Courchevel 1850 LLC v. STERN et al

Filing 111

MEMORANDUM & ORDER, For the reasons stated above, Defendant Isaac Stern's 104 Motion is GRANTED, and Plaintiff's complaint is DISMISSED without prejudice. So Ordered by Judge Nicholas G. Garaufis on 6/27/2018. (fwd'd for jgm) (Lee, Tiffeny)

r

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
-X

COURCHEVEL 1850 LLC,

Plaintiff,
MEMORANDUM & ORDER

-against17-CV-1794(NGG)
(JO)

ISAAC STERN etal..
Defendants.
-X

NICHOLAS G. GARAUFIS,United States District Judge.

Defendant Isaac Stem moves to dismiss this mortgage-foreclosure action on the grounds

that Plaintiff Courchevel 1850 LLC("Courchevel 1850") never served him with notice ofthe

impending foreclosure, as he claims Section 1304 ofthe New York Real Property Actions and
Proceedings Law("RPAPL")requires. (Mot. to Dismiss(Dkt. 104); Mem.in Supp. of Mot. to

Dismiss("Stem Mem.")(Dkt. 104-6).) For the reasons that follow,the motion is GRANTED.
I.

BACKGROUND

The following statement offacts is taken from Plaintiffs complaint(Dkt. 1), the well-

pleaded allegations of which the court accepts as tme for purposes ofthis motion.

Ashcroft

V. iQbal. 556 U.S. 662,678(2009).

In 2005, Stem borrowed $190,000 from National City Bank under a line of credit secured

by a mortgage on real property located at 355A Halsey Street in Brooklyn (the "Property").
(Compl.

1, 50-51; see also Note(Dkt. 1-2); Mortgage(Dkt. 1-3).) The terms ofthe line of

credit were reflected in an "equity reserve agreement," which the court refers to as the "Note"for
the sake of brevity. Several years later. National City Bank was acquired by PNC Bank,s^ The

PNC Financial Services Group, Annual Report(Form 10-K)(Mar. 11, 2010) at 2,25, which

thereafter endorsed the Note to non-party American Servicing Group,LLC(Compl.154). After
several further assignments, the Note wound up in Plaintiffs hands. (Id.

55-57.)

Stem failed to make a payment due "on the first day of June 22,2005" ["sic] and remains

in default on the Note. (Id.^ 58.) On December 15,2016, Plaintiff notified Stem that it intended
to treat the entire balance outstanding under the Note as immediately due, and gave him 30 days
to cure his default, as the Mortgage required. (Id ^ 59.) Plaintiff did not, however, send Stem a
notice that he was at risk offoreclosure because Stem no longer owned or resided at the Property
and so,in Plaintiffs view, was not entitled to such notice under RPAPL § 1304. (Id K 60.) As

the parties appear to agree, sometime after he executed the Note and Mortgage but before
Plaintiffinstituted this action. Stem sold the Property, which was subdivided into four units that

now belong to new owners. (Compl.

7-16; Affirm, ofIsaac Stem ("Stem Affirm.")(Dkt. 104-

2)^ 3; PI. Mem.in Opp'n to Mot. to Dismiss("PI. Mem.")(Dkt. 104-7)at 5.)
On March 30,2017, after Stem failed to pay offthe Note,Plaintiff commenced this

action to foreclose on the Mortgage, naming as defendants Stem,the new owners ofthe

subdivided Property, several financial institutions that hold mortgages allegedly junior to the
Mortgage, and several government agencies and creditors alleged to hold liens on the Property.

(Compl. KH 7-44.) Stem then moved to dismiss the complaint on the grounds that Plaintiff had
not served him with a pre-foreclosure notice in accordance with RPAPL § 1304. (Stem Mem.at
1; Stem Affirm.^ 3.)
n.

LEGAL STANDARD

The purpose of a Rule 12(b)(6) motion is to test the legal sufficiency of a plaintiffs

complaint. Patane v. Clark. 508 F.3dT06,111-12(2d Cir. 2007)(per curiam). "To survive a
motion to dismiss, a complaint must contain sufficient well-pleaded factual allegations, accepted
as tme,to 'state a claim to reliefthat is plausible on its face.'" Iqbal. 556 U.S. at 678

(quoting Bell Atl. Corp. v. Twomblv.550 U.S. 544,570(2007)).^ When considering a
Rule 12(b)(6) motion, the court accepts the plaintifiPs well-pleaded factual allegations as true and
draws all reasonable inferences in the plaintiffs favor. Id; ATSI Commc'ns.Inc. v. Shaar Fxmd
Ltd., 493 F.3d 87,98(2d Cir. 2007). On a Rule 12(b)(6) motion, the courfs review is generally
limited to the allegations ofthe complaint, as well as "any written instrument attached to it as an

exhibit or any statements or documents incorporated in it by reference," Chambers v. Time
Warner. Inc.. 282 F.3d 147,152(2d Cir. 2002), and "matters subject to judicial notice," N.Y. Pet
Welfare Ass'n v. Citv of New York. 850 F.3d 79, 86(2d Cir. 2017).
m.

DISCUSSION

This motion turns on a discrete question oflaw. Under New York law,"[pjroper service
ofRPAPL [§] 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 with this condition." Deutsche Bank Naf1 Tr. Co. v. Snanos. 961 N.Y.S.2d 200,202

(App. Div. 2013)(quoting Aurora Loan Servs.. LLC v. Weisblum. 923 N.Y.S.2d 609,616(App.
Div. 2011)). Does a plaintiff carry that burden at the pleading stage by alleging that it was not

required to serve RPAPL § 1304 notice on the borrower because he no longer owned or resided
at the subject property? The court answers this question in the negative: In the court's view,
RPAPL § 1304 requires that pre-foreclosure notice to be sent to the borrower of what is at

^ Plaintiff asserts that a Rule 12(b)(6) motion may be granted only "if it is clear that no reliefcould be granted imder
any set offacts that could be proved consistent with the allegations." (PL Mem.in Opp'n to Mot.to Dismiss("PL
Opp'n")(Dkt. 104-8) at 3(quoting Hishon v. King & Spalding. 467 U.S. 69,73 (1984)).) After Twomblv and Iqbal.
this "no set offacts" pleading standard is no longer the law.
Stephens v. Citv of Tarrant No. 16-CV-274,2017
WL 34829, at *2(N.D. Ala. Jan. 4,2017)("The Supreme Court clearly abrogated this standard in May of2007, over
[eleven] years ago. Plaintiffs counsel have no excuse for quoting it as current law, and doing so ... undermines the
credibility oftheir legal arguments.").

origination a "home loan," even ifthe borrower subsequently moves out ofthe property securing
the loan.

The court begins with some backgroimd on RPAPL § 1304. "In response to the mortgage
foreclosure crisis, New York enacted the Foreclosure Prevention and Responsible Lending Act

('FPRLA'), which provides a series of legal protections and foreclosure prevention opportunities
to homeowners at risk oflosing their homes." Avail Holding LLC,v. Ramos. No. 15-CV-7068

(NGG),2017 WL 979027, at *2(E.D.N.Y. Mar. 10,2017)(citing 2008 N.Y. Sess. Law ch. 472

(S. 8143-A)). Among these protections is the requirement, codified at RPAPL § 1304, that a
lender or mortgage servicer provide the borrower ofa "subprime" or "non-traditional home loan"
with certain prescribed notices at least 90 days before initiating mortgage foreclosure or other
legal action with respect to the loan. 2008 N.Y. Sess. Law ch. 472(S. 8143-A),§ 2. As the

bill's sponsor explained,the purpose ofthe notice was to "urge[] borrowers to work with their
lender or a housing counseling agency to address their situation." Introducer's Mem.,N.Y. Bill
Jacket, 2008 S.B. 8143, ch. 472, at 6: see also Aurora Loan Servs.. 923 N.Y.S.2d at 617(noting

that the "legislative history [of RPAPL § 1304] noted a typical lack ofcommunication between
distressed homeowners and their lenders prior to commencement oflitigation, leading to

needless foreclosure proceedings"). One year later, the New York State Legislature expanded
RPAPL § 1304 to apply to all "home loan[s]," notjust subprime or non-traditional loans. 2009
N.Y. Sess. Law ch. 507(S. 66007),§ 1-a: see Deutsche Bank Nat. Trust 961 N.Y.S.2d at 201.

Under New York law, a mortgagee must properly serve an RPAPL § 1304 notice before
bringing an action to foreclose on a mortgage securing a qualifying "home loan." S^ Aurora
Loan Servs.. LLC v. Komarovskv. 58 N.Y.S.3d 96,100(App. Div. 2017). When a lender,
assignee, or mortgage servicer fails to demonstrate strict compliance with RPAPL § 1304, its

foreclosure action must be dismissed. Weisblum. 923 N.Y.S.2d at 616; First Nat'l Bank of Chi.

V. Silver. 899 N.Y.S.2d 256,259-62(App. Div. 2000); see also In re Gill. 529 B.R. 31,41

(Bankr. W.D.N.Y. 2015)("New York Courts routinely dismiss foreclosure proceedings where a
mortgage lender does not provide notice in strict compliance with the RPAPL § 1304.").

With that background in mind,the court turns to the interpretive problem raised in this
case. At the time Stem executed the Note and Mortgage, he resided at the Property, which was

described in the recorded Mortgage as a single-family dwelling. (Mortgage at 2,7-8.)^ By the
time Plaintiffcommenced this action, however. Stem no longer resided at the Property. (Compl.

160.) Plaintiff does not allege that it served an RPAPL § 1304 notice on Stem before bringing
this action, but contends instead that no such notice was required because Stem no longer resided
at or owned the Property at the time. (Id) The question before the court, then, is whether
RPAPL § 1304 requires service of a pre-foreclosure notice on a "borrower" who no longer
resides at the property securing the defaulted loan.
To answer this question, the court looks to New York law. Because the New York Court
of Appeals has not answered this question,the court must "carefully ... predict how the[New

York Court of Appeals] woiild resolve the uncertainty or ambiguity" in the interpretation of
RPAPL § 1304. Travelers Ins. Co. v. 633 Third Assocs.. 14F.3d 114,119(2dCir. 1994). To
make such a prediction, the court may consider "the statutory language, pertinent legislative
history, the statutory scheme set in historical context, how the statute can be woven into the state
law with the least distortion ofthe total fabric, state decisional law,federal cases which constme

^ Because Plaintiff attached this document to its complaint, the court may consider it in deciding this motion to
dismiss.
Chambers. 282 F.Sd at 152. While there is some discrepancy between the Mortgage and Stem's
affirmation regarding whether the Property was a one- or two-family residence as of2005 fcompare Mortgage at 78, with Stem Affirm.^ 3), this discrepancy is immaterial for purposes ofthe motion to dismiss. See RPAPL
§ 1304(6).

the state statute, scholarly works[,] and any other reUable data tending to indicate how the New
York Court of Appeals would resolve the issue." Id (internal quotation marks and citation
omitted). Where the state's intermediate courts have decided a question, that decision is
authoritative and must be followed "unless [the court] find[s] persuasive evidence that the New
York Court of Appeals ... would reach a different conclusion." Pahuta v. Massev-Ferguson.
Inc.. 170 F.3d 125, 134(2d Cir. 1999). Although state trial-court rulings may be persuasive as to
what state law is, they are not binding on this court.

Fieger v. Pitnev Bowes Credit Corp.,

251 F.3d 386, 399(2d Cir. 2001).

The court begins with the plain meaning of RPAPL § 1304.

Am. Transit. Ins. Co. v.

Sartor. 814 N.E.2d 1189,1192(N.Y. 2004)("The starting point in any case of statutory

inteipretation must, of course, always be the language itself, giving effect to its plain meaning.").
At the time Plaintifffiled this suit, RPAPL § 1304(1), which prescribes the notice that must be

provided to a borrower at least 90 days before instituting foreclosure or certain other legal
proceedings against the borrower, provided in relevant part as follows:
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 fourteenpoint type which shall include the following:[text ofrequired notice
omitted].

RPAPL § 1304(1)(2016).^ This 90-day notice is thus required only before taking legal action
"with regard to a home loan." I^ At the time (as now),RPAPL § 1304 defined "home loan" as
a loan meeting four requirements:

^ The New York State Legislature has since amended RPAPL § 1304 twice. See 2018 N.Y. Sess. Law ch. 58(A.
9508-C), pt. HH,§§ 1, 3-6; 2017 N.Y. Sess. Law ch. 58(S.2008C), pt. FF,§ 1.

(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 oftrust 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 this state.
RPAPL § 1304(6)(a)(l)(2016).

In isolation, these provisions would appear to support Plaintiffs contention that RPAPL

§ 1304 only "applies to mortgagors whose primary residence is the mortgaged property." (PI.
Mem. at 5.) After all, ifthe borrower no longer resides at the property securing the mortgage,
then it would seem that the loan is not "secured by a mortgage ... on real estate ...[that] is or

will be occupied by the borrower as the borrower's principal dwelling."

id

§ 1304(6)(a)(l)(iii). Several courts in this district appear to have adopted Plaintiff's
interpretation ofthe statute.

Gustavia Home.LLC v. Ruttv. No. 16-CV-2823(BMC),2018

WL 2198742, at *4(E.D.N.Y. May 14,2018); CIT Bank N.A. v. Elliott. No. 15-CV-4395 (JS),
2018 WL 1701947, at *11 (E.D.N.Y. Mar. 31.20181: W.Coast 2014-7. LLC v. Tolson. No. 15CV-6306(ADS),2017 WL 3405517, at *7(E.D.N.Y. Aug. 7, 2017); Gustavia Home.LLC v.

Ruttv. No. 16-CV-2823(BMC),2017 WL 354206, at *3(E.D.N.Y. Jan. 24,2017), vacated and
remanded on other grounds. 720 F. App'x 27(2d Cir. 2017)(summary order); Gustavia Home.

LLCv. Rice. No. 16-CV-2353(BMC),2016 WL 6683473, at *2(E.D.N.Y. Nov. 14,2016). As
the court will explain, however, when read as a whole, RPAPL § 1304 requires pre-foreclosure

notice to a borrower even when that borrower no longer occupies the property m question as his
or her primary residence.
7

As aa initial matter,the court notes that RPAPL § 1304(6)is ambiguous about when a

loan qualifies a "home loan"—^at origination, at the time foreclosure proceedings commence, or
both. One aspect ofthe definition of"home loan"—^the purposes for which the borrower
incurred the debt— clearly depends on the borrower's intent and conduct at the time the loan was
originated.

RPAPL § 1304(6)(a)(l)(ii). Other aspects ofthe definition—^whether the

borrower is a natural person and the type of property securing the loan—could be analyzed,
however, based on the facts as they existed either at origination or at the time foreclosure

proceedings begin.

RPAPL § 1304(6)(a)(l)(i),(iii). The statute thus does not answer

whether a loan that qualifies as a"home loan" at origination ceases to be a"home loan" ifthese

requirements cease to be met in the future—^for example,ifthe original borrower dies or if he or
she moves out ofthe property securing the loan. Nor have New York State courts authoritatively
answered this question. C£ HSBC Bank USA.N.A. v. Ozcan.64 N.Y.S.3d 38,41-42(App. Div.
2017)(holding that a loan did not qualify as a home loan because "the defendant did not reside at
the property at the time he signed the mortgage or at the time the action was commenced," and
that, in any event, the mortgagee provided sufficient evidence that it had provided RPAPL
§ 1304 notice to the borrower).

The text ofRPAPL § 1304 as a whole resolves this ambiguity in Stem's favor. CL N.Y.

Stat. § 97("A statute... is to be constmed as a whole, and all parts of an act are to be read and
construed together to determine the legislative intent."); id. § 98("All parts of a statute must be
harmonized with each other as well as with the general intent ofthe whole statute, and effect and
meaning must,if possible, be given to the entire statute and every part and word thereof"). This
is because two other provisions ofthis statute would make little sense if a loan ceased to be a

"home loan"(and thus ceased to trigger RPAPL § 1304's notice requirement) once the borrower
no longer resided at the property securing the loan.
The first is RPAPL § 1304(3). At the time Plaintifffiled suit, this subsection ofthe

statute provided as follows:
The ninety[-]day period specified in the notice contained in
subdivision one of this section shall not apply, or shall cease to
apply,... if the borrower no longer occupies the residence as the
borrower's principal dwelling. Nothing herein shall relieve the
lender, assignee or mortgage loan servicer ofthe obligation to send
such notice, which notice shall be a condition precedent to
commencing a foreclosure proceeding.

RPAPL § 1304(3)(2016)."^ Under the first sentence block-quoted above, a mortgagee need not
wait 90 days after giving RPAPL § 1304 notice before instituting foreclosure proceedings.

RPAPL § 1304(3). The second sentence makes clear, however,that even though the 90-day

notice period does not apply,the mortgagee is not excused fiom the basic requirement that it
provide notice to the mortgagor, which remains "a condition precedent to commencing a
foreclosure proceeding." Id Thus,"the plain language of[this] exception only serves to

eliminate the 90-day notice period; it does not relieve a mortgagee ofits obligation to comply
with the other mandatory provisions ofRPAPL § 1304." In re Gill. 529 B.R. at 39; see also
Deutsche Bank Nat'l Trust Co. v. Martinez^ No. 24814/2011,2016 N.Y. Misc. LEXIS 4083, at

*16(Sup. Ct. Oct. 17, 2016)("The notice and the 90-day period required by RPAPL [§] 1304 are
recognized by the Legislature to be distinct concepts.... RPAPL [§] 1304(3) does not obviate

the need to serve a notice, but rather[] permits the shortening ofthe 90-day period for service

under certain described circumstances."). Plaintiffs reading of RPAPL § 1304 fails to account

As amended,this provision now also requires the provision ofcertain notices with respect to "reverse mortgage
home loan[s]." See RPAPL § 1304(3); see also id. § 1304(l-a). These amendments do not affect the effect ofthis
provision on the question before the court.

for this position, and Plaintiff offers no response to Stem's arguments on this point, fCompare

Stem Mem. at 2-3,a^ Reply Mem.in Support ofthe Mot. to Dismiss(Dkt. 104-8) at 2-3, with
PI. Mem.)

The second pertinent provision is RPAPL § 1304(2), which provided then, as now,in

relevant part that the required notice "shall be sent...to the borrower, by registered or certified
mail and also by first-class mail to the last known address ofthe borrower, and to the residence

that is the subject ofthe mortgage." (emphasis added). If RPAPL § 1304 notice were only
required ifthe borrower still resided at the mortgaged property, then much ofthis language
would be superfluous, as "the last known address ofthe borrower" would presumably be the
same as "the residence that is the subject ofthe mortgage" and the address of"the borrower."

See id. It would make little sense for the statute to require notice to be sent to the borrower, his
last known address, mid the mortgaged residence if, in any case in which RPAPL § 1304 notice

was required, those addresses would all be the same. Stem's contrary interpretation, however,
gives these clauses effect, insofar as it contemplates the possibility that the borrower might not
reside at the mortgaged property. S^ id Under New York law governing the interpretation of

statutes, such a readiag is therefore preferred. S^ N.Y. Stat. § 231 ("In the construction of a
statute, meaning and effect should be given to all its language,if possible, and words are not to
be rejected as superfluous when it is practicable to give to each a distinct and separate
meaning.").

Prior to a 2016 amendment, RPAPL § 1304(2)even more specifically contemplated that

a borrower might not live at the property securing the loan in question.

RPAPL § 1304(2)

(2015)("Such notice shall be sent by such lender, assignee or mortgage loan servicer to the
borrower, by registered or certified mail and also by first-class mad to the last known address of

10

the borrower and if different to the residence that is the subject ofthe mortgage,"(emphasis
added)). In 2016,the New York State Legislature struck the phrase "if different" from this

provision. 2016 N.Y. Sess. Law ch. 73(S. 8159)§§ 6, 7. Although the court strives to give
effect to this amendment,
^N.Y. Stat. § 193,it cannot see how the amendment substantively

altered RPAPL § 1304(2), rather than simply cleaning up extraneous language in the statute.
Next, reading RPAPL § 1304 as requiring notice even ifthe borrower no longer resides at
the mortgaged property also makes better sense of New York Civil Practice Law and Rules

("CPLR")3408, which was also added as part ofthe FPLRA.

2008 Sess. Law ch. 472,§ 3;

see also N.Y. Stat. § 97("[A]ll parts of an act are to be read and construed together to determine
the legislative intent."). At the time Plaintifffiled suit, CPLR 3408 required a mandatory
settlement conference "[i]n any residential foreclosure action involving a home loan as such term
is defined in[RPAPL § 1304],in which the defendant is a resident ofthe pronertv subject to

foreclosure." N.Y. CPLR 3408(a)(2016)(emphasis added).^ Under Plaintiff's reading ofthe
statute, every foreclosure action "involving a home loan as such term is defined in[RPAPL
§ 1304]" would necessarily be one in which the mortgagor still resided in the mortgaged

property, rendering the emphasized text above surplusage. As noted above, such constructions

are disfavored under New York Law.

N.Y. Stat. § 231. Under Stem's reading ofthe statute,

however,the emphasized language would have "effect and meaning," s^ id., in that it would
make clear that a settlement conference is mandatory in state-court proceedings to foreclose on a

"home loan" mortgage only ifthe mortgagor still resides at the property in question.

^ Courts in this district have repeatedly held that Rule 16 ofthe Federal Rules of Civil Procedure displaces
CPLR 3408, which therefore does not apply to foreclosure actions filed in federal court. See, e.g.. W. Coast 2014-7.
2017 WL 3405517, at *10 (collecting cases). This statutoiy text is nevertheless relevant insofar as it guides the
court's interpretation ofRPAPL § 1304.
11

The court acknowledges that this interpretation fits somewhat awkwardly with the likely

purpose ofthe statute. The FPRLA indicates that the general purpose ofthat act was to aid
homeowners facing foreclosure. See, e.g.. Weisblum. 923 N.Y.S.2d at 617; Letter firom Sen.

Hugh T. Farley to Kristin Rosenstein, Leg. Sec'y's Off.(July 31,2008)("Farley Ltr."), N.Y. Bill
Jacket, 2008 S.B. 8143,ch. 472, at 5, 5-6; Introducer's Mem.,N.Y. Bill Jacket, 2008 S.B. 8143,

ch. 472, at 7,7("This bill seeks to address the mortgage foreclosure crisis in the state by...
providing additional protections and foreclosure prevention opportunities for homeowners at risk
oflosing their homes...."(emphasis added)). It strikes the court as somewhat unlikely that the
New York State Legislature would have anticipated that the FRPLA might help borrowers like
Stem, who have not resided in the mortgaged property for years. S^ W.Coast 2014-7. 2017

WL 3405517, at *8-9. The legislative history is hardly clear on this point, however, see, e.g..
Farley Ltr. at 6(referring to the beneficiaries ofRPAPL § 1304 as "borrowers," not
"homeowners"), and in any event, there is no need to consult legislative history where, as here,
the meaning ofthe statute itselfis clear,s^ N.Y. Stat. § 120.
*

*

*

Under RPAPL § 1304, a party seeking to foreclose on a mortgage related to a"home
loan" must provide certain notices to the borrower before doing so. The question before the
court is whether a loan ceases to be a"home loan," for purposes ofRPAPL § 1304, when the
borrower no longer occupies the property securing the loan as his or her primary residence.
Based on the text ofRPAPL § 1304, read as a whole,such a borrower is nevertheless entitled to

pre-foreclosure notice. Accordingly, Plaintiffs allegation that it did not need to serve notice on
Stem before instituting foreclosure proceedings against the Property is insufficient to state a
foreclosure claim under New York law.

12

IV.

CONCLUSION

For the reasons stated above, Defendant Isaac Stem's motion to dismiss(Dkt. 104)is

GRANTED,and Plaintiffs complaint is DISMISSED without prejudice.
SO ORDERED.

s/Nicholas G. Garaufis
Dated: Brooklyn, New York
June
2018

NICHOLAS G. GARAUFIS
United States District Judge

13