Relevant case law pertaining to the Exempt Income Protection Act (EIPA)

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Holding: A Judgment Creditor who seeks a turn-over of moneys restrained in a judgment debtor’s account must plead and prove compliance with the requirements of CPLR 5222-a, including proof that the bank actually served the exemption notice and claim forms on the debtor. [This matter involved a levy by execution from the Sheriff].

LR CREDIT 21, LLC v. BURNETT, 40 Misc.3d 854, 967 N.Y.S.2d 916, 2013 N.Y. Slip Op. 23209 [District Court, Nassau County, June 24, 2013].

Relevant language from the decision:

Moreover, reading CPLR 5222–a in conjunction with provisions of CPLR 5232(g) governing execution and levy, the law clearly provides that ‘all procedures stated [in CPLR 5222–a(b) and CPLR 5232(g) ] must be followed.’ CPLR 5232(g)(emphasis added). Consistent with this mandatory statutory directive, this Court now holds that a judgment creditor seeking a turnover order in a matter involving a claimed levy by execution must plead and prove compliance with CPLR 5222–a(b)(2) and 5222–a(b)(3) in order to make a prima facie case for a turnover order.

Furthermore, in the absence of proof that the bank actually served an exemption notice and two exemption claim forms upon the judgment debtor within two business days of receipt of the execution, see CPLR 5222–a(b)(3), the Court has no way of determining whether the judgment debtor’s time to claim an exemption has expired. The law, as written, gives the judgment debtor twenty days “from the date postmarked on the correspondence containing the notice and forms” to claim an exemption. See CPLR 5222–a(c)(1). As Judge Hirsh explained in North Shore Univ. Hosp. v. Citibank, supra, “the only way a court can determine whether the time for a judgment debtor to exercise its right pursuant to CPLR 5222–a has expired is to require the judgment creditor to plead and prove in the turnover proceeding compliance with the provisions of CPLR 5222–a …” Id. Since “a judgment creditor cannot commence a turnover proceeding until the time for a judgment debtor to exercise its claim of exemption pursuant to CPLR 5222–a has expired,” the judgment creditor must necessarily plead and prove that this time limit has expired in order to make out a prima facie case for a turnover. Id.

Holding: A Judgment Creditor has the burden of proving that the debtor’s claimed exemption to restrained funds is inapplicable. The only requirement imposed by the statute on the debtor is to complete and return the Exemption Claim Form. [The debtor may but is not required to supply supporting documentation with the completed exemption claim form].

MIDLAND FUNDING LLC v. ROBERTS, 37 Misc.3d 617, 950 N.Y.S.2d 867, 2012 N.Y. Slip Op. 22241 [Supreme Court, Sullivan County, July 30, 2012].

Relevant language from the decision:

Consistent with EIPA’s goal of protecting judgment debtors from the seizure of exempt assets, CPLR § 5222–a(d) provides that the Exemption Claim Form by itself is prima facie evidence that the funds in a debtor’s account are exempt funds. Thus, once Defendant filed the Exemption Claim Form, Plaintiff had the burden to demonstrate that the claimed exemptions are inapplicable.

Plaintiff’s counsel also attempted to dissuade Defendant from opposing the motion by incorrectly asserting that Defendant failed to comply with CPLR § 5222–a by failing to provide “Information demonstrating that the funds are exempt [including], but not limited to, originals or copies of benefit award letters, checks, check stubs or any other documents that discloses the source of the judgment debtor’s income, and bank records showing the last two months of activity” in addition to the Exemption Claim Form. While judgment debtors are encouraged to provide documentation supporting their exemption claim in order to speed up the process of unfreezing their money, CPLR § 5222–a does not require judgment debtors to supply any supporting documents with their Exemption Claim Form. Thus, a judgment debtor’s failure to submit any documents with their Exemption Claim Form does not render the Exemption Claim Form invalid or even suspect.

Consistent with EIPA’s goal of offering special protection to judgment debtor’s exempt assets, CPLR § 5222–a(d) specifically refers to holding a “hearing” and does not provide for generally resolving these proceedings on the papers.

Holding: While the debtor may simply return the exemption claim form as prima facie evidence of an exemption, the judgment creditor is entitled to question the source(s) of funds in order to meaningfully contest the debtor’s claim.

MIDLAND FUNDING LLC v. SINGLETON, 34 Misc.3d 798, 935 N.Y.S.2d 844, 2011 N.Y. Slip Op. 21430 [District Court, Nassau County, Dec. 1, 2011]

Relevant language from the decision:

While CPLR 5222–a(d) makes the Exemption Claim Form prima facie evidence of an exemption and places the burden of proving the funds are not exempt upon the judgment creditor, the judgment creditor is entitled to the opportunity to question the judgment debtor as to source of the funds claimed to be exempt. Fundamental fairness and basic due process require the judgment creditor be provided with some method for meaningfully contesting the judgment debtor’s claim the funds on deposit in an account are exempt from execution.

Holding: A Judgment Creditor cannot commence its turn-over special proceeding prior to the time that the debtor’s time to complete the exemption claim form and claim his exemption has expired.

NORTH SHORE UNIVERSITY HOSPITAL AT PLAINVIEW v. CITIBANK LEGAL SERVICE INTAKE UNIT, 25 Misc.3d 655, 883 N.Y.S.2d 898, 2009 N.Y. Slip Op. 29333 [District Court, Nassau County, Aug. 4, 2009]

Relevant language from the decision:

CPLR 5222–a creates new statutory procedures for advising a judgment creditor certain funds on deposit in a bank account are exempt from restraint and execution and creates an expeditious and possibly non-judicial resolution of a judgment debtor’s claim of exemption.

Permitting a judgment creditor to commence a turnover proceeding before the judgment debtor’s time to exercise his or her rights under CPLR 5222–a has expired would provide a judgment creditor with the ability to circumvent the safeguards and rights provided to a judgment debtor pursuant to this section. Thus, this court finds a judgment creditor cannot commence a turnover proceeding until the time for a judgment debtor to exercise its claim of exemption pursuant to CPLR 5222–a has expired.

The only way a court can determine whether the time for a judgment debtor to exercise its rights pursuant to CPLR 5222–a has expired is to require the judgment creditor to plead and prove in the turnover proceedings compliance with the provisions of CPLR 5222–a that require a judgment creditor to serve an Exemption Notice and Exemption Claim Form with the restraining notice and to plead the judgment debtor’s time to serve an Exemption Claim Form has expired and none has been received.

Such a requirement will give the judgment debtor the opportunity to claim an exemption and have the claim of exemption determined without having to defend a turnover proceeding. If the exemption is claimed, then the judgment creditor can proceed to either release the funds [CPLR 5222–a(c)(4) ] or object to the claimed exemption. Id.; and CPLR 5222–a(d). If the funds on deposit are exempt, the judgment creditor should release the funds without judicial intervention. CPLR 5222–a(c)(4).

If the judgment creditor challenges to the claimed exemption, then the judgment creditor must move within 8 days of the date postmarked on the envelope containing the Exemption Claim Form to challenge the claimed exemption. CPLR 5222–a(d). The motion to contest an exemption can be brought on by motion in the action in which the judgment was entered and will be resolved within a maximum of 20 days from the date the Exemption Claim Form is served.(FN2) If the court finds the funds on deposit in the account are exempt from restraint and execution, the court will issue an order releasing the funds. A turnover proceeding will never be commenced.

(FN2) The motion to challenge the exemption must be made within 8 [sic] of postmarked date on the envelope containing the executed Exemption Claim Form. The motion must be made returnable 7 days after the service of the motion papers. The court must decided [sic] the motion within 5 days of the hearing date. CPLR 5222–a(d).

If a judgment creditor commences a turnover proceeding before the judgment debtor has the time to claim an exemption pursuant to CPLR 5222–a has run, the possibility exists for the turnover proceeding to be heard by one court and the CPLR 5222–a application to be heard by another court. This could result in one court issuing a turnover order while the other court finding the funds are exempt from execution. The court must do everything possible to avoid to such irreconcilably inconsistent results.

In order to insure a judgment debtor is given the opportunity to assert a claim that the funds on deposit in the restrained bank account are exempt from restraint and execution, a judgment creditor who serves a restraining notice on a bank must plead and prove proceeding compliance with CPLR 5222–a as part of its prima facie case in a turnover proceeding. Since a judgment creditor must plead and prove compliance with CPLR 5222–a in the petition filed in a turnover proceeding, a judgment creditor cannot commence a turnover proceeding before the time for a judgment debtor to claim an exemption pursuant to CPLR 5222–a has expired.

Holding: There is no private cause of action in favor of a judgment debtor against a bank for failure to comply with the requirements of the Exempt Income Protection Act.

CRUZ v. TD BANK, N.A., 22 N.Y.3d 61, 2 N.E.3d 221, 979 N.Y.S.2d 257, 2013 N.Y. Slip Op. 07762 [Court of Appeals of New York, Nov. 21, 2013]

Relevant language from the decision:

CPLR article 52 sets forth procedures for the enforcement of money judgments in New York, which may include the imposition of a restraining notice against a judgment debtor’s bank account to secure funds for later transfer to the judgment creditor through a sheriff’s execution or turnover proceeding. Under both federal and state law, certain types of funds are exempt from restraint or execution, including Social Security benefits, public assistance, unemployment insurance, pension payments and the like (see generally CPLR 5205). Although the clear legislative intent is that funds of this nature are not to be subject to debt collection (and therefore excluded from any pre-execution restraint), prior to 2008 banks served with restraining notices often inadvertently froze accounts containing income from these sources, leaving judgment debtors without access to much-needed exempt monies.

The EIPA was intended to ameliorate this problem, amending certain existing statutes in CPLR article 52 and adding a new CPLR 5222–a (L. 2008, ch. 575). The amendments restricted the scope of the restraint that can be implemented against the bank account of a natural person and created a new procedure aimed at ensuring that this class of judgment debtors is able to retain access to exempt funds. In substance, subject to limited exceptions consistent with federal law, the EIPA precludes a bank from restraining baseline minimum balances in a “natural person’s” account absent a court order. Specifically, $2,500 is free from restraint “if direct deposit or electronic payments reasonably identifiable as statutorily exempt payments … were made to the judgment debtor’s account during the forty-five day period preceding” the restraint (CPLR 5222[h] ). Otherwise, the statute excludes from restraint an amount that corresponds to 90% of 60–days wages under the federal or state minimum wage laws, whichever is greater, to be periodically adjusted—$1,740 as of July 2009 (CPLR 5222[i] ).

In addition to limiting the scope of a restraint, the EIPA added new notification and claim procedures in CPLR 5222–a intended to educate judgment debtors concerning the types of funds that are exempt from restraint or execution in order to facilitate the filing of exemption claims. A judgment creditor restraining a bank account (in anticipation of a sheriff’s execution by levy or court-ordered transfer of assets) must serve the bank with specific forms: two copies of the restraining notice, an exemption notice and two exemption claim forms (CPLR 5222–a [b][11] ). The restraint is void if the judgment creditor fails to provide these documents to the bank; in that event, the bank “shall not restrain the account” (CPLR 5222–a [b][1] ), nor can the bank charge fees associated with a restraint (CPLR 5222[j] ).

CPLR 5222–a also imposes a new obligation on financial institutions because it compels banks to mail to judgment debtors (the account holders) copies of the exemption notices and exemption claim forms received from judgment creditors (CPLR 5222–a [b][3] ). The statute states, however, that “[t]he inadvertent failure by a depository institution to provide the notice required … shall not give rise to liability on the part of the depository institution” (CPLR 5222–a [b][3] ). The notice advises the judgment debtor that the bank account is being restrained, describes the categories of funds that are exempt from restraint, and provides information concerning how to seek vacatur of the money judgment to avoid a subsequent transfer of the funds to the judgment creditor (CPLR 5222–a [b][4][a] ). The exemption claim form lists specific income sources that are not subject to restraint or execution (such as Social Security benefits, unemployment insurance, child support, veteran’s benefits, etc.) and directs the debtor to check the box next to any applicable exempt funds that have been deposited in the account (CPLR 5222–a [b][4][b] ). The debtor is then advised to return one copy of the claim form to the bank and the other to the creditor (or its representative) within 20 days (CPLR 5222–a [b][4][b] ). If 25 days have elapsed and the bank has not received an exemption claim form from the judgment debtor, all funds in the account in excess of the applicable statutory minimum remain subject to the restraining notice (CPLR 5222–a [c][5] ). However, a failure to return the claim form may not be interpreted as a waiver of any exemption the judgment debtor may possess (see CPLR 5222–a [h] ).

Upon receipt of an exemption claim form from the account holder, the bank must notify the judgment creditor “forthwith” of the exemption claim and the creditor then has eight days to object (CPLR 5222–a [c][2], [3] ). If no objection is lodged, the restraint is lifted with respect to the disputed funds and the monies are released to the judgment debtor (CPLR 5222–a [c][3] ). To object to an exemption claim, the creditor must timely commence a special proceeding under CPLR 5240, serving papers on both the debtor and the bank before the expiration of the eight-day objection period (CPLR 5222–a [d] ). Within seven days of commencement of the proceeding, a hearing is to be held before a court, resulting in issuance of a judicial decision no later than five days after the hearing (CPLR 5222–a [d] ). In the meantime, the bank is required to hold the disputed funds for 21 days unless a court order directs otherwise; if 21 days pass and no judicial resolution of the exemption issue is forthcoming, the bank must release the disputed funds to the judgment debtor (CPLR 5222–a [e] ). Another subdivision imposes special liability upon judgment creditors that object to exemption claims in bad faith (CPLR 5222–a [g] ).

The EIPA did not alter the preexisting provisions in CPLR article 52 permitting the commencement of special proceedings whereby creditors, debtors and “any interested person” can adjudicate disputes over the ownership of income or property (CPLR 5239, 5221), nor did it restrict the power of the court to “make an order denying, limiting, conditioning, regulating, extending or modifying the use of any enforcement procedure” (CPLR 5240).

Plaintiffs appealed to the United States Court of Appeals for the Second Circuit, which consolidated their cases for the purpose of appeal only. After reviewing CPLR article 52, including the EIPA, the court concluded that the cases presented novel issues of New York law that should be resolved by this Court, certifying the following questions:

“first, whether judgment debtors have a private right of action for money damages and injunctive relief against banks that violate EIPA’s procedural requirements; and

“second, whether judgment debtors can seek money damages and injunctive relief against banks that violate EIPA in special proceedings prescribed by CPLR Article 52 and, if so, whether those special proceedings are the exclusive mechanism for such relief or whether judgment debtors may also seek relief in a plenary action” ( 711 F.3d 261, 271 [2d Cir.2013]).

We agree with the District Courts that a private right to bring a plenary action for injunctive relief and money damages cannot be implied from the EIPA—and we therefore answer the first certified question in the negative. As for the second certified question, a judgment debtor can secure relief from a bank arising from a violation of the EIPA in a CPLR article 52 special proceeding as we have explained. And our determination that the legislation created no private right of action compels the conclusion that the statutory mechanisms for relief are exclusive. Banks had no obligation under the common law to forward notices of exemption and exemption claim forms to judgment debtors. It therefore follows that any right debtors have to enforce that obligation, among others imposed under CPLR 5222–a, arises from the statute and, since the EIPA does not give rise to a private right of action, the only relief available is that provided in CPLR article 52 (see generally Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236, 879 N.Y.S.2d 17, 906 N.E.2d 1049 [2009] ).

by Richard A. Klass, Esq.

copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Buying a Cooperative Apartment: tips for the prospective owner

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Here are some tips for the prospective purchaser of a cooperative apartment.

Not owning real estate

As owning a cooperative unit really means owning shares of stock in a cooperative corporation with a right to a proprietary lease to a particular apartment, as opposed to actually owning a parcel of land, some people are swayed away from this investment. First, the buyer must decide if this form of property ownership is acceptable.

Documentation

The buyer should review the following documents relating to the cooperative unit:

  1. offering plan and by-laws: this bulky book will discuss the formation of the cooperative corporation and the powers of the board of directors. The buyer can discover the rules regarding subletting an apartment, transferring shares, and other rules;
  2. house rules: this document, which is usually several pages long, lists rules relating to day-to-day living at the building, including pet ownership, access to common areas, and maintenance of the hallways, etc.;
  3. last two years’ financial statements: these statements will provide good snapshots of the financial health of the corporation. The statements will advise as to any mortgages on the property, the assets and income of the corporation, and the expenses of operation of the building.

Unit charges

Charges relating to the purchase of a cooperative unit can be for:

  1. maintenance charges;
  2. building-wide assessments (which may be for a specified term, and which may be signs of a tenuous corporation);
  3. electricity/air-conditioning;
  4. “flip” taxes — charges imposed by a cooperative corporation upon the transfer of a unit, which may be imposed (depending on the by-laws) upon the seller or the buyer of the unit.

Board approval

One should become familiar with the board of directors, who must give approval of the sale. While this is sometimes perceived as one of the drawbacks of cooperative apartment ownership, the board’s basis for denial may be for many reasons, including those that maintain the value of the cooperative corporation.

copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Exempt Assets: ” Wild Card ” (Or How Mad Max Got to Keep His Camaro!)

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It was a really nice car – a 1999 Chevy Camaro with only 51,000 miles. Maybe it wasn’t the most expensive car (like a Chevy Corvette) but Mad Max loved driving it on weekends. Mr. Max also had another vehicle (a truck) that he needed for work during the week. Unfortunately, Max’s business wasn’t doing well and he was forced to file for personal bankruptcy due to his mounting debts. As part of filing for Chapter 7 bankruptcy, Max had to submit to the Bankruptcy Court his Petition.

Chapter 7 Bankruptcy Petition

When a person files for bankruptcy (the “ debtor ”), he has to file a Petition, in which the debtor lists comprehensive financial information, including his (a) assets; (b) liabilities; (c) income; and (d) expenses. In the Petition, the debtor will detail all of his assets, such as real estate, bank accounts, life insurance policies, pensions and all other personal assets. Among the typical assets that are listed in the Petition is a debtor’s car.

Exempt Assets

There is a concept in the law that, even though a person is a debtor and owes debts to creditors, there are certain types of property and income that will be left with the debtor (“ exempt ”) — and, thus, beyond the reach of creditors. These types of “ exempt ” property and income are enumerated under various sections of law. In New York, for instance, those sections of law include various provisions under the Debtor and Creditor Law, Civil Practice Law and Rules (CPLR), Insurance Law and other sections. The usual types of exempt property owned by people filing bankruptcy include clothing, household furnishings, security deposits with a landlord, life insurance and annuity policies, and retirement/pension plans (such as 401(k) plans; Individual Retirement Accounts (IRAs); Roth IRAs; 403(b) plans; and similar qualified plans). The usual types of exempt income of a debtor include social security benefits, disability, unemployment, worker’s compensation, and 90% of wages earned 60 days prior to filing. In fact, over 90% of the bankruptcy cases filed throughout the country are commonly referred to as “ no asset ” cases in which, after taking the debtor’s exempt property off the table, there are no assets to distribute to creditors.*

Specifically as to a debtor’s car, under New York’s Debtor and Creditor Law Section 282(1), a debtor may take 1 exemption as follows: “Bankruptcy exemption of a motor vehicle. One motor vehicle not exceeding four thousand dollars in value above liens and encumbrances of the debtor; provided, however, if such vehicle has been equipped for use by a disabled debtor, then ten thousand dollars in value above liens and encumbrances of the debtor.”

Two Cars; Only One Exemption

In Max’s situation, he owned 2 cars (Truck worth $3,600 and Camaro worth $8,800). Under New York State law, Max had only 1 exemption for a car, and he needed to keep his truck for work purposes. But, Max really wanted to keep his Camaro. He could only keep the truck, using the $4,000 car exemption; the Camaro would have to be turned over to the bankruptcy trustee and sold to pay off creditors’ claims.

Fortunately for the debtor, he came to Richard A. Klass, Your Court Street Lawyer, for help. The first step was trying to figure out how Max could retain both cars even though he was going to file for bankruptcy.

The Federal “ Wild Card ” Exemption

A few years ago, the law was changed to allow New York debtors to opt to take either the New York or federal exemptions. Up until then, debtors who filed for bankruptcy in New York State could only use the New York State exemptions (as opposed to the exemptions afforded to debtors under the federal Bankruptcy Code). Some of the New York exemptions are actually quite generous in some respects, including the “ homestead ” exemption for real estate up to $150,000.

Under the federal exemptions, there is, however, a really good exemption for debtors in the same situation as Max — the “ Wild Card ” one! Under Bankruptcy Code Section 522(d)(5), a debtor is allowed to take an exemption on any property up to $12,725 (“The debtor’s aggregate interest in any property, not to exceed in value $1,225 plus up to $11,500 of any unused amount of the exemption provided under paragraph (1) of this subsection [the homestead exemption].”)**

In preparing the Petition, the federal exemptions were selected for Max. The truck was exempted as the one car permitted ($3,675 exemption) to be taken under federal law. The Chevy Camaro was exempted for its full amount ($8,800) because Max was allowed to use the ” Wild Card ” exemption. Mad Max got to keep both cars!

by Richard A. Klass, Esq.

* Source: National Association of Bankruptcy Trustees (www.nabt.com/faq.cfm)

** (1) The debtor’s aggregate interest, not to exceed $22,975 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.

Art Credits:
Image on page one: Joker red 02.svg; Author: David Bellot, Berkeley, CA, USA.  Used under the terms of the GNU Lesser General Public License as published by the Free Software Foundation.

copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Lenders “Livin’ la Vida Loca” till HETPA Ended The Fiesta

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In 2006, New York State enacted the Home Equity Theft Prevention Act (“ HETPA ”) for the purpose of affording greater protection to homeowners who face foreclosure proceedings against their homes. HETPA was instrumental in addressing increasingly rampant swindling where con men, proposing to “help” homeowners out of foreclosure, instead, stole homes and home equity from homeowners through deed/equity thefts and other mortgage foreclosure “rescue” scams. HETPA also gave borrowers greater protection from mortgage lenders (by adding extra steps) in those cases where borrowers couldn’t make mortgage payments and fell into default or foreclosure. HETPA changed certain parts of the Banking Law, Real Property Law (“RPL”), and Real Property Actions and Proceedings Law (“ RPAPL ”).

HETPA spoils all the lenders’ fun

Among the changes put into place by HETPA were:
  1. requiring that, at least 90 days before the foreclosure proceedings are brought, a written notice (the RPAPL Section 1304 notice*) be served upon the “borrower” by regular and certified mail;

  2. extending the service of a similar type of “RPAPL Section 1304 notice” or “90-day notice” called a “pre-disposition notice” upon homeowners who own cooperative apartments, as now required by Uniform Commercial Code (UCC) Section 9-611. It is important to note that, unlike houses which are considered “real property,” cooperative apartments are considered “personalty” in some regards — a person who buys a cooperative apartment is actually buying shares of stock in the cooperative housing corporation and a proprietary lease associated with a particular apartment. Before the enactment of HETPA (as amended by the Home Equity Theft Prevention Act of 2009), a co-op unit owner’s shares and proprietary lease could be quickly foreclosed and auctioned off in a matter of a couple of months. Now, the lender has to wait at least 90 days from the pre-disposition notice to exercise its “non-judicial foreclosure” rights and auction off the collateral (the shares of stock in the cooperative housing corporation) for the loan on the cooperative apartment;
  3. requiring the lender or mortgage servicer to file within 3 days of service of the RPAPL Section 1304 notice certain information with the New York State Superintendent of Financial Services and provide proof of filing; and
  4. requiring that a statutorily-specific notice to the homeowner/mortgagor about foreclosure, be served together with the Summons and Complaint (RPAPL Section 1303 notice**) when foreclosure proceedings are commenced.

You’re a “borrower”? Says who?

Who is considered a “borrower” who must be served with the RPAPL Section 1304 notice?
All of the RPAPL noticing requirements under HETPA pertain to residential home loans and are designed to give borrowers notice of default in their mortgage payments or other obligations. Two recent court cases resolved an issue unaddressed in the enactment of HETPA and, more specifically, RPAPL Section 1304, namely: under the statute, what is the definition of a “borrower” who is entitled to the various notices from the lender or mortgage servicer? As you will see from these recent court cases, this is an important issue.
The Second Department held in Aurora Loan Services LLC v. Weisblum, 85 A.D.3d 95, 103 [2 Dept. 2011] that “[P]roper service of the RPAPL Section 1304 notice containing the statutorily-mandated content is a condition precedent to the commencement of the foreclosure action. The plaintiff’s failure to show strict compliance requires dismissal.” From this holding, it is certainly apparent that the failure of the mortgage lender/foreclosing plaintiff to serve the RPAPL Section 1304 notice is fatal to the foreclosure proceedings commenced — before the case can be filed, this first step of serving the notice must be taken.
In Aurora Loan Services LLC v. Weisblum, the mortgaged property was owned by a husband and wife. Only the husband signed the note but both the husband and wife signed the Consolidation, Extension and Modification Agreement (commonly known as a “CEMA”) to secure the note signed by the husband along with a prior mortgage. Before the mortgage lender brought its foreclosure proceeding to foreclose its consolidated mortgage upon the house, it served the RPAPL Section 1304 notice on the husband who signed the note. However, the lender did not serve the notice on the wife, arguing that she was not a signatory on the note, but only the CEMA. In addition, they argued that service upon her was unnecessary because the wife was not defined in the terms of the note as the “borrower” and, therefore, the plaintiff/mortgage lender was not required to serve the 90-day notice upon her pursuant to RPAPL Section 1304.
In Aurora Loan Services LLC v. Weisblum, the Second Department stated that the co-mortgagor wife (who signed the CEMA but not the note) was deemed a “borrower” under RPAPL Section 1304 who was also entitled to receive the 90-day notice prior to the commencement of the foreclosure.

In the follow-up case of Wells Fargo Bank, N.A. v. Miller, [Sup. Ct. Rockland Co. Index No. 4256/2011, Dec. 11, 2013], the issue was whether a co-mortgagor who did not sign the note was also deemed a “borrower,” under RPAPL Section 1304, and, therefore, should have also been served with the requisite 90-day notice. In this case, the mortgage lender (Wells Fargo Bank) provided the court with a copy of the purported notice that it allegedly served upon one of the defendants (the husband) and did not provide any proof of service of the requisite RPAPL Section 1304 notice upon the other defendant (the wife). In response, Wells Fargo Bank argued that the defendant/co-mortgagor wife signed only the mortgage and not the underlying promissory note. The underlying promissory note was signed only by the husband. The bank averred that the wife was not a “borrower” within the meaning of the statute and, therefore, was not entitled to the 90-day notice.

Messing with the wrong borrowers

In response, Richard A. Klass, Esq., Your Court Street Lawyer, successfully argued to the court that both husband and wife were indeed entitled to be served with the 90-day notice required by RPAPL Section 1304. Specifically, the lender’s own documents were put before the court to prove that the co-mortgagor wife was a “borrower” even under the bank’s definition (on the mortgage’s first page, in the section entitled “Words Used Often In This Document,” the word “Borrower” is stated as “ISRAEL MILLER CHAYA B. MILLER”).
In Aurora Loan Services LLC v. Weisblum, the Second Department recognized the provision in the mortgage instrument that the lender had the right to “enforce its right” against the subject property. Similarly, in Wells Fargo Bank, N.A. v. Miller, the mortgage stated: “each of us is fully obligated to keep all of Borrower’s promises and obligations contained in this Security Instrument. Lender may enforce rights under the Security Instrument against each of us individually or against all of us together.”

The court was urged, by the defendants/homeowners in Wells Fargo Bank, N.A. v. Miller, that it should recognize, similar to the co-mortgagor in the Aurora Loan Services LLC v. Weisblum case involving a CEMA, that the co-mortgagor wife who did not sign the underlying note has a significant interest in protecting her home from loss in a foreclosure. The design and purpose of RPAPL Section 1304 is to apprise all owners of residential homes that they risk losing their homes because an obligation was not met (“fair warning”). This initial step of the 90-day notice (which is a “condition precedent” to a foreclosure proceeding) adds an extra layer of support to homeowners who face imminent foreclosure but might find a means to remedy an impending predicament: where their property is in foreclosure; their credit history is damaged; and their lending alternatives have disappeared. Moreover, the non-defaulting property owner who put up her home as collateral for a loan to her spouse deserves to know of her spouse’s default and apprised of her rights prior to the institution of the foreclosure proceeding. Otherwise, the results would be severely harsh and inequitable.

Action Dismissed

In reaching the ultimate decision to dismiss the foreclosure proceeding brought by Wells Fargo Bank, the Supreme Court Justice held: “Therefore, pursuant to the Weisblum case, supra, the Court finds that Defendant Chaya B. Miller is a ‘borrower’ for the purposes of Real Property Actions and Proceedings Law Section 1304, and Plaintiff’s failure to comply with the strict mandates of that statute require dismissal of the action without prejudice.”
by Richard A. Klass, Esq.

*The language of the letter for the RPAPL Section 1304 notice:

The RPAPL Section 1304 notice must be accompanied by a list of at least five housing counseling agencies. The language of the letter for the RPAPL Section 1304 notice is as follows:

YOU COULD LOSE YOUR HOME. PLEASE READ THE FOLLOWING NOTICE CAREFULLY
As of …, your home loan is … days in default. Under New York State Law, we are required to send you this notice to inform you that you are at risk of losing your home. You can cure this default by making the payment of ….. dollars by …..
If you are experiencing financial difficulty, you should know that there are several options available to you that may help you keep your home. Attached to this notice is a list of government approved housing counseling agencies in your area which provide free or very low-cost counseling. You should consider contacting one of these agencies immediately. These agencies specialize in helping homeowners who are facing financial difficulty. Housing counselors can help you assess your financial condition and work with us to explore the possibility of modifying your loan, establishing an easier payment plan for you, or even working out a period of loan forbearance. If you wish, you may also contact us directly at ………. and ask to discuss possible options.
While we cannot assure that a mutually agreeable resolution is possible, we encourage you to take immediate steps to try to achieve a resolution. The longer you wait, the fewer options you may have.
If this matter is not resolved within 90 days from the date this notice was mailed, we may commence legal action against you (or sooner if you cease to live in the dwelling as your primary residence.)

If you need further information, please call the New York State Department of Financial Services’ toll-free helpline at (show number) or visit the Department’s website at (show web address)”.

**The specific notice for RPAPL Section 1303:

The specific notice, to be delivered with the Summons and Complaint, must be printed in big bold letters on colored paper and read as follows:

HELP FOR HOMEOWNERS IN FORECLOSURE

New York State Law requires that we send you this notice about the foreclosure process. Please read it carefully.
Summons and Complaint
You are in danger of losing your home. If you fail to respond to the summons and complaint in this foreclosure action, you may lose your home. Please read the summons and complaint carefully. You should immediately contact an attorney or your local legal aid office to obtain advice on how to protect yourself.
Sources of Information and Assistance
The State encourages you to become informed about your options in foreclosure. In addition to seeking assistance from an attorney or legal aid office, there are government agencies and non-profit organizations that you may contact for information about possible options, including trying to work with your lender during this process.
To locate an entity near you, you may call the toll-free helpline maintained by the New York State Department of Financial Services at (enter number) or visit the Department’s website at (enter web address).
Foreclosure rescue scams
Be careful of people who approach you with offers to “save” your home. There are individuals who watch for notices of foreclosure actions in order to unfairly profit from a homeowner’s distress. You should be extremely careful about any such promises and any suggestions that you pay them a fee or sign over your deed. State law requires anyone offering such services for profit to enter into a contract which fully describes the services they will perform and fees they will charge, and which prohibits them from taking any money from you until they have completed all such promised services.

copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Good Guy Guaranty and Surrender Dates

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When a tenant enters into a lease, they agree to pay all rent sums and in some cases additional rent as they become due and owing. When a tenant defaults on a lease, New York law does not require a landlord to mitigate their damages if they elect not to re-let the space, and the tenant remains liable for unpaid rent throughout the duration of the lease term.

Commercial leases executed between the landlord and tenant often include a personal guaranty executed by the tenant personally to ensure the payment of rent. A “Good Guy Guaranty” is a document executed by an individual or individuals of a corporation leasing space which, on the one hand, protects the tenant by limiting their liability under the lease in the event of default, and on the other hand, protects the landlord by allowing them to proceed against an individual person for any non-payment of rent that may accrue during the lease term.

In any scenario, Good Guy Guaranty generally apply to obligations that have accrued prior to the surrender of the leased space, and the accrued obligation remains due and owing even after the tenant has vacated the space. Russo v. Heller, 80 A.D.3d 531.

The surrender of the space, also known as the “Surrender Date” in a Good Guy Guaranty is a defined event in the guaranty that a guarantor/tenant is required to follow in order to limit his liability under the lease. Although the landlord cannot utilize a “hyper-technical interpretation” of the Surrender Date requirements, a tenant remains required to follow the conditions specified in the guaranty to surrender the space and thereby end any further personal obligations under the lease. 150 Broadway v. Shandell, 27 Misc.3d 1234(A).

If the tenant fails to abide by the terms of the Good Guy Guaranty, he may likely remain obligated for rent that will continue to accrue even after the tenant surrendered the space to the landlord. Broadway 36th Realty, LLC v. London, 29 Misc.3d 1238(A).

In Broadway, the “Surrender Date was defined as follows: “The date that Tenant shall have performed all of the following: (a) vacated and surrendered the demised premises to the Landlord free of all subleases or licensees and in broom clean condition (b) delivered the keys to the doors to the demised premises to Landlord, and (c) paid all sums due and payable under the Lease as Base Annual Rent or Additional Rent or other such charges to Landlord up until the date of (a) and (b) above.

In Broadway, the Court determined that since there were outstanding payments of additional rent due and owing, the tenant failed to comply with the requirements of the Surrender Date and the limitation of liability pursuant to the Good Guy Guaranty would not apply, thus tenant is liable for all rent that will accrue for the remainder of the lease term. Broadway at *5.

In this case, the Good Guy Guaranty provides as follows:

“ Guarantor hereby absolutely, unconditionally, and irrevocably personally guarantees to Owner the full and prompt payment of rent due under the Lease payable by Tenant, its successors and assigns and the performance of all of Tenant’s other obligations under the Lease (including, without limitation, Tenant’s obligation to insure that the security deposit held in connection with the Lease shall be equal to the amount as required under the Lease). Notwithstanding the foregoing, if Tenant has performed all of its obligations under the Lease and is not in default AFTER August 1, 2011 (or if Tenant is in default but cures such default before the expiration of the applicable grace, notice and cure period), then the obligations of Guarantor thereafter shall only extend through the period up to and including the Surrender Date. “

The definition of Surrender Date pursuant to the lease is as follows:

“ The date upon which Tenant shall have: (a) vacated, and caused all subtenants, assignees, and other parties claiming through or under tenant (other than those that have entered into a written occupancy agreement with Owner) to have vacated the demised premises and surrendered the same in the condition required pursuant to the Lease; (b) delivered all keys to the demised premises to Owner (c) executed and delivered to Owner an agreement pursuant to which Tenant agrees that the lease and any right of tenant to use or occupy the demised premises have terminated; and (d) all of Tenant’s obligations under the Lease shall have been performed including, without limitation, payment of all Rent then due and owing (the date on which all of the foregoing to occur shall be referred to herein as the ‘Surrender Date’). ”

The facts in the instant case are as follows: From the execution of the lease on June 30, 2010 through September 30, 2011, tenant paid his rent (August and September rents were paid together on or about October 5, 2011). At that time, correspondence was received by the landlord from the guarantor, who had agreed to pay the rent due and owing provided the late fees were removed from the past balance.

Beginning with October’s rent, no further rent payments were made by the tenant. On April 25, 2012, the Marshal entered the property as part of an eviction and inventoried the premises. The premises were found vacant.

Landlord seeks payment of rent from October 2011 to the present, as it has not yet re-let the space, although the space has been marketed and is listed with a broker.

Conclusion:

Based upon the language of the Good Guy Guaranty combined with the case law, the tenant has failed to comply with the terms of the Good Guy Guaranty and Surrender Date and thus the accrual of rent continued throughout the term of the lease (June 30, 2015) for the following reasons:

  1. Tenant was required to be current with rent AFTER August 1, 2011;
  2. Guarantor was required to return the keys to the Landlord upon Surrender;
  3. Guarantor was required to execute an agreement whereby tenant states all rights to the premises have terminated; and
  4. All rent due and owing has been paid in full.
by Elisa S. Rosenthal, Esq.,
Associate
Copyright 2013 Richard A. Klass, Esq.

copyr. 2013 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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