The Producer: overselling available interests

Posted on July 30, 2013 by Richard Klass

The Rehearsal Onstage (detail), c. 1874, by Edgar Degas (1834–1917) illustrating article by Richard Klass about overselling available interests. — The Rehearsal Onstage (detail), c. 1874, by Edgar Degas (1834–1917).

Mel Brooks’ movie and musical The Producers may have been a fictional story of fraudsters selling more shares in the production of their Broadway show “Springtime for Hitler” than actually existed, but such fraudsters exist in real life, overselling available interests not only in Broadway productions, but in every type of investment, including real estate.

In this modern day The Producers story, a particular real estate broker (we’ll give him the name “Bob”) had a plan. The idea behind this particular investment was simple: purchase a house in Passaic, New Jersey; fix it up; and then resell it for a profit—the classic real estate “ flip. ” This broker solicited a number of investors. Each investor would purchase a membership interest in a limited liability company [LLC]. With the funds provided by the members, the LLC would buy the house. A contractor-partner would be hired to renovate the house. Each investor was promised a certain percentage of the net proceeds from the ultimate sale of the house. Unfortunately, the real estate market tanked, construction costs soared and the investment became a huge loss before construction was ever completed.

New Jersey state court action

One of the investors (we’ll call him “John”) brought a lawsuit in the Superior Court in New Jersey for breach of contract, misappropriation of funds, and fraud. In that case, the judge appointed a special fiscal agent (similar to a court-appointed receiver) to manage the operations of the house, list the house for sale, and take all steps necessary to sell the house and distribute the net proceeds to the LLC’s investors.

Real estate broker files for bankruptcy

Bob filed for personal bankruptcy in the New Jersey Bankruptcy Court to avoid his liability to the investors. John filed a lawsuit (known as an adversary proceeding) against Bob in the New Jersey bankruptcy case to have Bob’s liability in this house-investment-gone-wrong declared “nondischargeable.” (The adversary proceeding here was a mini-lawsuit inside of the bankruptcy case, intended to have the effect that Bob would remain liable to John for the collapse of the real estate deal.) In the adversary proceeding, John alleged that Bob brought too many investors into the deal without telling the other investors. A settlement was reached between John and Bob in the “adversary proceeding” and John negotiated with the bankruptcy trustee to purchase the house directly from the trustee to recoup some of his (John’s) losses.

Another investor (we’ll call her “Sally”) who lost money in the same Passaic real estate deal then sued John (now the owner of the Passaic real estate) in New York City’s Civil Court, claiming that John defrauded Sally by not including her in the buy-out of the house. This is when John sought help from Richard A. Klass, Your Court Street Lawyer. The aim was to have Sally’s lawsuit, brought in New York, dismissed.

Lack of jurisdiction in the New York Civil Court

There is a basic concept involving any court system that a particular court maintains the authority (“jurisdiction”) to make decisions and orders over a particular controversy.

According to New York’s Civil Practice Law and Rules [CPLR] Section 302, New York State courts may exercise jurisdiction over nonresidents under certain circumstances, when the defendant:

Transacts any business within the state or contracts anywhere to supply goods or services in the state; or
Commits a tortious act within the state, except as to a cause of action for defamation of character arising from the act; or
Commits a tortious act without the state causing injury to person or property within the state.

There is a separate rule as to when New York City’s Civil Court may exercise jurisdiction over cases because it is considered a court of “limited” jurisdiction (See Civil Court Act Section 202).

In asking the judge to dismiss the New York Civil Court case, Richard A. Klass argued that any action that could be brought by Sally must be brought in the State of New Jersey, and not in New York. The project-house was located in New Jersey; the LLC was a New Jersey entity; both the New Jersey Superior Court and New Jersey Bankruptcy Court had pending cases involving the house and the LLC; and all of the events transpired in New Jersey. It was urged that New York was the wrong forum for Sally to bring this dispute, citing to Epstein v. Sirivejkul, 48 NY2d 728 [1979]; Irrigation and Industrial Development Corp. v. Indag S.A., 37 NY2d 522 [1975].

The Civil Court judge agreed with the arguments of Richard A. Klass and determined that the New York Civil Court lacked jurisdiction over the case. The judge specifically found that the transaction in dispute occurred in New Jersey and the plaintiff presented no allegations that there was tortious conduct within New York State; also, the fact that there were existing proceedings in New Jersey courts confirmed the conclusion that New Jersey was the proper forum for any dispute. The court then dismissed the plaintiff’s case.

by 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 at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Surprise!

Posted on June 11, 2013 by Richard Klass

On a recent day, “Jack” (not his real name) went to an ATM to withdraw money from his bank account. To his surprise, he could not. Upon contacting the bank’s customer service department, he discovered that his bank account was restrained and could not be accessed. The bank’s representative informed him that there was a judgment against the joint accountholder—a friend, we’ll call him “Stan”—and this was the reason for the restraint on the account.

Jack remembered that many years ago, when he needed to travel to his home country for several months, he asked Stan if he could put Stan’s name on the bank account in case Jack needed someone to pay his bills while traveling. Ultimately, Stan never used the account—never wrote a check, never made a deposit, and never made any withdrawals. Unfortunately, years later, a creditor of Stan got a judgment against Stan and now, Jack, the primary account holder of the bank account, was paying the price.

Joint bank accounts and Banking Law Section 675

According to New York Banking Law Section 675, a joint bank account is presumed to belong to each of the accountholders—meaning that each person (and his judgment creditors) may access the full amount of the account. Specifically, this section of law provides that, except for fraud or undue influence, the making of deposits into a joint account is evidence that the depositor intended the account to be a joint tenancy. The burden of proving otherwise is upon the person who challenges title, which, in this case, would be the primary accountholder.

Once restrained, a creditor of one accountholder may be able to obtain half or all of the money in the joint account, according to differing court opinions. (One opinion, Ford Motor Credit Co. v. Astoria Federal, 189 Misc.2d 475, holds the creditor is entitled to more than half of account, and another, Mendel v. Chervanyou, 147 Misc.2d 1056, holds that it is not). In any event, in this situation, Jack had the problem where all of the money in the account belonged solely to him and Stan never used the account.

“Convenience” bank accounts

Luckily, there is another concept that applied to this situation. The law recognizes that a bank account may be established as a quasi-joint account, where a person is added merely as a “convenience” to the primary accountholder. This convenience is typically done in situations where there is an elderly parent or disabled person who cannot easily travel to the bank to handle his banking needs.

The account may actually be set up in this exact form from its inception (Banking Law Section 678 authorizes this type of account), or it may operate as one where there is sufficient proof that adding the other name to the account was just for the convenience of the accountholder. Where the account is initially set up as a convenience account, the bank will indicate the same and any deposits will not be presumed to belong to each of the accountholders but just the primary one. Also, upon death of the primary accountholder, the other person will not have a right of survivorship in the account, but the moneys will pass to whomever the primary accountholder has designated in his Will or heirs at law. Where the account is not designated as a convenience account from the onset, Banking Law Section 675 will allow a party to rebut or disprove the general presumption that it was a true joint account—evidence may include the wording written in on the account application or signature card, sources of deposits, usage of the account, and the circumstances in which the account was set up.

Jack’s attorney searched the internet for “exempt property and accounts” for more information and found an article by Richard A. Klass on the subject of the Exempt Income Protection Act (EIPA).* After getting the run-around from the creditor’s attorney for almost three weeks, Jack decided to retain Richard A. Klass, Your Court Street Lawyer.

Upon sending proof regarding the fact that the account belonged to the primary accountholder and that the debtor was on the account only for convenience purposes, along with a letter explaining the law and threatening to sue for attorney’s fees, the creditor’s attorney confirmed the next day that the account would be immediately released.

by Richard A. Klass, Esq.

* The article, entitled “Analysis of Exempt Income Protection Act,” may be found on the firm’s website.

Credits:
Photograph on page one: ATM in Santillana, 2008, by Handige Harrie. Artwork released by author into the public domain.

R. A. Klass
Your Court Street Lawyer

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529 Plans in Bankruptcy

Posted on April 30, 2013 by Richard Klass

Americans rely on easy credit in order to fund their lifestyles. We are lured by good credit terms, the desire to buy a home, and the need to pay for things like education and home improvements. We do our best to save for our future, putting money into Individual Retirement Accounts (IRAs) or 401Ks, money that is not to be used until retirement. When we have children we consider their futures and the ever increasing costs of college, and we want to save for our children’s future education by opening Education IRAs or 529 Savings Plans.

In New York State, when someone obtains a money judgment against you, they have several remedies in order to obtain payment of the judgment, including garnishing your wages, putting a lien on bank accounts and other property held in your name. This may include a 529 Savings Plan. CPLR section 5205 provides several exemptions to protect debtors. It lists several types of property that cannot be reached by creditors. CPLR 5205(j) provides protection for New York 529 Savings Plans by exempting and thus protecting from creditors a New York State 529 Savings Plan in an amount not exceeding $10,000. This is good news and bad news for debtors. It protects smaller 529 plans from being plundered by a creditor, but if you’ve saved for many years, the 529 Savings Plan may exceed the $10,000 balance and is thus open season for a creditor looking for repayment of an outstanding debt.

Bankruptcy can offer better protection for a debtor who is trying to protect a 529 Savings Plan he has created for his children. Bankruptcy Code 541(b)(6) provides that funds placed in an 529 Savings Plan 1 year or longer before the date the debtor files for bankruptcy is not property of the bankruptcy estate if the designated beneficiary is a child, stepchild, grandchild or step-grandchild, and the funds contributed do not exceed the total contributions permitted. In addition, in order to ensure debtors have not transferred assets to exempt accounts in preparation of filing bankruptcy, any contributions made between year one and year two before filing are limited to a total contribution of $5,850. The exemption regarding an education IRA is similar in nature to the 529 Savings Plan, but include a requirement that the account could not be pledged to have credit extended to the debtor. This language can be found in Bankruptcy Code 541(b)(5).

Therefore, for individuals who are contemplating bankruptcy but are concerned about 529 Savings Plans they have established for their children can now rest easy in the knowledge these accounts may be protected and may not be reached by creditors.

by Elisa S. Rosenthal, Esq.,

Associate

Law Office of Richard A. Klass

R. A. Klass
Your Court Street Lawyer

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“Then I’ll huff and I’ll puff, and I’ll blow your house in!”

Posted on February 26, 2013 by Richard Klass

Those famous words were said by the Wolf in the fairy tale Three Little Pigs. Sometimes, municipalities have to say those same words to homeowners whose buildings become so damaged that they have become “unsafe.”

The “unsafe structures” law

There is a common recognition that an unsafe or dangerous structure constitutes a threat to the public’s health, safety and welfare, and the sealing or removal of the structure is an exercise of a municipality’s police powers to protect the public. For this reason, municipalities enact building codes to ensure that owners keep and maintain their buildings.

In New York City, Administrative Code Section 26-236 provides that, immediately upon receipt of a report by an officer or building department employee that a structure is unsafe or dangerous, the Department of Buildings is to make a formal report, which triggers quick action. The next step is to notify the building owner within 24 hours of the duty to remedy the unsafe or dangerous condition. If no action by the owner is immediately taken, then the Buildings Department must order a survey of the unsafe structure, which survey (together with a report) acts as the basis of a law suit in the Supreme Court.

So important to the public is the remediation of an unsafe structure, that Administrative Code Section 26-239 states that the “determination of the issue in an unsafe structure proceeding shall have precedence over every other business” of the court. Once the trial has taken place (“without delay”), the court then issues a “precept” directed to the Superintendent of Buildings to repair or secure the unsafe structure.

Knock-down of the client’s building

The client bought a building in Brooklyn from a bank that had recently foreclosed on the property and took back the building (what is commonly referred to as an “REO” – real estate owned property in a bank’s inventory). At about the same time that the client bought the building, the City of New York determined that the building was an unsafe structure and notified the bank. The notice informed that a court proceeding would be held in the Supreme Court, Kings County on April 22nd to determine the building to be an “unsafe structure” pursuant to the New York City Administrative Code.

When the client bought the building, he had the intention of renovating it. The client hired an architect who drew up plans to utilize the skeleton of the building and its basic plumbing and heating systems. The plans filed with the Buildings Department provided for the rehabilitation and renovation of the building. The architect’s plans were allegedly approved by the Department. The architect then met with the Buildings Department’s Borough Commissioner on April 10th; assurance was allegedly made to the architect that a work permit based upon the approved plans would be issued, allowing the “rehab” of the building to start. Allegedly, the Buildings Department noted the approval of plans with the City’s Department of Housing Preservation and Development. Unfortunately, on April 15th, prior to the upcoming court date, the City demolished the building. To add insult to injury, the City placed a lien on the building for the demolition costs.

Claim and law suit

The building owner came to Richard A. Klass, Your Court Street Lawyer, for help. Now that the entire building was demolished, there was tremendous added expense to the rehab of the building, given that all new building systems would have to be installed and the shell was no longer there.

Notices of claim were filed with the City of New York and its agencies. Once the requisite period of time for the City to act on those notices passed, a law suit was filed against the City. The action listed several causes of action including negligence, trespass to property, interference with quiet enjoyment of property and violation of due process rights since the building was demolished before the court proceeding.

The City agreed to settle the law suit by payment for the loss of the building (based upon the difference in fair market values for the property pre-demolition and post-demolition) along with cancellation of the demolition lien.

by Richard A. Klass, Esq.

R. A. Klass
Your Court Street Lawyer

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Saved from the Auction Block

Posted on December 4, 2012 by Richard Klass

A Kings County homeowner was unable to pay his mortgage. He had been in and out of bankruptcy and his Midwood-area house had been in foreclosure since 2007. A Judgment of Foreclosure and Sale had been entered in 2010. Now, the foreclosure auction was scheduled for September 13th. In laymen’s parlance, the auction sale date is the “drop dead” date for the homeowner to keep his house and, in the final days before the auction, the homeowner needed Richard A. Klass, Your Court Street Lawyer, to save the house from the auction block.

What is a Foreclosure Auction Sale

When there is a lien against real estate in New York, the plaintiff-lienor (usually a mortgage lender) can bring a foreclosure proceeding to foreclose that lien against the property in order to have the debt paid. This includes actions to foreclose a mortgage, mechanic’s lien for labor rendered or goods delivered by a contractor, a condominium building’s common charges, or homeowners’ association fees. The culmination of a foreclosure proceeding is the auction sale of the property to the highest bidder.

Once the hammer of the court-appointed referee drops, the homeowner’s right to redeem the property is gone! Then, it’s time for the homeowner to plan to move from the house or be ejected by the successful bidder. In this case, this homeowner needed to stop the auction sale — stop the drop of the hammer.

Old Foreclosure Cases

Recently, the foreclosure process in various counties has ground to an almost-halt, where foreclosure proceedings have been litigated in the courts in excess of three or four years (or even longer!). Depending on the perspective of the plaintiff-lienor or the defendant-homeowner, this is either a good or bad consequence of the slow process.

As a result of several factors, including the slower foreclosure process, bankruptcy, motions to vacate default judgments and requests for loan modification, the actual foreclosure auction sale date could wind up being many months or even years after the Judgment of Foreclosure and Sale has been entered by the court. Eventually, concern may arise about holding an auction sale so long after the Judgment has been entered. While the amount indicated in the Judgment may have been $100,000 at the time of the auction, the amount due to the plaintiff with accrued interest, property taxes, etc., may become $150,000.

In the Supreme Court decision of Bardi v. Morgan, 17 Misc.3d 927, 847 NYS2d 431 [Sup.Ct., Kings Co. 2007], Justice Kramer noted that a crucial component of the foreclosure process — which is often conducted on the default of the homeowner who never answered the Summons — is the referee’s accounting of the amounts due to the mortgage lender — which is done pre-judgment, providing a detailed snapshot of the mortgage debt. This accounting, done by an impartial appointee of the court, ensures the reliability and fairness of the foreclosure proceeding. This serves the function of accurately advising the court of the costs and disbursements expended during the process, thus enabling the court to determine whether the charges were taken in accordance with the law and ensure that there has been no overreaching by the plaintiff. An accurate, impartial and transparent accounting becomes particularly important when the purchaser is not a third party but is the foreclosing mortgage holder and the potential for self-dealing arises. In Bardi v. Morgan, the judge held as follows: “Accordingly, this Court holds that in any case where an auction sale has been scheduled more than one year after the entry of the judgment of foreclosure and sale, the Notice of Sale is invalid and the Clerk of this Court is directed to reject it, unless an amended and updated reference and a supplementary foreclosure judgment reflecting the corrected amount is provided.”

The Supreme Court for Kings County followed suit and enacted Rule 13 of Part F of the General Foreclosure Rules, which provides as follows: “Notices of Sale may be filed with the Clerk within one year of the entry of the Judgment of Foreclosure and Sale. Permission of the Court must be obtained for any filings made thereafter.”

Upset Price vs. Judgment Amount

The reasons this rule is so important become evident when considering the above example (Judgment is $100,000 but amount due with accrued interest is $150,000), including: (1) The homeowner may be relying upon the judgment amount in order to attempt to raise the money necessary, right before the auction sale, to satisfy the judgment; (2) The homeowner may need to know the amount due if he elects to file a bankruptcy case for estimation purposes; and (3) Prospective bidders would be interested so they know how much money to bring to the auction to bid on the property. At the auction sale, if the lender calls out a much higher “upset” price than the judgment amount, everyone except the lender will be surprised; it would be unfair for the lender to have so much control over the bidding process.

In our case here, upon presentment of the Order to Show Cause to stop the auction sale — because the lender proposed selling the house without having gotten permission from the Supreme Court — the lender retreated and agreed to cancel the sale. Now, the lender will have to go through the steps of obtaining an amended referee’s report of the amount due, along with the request from the court of issuance of a supplementary judgment. These steps will add several months to the process.

by Richard A. Klass, Esq.

copyr. 2012 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 with any questions.
Prior results do not guarantee a similar outcome.

Painting at top: The Captain’s Auction (by 1875), John Ritchie (fl. 1858-1875). This work is in the public domain in the United States because it was published (or registered with the U.S. Copyright Office) before January 1, 1923 and its copyright has expired.

R. A. Klass
Your Court Street Lawyer

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