One of the most potent defenses a homeowner has in a foreclosure lawsuit is based on the concept the financial institution bringing the lawsuit is not the rightful owner of the note and mortgage at the time the lawsuit was commenced. The legal terminology regarding this situation refers to the fact the financial institution lacked standing to bring the lawsuit. When this affirmative defense is alleged by the attorney for the homeowner, the lender now has the burden of proving it actually was the rightful owner of the note and mortgage at the time the lawsuit was initiated. In other words, the financial institution must show it was the appropriate institution to bring the foreclosure lawsuit.

Pleading Lack of Standing As An Affirmative Defense

The homeowner in a foreclosure lawsuit, up until now, needed to plead the affirmative defense of lack of standing in their Answer. If they did not specifically plead the lack of standing affirmative defense, courts have traditionally taken the position the homeowners have waived their right to allege this defense. This means the financial institution did not have to meet the burden of establishing it was the proper party at the time the lawsuit was initiated to bring the foreclosure proceedings. New York Civil Practice Law and Rules section 3018(b) which is entitled “Responsive Pleadings” states “[a] party shall plead all matters which if not plead would be likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading.” This section of the law requires defendants in all lawsuits to plead whatever defenses they feel are appropriate. If defendants in civil lawsuits do not plead their defenses, they simply waive them.

Appeals Court Decision May Have Changed the Law

Recently the Appellate Division of the Second Department, an appeals court, has rendered a decision which may change the law with regard to a homeowner raising the issue of standing in a mortgage foreclosure lawsuit as a defense. In the case of U.S. National Association v. Faruque, 120 A.D.3d 575, 991 N.Y.S.2d 630 (2d Dept. 2014) they placed the issue of standing before a court even though it was not alleged in the homeowner’s pleading.

In the Faruque case the appeals court departed from prior legal precedents. In the Faruque case the bank started a foreclosure lawsuit. The homeowner submitted an Answer which stated they “specifically denied that the note was delivered to the plaintiff or that an assignment” from the originating lender to the plaintiff “had been recorded.” Although this allegation contained elements of the lack of standing defense, the homeowners did not plead the bank had lacked standing to bring the lawsuit. In this case the court held the homeowner “was not required to plead lack of standing as an affirmative defense.” The court went on to state “in order for the plaintiff to be entitled to relief, it had to prove its standing.”

The court in the Faruque case rendered a decision whereby the financial institution did not meet its burden under the circumstances of the case because it “did not establish that the note was physically delivered to it prior to the commencement of the action.”

Best Practice

Whether the Faruque case will change the case law in the State of New York to assume a lack of standing legal defense is questionable. The best way for a homeowner to submit the most potent Answer in a foreclosure lawsuit is to plead the affirmative defense of lack of standing. This creates a problem for the bank in the case. The bank then must prove they actually were the legitimate owner of the note and mortgage at the time of initiation of the foreclosure lawsuit.