NATIONAL ASSOC. v. KOSAROVICH

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Docket Number

500114.

Judges

Karen K. Peters
Robert S. Rose
John A. Lahtinen

Acts

Commerce And Trade — Consumer Credit Protection — Consumer Credit Cost Disclosure — General Provisions — Congressional Findings And Declaration Of Purpose

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Smart Summary

Factual and Procedural Background

Defendant purchased a home in Stillwater, Saratoga County, in 1990, making timely monthly mortgage payments on a $62,000 principal debt with a 7.625% adjustable interest rate. In 1999, after responding to a telephone solicitation from plaintiff's assignor, defendant received documents promoting a "Savings Accumulation Mortgage" with certain benefits, including no payments for up to three months post-closing and no fees for origination or processing. Defendant was allegedly promised a fixed interest rate of 7.9% or lower.

In November 1999, defendant refinanced with plaintiff, executing documents for a note of $78,400 secured by a mortgage on his residence. However, the note was for a conventional mortgage at an 11.025% interest rate, not the Savings Accumulation Mortgage initially solicited. Defendant also executed an Interest Rate Buydown Agreement reducing the interest rate to 9.025% in exchange for payments over five years. Various closing costs were assessed.

Defendant defaulted in November 2003, prompting plaintiff to commence foreclosure proceedings. Defendant admitted default but raised affirmative defenses and counterclaims alleging failure to state a cause of action, unconscionability, estoppel, violations of the Truth in Lending Act (TILA), deceptive business practices under General Business Law § 349(a), fraud, misrepresentation, and breach of good faith. Plaintiff moved for summary judgment and dismissal of defendant’s answer and counterclaims, which the Supreme Court granted. Defendant appealed.

Legal Issues Presented

Whether plaintiff was entitled to summary judgment of foreclosure based on defendant's admitted default and the mortgage and note documentation.
Whether defendant's affirmative defenses of failure to state a cause of action, unconscionability, and estoppel were sufficient to raise a question of fact defeating summary judgment.
Whether defendant's counterclaims alleging violations of TILA, deceptive business practices, fraud, misrepresentation, and breach of duty were properly dismissed and whether they could defeat plaintiff's motion for summary judgment.

Arguments of the Parties

Appellant's Arguments

Defendant claimed he was promised a fixed interest rate of 7.9% or lower under the Savings Accumulation Mortgage, which was not reflected in the executed note.
Defendant raised affirmative defenses including failure to state a cause of action, unconscionability of the mortgage terms, and estoppel.
Defendant asserted counterclaims alleging violations of the federal Truth in Lending Act, deceptive and unfair business practices, fraud, misrepresentation, and breach of the duty of good faith and fair dealing.

Respondent's Arguments

Plaintiff contended that defendant executed a conventional mortgage note at a higher interest rate, supported by proper documentation of default, entitling plaintiff to summary judgment.
Plaintiff argued defendant failed to raise any viable defense to the admitted default sufficient to create a question of fact.
Plaintiff sought dismissal of defendant’s answer and counterclaims and permission to treat defendant’s answer as a limited notice of appearance.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
United Cos. Lending Corp. v Hingos, 283 AD2d 764	Mortgagee’s entitlement to foreclosure judgment upon producing mortgage, unpaid note, and evidence of default shifts burden to mortgagor to raise a factual defense.	Supported plaintiff’s entitlement to summary judgment; defendant failed to raise a factual defense to default.
Marshall v Alaliewie, 304 AD2d 1032	Reinforces burden-shifting framework in foreclosure actions.	Referenced to confirm legal standard applied to plaintiff’s motion.
Fleet Bank v Pine Knoll Corp., 290 AD2d 792	Counterclaims must be inextricably intertwined with foreclosure cause of action to defeat summary judgment.	Determined defendant's counterclaims were not intertwined and thus could not defeat summary judgment.
Pellicane v Norstar Bank, 213 AD2d 610	Unconscionability may be an affirmative defense to foreclosure default.	Assumed unconscionability as a defense but found defendant failed to meet the high threshold.
Rodriguez v Rodriguez, 11 AD3d 768	Defines unconscionability as terms so inequitable as to shock the conscience.	Applied standard to reject defendant’s unconscionability defense.
Lounshury v Lounshury, 300 AD2d 812	Supports the standard for unconscionability.	Used to reinforce rejection of unconscionability defense.
Mahopac Natl. Bank v Baisley, 244 AD2d 466	Fraud in inducement may constitute a defense to foreclosure.	Noted but found defendant failed to raise a factual question due to inconsistency with executed documents.
Jovee Contr. Corp. v AIA Envtl. Corp., 283 AD2d 398	Counterclaims must be intertwined with cause of action to defeat summary judgment.	Supported dismissal of counterclaims as defenses but allowed counterclaims to be pursued separately.

Court's Reasoning and Analysis

The court acknowledged that plaintiff produced the mortgage, unpaid note, and evidence of defendant’s default, satisfying the prima facie entitlement to summary judgment. This shifted the burden to defendant to demonstrate a viable defense raising a factual question. Defendant’s affirmative defenses were analyzed individually: the failure to state a cause of action was found meritless; unconscionability was deemed unproven as the terms did not shock the conscience; and estoppel lacked merit. Although fraud in inducement may be a valid defense, defendant failed to show factual inconsistencies sufficient to raise a question of fact, given that the alleged misrepresentations conflicted with the executed documents.

The court further held that defendant’s counterclaims, including those alleging violations of TILA and deceptive business practices, were not intertwined with the foreclosure cause of action and thus could not defeat summary judgment. However, the court found that the summary dismissal of these counterclaims was erroneous and reinstated them, allowing defendant to pursue them separately if he chose. The court modified the lower court’s order accordingly and affirmed it as modified.

Holding and Implications

The court granted summary judgment in favor of plaintiff on the foreclosure action, dismissing defendant’s answer and affirmative defenses related to the default. However, the court reversed the dismissal of defendant’s counterclaims alleging fraud, TILA violations, and deceptive business practices, reinstating them for separate pursuit.

The direct effect of this decision is that plaintiff may proceed with foreclosure based on defendant’s admitted default, while defendant retains the right to litigate his counterclaims independently. The opinion does not establish new precedent but clarifies the boundaries between defenses to foreclosure and separate counterclaims.

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LASALLE BANK NATIONAL ASSOCIATION, Formerly Known as LASALLE NATIONAL BANK, as Indenture Trustee, Respondent, v. DANIEL KOSAROVICH, Appellant.

Defendant purchased his home in the Town of Stillwater, Saratoga County, in 1990 and thereafter made timely monthly payments of approximately $438 to pay down a principal debt of $62,000 with an annually adjustable interest rate of 7.625%. In 1999, defendant responded to a telephone solicitation from plaintiff's assignor (hereinafter referred to as plaintiff), as a result of which defendant received a document describing and extolling the many virtues of refinancing with plaintiff's "Savings Accumulation Mortgage," including no payments for up to three months after closing and monthly payments thereafter. Included in this document was a good faith estimate of closing costs based upon a proposed mortgage of $62,500, which reflected that the only closing costs due on a Savings Accumulation Mortgage were for those services provided by independent third parties. Hence, plaintiff would not charge defendant, among other things, an origination, processing, underwriting or documentation preparation fee. According to defendant, he was promised a fixed interest rate of 7.9% or lower.

Thereafter, in November 1999, plaintiff executed various documents effectuating a refinance with plaintiff, including a note in the amount of $78,400 that was secured by a mortgage on defendant's residence. It appears, however, that defendant obtained and, according to plaintiff, applied for a conventional mortgage, not the Savings Accumulation Mortgage contained in the initial solicitation. To that end, the note defendant executed was financed at an interest rate of 11.025% and required payments in the amount of $690.52 every 28 days until October 31, 2029. Defendant also executed an "Interest Rate Buydown Agreement and Buydown Note" that, in exchange for $7,583.84, reduced the interest rate on the original note from 11.025% to 9.025% and the required periodic payments to $583.57. The amount of the buydown note was loaned by plaintiff to defendant at no interest, with that amount to be paid back over five years in periodic payments of $120.37 due every 28 days — specifically, the same date upon which the periodic payments under the original note were due. As with the original note, the buydown note was secured by the mortgage on defendant's residence. Defendant also was assessed various closing costs.

Defendant defaulted in November 2003, prompting plaintiff to commence this foreclosure action. In his amended answer, defendant admitted his default and raised three affirmative defenses — failure to state a cause of action, unconscionability and estoppel. Defendant also asserted four counterclaims alleging violations of the federal Truth in Lending Act ( 15 USC §§ 1601 et seq. [hereinafter TILA]), deceptive and unfair business practices under General Business Law § 349 (a), fraud, misrepresentation and breach of the duty of good faith and fair dealing. Plaintiff thereafter moved for summary judgment and an order of reference, seeking dismissal of defendant's answer and permission to treat the answer as a limited notice of appearance entitling defendant's counsel to receive, without prior notice, a copy of the notice of sale, notice of discontinuance and notice of surplus money proceedings, which relief defendant opposed. Supreme Court granted plaintiffs motion in its entirety and this appeal by defendant ensued.

It is not clear from the record or Supreme Court's order whether the court expressly dismissed defendant's counterclaims. Given the sweeping nature of the relief awarded, however, we are treating defendant's counterclaims as having been dismissed.

"The case law makes clear that where a mortgagee produces the mortgage and unpaid note, together with evidence of the mortgagor's default, the mortgagee demonstrates its entitlement to a judgment of foreclosure as a matter of law, thereby shifting the burden to the mortgagor to assert and demonstrate, by competent and admissible evidence, any defense that could properly raise a question of fact as to his or her default" ( United Cos. Lending Corp. v Hingos, 283 AD2d 764, 765 [citations omitted]; see Marshall v Alaliewie, 304 AD2d 1032, 1033; Fleet Bank v Pine Knoll Corp., 290 AD2d 792, 794). As plaintiff's motion here was supported by the required documentation, it was incumbent upon defendant to establish the existence of a viable defense to his admitted default. This defendant failed to do.

Defendant's first affirmative defense — failure to state a cause of action — is boilerplate in nature and plainly lacking in merit. Assuming, without deciding, that the asserted unconscionability of the note and mortgage is an affirmative defense to the underlying default ( see Pellicane v Norstar Bank, 213 AD2d 610, 610-611), defendant failed to demonstrate that "no reasonable and competent person would accept [their] terms, which are so inequitable as to shock the conscience" ( Rodriguez v Rodriguez, 11 AD3d 768, 769; see Lounshury v Lounshury, 300 AD2d 812, 814). Simply put, the unfortunate fact that defendant may have struck a bad bargain does not excuse his default. Defendant's final affirmative defense — estoppel — also is lacking in merit.

To the extent that fraud in the inducement, as set forth in defendant's counterclaims, may constitute a viable defense ( see Mahopac Natl. Bank v Baisley, 244 AD2d 466, lv dismissed 91 NY2d 1003), we need note only that inasmuch as the alleged misrepresentations are plainly inconsistent with the disclosures contained in the documents that defendant ultimately executed, defendant has failed to raise a question of fact in this regard.

Turning to defendant's counterclaims, such claims cannot defeat plaintiff's motion for summary judgment unless they are inextricably intertwined with plaintiff's cause of action for foreclosure, which we do not find to be the case here ( see Fleet Bank v Pine Knoll Corp., supra at 794; Jovee Contr. Corp. v AIA Envtl. Corp., 283 AD2d 398, 400). Nevertheless, to the extent that Supreme Court summarily dismissed defendant's counterclaims sounding in fraud and deceptive business practices and asserting violations of TILA and the General Business Law, we find such dismissal to be erroneous. Should defendant separately wish to pursue the affirmative relief sought therein, he should be able to do so but, again, such counterclaims simply do not constitute an affirmative defense to his default.

Ordered that the order is modified, on the law, without costs, by reversing so much thereof as dismissed defendant's counterclaims; counter-claims reinstated; and, as so modified, affirmed.