Don’t Give Me a Black Russian!

Posted on October 7, 2011 by Richard Klass

IN 2006, the executor of the estate of a woman who owned a cooperative apartment in Brooklyn attempted to sell the apartment. She first made a contract with a black woman who had two children to sell the apartment for $160,000. The contract of sale provided (as almost all do in cooperative apartment sales) that the buyer had to apply to the coop board for approval of the sale. She applied to the coop board for approval; then, dissention came about between the resident board members and the sponsor-management company. Despite supposedly being “approved” by the residents on the board, the management company claimed that the board was not legally constituted; accordingly, no closing of title would be scheduled.

The buyer elected to file a complaint with the New York State Division of Human Rights, charging that the coop engaged in discriminatory housing practices against her based upon her race. The NYS Division of Human Rights made a determination after investigation that there was “probable cause” to believe that the respondents engaged in discriminatory practices.The executor then attempted to sell the apartment to another person, a young Russian woman whom the board declined to even interview. It started to appear to the executor that a cooperative apartment owner’s fear of having every potential buyer denied, like a revolving door, was happening here.Faced with the possibility of the estate being left with a “dead asset”—an apartment that cannot be disposed of by the estate and continues to incur monthly maintenance charges, the estate turned to Richard A. Klass, Your Court Street Lawyer, for legal assistance to sue the coop board for breach of fiduciary duty, breach of the proprietary lease and housing discrimination.

Breach of Fiduciary Duty:

According to New York State law, the directors of a corporation owe its shareholders a fiduciary duty. The fiduciary duty of a director of a corporation consists of the obligation to perform his duties in good faith, without discriminatory practice, and with the degree of care which an ordinary prudent person in a like position would use under similar circumstances. See, Bernheim v. 136 East 64th Street Corp.,128 AD2d 434 [1 Dept. 1987]. In the Complaint against the coop, it was alleged that the coop board breached its fiduciary duty to the estate as the owner of shares of stock in the corporation and the proprietary lease to the apartment.In a similar case, in which the owner of a cooperative unit sued the board members for rejecting applicants for various reasons, including discriminatory ones, the court noted that the general deference granted to decisions of a cooperative corporation’s board of directors is not unlimited. If those board members act in a manner which is contrary to their duty to act fairly and impartially, courts may review claims of misconduct. Further, upon review, those claims of misconduct may prove actionable against the board members. See, Axelrod v. 400 Owners Corp., 189 Misc.2d 461 [Sup.Ct., NY Co. 2001].

The Estate was “Personally Affected” by Discrimination:

Both New York Executive Law §296 and New York City Administrative Code §8-107 provide that it is an unlawful discriminatory practice for a cooperative housing corporation to discriminate against an applicant based upon his age, race, familial status or religion. Those statutes also provide that it is an unlawful discriminatory practice for any person to aid, abet, incite, or compel the doing of any acts forbidden under those statutes. In Dunn v. Fishbein, 123 AD2d 659 [2 Dept. 1986], the court permitted a Caucasian person to maintain a claim that he was denied an apartment because his roommate was African-American. As was held in Axelrod v. 400 Owners Corp.,189 Misc.2d 461 [Sup.Ct., NY Co. 2001], if the plaintiff can show that she was adversely affected by reason of discrimination perpetrated against the prospective purchasers, she has a cognizable claim for discrimination. The Complaint alleged that the estate was personally affected by the unlawful discriminatory practices of the coop board and coop corporation.

“ Reverse Holdover ”:

The Complaint suggested the creation of a new cause of action under New York law—the concept of a “reverse holdover.” In this case, the estate claimed that the defendants effectively prevented the estate from exercising its right to sell the apartment to another party. Accordingly, it was urged that the defendants should be deemed to have effectively “purchased” the estate’s shares and leasehold interest in the apartment. By their alleged actions, it was claimed that the defendants had rendered this asset of the estate a “dead” asset—it could not be disposed of or sold!Generally, a tenant may be subject to eviction because of a substantial violation of the terms of the tenancy. In this situation, the reverse had occurred—the Complaint claimed that the defendants have committed a substantial violation of the estate’s tenancy. It is axiomatic that in every cooperative corporation, the right to sell a cooperator’s apartment is a valuable right, which ought not be irrationally or arbitrarily taken away. It is safe to say that the whim and caprice of coop boards is one of the prime reasons that people prefer to buy condominiums.In upholding the estate’s Complaint, the judge held that the estate had stated “ cognizable causes of action.” Estate of Cameron v. United Management, Sup. Ct., Kings Co. Index No. 2671/2008. During the pendency of the litigation, the estate found another buyer for the apartment, albeit at a lower price than originally negotiated with the first buyer. The estate, coop board, and management company settled the litigation—the estate sold the apartment for $139,000 and the defendants paid $35,000 to the estate.

by Richard A. Klass, Esq.

©2009 Richard A. Klass. Art credits: page one, Man in uniform beside building, yurt in background (1905-1915). Photographer: Prokudin-Gorskii, Sergei Mikhailovich, 1863-1944. Digital color composite made for the Library of Congress by Blaise Agüera y Arcas, 2004. Newsletter marketing by The Innovation Works, Inc.

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Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
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Making Sure the Guarantor is a “Good Guy.”

Posted on September 14, 2011 by Richard Klass

In 1997, a landlord rented a commercial space to a tire company pursuant to a commercial lease agreement. The tenant defaulted in the payment of rent, owing the landlord the claimed arrearage sum of $157,000. To collect the rent arrears, the landlord came to Richard A. Klass, Your Court Street Lawyer to recover.

When the lease was entered into, the president of the tenant executed the lease agreement both as president of the tenant and as personal guarantor of performance and payment of rent. The initial term of the lease agreement was for two years, and it provided for two-year renewal periods, with all of the terms and conditions of the original lease expressly reserved. The president of the tenant signed letter agreements extending the lease four times, the last time being December 20, 2004.

The landlord brought a motion for summary judgment against the personal guarantor of the lease, seeking payment of all outstanding arrears; the guarantor cross-moved for summary judgment, seeking to dismiss the case. The guarantor contended that he was not a proper party, claiming that he notified the landlord in February 2005 that the tenant was going out of business and all of its assets were being transferred to a different entity, effective March 2005. The landlord refuted receiving this notice from the guarantor.

Motion for Summary Judgment:

The term “summary judgment” means that a litigant is claiming that there is no reason to have a trial (either by judge or jury) because the case can be decided based upon application of the law. A “motion” is basically a request for a judge to take some sort of action.

Summary judgment is a drastic remedy, as it deprives a party of his day in court, and should be granted when it is clear that there are no triable issues of fact. See, Alvarez v. Prospect Hospital, 68 NY2d 320 [1986]. The burden is upon the moving party (the landlord in this case) to make a prima facie (Latin term for “by its first instance”) showing that the movant is entitled to summary judgment as a matter of law by presenting evidence in admissible form demonstrating the absence of any material facts. See, Giuffrida v. Citibank, 100 NY2d 72 [2003]. The failure to make that showing requires the denial of the motion regardless of the adequacy of the opposing papers. See, Ayotte v. Gervasio, 81 NY2d 1062 [1993]. Once a prima facie showing has been made, the burden of proof shifts to the opposing party (the tenant in this case) to produce evidentiary proof sufficient to establish the existence of material issues of fact which necessitate a trial.

In this case, the judge decided that the landlord laid out its case that the tenant owed rent arrears. This was based upon the evidence submitted with the motion, including the written lease agreement, the letters extending the lease for several additional terms, and the rent ledger. The judge dismissed the evidence presented by the guarantor, which amounted to his affidavit and the supposed notice that the tenant was ceasing business and a new company would be the tenant going forward.

Restriction on Assignment of Lease:

The argument that the tenant had given notice of assignment of the lease to a new company was refuted by the specific provisions of the lease. A provision in a lease which restricts assignment or subletting, and requires the consent of the landlord prior to doing so, is enforceable. See, Matter of Clason Management Co. v. Altman, 40 AD2d 635 [1 Dept. 1972]. The lease agreement at issue had such a restriction, which explicitly barred the tenant from assigning or transferring the lease or subletting the premises unless the tenant obtained the prior written consent of the landlord. Thus, even if the landlord did receive the letter from the guarantor in February 2005, there was no showing that the mandated consent was ever procured from the landlord.

Enforceability of Personal Guaranty:

It is no secret to landlords that, unless the incoming tenant is a large corporation, a commercial tenant is essentially a shell entity whose assets can disappear overnight (nowadays, even large corporations could qualify). So, landlords insist upon obtaining signed personal guaranties from the principals of the corporate tenants. Sometimes, the guaranty will be for all lease obligations through the end of the lease term, and sometimes, the guaranty will be effective through the date the tenant physically moves out of the premises – the proverbial “good guy clause.”

In this case, the landlord obtained the guaranty through the end of the lease term, but still expected the guarantor to be a “good guy” and pay the rent. Generally, a guaranty is to be interpreted in the strictest manner. See, White Rose Food v. Saleh, 99 NY2d 589 [2003]. But it is also the case that a personal guaranty which contains language of a continuing obligation is enforceable and survives payment of the original indebtedness. USI Capital and Leasing v. Chertock, 172 AD2d 235 [1 Dept. 1991]. Thus, termination of a continuing personal guaranty requires compliance with the provisions governing termination expressly set forth in the guaranty. In the absence of some writing which addresses termination, a guaranty which is silent on that issue remains in full force and effect. See, Chemical Bank v. Geronimo Auto Parts Corp., 224 AD2d 461 [1 Dept. 1996]. In this case, the personal guaranty could not be canceled merely by the president of the tenant sending a notice, indicating that the old company was going out and a new one was coming in.

In granting the landlord’s motion for summary judgment, the judge held that the personal guarantor is liable to the landlord, based upon his guarantee of the tenant’s lease obligations. Ribellino v. Fleet 2000, Inc. and Rosenfeld, Sup. Ct., Kings Co. Index No. 7501/2008 [Decision dated October 7, 2009].

Richard A. Klass, Esq.

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.

R. A. Klass
Your Court Street Lawyer

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Amendment to Bankruptcy Petition Worth Millions!

Posted on August 1, 2011 by Richard Klass

A brother tried to help his sister, and it almost cost him millions of dollars. Based upon the brother’s good credit, his sister bought a house in Queens in his name. At some point, she was unable to keep up with the mortgage payments and the house fell into foreclosure.

On the eve of the foreclosure sale, the brother filed bankruptcy to “stay” the sale. In the mad rush to save the family home (which, unfortunately, is common these days!), the brother did not understand something very important: the personal injury lawsuit he filed years earlier, relating to a construction work-site injury in which he was severely injured, was an “asset” of his to be listed in his bankruptcy petition. Unfortunately, the Chapter 13 bankruptcy case was dismissed because the brother could not make the mortgage or bankruptcy plan payments. The house was later sold at foreclosure sale.

State Court Motion to Dismiss:

Subsequently, the defendants in the state court personal injury case asked the judge to dismiss the case based upon the failure of the plaintiff/injured person to list the pending lawsuit as a “contingent asset” in his bankruptcy petition. Substantial New York case law, going all the way up to the New York State Court of Appeals, has held that the failure to list the asset in the petition is fatal to the continuance of the personal injury case – every case on point says the injured person’s lawsuit gets dismissed without any recovery, no matter how grave the injury.

Uncharted Course to Be Taken:

Faced with this apparently insurmountable challenge, Richard A. Klass, Your Court Street Lawyer, was brought in to help save the man’s personal injury case. The strategy developed was to return to the Bankruptcy Court to seek to amend or fix the petition to reflect the existence of the personal injury claim. This was trail-blazing!

In determining that the debtor/personal injury plaintiff should be permitted to amend his bankruptcy petition to list the claim as an asset, Chief Bankruptcy Judge Craig stated: “This Court has not found any statute, rule or precedent that provides that a debtor’s right to amend expires upon dismissal of the case, or that the order dismissing the case must be vacated before schedules, statements or lists may be amended.” In re Severius Raggie, New York Law Journal 7/9/2008.

Interplay between “Closed” and “Closed”:

At first glance, the court noted that the bankruptcy case was marked “closed.” The judge was skeptical that an amendment to the petition could be made because Bankruptcy Rule 1009 provides that “a voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed.”

However, in relying upon the decision in In re Critical Care Support Services, 236 BR 137, it was pointed out that a case can only be “closed” when the assets of the bankruptcy estate have been fully administered. The term “closed,” as used in Bankruptcy Rule 1009 and Bankruptcy Code §350, does not encompass “dismissed” cases. Thus, an Order dismissing a case accomplishes a completely different result than an Order closing it would; essentially, upon dismissal of a bankruptcy case, all of the debtor’s rights in his property revert back to him.

Separately, the court also held that, as part of accepting the debtor’s amendment, it could reject the amendment when “the facts and circumstances presented indicate that the amendment was filed in bad faith, fraudulent or prejudicial.” Citing to In re Nye, 250 BR 46. In this case, Judge Craig held that there was no evidence of bad faith, fraud or prejudice; the state court defendants’ argument that granting the amendment would “reward” the debtor was not persuasive. In the absence of any evidence that the debtor deliberately omitted the personal injury claim from his schedules to defraud his creditors, permitting the debtor to amend did not reward wrongdoing.

After Judge Craig granted the debtor’s motion to amend his bankruptcy petition, the state court defendants in the personal injury lawsuit withdrew their motion to dismiss the case. The plaintiff’s case is now winding through the New York State Supreme Court towards a trial, in which his serious injuries will be considered by a jury.

Richard A. Klass, Esq.

©2008 Richard A. Klass. Art credits: Selbstporträt mit fünfzig Jahren, by Giovanni Fattori, 1884; Porträt der dritten Ehefrau, by Giovanni Fattori, 1905. Newsletter marketing by The Innovation Works, Inc.

R. A. Klass
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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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R. A. Klass
Your Court Street Lawyer

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Real Estate

Don’t Give Me a Black Russian!

Breach of Fiduciary Duty:

The Estate was “Personally Affected” by Discrimination:

“ Reverse Holdover ”:

Making Sure the Guarantor is a “Good Guy.”

Motion for Summary Judgment:

Restriction on Assignment of Lease:

Enforceability of Personal Guaranty:

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

Definition of Surplus Moneys:

Fighting over $401,452.59 Surplus Moneys:

Amendment to Bankruptcy Petition Worth Millions!

State Court Motion to Dismiss:

Uncharted Course to Be Taken:

Interplay between “Closed” and “Closed”:

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

Automatic Stay Operates as a “Stop” Sign:

Searching for Details:

Validation of Post-Petition Foreclosure Sale:

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