Feeling a Million Bucks Better!

Posted on November 21, 2011 by Richard Klass

Bad economic times over the past few years have seen the foreclosure of tens of thousands of properties across New York State (as well as around the country). One corporate landlord had two commercial rental buildings located in Brooklyn. Spread across those two buildings was a ‘blanket’ mortgage of $1.1 million (the term ‘blanket mortgage’ refers to one mortgage recorded against two or more properties). The buildings fell into foreclosure as a result of the landlord’s inability to pay the mortgage loan and the general economic downturn in the area. The corporation that owned the buildings and the individual owner who signed a personal guaranty of the mortgage loan were sued in the mortgage foreclosure proceeding.

On September 30, 2010, the two buildings were sold at the foreclosure auction sale by the court-appointed Referee as one combined lot for $574,000. The mortgage lender’s attorneys prepared the Referee’s Report of Sale and Statement of the balance due to the lender on the mortgage loan after the auction sale (the “deficiency”), which was computed as follows: Total due Plaintiff: $1,408,111.61. Amount of Bid: $574,000. Deficiency: $834,111.61.

After the foreclosure auction sale, the plaintiff-mortgage lender filed a motion with the court, asking the judge to grant a Deficiency Judgment against the corporation and the individual owner based upon his personal guaranty. The defendants did not receive notice of the motion. The motion was granted and the court entered a Deficiency Judgment against them for $902,506.17.

The individual guarantor (and now judgment debtor), came to Richard A. Klass, Your Court Street Lawyer, for legal advice to challenge the Deficiency Judgment.

Deficiency Judgment:

Mortgage foreclosures in New York are governed by Article 13 of the Real Property Actions and Proceedings Law (RPAPL). The normal flow of a mortgage foreclosure proceeding is: (a) filing and serving the Summons and Complaint; (b) having the court appoint a referee to determine how much is due to the lender on the mortgage loan; (c) granting the Judgment of Foreclosure and Sale, allowing the mortgage lender to “foreclose” the mortgage upon its collateral (security for the loan) – the house; and then (d) conduct an auction sale of the house to satisfy the debt owed.

Many times, the foreclosure auction sale of the property does not sell for enough money to pay off the debt due to the mortgage lender/bank. When a property is worth less than the amount due on the mortgage, the property is considered “underwater.” If, after the sale, the lender is still due money for its debt under the Judgment of Foreclosure and Sale, the lender may bring a request for the judge to award a judgment for the balance of the money due for its debt – it is asking for a Deficiency Judgment to be entered against the person or people liable under the mortgage note (the term “deficiency” referring to the remaining shortage due to the bank). The procedure for requesting the Deficiency Judgment is laid out in RPAPL Section 1371, and it must be strictly followed.

Attacking the Validity of the Deficiency Judgment:

At the stage that the client retained Richard A. Klass, Your Court Street Lawyer, to help, a game plan to attack the Deficiency Judgment had to be formulated and put into action. The entire file in the mortgage foreclosure proceedings, including all of the pleadings, motions, and court orders had to be obtained from court and reviewed to see whether every step taken by the mortgage lender was proper – in other words, did the mortgage lender cross every “t” and dot every “i”?

Motion made after 90-day time limit.

The Referee’s Deed from the auction sale was dated October 9, 2010. The date that the motion was served upon the defendants, January 11, 2011, exceeded the 90-day time limit specified in RPAPL 1371(2) by four days. New York case law has held that the 90-day time period in which to request that a deficiency be granted is considered a “ statute of limitations ” and, if not made within this period, it is time-barred. Thus, it was argued that the plaintiff-mortgage lender made the motion too late.

Improper calculation of the deficiency.

In RPAPL 1371(2), it states that the deficiency is the amount owing less “the market value determined by the court or the sale price of the property whichever shall be the higher.” The plaintiff calculated the deficiency based upon the lower sale price ($574,000) instead of the higher appraised fair market value ($675,000), which would have resulted in a lower deficiency amount (by over $100,000).

Both properties were sold together as one combined lot.

For some reason, the plaintiff opted to lump together two separate and distinct properties into one foreclosure sale. By conducting the sale of both properties at the same time, it was argued the plaintiff waived the right to claim a deficiency against the defendant. In Sanders v. Palmer, 68 NY2d 180 [1986], the Court of Appeals held that “there shall be separate sales of the security in such order as the court may fix, and an application after each sale and before the next occurs for determination of the deficiency resulting from the sale, for otherwise what remains due and payable from the additional security provided cannot be known.” Here, the plaintiff decided to sell both properties as a “package deal” without selling each property separately; therefore, the proper deficiency could not have been determined.

The personal guaranty was “limited” to $55,000.

But, perhaps, the most glaring mistake in the foreclosure proceedings was that the personal guaranty of the individual owner (attached to the Complaint) stated on its face that it was limited to only $55,000 of the mortgage debt plus the legal expenses and costs associated with protecting the collateral. This was not brought to the attention of the judge when the plaintiff made the motion for the deficiency.

Based upon the several errors in the motion and procedures taken to obtain the Deficiency Judgment, the plaintiff-mortgage lender agreed to vacate and dismiss the Deficiency Judgment against the individual guarantor. Instead of owing the bank close to $1 million, he wound up owing $0!

by Richard A. Klass, Esq.

copyr. 2011 Richard A. Klass, Esq.
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

Credits:
Photo of Richard Klass by Robert Matson, copyr. Richard A. Klass, 2011.
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Image at top: The Merry Fiddler, 1623, by Gerard van Honthorst (1590-1656). This image is in the public domain because its copyright has expired. This applies to Australia, the European Union and those countries with a copyright term of life of the author plus 70 years. This image is in the public domain in the United States. This applies to U.S. works where the copyright has expired, often because its first publication occurred prior to January 1, 1923.

R. A. Klass
Your Court Street Lawyer

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$401,452.59 Surplus Moneys: The Extra Bit Left Over!

Posted on August 21, 2011 by Richard Klass

In the typical mortgage foreclosure proceeding, the mortgage lender (or “mortgagee”) brings an action against the homeowner to foreclose on its mortgage against the real estate, generally because the homeowner (or “mortgagor”) failed to make payments on the loan. The mortgage is the legal document recorded by the mortgagee against the mortgagor property to provide the collateral for the making of the loan. In case of default in payment, the mortgagee has the right to sell the collateral to satisfy the remaining balance due on the loan (most foreclosure proceedings are judicial sales, where a court has authorized the sale, as opposed to ‘non-judicial’ sales in limited circumstances). Sometimes, in a foreclosure action, the plaintiff is not the holder of a mortgage but rather has another type of lien against the real estate, such as a tax lien for unpaid real estate taxes, mechanic’s lien (for building supplies or labor performed), or judgment lien.

Once the mortgagee or lienor has obtained a Judgment of Foreclosure and Sale, it can then sell the real estate. The mortgage foreclosure proceeding culminates with the public auction of the mortgagor’s real estate to the highest bidder. At that point, the property is sold to the bidder, who pays the sale price to a court-appointed referee.

Definition of Surplus Moneys:

If the amount paid by the successful bidder at the auction sale exceeds the amount due to the mortgagee according to the Judgment of Foreclosure and Sale, then there is created a special fund of the left-over purchase price called the “Surplus Moneys.” For example, if the mortgagee is due $200,000 and the property sold for $300,000, the remaining sale price of $100,000 is the surplus. According to Article 13 of New York’s Real Property Actions and Proceedings Law (RPAPL), there is a procedure for the former homeowner (and other junior lienors, such as second mortgagees, judgment creditors or other lienholders) to petition the court for the release of the surplus moneys.

Fighting over $401,452.59 Surplus Moneys:

In 2005, the owner of a building in Brooklyn failed to pay his property taxes. A foreclosure proceeding was brought based on the tax lien, and the building was sold at auction. The referee paid off the tax lien and then deposited the remaining surplus moneys of $401,452.59 into court. The building owner died, leaving his second wife and children as his survivors. He had been married previously and, as part of his and his first wife’s divorce case, had agreed to pay her half of the value of the building. The first wife and one of the owner’s children retained Richard A. Klass, Your Court Street Lawyer, to pursue the payment of their respective shares of the surplus moneys.

The various heirs to the estate of the owner, along with the first wife, filed motions in court to have a “surplus moneys referee” appointed to determine who would be entitled to what portion of the surplus moneys. The second wife alleged that the first wife was not entitled to any portion of the surplus moneys, claiming that she was previously paid by the decedent for her portion – but she could not find proof of the alleged payment. A hearing was held before the surplus moneys referee, who determined that the first wife should receive her half-share of the moneys of over $200,000, along with accrued interest.

The balance of the surplus moneys were to be distributed according to New York’s Estates, Powers and Trusts Law (EPTL) Section 4-1.1, which comes into play when someone dies without a Will. (This is the reason that making a Last Will and Testament is very important!) According to the EPTL, the balance of the surplus moneys were to be distributed as follows: (a) the first $50,000 plus half of the remaining balance paid to the second wife; and (b) the other half of the remaining balance paid to the surviving children, evenly divided among them.

After the completion of the hearing, the referee rendered a report, setting forth the manner of distribution. Then, an Order confirming the report and directing the distribution was signed by the Judge. At the conclusion, each of the clients received her fair share of the surplus moneys in full with interest.

Richard A. Klass, Esq.

copyr. 2011 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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$73K Buys $200,000 House, Thanks to Debtor’s “Hat Trick” Screw-up.

Posted on July 7, 2011 by Richard Klass

The foreclosure auction of the defendant’s Staten Island house came up on a Wednesday at 9:30AM. The courtroom was packed with people ready to bid on the house. The Referee announced the sale of the house, took bids, and struck down the sale at $73,000 to the successful bidder.

Moments later, the Referee informed the successful bidder that one of the two owners of the house had filed bankruptcy at 9:26AM; therefore, the foreclosure sale was invalid and the bidder should take back his bid deposit. At that moment, the successful bidder called Richard A. Klass, Your Court Street Lawyer about whether the sale was indeed invalid.

Automatic Stay Operates as a “Stop” Sign:

People normally file for bankruptcy protection for one or both of two reasons: (1) to discharge debt; and (2) to “stay” (or stop) proceedings against the debtor, such as foreclosures, lawsuits, repossessions, evictions, etc.

Under Bankruptcy Code §362(a), the filing of a bankruptcy petition with the United States Bankruptcy Court imposes an automatic stay upon creditors from taking certain actions, including specifically auctioning off the debtor’s house (Note: there are exceptions which may apply). Generally, actions taken after the filing of the bankruptcy petition are null and void, as if they never occurred. In this particular situation, the foreclosure auction happened 4 minutes after the bankruptcy filing. Under normal circumstances, the automatic stay would have voided this sale and the successful bidder would have merely gotten back his bid deposit, without getting the house.

Before the drastic changes to the Bankruptcy Code in 2005 (under the Bankruptcy Abuse Prevention and Consumer Protection Act [BAPCPA]), debtors would go in and out of bankruptcy to prevent their houses from being sold. Since BAPCPA, it has gotten more difficult for debtors to get the benefit of the “Stop” sign – the first filing will trigger a stay, the second filing a briefer stay, and the third filing no stay unless requested. These “Stop” signs begin to feel like a “Hat Trick,” where one player scores three times.

Searching for Details:

The first step in trying to salvage the foreclosure sale for the successful bidder was reviewing every document filed in the bankruptcy case. This included the “bare bones” petition and the “Credit Counseling Certificate.” This Certificate states that the debtor completed a credit counseling course within six months before the bankruptcy filing, which must be done in order to be eligible to file bankruptcy. Upon very close review, it appeared that the debtor simply took the old, expired Certificate from her prior bankruptcy case the year before (more than 6 months old) and filed the same one again – a big but little-noticed “no-no.”

Upon further digging, it appeared that the co-owner of the house had previously filed bankruptcy and there was an order terminating the stay a year earlier. Also, the debtor had both unsuccessfully filed a bankruptcy before and had filed the current one without complying with the rules, including paying the court’s filing fee.

Validation of Post-Petition Foreclosure Sale:

The Court found that grounds existed to warrant the annulment or termination of the automatic stay and validation of the foreclosure sale. Citing to several cases, the court identified various factors that should be considered in determining whether to validate a post-petition foreclosure sale, including whether:

the creditor had actual or constructive knowledge of the bankruptcy filing and, therefore, of the stay;
the debtor has acted in bad faith;
there is equity in the property of the estate;
the property is necessary for an effective reorganization;
grounds for relief from stay exist and a motion, if filed, would have been granted prior to the violation;
failure to grant retroactive relief would cause unnecessary expense to the creditor;
the creditor has detrimentally changed its position on the basis of the action taken;
the creditor took some affirmative action post-petition to bring about the violation of the stay; and
the creditor promptly seeks a retroactive lifting of the stay and approval of the action taken. In re Campbell, 356 BR 722 (WD Mo.2006); In re Williams, 257 BR 297 (Bankr.WD Mo. 2001).

Reviewing the facts of the particular situation, the Court found “ample support” for annulling the stay retroactively and validating the post-petition foreclosure sale. These facts included the bare bones petition filed by the debtor with the expired Certificate, her case being filed on the same date as the auction sale, her significant prior experience in bankruptcy, and the negative effect to the successful bidder’s (an independent third party) rights.

In granting the successful bidder’s motion, the Bankruptcy Judge determined that the “debtor’s failure to act in good faith in this case warrants the annulment of the automatic stay and the validation of the petition day foreclosure sale.” In re Annie Williams, US Bankruptcy Court, Eastern District of New York, Case No. 1-09-44856-dem [Decision dated January 27, 2010]. Since the Bankruptcy Court validated the foreclosure sale, the successful bidder achieved his desired result – the purchase of the Staten Island house, valued at more than $200,000, for $73,000.

by Richard A. Klass, Esq.

Credits:
Image by artist August Macke (1887-1914).
Photo of Richard Klass by Tom Urgo, 2008.
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