence of affiant’s lack of personal knowledge of applicable mailing procedures); Bank of N.Y. Mellon v. Ettinger, 111 N.Y.S.3d 340 (N.Y. App. Div. 2019) (reversing, on appeal, summary judgment where affidavit of servicer’s representative did not attest to knowledge of the mailing practices of the entity which sent the notice, and provided no independent proof of the actual mailing); U.S. Bank v. Fisher, 95 N.Y.S.3d 114 (N.Y. App. Div. 2019) (servicer’s affidavit contained a bar code with a 20–digit number below it, but no language indicating that a mailing was done by first-class or certified mail, or even that a mailing was done by the U.S. Postal Service); Deutsche Bank Nat’l Trust Co. v. Dennis, 122 N.Y.S.3d 95, 100 (N.Y. App. Div. 2020) (no evidence notice sent by first-class mail and certified mail); CitiMortgage, Inc. v. Pappas, 47 N.Y.S.3d 415 (N.Y. App. Div. 2017) (proof of service § 1304 notice in accordance with statute is condition precedent to foreclosure; because plaintiff offered neither postal service proof of mailing or affidavit establishing mailing with appropriate business record foundation, plaintiff failed to overcame borrower’s denial of receipt).
Notice be sent in a “Separate Envelop”
Recently the appellate division court strictly construed the “separate envelope” requirement of RPAPL 1304. Separate means that no other document should be found along besides 90 days’ notice. On December 15, 2021, a New York state appeals court, Second Department held, “strict compliance with the requisite RPAPL 1304 notices to the borrower or borrowers is a condition precedent to the commencement of a foreclosure action. . . . such notice must be sent in a separate envelope from any other mailing or notice (RPAPL 1304[2]) . . . hold that 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).” Bank of Am., N.A. v. Kessler, 202 A.D.3d 10, 14, 160 N.Y.S.3d 277, 280 (2021) (case wherein the 90 days’ notice also had information regarding bankruptcy debtors’ rights and those serving in military). Court emphasized on strict compliance with the notice provision: This strict approach precluding any additional material in the same envelope as the requisite RPAPL 1304 notices not only comports with the statutory language, it also provides clarity as a bright-line rule to plaintiff lenders and “promotes stability and predictability . . . in foreclosure proceedings” Id. The Court considered the legislative history and the policy consideration behind the enactment of section 1304, besides drawing upon the Court of Appeals’ insistence in mortgage foreclosure cases for ““adopt[ing] a clear rule that will be easily understood by the parties and can be consistently applied by the courts.” Id quoting Freedom Mtge. Corp. v. Engel, 37 N.Y.3d at 19, 146 N.Y.S.3d 542, 169 N.E.3d 912). The Second Department reiterated the separate envelop requirement in subsequent cases dealing with this issue.
Separate Envelop rule might violate federal law
However, this approach was not agreed upon by the federal court entertaining a foreclosure proceeding. See CIT Bank, N.A. v. Neris, No. 18 CIV. 1511 (VM), 2022 WL 1799497, at *5 (S.D.N.Y. June 2, 2022). In Neris case, the borrower argued that the separate envelop rule was violated as the lender had also inserted a notice under Fair Debt Collection Practices Act (FDCPA), especially dealing with section 1692 (e)of FDCPA and bankruptcy along with the 90 days’ notice. The Neris court disagreed. Usually, the “federal courts sitting in diversity are guided by state court interpretation of state law,” Tafflin v. Levitt, 493 U.S. 455, 465 (1990), the court in Neris was confronted with an issue of debt collector’s compliance with FDCPA in foreclosure proceeding. The court realized the importance of the lender’s compliance with FDCPA which requires proper disclosure statements to be mailed “in a debt collector's initial and subsequent communications.” The Neris court found an irreconcilable differences in approach between FDCPA requirements and strict enforcement of state court in Kessler, as the FDCPA obligation is triggered with the first contact with the borrower for delinquent debt. Usually, the federal courts apply the state law as resolved by the state’s highest court. In absence of such a ruling, the federal courts have looked at the state trial court’s decision of “what the state law is.” Fidelity Union Trust Co. v. Field, 311 U.S. 169 (1940). However, the state court decision must be “settled and can be ascertained.” Polk’s Lessee v. Wendal, 13 U.S. (9 Cranch) 87, 98(1815). But in case there is no ruling from any state court, the federal judges are not helpless rather, “he or she is free, just as state judges are, to consider all the data the highest court of the state would use in an effort to determine how the highest court of the estate would decide.” Wright & Kane, Federal Courts § 58 at 394 (7th ed. 2011). Such a speculation has been approved by the United State Supreme Court. In King v. Order of United Commercial Travelers, 333 U.S. 153 (1948), the Court exhorted courts to make its own determination as to what the highest court of the state would do. Of course, that entails rejection by the federal court of a flawed decision by the lower and intermediate courts. See Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 739 F.3d 45, 48 (2d Cir. 2013) (quoted by Judge Victor Marrero in Neris case). The Second Circuit had refused to follow a lower appellate court because it reasoned that the court had not misinterpreted the state highest court’s precedent.
And this is precisely what the presiding judge Victor Marrero did in Neris case. He said “that the New York Court of Appeals would not follow the bright-line rule that the Second Department adopted in Kessler.” And held , “debt collectors cannot simply mail a separate letter containing the FDCPA disclosure statement, as the Kessler court reasons, because the FDCPA requires the disclosure statement to be in a debt collector's “initial” and “subsequent” communications.” Judge Marrero thus upheld the adequacy of the joint notices (90 days and FDCPA notices) as sent by the lender.
But Neris is not binding on the state courts. It is clear that the lower federal courts do not have appellate jurisdiction on the state courts. Johnson v. Williams, 133 S. Ct. 1088 (2013)(finding that federal circuit court decision not binding on the state court). But then FDCPA is a federal statute, federal court reasoning might be a guidance to the state court when confronted with the issue of FDCPA issues with the home loan collection. See Tafflin v. Levitt, 493 U.S. 455, 465 (1990). And what about preemption doctrine? But FDCPA only preempts state laws that which are inconsistent with the Act and no doubt that consumer protections are traditionally left to the state to regulate. It is also reinforced by FDCPA itself, it has a broad based language, that the Act does not “annul, alter, or affect, or exempt any person subject to the provisions of this subchapter from complying with the laws of any state with respect to debt collection, except to the extent that those laws are inconsistent with any provision of this subchapter, and then only to the extent of the inconsistency.” 15 U.S.C. § 1692n. It seems that section 1304 separate envelope compliance might be inconsistent with the FDCPA requirement. Kessler and Neris issues are not unique to New York. Other courts of other states have combatted this issue. See Sanchez v. Client Serv., Inc., 520 F. Supp. 2d 1149 (N.D. Cal. 2007). See, e.g., Patterson v. Howe, 307 F. Supp. 3d 927, 934 (S.D. Ind. 2018) (holding that debt collector’s service of Requests for Admissions in conjunction with the Complaint and summons was authorized by state law and yet was found to violate the Act). See also, Romea v. Heiberger & Assoc., 163 F.3d 111 (2d Cir. 1998) (rejecting argument that FDCPA should not apply to state eviction proceedings because combined effect of applying both the New York and federal protections was more than Congress intended). But based on the Kessler decision, it could be argued that there are very important policy reasons for having a separate envelop rule. And if it can be proven that separate envelop rule provides more protection to the home loan borrowers, than a FDCPA required notice, compliance with FDCPA initial notice is not necessary. Missionary Sisters v. Dowling, 703 N.Y.S.2d 362 (Civ. Ct. 1999) (FDCPA does not preempt state eviction law requiring three-day notice). But see Garmus v. Borah, Goldstein, Altschuler & Schwartz, P.C., 1999 WL 46682 (S.D.N.Y. Feb. 1, 1999) (FDCPA’s thirty-day verification provision preempts state law allowing three-day rent demand notice). And DeNicolo v. Hertz Corp., 2020 WL 5816365 (N.D. Cal. 2020) (section 1692n “specifically allows for a state law to provide for greater consumer protections than the FDCPA”). And if it is not necessary to comply with FDCPA notice, then the separate envelope rule could be violated by the loan collection entity. Lenders themselves of course has to comply with the separate envelop rule as FDCPA does not apply to them, for they are directly involved in collecting their own loans.
But there is little catch to the lenders collecting their own loans. There is no doubt that different notices in the same envelop might still violate section 1304 where FDCPA does not apply, especially when the lender itself is collecting on the debt without the help of third parties. But if the lender is using some other name to collect the debt, for instance we have seen loans are getting assigned in midst of foreclosure and parties continue to use old names and amendment of the caption in the court case is delayed, this would definitely subject it to FDCPA. See case of Kilpakis v. JPMorgan Chase Fin. Co., 229 F. Supp. 3d 133 (E.D.N.Y. 2017)(subjecting Wells Fargo to FDCPA as it was using America Servicing Company as a trade name to engage in debt collection). The test is of a lease sophisticated consumer’s impression—if a consumer can feel that it is third party collecting the debt, then the transaction is covered under FDCPA. Also, if the one who purchase debts originated by someone else and then seek to collect those debts for their own account are not debt collectors subjected to FDCPA. Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718 (2017). But then be careful that the debt buyers can be debt collectors if the “principal purpose” is collection.