No Foreclosures for Technical Mortgage Defaults

New York Real Estate Journal recently published an article written by Olshan Real Estate Partner Thomas Kearns entitled “No Foreclosures for Technical Mortgage Defaults.” Looking back to the start of his legal career as a law clerk in the early 1980’s, Mr. Kearns recalls working on several matters where lenders holding older, long term mortgages at rates much lower than the then market would try to default borrowers based on technical violations of the mortgage. At the time, New York law had softened on technical defaults in the lease context relying on concepts of equity, but the notorious 1930 decision in Graf v Hope Building Corp. was thought to be the law of the state when it came to mortgages. In the Graf decision, New York’s Court of Appeals, the state’s highest court, held that, despite prompt correction of a modest monetary mistake by a borrower, the lender could enforce a default. As a law clerk, he tells of working on a case wherein a client failed to deliver certain financial statements and failed to pay taxes for a short time. In charge of researching whether the equitable principles that New York applied to lease contexts was also applicable to mortgages, Mr. Kearns scoured the leading treatises but found only a favorable dissenting opinion by an intermediate appellate court in Bay v Bay (1960). In this case,  taxes on a farm were not paid until after the default cure period passed, the dissent argued that equity required that the farm not be forfeited for the tax non-payment. Though the dissent was useful in the case Mr. Kearns was handling, the majority cited Graf and the farmer lost. On further research, however, he learned that the Court of Appeals had subsequently overturned the Bay decision by citing the dissenting opinion. With this revelation, he positioned the Bay decision to a more important place in the brief and his client won the motion. He reviewed the treatises again and consulted others to see how he initially missed the reversal, discovering that the texts largely ignored it. “To this day,” he concludes, “Bay is not frequently cited in court opinions but it should be. Borrowers faced with a mortgage acceleration based on a short-term failure to pay taxes or other technical default should cite to Bay v Bay.... Borrowers should not be defaulted for technical, short-term matters that don’t materially affect the security of the mortgage. This is crucial since forfeiture of the property through a foreclosure process is a draconian penalty and because default interest charges can be punitive.”