Settlement Negotiations As The Basis For A Reasonable Excuse To Vacate A Default And File A Late Answer

A foreclosure can be upset if the borrower convinces a court that he thought settlement negotiations were proceeding and that he therefore was not obliged to defend the case. This happened in Wells Fargo Bank, N.A. v. Chateau, 36 Misc.3d 280, 947 N.Y.S.2d 773 (2012).

A borrower had defaulted in the foreclosure action and later moved to vacate that default claiming that his lawyer had failed to interpose an answer. The borrower stated that the attorney had assured him that the foreclosure would not proceed while negotiations took place and that his counsel had made five attempts to obtain a loan modification.

Although all this lacked any documentary support the court also found that the assertion was combined with the borrower’s claim that his failure to timely respond to the complaint was also due to his good faith belief in settlement negotiations. The court then ruled that such a good faith belief will supply a reasonable excuse for failure to timely answer.

The bank probably could have avoided this outcome with a letter or agreement indicating that foreclosure would not be delayed or held in abeyance until a written settlement agreement/modification was actually approved.

This is not the ideal scenario for a borrower to file an order to show cause to vacate a default but apparently it can succeed under certain circumstances.