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New York Court of Appeals Rejects “Separate Envelope Rule”, Holding a Bright Line Rule Not Appropriate for RPAPL § 1304.

On February 14, 2023, the New York State Court of Appeals issued a favorable decision in Bank of America, N.A. v. Kessler, rejecting the Second Department’s ruling that a mortgage foreclosure action is subject to dismissal under New York’s Real Property Actions and Proceedings Law (“RPAPL”) when a lender includes any additional material in the same mailing as the mandatory 90-day pre-foreclosure notice sent to a defaulting borrower.

In Bank of Am., N.A. v. Kessler, the Court of Appeals held that the inclusion of concise and relevant additional information in a pre-foreclosure notice to borrowers pursuant to Real Property Actions and Proceedings Law Section 1304 (“RPAPL 1304”), does not bar a subsequently filed foreclosure action.  2023 N.Y. LEXIS 162, 2023 N.Y. Slip. Op. 00804 (Ct. Appeals Feb. 14, 2023).  The purpose behind RPAPL 1304 was to address the “lack of communication” between borrower and lender pre-foreclosure.  The statute was not intended to extinguish a lender’s right to foreclose or to limit the information provided to Borrower’s pre-foreclosure.

Specifically, the statutory language of RPAPL 1304 requires that a ninety-day pre-foreclosure notice (1) “shall include” the specified language and information set forth in the statute; and (2) that notice must be sent “in a separate envelope from any other mailing or notice.”  See RPAPL 1304.

In Kessler, the lender sent the borrower a notice of his loan default, containing all of the required RPAPL 1304 language. The notice also included additional notices not required by 1304, but required by other federal statutes pertaining to bankruptcy status, debt collection, and military membership.  The borrower moved for dismissal, arguing that the inclusion of these additional notices violated RPAPL 1304’s “separate envelope provision.” 

The Westchester County Supreme Court of the State of New York granted the borrower’s motion to dismiss and dismissed the complaint for violating RPAPL 1304 due to the inclusion of notices beyond the required notices set forth in RPAPL 1304. The Appellate Division, Second Department, affirmed, holding that the inclusion of any language not required by the RPAPL 1304 violated the statute’s “separate envelope provision,” thereby barring the foreclosure action.

The Court of Appeals was tasked with answering the question of whether the inclusion of concise and relevant additional information voids an otherwise proper ninety-day pre-foreclosure notice to borrowers in compliance with RPAPL 1304. The Court of Appeals reversed holding “[a] bright-line rule would be both unfair and contrary to the statutory purpose, as it would deprive borrowers of information that could help them avoid foreclosure and penalize lenders who attempt to ensure their customers are better informed. It could also result in windfalls to borrowers resulting from clerical errors and bona fide attempts by lenders to assist borrowers in avoiding foreclosure.” In rejecting the Appellate Division’s so-called “separate envelope rule,” the Court of Appeals held the application of that rule would not only be contrary to the legislative intent underlying RPAPL 1304, but would also be harmful to both lenders and borrowers.

Notably, the Court of Appeals cited with approval its analysis of the court’s “judicial scrutiny” of mortgage foreclosure correspondence in Freedom Mtge. Corp. v. Engel, 37 N.Y.3d 1 (2021).  In Engel, the Court of Appeals held that the court must not explore a bank’s intent and evaluate or examine post-discontinuance actions of the lender in determining whether an acceleration of the mortgage debt was revoked by a voluntary discontinuance of a foreclosure action.  The Court of Appeals held that, like Engel, “[d]etermining whether additional language in a section 1304 notice is permissible requires an examination of intent or extrinsic evidence, bur rather an objective facial determination of the language’s relevance, truth, falsity, or potential to mislead or confuse.”

Ultimately, prohibiting lenders from informing borrowers of additional rights they may have to avoid foreclosure is at odds with the purpose of the statute – to be read broadly to help provide relevant information to borrowers to avoid foreclosure. Thus, accurate statements and notices that further this purpose do not constitute “other notice”, and, rather, informs borrowers that foreclosure proceedings may commence if they fail to take any action to resolve the default within ninety-days. This broad decision is a victory for lenders and borrowers in that there is no longer a rigid bright-line test penalizing lenders from including mandatory and helpful language to borrowers to avoid foreclosure.  

For additional information or assistance, contact Jonathan.Robbin@Jrobbinlaw.com