New York Governor Patterson signed a new law on October 20, the "Access to Justice in Lending Act" (Chapter 550 of the Laws of 2010), which allows defendants who are successful in defending against foreclosures to have the bank pay their attorney fees. Bill A01239 (also known as S2614b), passed the New York State Assembly and Senate in June.
The bill states that if a mortgage document contains a provision that the lender may recover attorney fees and expenses in a foreclosure, then there shall be an "implied covenant" that the borrower may also recover attorney fees and expenses "in the successful defense of any action or proceeding" commenced by the lender against the borrower arising out of the mortgage contract.
As pointed out by the New York Times (article Oct. 21, 2010, by John Eligon), this law comes about at a time mortgage foreclosures are being scrutinized for lax paperwork. The new law takes effect approximately December 20, 2010 (60 days after the governor signed the bill), and only applies to residential mortgages where the borrower lives in the property and the property is a condo, a co-op, a single family house, or a house with no more than four living units. The law applies to both new and existing mortgages, but only applies to actions and proceedings started after December 20. The bill passed the assembly 121 to 23 and the Senate 32 to 28.
While the chief aim of the new law appears to be foreclosure defense in state court, it would appear that the provision would also apply in bankruptcy court. Lenders will often file motions during the case, asking for permission to start or resume a foreclosure, if they believe the borrower is not keeping up with mortgage payments during the bankruptcy case. If the debtor successfully defends against the motion -- by showing that they actually are current on mortgage payments, for example -- the debtor would be entitled to ask for the lender to pay the debtor's attorney fees. This is a rare occurrence, to be sure, and Judge Ninfo in Rochester usually will allow the debtor attorney fees in those instances now. But I could imagine the provision in other contexts.
For example, if a debtor objects to a mortgage proof-of-claim filed in a bankruptcy case, as being excessive somehow, I would think the debtor would be entitled to attorney fees. More significantly, if a bankruptcy debtor challenges the party claiming to own the mortgage, in cases where a mortgage has been assigned and the documents showing the chain-of-title assignments from the original mortgage owner to the current (alleged) owner are mission (or never existed), the debtor might not only end up voiding the mortgage but perhaps getting very significant attorney fees as well.
The bill memo states that the purpose of the bill is "to allow borrowers in a foreclosure proceeding access to legal representation by providing that mortgage agreements which allow a prevailing lender to recover attorneys fees in a foreclosure proceeding shall be read to allow prevailing borrowers to recover attorneys fees as well, thereby enabling borrowers with meritorious defenses to foreclosure to obtain the legal representation necessary to assert those defenses, similar to the reciprocal attorneys fees rights given tenants by Real Property Law"
The bill amends Real Property Law to add a new section 282:
Mortgagor's Right to Recover Attorneys' Fees in Actions or Proceedings Arising out of Foreclosures of Residential Property.
1. Whenever a covenant contained in a mortgage on residential real property shall provide that in any action or proceeding to foreclose the mortgage that the mortgagee may recover attorneys' fees and/or expenses incurred as the result of the failure of the mortgagor to perform any covenant or agreement contained in such mortgage, or that amounts paid by the mortgagee therefor shall be paid by the mortgagor as additional payment, there shall be implied in such mortgage a covenant by the mortgagee to pay to the mortgagor the reasonable attorneys' fees and/or expenses incurred by the mortgagor as the result of the failure of the mortgagee to perform any covenant or agreement on its part to be performed under the mortgage or in the successful defense of any action or proceeding commenced by the mortgagee against the mortgagor arising out of the contract, and an agreement that such fees and expenses may be recovered as provided by law in an action commenced against the mortgagee or by way of counterclaim in any action or proceeding commenced by the mortgagee against the mortgagor. Any waiver of this section shall be void as against public policy.
2. For the purposes of this section, "residential real property" means real property improved by a one- to four-family residence, a condominium that is occupied by the mortgagor or a cooperative unit that is occupied by the mortgagor.