Indy-Mac Bank, F.S.B. v. Yano-Horoski

Is the toothpaste back in the tube for equitable remedies in foreclosure cases?

In 2009, Justice Jeffrey A. Spinner of the Suffolk County Supreme Court became somewhat of a folk hero when, in Indy Mac Bank F.S.B. v. Yano-Horoski, 26 Misc.3d 717 (Sup. Ct. Suffolk Co. 2009), a mortgage foreclosure action, he invoked the Court’s equitable powers to cancel the underlying mortgage and note. Recently, however, the Second Department reversed Justice Spinner. Does that reversal now limit a Judge’s ability to fashion an equitable remedy in foreclosure cases?

The original mortgage foreclosure action was commenced in 2005. A Judgment of Foreclosure and Sale was granted on January 12, 2009. In accordance with CPLR 3408, as the underlying loan was deemed to be “sub-prime” or “high cost,” Ms. Yano-Horoski requested a settlement conference. The conference, originally scheduled in February, 2009, was continued five times while the Court attempted “to obtain meaningful cooperation” from Indy Mac. As a result of Indy Mac’s “intransigence in its continuing failure and refusal to cooperate,” the Court directed Indy Mac to produce a bank officer at a conference scheduled for September, 2009.1

At that conference, “it was celeritously made clear to the Court that Plaintiff had no good faith intention whatsoever of resolving this matter in any manner other than a complete and forcible devolution of title from Defendant.”2 Further, it was made “abundantly clear” to the Court that “no form of mediation, resolution or settlement would be acceptable to” Indy Mac.3 Indy Mac conceded that the amount due on the Mortgage exceeded the relevant real property’s value by more than $250,000.00. Indy Mac also claimed that Yano-Horoski was offered a Forebearance Agreement, but “after substantial prodding by the Court” Indy Mac “conceded, with great reluctance,” that the agreement was sent after the first payment was due under its terms, making it impossible for Yano-Horoski to comply with the agreement’s terms.4 Indy Mac rejected an offer by Yano-Horoski’s daughter to purchase the property for its fair market value in a short sale and would not consider a loan modification using income from Yano-Horoski’s husband and daughter, both of whom reside at the property. An offer by Yano-Horoski’s husband and daughter to obligate themselves to pay the loan indebtedness was also rejected by Indy Mac. “In short, each and every proposal by Defendant, no matter how reasonable, was soundly rebuffed by plaintiff.”5

The Court ordered a hearing to be held to explore various issues. At that hearing, Indy Mac was unable to advise the Court of the principal balance owed by Yano-Horoski. Two letters from Indy Mac to Yano-Horoski some eight months apart indicated that the principal balance owed decreased, though no additional payments were made. Indy Mac claimed that it has extended two modification offers to Yano-Horoski which were not accepted and that Yano-Horoski was ineligible for a modification under the Federal HAMP guidelines.6

The Court found it troubling that the amount claimed to be due was some $80,000.00 more than the amount calculated to be due based on the Judgment of Foreclosure and Sale. The Court was “astounded” that Indy Mac claimed an escrow advance $34,611.22 more than what was previously claimed under oath to be due for the very same advance. The amount of the principal balance due was also not clear.7

Finding that it had an obligation to assess and determine the parties’ credibility, the trial court found Yano-Horoski credible and Indy Mac not. Indeed, “the Court has been unable to find so much as a scintilla of good faith on the part of” Indy Mac, also finding that Indy Mac had “unclean hands.”8 The trial court went on to find that as the case was a mortgage foreclosure action, the court’s equity jurisdiction was invoked. This allowed the trial court to determine whether equity would allow the court to intervene or to permit the foreclosure of the underlying mortgage.9

A review of all of the facts and circumstances lead the trial court to conclude that Indy Mac’s actions were “inequitable, unconscionable, vexatious and opprobrious.” It further found Indy Mac’s conduct was not only unsupported, but “greatly egregious and so completely devoid of good faith that equity cannot intervene on its behalf. Indeed, [Indy Mac’s] actions toward [Yano-Horoski] in this matter have been harsh, repugnant, shocking and repulsive to the extent that it must be appropriately sanctioned so as to deter it from imposing further mortifying abuse against [Yano-Horoski].”10

In determining what the appropriate remedy should be, Justice Spinner was not assured that a dismissal of the action would stop Indy Mac from engaging in the very same conduct in the future. Justice Spinner also did not believe that the imposition of monetary sanctions would result in Indy Mac changing its conduct or would benefit Horoski. So, the trial court determined that the “appropriate equitable disposition under the unique facts and circumstances presented” was the cancellation of the indebtedness and a discharge of the underlying mortgage, as well as prohibiting Indy Mac from enforcing the Mortgage or Note and vacating the Judgment of Foreclosure and Sale, which was ordered to be done.11

According to the New York Post, this was a “bombshell” decision which cancelled the mortgage debt owed to the “ruthless” bankers.12 Judge Spinner was called a hero and praised by commenters on the Internet.13 The decision was said to offer possible relief to the millions of others behind in their mortgages,14 a harbinger of “the changing tide against mortgagees, lenders and banks” which demonstrated that judges would no longer tolerate improprieties in the mortgage foreclosure process.15

Nearly a year to the day after Justice Spinner’s decision in Yano-Horoski, the Second Department issued an unsigned opinion on Indy Mac’s appeal in IndyMac Bank F.S.B. v. Yano-Horoski, 78 A.D.3d 895 (2d Dep’t 2010). In the decision, the Appellate Division reversed Justice Spinner, stating that the “severe sanction” of cancelling the mortgage and note “was not authorized by any statute or rule,” and that Indy Mac was not given “fair warning that such a sanction was even under consideration.” Going to the heart of the lower court’s ruling, the Second Department further held that the lower court was wrong in claiming that its equitable powers allowed it to cancel the mortgage and note as “there was no acceptable basis for relieving the homeowner of her contractual obligations to the bank,” especially after the judgment of foreclosure and sale had already been issued. Two cases were cited as support for this holding, First Natl. Stores Inc. v. Yellowstone Shopping Center, Inc.16 and Levine v. Infidelity, Inc.17 Yellowstone makes it clear that contractual rights trump equitable ones. “Stability of contract obligations must not be undermined by judicial sympathy.”18 Applying this to Yano-Horoski, the fact that Ms. Yano-Horoski had a contractual obligation to repay Indy Mac cannot be undermined by her personal issues and her plight in attempting to work out her debt. Levine reiterates the long standing principle that a mortgagor can only be relieved of its default in limited circumstances. Such circumstances, however, include bad faith and oppressive or unconscionable conduct on the part of the mortgagee. Despite Justice Spinner detailing Indy Mac’s failings throughout the foreclosure process, the Second Department was not persuaded that such actions warranted cancellation of the underlying debt. As a result, the mortgage, note, judgment of foreclosure and sale and the notice of pendency were all reinstated. By focusing on the remedy of cancellation of the mortgage, note and judgment of foreclosure and sale as ordered by Justice Spinner, the Appellate Division left the door open for other remedies to withstand scrutiny. In Emigrant Mortgage Co. v. Corcione,19 Justice Spinner canceled all interest and imposed punitive damages against the lender of $100,000.00. Justice Spinner also awarded punitive damages against the lender in Wells Fargo v. Tyson.20 In BAC Home Loans Servicing v. Westervelt,21 after the lender failed to appear for a conference, the court barred the lender’s collection of interest and arrears from the date the homeowner received correspondence she was not qualified for a loan modification and the lender refused to consider the basis for the homeowner’s objection that denial. As each of these cases leaves the underlying contractual obligation intact, they would likely not be reversed on the basis of the Appellate Division’s holding in Yano-Horoski. The same could be said for any remedy fashioned by a judge against a lender which leaves the mortgage and note intact, even if that remedy strikes hard at the lender’s pocketbook. As such, the Second Department has simply removed one weapon from a Judge’s arsenal to keep lenders in line when dealing with homeowners during the foreclosure process.

Douglas M. Lieberman is a partner in the general practice firm of Markotsis & Lieberman, P.C., located in Hicksville, whose particular practice focuses on litigation and transactional work.

1. Yano-Horoski at 718.
2. Id. at 718.
3. Id. at 718-19.
4. Id. at 719.
5. Id. at 719.
6. Id. at 720.
7. Id. at 720-21.
8. Id. at 721.
9. Id. at 722.
10. Id. at 724.
11. Id. at 724-25.
12. “Judge Blasts Bad Bank, Erases 525G Debt,” New York Post, November 25, 2009. 13. NYJudges ROCK!!Indymac Bank F.S.B. v. Yano-Horoski, http://livinglies.wordpress.com/2009/11/20/ny judges rock indymac bank f s b v yano horoski/, November 20, 2009; Cracking Down on Destructive Lenders, http://blogs.reuters.com/felix salmon/2009/11/27/cracking down on destructive lenders/, November 27, 2009.
14. Judge Wipes Out $500,000 Debt to Punish “Repulsive” Bank, http://www.timesonline.co.uk/tol/news/world/us_and_americas/article6932535.ece, November 26, 2009.
15. Judge Cancels Mortgage Due to Mortgagee’s Shocking Behavior in Long Island Foreclosure Action, http://longislandbankruptcyblog.com/judge cancels mortgage due mortgagees shocking behavior long island foreclosure action/, November 24, 2009.
16. 21 N.Y.2d 630 (1968).
17. 285 A.D.2d 629 (2d Dep’t 2001).
18. Yellowstone at 638, citing, Graf v. Hope Bldg. Corp., 254 N.Y. 1, 4 (1930).
19. 28 Misc.3d 717 (Sup. Ct. Suffolk Co. 2010)
20. 27 Misc.3d 684 (Sup. Ct. Suffolk Co. 2010).
21. 29 Misc.3d 1224(A), 2010 WL 4702276 (Sup. Ct. Dutchess Co. 11/18/10).