Justice Schack, in a December 2011 order, following a hearing, issued sanctions against both the Plaintiff and the law firm. Justice Schack ordered that the Plaintiff pay a sanction in the sum of $10,000.00 to the Lawyer’s Fund for Client Protection, and ordered that the law firm pay a sanction in the sum of $5,000 to the Lawyers’ Fund for Client Protection. HSBC appealed. On appeal, the Second Department held that the bank had established standing. The Second Department also held that the trial court abused its discretion in, sua sponte, directing dismissal of the complaint with prejudice and cancellation of the notice of pendency. The Second Department noted that a courts power to dismiss a complaint, on its own initiative, is to be used sparingly and only when extraordinary circumstances exist to warrant dismissal. In this case, the court noted, the Supreme Court was not presented with any such extraordinary circumstances. Moreover, the court noted, as the defendants failed to answer the complaint and did not make pre-answer motions to dismiss the complaint, they waived the defense of lack of standing (the court held that a party’s lack of standing does not warrant sua sponte dismissal).

The Court further noted that the Supreme Court abused its discretion in directing a hearing on the issue of sanctions and, thereafter, directing Plaintiff and the law firm to pay sanctions.

The Second Department decision ended on a highly unusual note – concluding with a paragraph singling out Justice Schack for having engaged in improper activity to not be proceeded, and ordering that the matter be remitted to the Supreme Court for further proceedings before a different Justice. The concluding paragraph noted that in a previous matter, the Second Department reversed an order issued by Justice Schack in a mortgage foreclosure action, that also directed dismissal, sua sponte, of a complaint for lack of standing. In that prior case, U.S. Bank N.A. v. Emmauel, the court noted that a lack of standing is not an “Extraordinary circumstance” warranting sua sponte dismissal but rather is an affirmative defense which is waived if not raised by the defendant in either an answer or pre-answer motion to dismiss. The court noted that Emmanuel was decided a mere two months before the improper dismissal in HSBC Bank, and concluded with the following: “..we take this opportunity to remind the Justice of his obligation to remain abreast of and be guided by binding precedent. We also caution the Justice that his independent internet investigation of the plaintiff’s standing that included newspaper articles and other materials that fall short of what may be judicially noticed, and which was conducted without providing notice or an opportunity to be heard by any party, was improper and should not be repeated. Under these circumstances, we deem it appropriate to remit the matter to the Supreme Court, Kings County, for further proceedings before a different Justice.”