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Anyone who purchases mortgages under foreclosure should pay attention to a recent case decided by the New York State Supreme Court. The decision provides defaulting mortgagors with a significant defense to a foreclosure action that may give pause to prospective buyers of such mortgages.
The action was brought in New York County, in FTBK Investor II LLC, as Trustee for NY Brooklyn Investor II Trust 1 v. Joshua Management LLC, Index No. 810164/11. The plaintiff in the action, Joshua Management, LLC, gave a mortgage and note in 2005 to Washington Mutual Bank, F.A. (“WaMu”) to secure a mortgage covering property located in Manhattan. Several years later, in 2008, WaMu was seized by the FDIC and placed into receivership. The FDIC immediately transferred all of WaMu’s loans to JPMorgan Chase & Co. (“Chase”). Sometime in 2010, the borrower defaulted on the mortgage and a foreclosure action was instituted in 2011. Thereafter, the mortgage and note were transferred by Chase to N.Y. Brooklyn Investor II, LLC. FTBK was substituted as plaintiff in the action.
In response to the plaintiff’s motion for summary judgment, the defendant, Joshua, raised a defense that the lender had not demonstrated a default because FTBK did not have personal knowledge of the alleged default. Joshua attacked as insufficient the affidavit presented by FTBK’s managing member that personal knowledge of the default was obtained by a review of the books and records that were maintained in the ordinary course of Chase’s and FTBK’s business. The court agreed with the defendant, finding that the plaintiff’s acquisition of the mortgage and note long after the default prevented FTBK from having personal knowledge of the default, and that FTBK’s subsequent review of Chase’s books and records did not constitute personal knowledge on the part of FTBK. The court further found that FTBK could not maintain that Chase’s book and records were “kept in the ordinary course of business” and therefore admissible as Chase’s business records because no affidavit had been obtained from a Chase employee that stated that those records were in fact kept in the ordinary course of Chase’s business. As a result, FTBK's motion for summary judgment was denied without prejudice with leave to renew.
Since it is unlikely that a purchaser of defaulted mortgage loans will have the level of personal knowledge required under this decision, a prospective purchaser of such a loan should condition the purchase upon the seller’s production of an affidavit demonstrating personal knowledge of the default at the time of the default. This may be difficult if the seller was not itself the holder of the mortgage at time the foreclosure action was commenced. This case may be appealed, making this issue moot, however, until such time, obtaining such an affidavit should not be ignored.
Transferring real property before filing a bankruptcy petition is a risky proposition given creditor’s rights to set aside certain transfers. A recent case adjudicated before the U.S. Bankruptcy Court Western District of New York is apparently a case of first impression, and demonstrates the hazards of pre-petition transfers of real property in New York. In re Tina M. Panepinto, Case No. 12-11230K, the debtor Panepinto transferred a half interest in her home to her husband in 2008, with the intent of avoiding a money judgment docketed against her. Panepinto filed a Chapter 13 bankruptcy proceeding in 2012, seeking to have a judgment creditor’s lien set aside under Section 522(f) of the Bankruptcy Code, which permits a judgment to be removed if the lien impairs an exemption that is permitted under state law. In this case, Panepinto argued that the property being her homestead was exempt under New York’s bankruptcy laws and therefore her transfer to her husband could not be deemed fraudulent.
The court recognized that the vast majority of states granted an unlimited homestead exemption under their state bankruptcy laws that barred judgment creditors from enforcing their judgments against the debtor’s homestead. So a transfer of a homestead in these jurisdictions could not be set aside.
The court turned to New York’s laws under the Debtor and Creditor Law (“DCL”). It focused on the treatment of exempt property in the DCL, specifically Section 276 of the DCL which states that, “Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, is fraudulent as to both present and future creditors.” Since the term “conveyance” as defined in the statute did not distinguish between exempt and non-exempt property, the Court found that the DCL’s fraudulent conveyance statute applied to transfers of exempt and non-exempt property alike.
It further recognized that New York’s homestead exemption was based on the value of the debtor’s equity in the homestead. Section 5206 of the CPLR allows a judgment debtor to claim a limited homestead exemption, the value of which is dependent upon the county where the homestead is located. The exemption value is $150,000 for the counties of New York, Kings, Queens, Bronx, Richmond, Westchester, Nassau, Suffolk, Rockland and Putnam. In the counties of Albany, Columbia, Dutchess, Orange, Saratoga and Ulster, the exemption is $125,000. The remainder of the counties in New York have an exemption of $75,000.
Based on its findings, the court denied Panepinto’s motion to set aside the judgment creditor’s lien.
As part of your spring cleaning, please remember to discard your outdated forms of the NYS TP-584 (Combined Real Estate Transfer Tax Return, Credit Line Mortgage Certificate, and Certificate of Exemption from the Payment of estimated Personal Income Tax). For conveyances of property in counties other than New York, Kings, Queens and Bronx, make sure that the form you are using bears a date of 4/13 in the upper left hand corner, instead of the previous date of 3/07. New forms may be obtained at nystaxforms@tax.ny.gov. If you have an outdated, but signed TP-584 for a transfer prior to April 15, most counties will accept the filing provided it is submitted by June 14, 2013. Transfers of property in the counties of New York City, except Richmond, are now using the updated TP-584 provided in ACRIS. However, the City Register will continue to accept the outdated forms until June 28, 2013.
The changes on the new TP-584 include the following:
Local transfer tax due on transfers of real property within the City of Yonkers is subject to a new payment deadline of seven days from the date of the delivery of the deed, down from the previous deadline of 30 days. To avoid the payment of interest and penalties, any transfer tax payment for a conveyance in Yonkers must be made promptly. Both grantor and grantee are liable for the payment of this tax. Although the Cities of Mount Vernon and Peekskill are also subject to the local transfer tax, the payment deadline for these cities remains at 30 days.
If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Anthony Chiellino at (212) 651-1200 or achiellino@prestitle.com.
Also, if there are any topics that you would like us to include in future newsletters, please feel free to e-mail us with suggestions at info@prestitle.com.
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