E D I T O R S Magda L. Cruz Aaron Shmulewitz Kara I. Rakowski Belkin Burden Wenig & Goldman, LLP UPDATE JUNE 2011 VOLUME 11 Inside This Issue LITIGATION UPDATE Stipulations of Settlements in Non-Payment Housing Court Proceedings...1,2 Mortgagors and Bankruptcy What Happens When a Mortgagor Fails to List a Pre-Petition Claim Against His Lender in a Bankruptcy Filing...1,2 ADMINISTRATIVE UPDATE A 421-a Refresher: Lease Riders and Collection of the 2.2% Rent Increase...3 TRANSACTIONAL UPDATE Home is Where the Guarantor Is...4 NOTABLE ACHIEVEMENTS...5 CO-OP / CONDO CORNER...6 CASES AND TRANSACTIONS OF NOTE...7 LITIGATION UPDATE STIPULATIONS OF SETTLEMENTS IN NON-PAYMENT HOUSING COURT PROCEEDINGS LITIGATION UPDATE By Martin Meltzer A stipulation of settlement is a written agreement entered into by the parties in open court. It is a useful tool in a pending non-payment case. All stipulations are required under Real Property Actions and Proceedings Law to be approved by the court. Most non-payment proceedings are resolved by stipulations. Although there is no empirical accounting, it is safe to estimate that at least 95% of all non-payment cases are settled by stipulation. Stipulations offer the parties a fairly quick and less expensive way to initially resolve the rent dispute. The benefits of a stipulation include, but are not limited to saving money on legal fees for court appearances (not settling the case and going to trial can take several court appearances before seeing a trial judge and several months of delay); litigation strategy and finality; taking uncertainty out of the litigation process and getting the tenant to commit to a payment plan to pay the owner the rent and/or additional rent arrears. Generally, there are three types of stipulations. The first is a settlement with a payment plan and for the right of continued on page 2 MORTGAGORS AND BANKRUPTCY WHAT HAPPENS WHEN A MORTGAGOR FAILS TO LIST A PRE-PETITION CLAIM AGAINST HIS LENDER IN A BANKRUPTCY FILING save, or at least temporarily delay, the foreclosure sale of their home. By William M. Rifkin and David R. Brand In today s turbulent real estate market, it is not uncommon for mortgagors, on the eve of the foreclosure sale of their home, to file for bankruptcy protection. Mortgagors opt to file for bankruptcy be it Chapter 7, a liquidation of a mortgagor s assets, or Chapter 13, a reorganization of those assets in an effort to try and Under the U.S. Bankruptcy Code, a debtor is required to include all pre-bankruptcy petition causes of action that he has or believe he may have against his lender in their bankruptcy filing. For example, if a mortgagor believes its lender committed a violation under the Truth in Lending Act ( TILA ), the Real Estate Settlement Procedures Act ( RESPA ) or have committed common law fraud in their dealings, it must be listed in the bankruptcy petition as an asset of the debtor with an estimated valuation. continued on page 2 Belkin Burden Wenig & Goldman, LLP 270 Madison Avenue New York, NY 10016 Tel 212.867.4466 Fax 212.867.0709 Attorney Advertising 1
LITIGATION UPDATE STIPULATIONS OF SETTLEMENTS IN NON-PAYMENT HOUSING COURT PROCEEDINGS continued from page 1 the owner to bring the case back to court if the tenant does not pay the owner the agreed upon arrears and future rent as promised in the stipulation. This type of settlement does not provide for a money judgment, judgment of possession or warrant of eviction. For a tenant, this is the least severe stipulation. A default requires the owner to bring the case back to court by making a motion (a written request to the court asking for judgments to be entered and a warrant of eviction issued). Some judges require the stipulation without the judgments and warrant. This is especially the case when a tenant has paid most of the arrears sued for before the case goes to court or the tenant is in court for the first or second time in an otherwise blemish free tenancy. If there are repair conditions in the apartment that the owner has been previously made aware of and the conditions are dangerous to the safety, health or welfare of the tenant (lack of heat or hot water, for example) most judges will still allow the case to be settled, but with no judgments or warrant of eviction. The second type of stipulation provides for a money judgment for the amount of the arrears, a judgment of possession and the issuance of the warrant of eviction stayed during the tenant s compliance with his/her agreement to pay under the payment plan in the stipulation. With this type of settlement, the warrant of eviction can be ordered only after the tenant defaults in any of the payments he/she promised to pay. If the amount is ultimately paid before the warrant issues, the eviction cannot be scheduled, but the issued warrant may be used for a later default. In other words, ordering the warrant does not have to be done again and remains in place for the duration of the stipulation s payment plan. The third type of stipulation provides for a money judgment for the rent arrears owed, the entry of a judgment of possession and the immediate or forthwith issuance of a warrant of eviction. Under this type of stipulation the warrant can be ordered right away. If the tenant does not make a payment when due and remains unpaid when the warrant issues, the tenant s eviction can be scheduled without having to make a motion to the court as in the first example or order the warrant upon a default as in the second example. It is preferable for owners to obtain the results in this third example because it hastens the time in which an eviction can occur after a default by the tenant. The above stipulations are general overviews of the ways cases are settled. There are various circumstances that can occur in each and every non-payment case that gage what we can accomplish for our clients in court and which of the three stipulations we can employ. The variables that we encounter occur on a case by case basis. To name a few variables that we have to be aware of are the judges predilections, the amount of the rent arrears, any prior non-payment history of the tenant, any prior repairs that an owner has not made, the age and well being of the tenant and the length of the tenancy. Navigating through the many obstacles that we will encounter in court, becoming familiar with the tenants history and the goals our clients want to achieve take team work between our clients and the BBWG attorneys from the time we start the nonpayment case through the time that we enter into a stipulation of settlement. Martin Meltzer is the head of BBWG s nonpayment department and a partner in the Firm s Litigation Department. LITIGATION UPDATE MORTGAGORS AND BANKRUPTCY continued from page 1 The reason for this requirement is evident. By filing a bankruptcy petition, a debtor transfers all of his assets, including any causes of action, to the bankruptcy estate. If a claim or potential claim is not listed in the bankruptcy petition, it constitutes an admission by the debtor that no claim exists. (Crawford v. Franklin Credit Mgmt. Corp. et al,) 2011 WL 1118584 (S.D.N.Y. Mar. 23, 2011), illustrates this situation. The Court held that the plaintiff s action for purported TILA, RESPA and other alleged violations by the lender was barred because the debtor failed to list these purported claims on her previously filed and dismissed bankruptcy filings. The Court held, [d]ue to Plaintiff s failure to raise these claims in her 2006 bankruptcy petitions, she many not assert this in this action, and therefore Defendants motions for summary judgment are granted. It is in a lender s best interest to review previous bankruptcy filings of mortgagors who are asserting counter-claims for alleged TILA, RESPA or other violations in a foreclosure action. If the mortgagor failed to list these claims as assets in its bankruptcy petition, they will be barred from alleging these claims as counter-claims in the lender s foreclosure action or in a separate suit against the lender. William M. Rifkin (wrifkin@bbwg.com) is a partner, and David R. Brand (dbrand@bbwg. com) is an associate, in the Firm s Litigation Department. 2
ADMINISTRATIVE LAW UPDATE A 421-a REFRESHER: LEASE RIDERS AND COLLECTION OF THE 2.2% RENT INCREASE By Alyssa Sandman The 421-a tax incentive program was created in 1971 to stimulate construction of residential buildings throughout New York City. The program granted phased-out tax exemptions in 10, 15, 20 and 25-year increments to eligible properties and required that buildings constructed under the program contain a certain number of affordable units. As a condition to receiving the 421-a tax exemption the recipient properties must also become subject to rent stabilization. After the 421-a exemption period expires, rental apartments formerly subject to rent stabilization may be deregulated if the owner follows the correct procedure. The legislation which created the 421- a program expired in December 2010. However, due to the length of the various exemption periods offered under 421-a, many properties throughout New York City are still receiving a 421-a tax exemption and remain subject to the program s rules. Most owners of 421-a rental properties are aware of the basic procedural requirements for ensuring that an apartment can be deregulated upon expiration of the 421-a exemption period: Each tenant who takes occupancy during the exemption period must receive a 421-a Rider in the initial lease and in all renewal leases issued during the exemption period ( 421-a Rider ); The 421-a Rider must be typed in 12-point font; The 421-a Rider must notify the tenant that the unit shall be subject to deregulation upon the expiration of the tax exemption; and The 421-a Rider must notify the tenant of the approximate date on which the tax benefits are to expire. At the expiration of the exemption period, if the tenant in occupancy received a 421- a Rider with each lease and renewal lease issued during the exemption period, the apartment becomes deregulated when the last lease commencing during the exemption period expires. If the owner fails to include a 421-a Rider in any lease, the tenant in occupancy at the expiration of the exemption period is entitled to rent stabilized protection for the duration of his or her tenancy, and the apartment may not be deregulated until (1) the tenant s income and the apartment s rent make the unit eligible for High Rent/ High Income Deregulation (the owner must obtain an order of deregulation from DHCR); or (2) the tenant vacates. Under current law, owners who receive 421-a (or J-51) tax benefits are precluded from deregulating apartments under Luxury continued on page 4 3
ADMINISTRATIVE LAW UPDATE A 421-a REFRESHER: LEASE RIDERS AND COLLECTION OF THE 2.2% RENT INCREASE continued from page 3 Deregulation while receiving such benefits. Owners of 421-a rental properties are also entitled to collect an annual rent increase of 2.2% during certain years of the exemption period, separate from the allowable Rent Guidelines renewal increases. The 2.2% increase is intended to offset the reduction of benefits during the phase-out period of the exemption. The calculation of the 2.2% increase under 421-a and the date on which the owner may begin collecting the increase varies from building to building and from apartment to apartment. Many owners are unaware of the intricacies involved in collection of the 2.2% increase. In order to collect the 2.2% increase, the tenant must receive notice of the owner s right to collect the increase in his or her lease and each renewal lease. Notification is generally given by way of the 421-a Rider. The year in which the owner may begin collecting the 2.2% increase depends on the length of the property s 421-a exemption period. o 10-year exemption: The owner may begin collecting the 2.2% increase in the first year of the exemption period after completion of construction. o 15-year exemption: The owner may begin collecting the 2.2% increase in the 11th year of the exemption after completion of construction. o 20-year exemption: The owner may begin collecting the 2.2% increase in the 13th year of the exemption after completion of construction. o 25-year exemption: The owner may begin collecting the 2.2% increase in the 21st year of the exemption after completion of construction. The rent upon which the 2.2% increase is calculated is the actual rent being charged during the first year that the 2.2% increase may be charged. For example, for a building receiving a 20-year exemption, the 2.2% increase would be calculated based upon the rent in effect during the 13th year of the exemption after completion of construction. Where the legal rent is $1,000, but the tenant is paying a preferential rent of $800, the 2.2% would be calculated based upon a rent of $800 the actual rent being charged. The calendar date on which the 2.2% becomes collectable for a particular unit depends on the anniversary date of the first lease executed for the unit. For example, for a building receiving a 20-year exemption, the owner may begin collecting the increase in the 13th year of the exemption, but the calendar date of the 13th year (and each year thereafter) on which the increase becomes collectable depends on the date the very first lease for that particular unit was executed. Where the first lease for the unit commenced on September 1, the tenant occupying the unit in the 13th year cannot be charged the 2.2% increase until September 1 of the 13th year, and is subject to additional 2.2% increases on September 1 of the subsequent years of the exemption period. Therefore, the collection date may not coincide with a tenant s lease commencement date, and the collection date will be different for every tenant. The 2.2% increase is not compounded from year to year. Rather, the increase remains constant. For example, for an apartment with a rent of $1,000 during the first year that the increase may be charged, the constant increase figure would be $22, and the owner would be entitled to an increase of $22 in the first year of collection, $44 in the second year, $66 in the third year and so on. The 2.2% increase cannot be included in the Legal Regulated Rent for the apartment. For example, if the Legal Regulated Rent is $1,000 and the 2.2% increase is $22, the Rent Guidelines Increase for a renewal lease would be applied to $1,000, and not $1,022. No more than one 2.2% increase may be charged or collected in each collectable year, regardless of the number of lease renewals or new leases executed for a particular unit in a single year. This also means that if an owner failed to collect the 2.2% increase in a prior year, the owner cannot begin to collect the lapsed increase along with another 2.2% increase in a subsequent year. Upon expiration of the 421-a exemption period, an owner may continue to collect the 2.2% increases which became collectable during the exemption period, but no new 2.2% increases may be collected once the exemption period expires. It is important that owners confirm that all 421-a tenants receive a 421-a Rider with every lease and that such rider adequately complies with all legal requirements. Owners should also verify that any 2.2% increases collected under the 421-a program are collected on the appropriate dates. Faulty administration of the 2.2% increase may subject owners to rent overcharge liability, and failure to properly notify tenants with a 421-a Rider may unnecessarily subject an apartment to rent stabilization for years beyond the expiration of the 421-a benefits. Alyssa Sandman (asandman@bbwg.com) is an associate in the Firm s Administrative Law Department. 4
TRANSACTIONAL UPDATE HOME IS WHERE THE GUARANTOR IS By Craig Ingber The phrase the devil is in the details certainly applies to circumstances where a default under a lease or a loan leads to circumstances where an owner elects to seek recovery of its monetary loss from a guarantor. While institutions and owners engaged in large transactions go to great lengths to review the credit and financial standing of prospective guarantors, smaller owners often do not put their guarantors through an equally rigorous vetting process. Oftentimes, guarantors do not have financial statements and/or accountants to provide financial information. Consequently, owners are often forced to make a determination on whether to rent to a tenant, or to loan money to a borrower, based primarily upon their personal interactions with the individuals and/or upon their instincts. In any case, it is always advisable to obtain copies of at least one of the following from a guarantor: tax returns; bank statements; credit checks; driver s license; passport or other form of officially issued identification. Such identification can help to confirm basic information regarding such individuals and may be invaluable when a default results and one seeks to exercise its rights under a guaranty. Too often, the home address provided by the guarantor is in fact a business address which is always subject to change or may not be current at the time it is provided and therefore can result in the guarantor avoiding service of process. Retaining copies of the due diligence documents referred to above and making occasional inquiries into the continued accuracy of the guarantor s home address throughout the lease term is a good way of protecting yourself and your rights vis á vis the guarantor. For these reasons, it is important to check with your counsel when engaging in a transaction to ensure that you have taken the time to gather this information from a proposed guarantor. Craig Ingber (cingber@bbwg.com) is a partner in the Firm s Transactional Department. BBWG Notable Achievements SHERWIN BELKIN, a partner in BBWG s Administrative Law and Appeals Departments, responded to an inquiry in the May 8 Sunday Real Estate Section of the New York Times regarding the manner in which a landlord is permitted to calculate rent increases to rent stabilized tenants based on major capital improvements. CRAIG INGBER, a partner in BBWG s Transactional Department, was a panelist in a May 24 continuing legal education seminar on Aspects of Due Diligence When Acquiring Residential Property, co-sponsored by the Community Housing Improvement Program and the New York County Lawyers Association. JEFFREY S. LEVINE, a partner in BBWG s Litigation Department, authored an article in the March 30 edition of Real Estate Weekly on landlords rights with regard to code-violative alterations by commercial tenants. The article was also published, in an expanded form, in the June/July issue of The Mann Report. 5
Co-op Condo Corner By Aaron Shmulewitz Aaron Shmulewitz heads the Firm s co-op/condo practice, consisting of more than 300 co-op and condo Boards throughout the City, as well as sponsors of condominium conversions, and numerous purchasers and sellers of co-op and condo apartments, buildings, residences and other properties. If you would like to discuss any of the cases in this article or other related matter, you can reach Aaron at 212-867-4466 or (ashmulewitz@bbwg.com). AS IS CLAUSE IN BUILDING SALE CONTRACT BARS BUYER S CLAIM OVER UNDISCLOSED BEDBUG CONDITION 85-87 Pitt Street, LLC v. 85-87 Pitt Street Realty Corporation Appellate Division, 1st Department COMMENT While not involving a co-op or condo, the case is instructive for apartment buyers as well. The Court emphasized that the buyer had an opportunity to inspect prior to contract and could have discovered the bedbug condition through due diligence. The Court stated that the bedbugs were not a condition so peculiarly within the seller s knowledge as to require affirmative disclosure by the seller. OFFICE BUILDING OWNER NOT LIABLE TO TENANT S EMPLOYEES FOR BEDBUG BITES Clark v. Beacon Capital Partners, LLC Supreme Court, New York County COMMENT The Court emphasized that the building owner had complied with all statutory obligations applicable to an office building, and had even gone further, like having its exterminator inspect employees homes to try to pinpoint the source of the continuing infestation. The Court indicated that owners of residential buildings, including co-ops and condos, are held to a higher standard and could be held liable for the claims asserted here. CO-OP NOT LIABLE TO SHAREHOLDER FOR NOISE EMANATING FROM ADJOINING APARTMENT, SINCE CO-OP NOT THE CAUSE OF THE NOISE Sherlock v. 20 East 9th Street Owners Corp. Supreme Court, New York County COMMENT This curious decision did not indicate whether the plaintiff alleged a breach of the warranty of habitability. The Court held that the plaintiff could still sue the alleged noisemaking neighbors next door. CO-OP SELLER CANNOT PROVE ALLEGATIONS THAT REJECTED BUYER DELIBERATELY SABOTAGED BOARD INTERVIEW, SO BUYER ENTITLED TO REFUND OF DEPOSIT Cetindogan v. Schuyler Supreme Court, New York County COMMENT The seller, who was not present at the Board interview, claimed that an unnamed Board member told him of the buyer s statements, which were allegedly perceived to be designed to engineer a Board rejection. As was the case here, such a claim is not sustainable absent evidentiary proof. CONDO BOARD ACTED APPROPRIATELY IN PLANNING AND EFFECTING REPAIR OF FIRE-DAMAGED UNIT, AND IS NOT LIABLE TO UNIT OWNER Katz v. Board of Managers and American Insurance Company Appellate Division, 1st Department CO-OP BUYERS DELAY IN SCHEDULING CLOSING UNTIL AFTER THEIR LOAN COMMITMENT EXPIRED ENTITLED SELLER TO SCHEDULE TIME-OF-ESSENCE CLOSING; BUYER S FAILURE TO CLOSE THEN WAS A BREACH, ENTITLING SELLER TO KEEP DEPOSIT Chaves v. Kornfeld Appellate Division, 1st Department COMMENT The facts as recited in the decision implied repeated bad faith conduct by the buyers. CO-OP BOARD CAN REFUSE TO ALLOW SHAREHOLDER TO OBTAIN HOME EQUITY LOAN AGAINST APARTMENT Kikis v. 1045 Owners Corp. Supreme Court, New York County COMMENT In dismissing the shareholder s suit, the Court held that the Board s apparent policy to not allow home equity loans was protected under the business judgment rule, and did not constitute disparate treatment, even though the Board s alleged policy was not in writing. Despite the ruling, Boards would be well-advised to ensure that any such policies are, in fact, written. BROKER ENTITLED TO COMMISSION FROM SUCCESSFUL CO- OP SELLER, DESPITE BROKER HAVING SHOWN BUYER OTHER APARTMENTS IN BUILDING Douglas Elliman LLC v. Tretter Appellate Division, 1st Department COMMENT The Court minimized various statements that the broker had allegedly made against the seller s interests, and emphasized that the broker did what it was engaged to do find a buyer, who closed on the purchase. 6
CASES AND TRANSACTIONS OF NOTE JOSEPH BURDEN, co-chair of BBWG s Litigation Department, and LISA GALLAUDET, an associate in the department, successfully represented a lower Manhattan condominium in obtaining an arbitration award totaling approximately $337,000 against a commercial unit owner in the condominium, over the issue of the commercial unit owner s obligation to pay its share of a building-wide assessment. The arbitrator s award included $50,000 in legal fees. 7
www.bbwg.com New York Office 270 Madison Avenue New York, NY 10016 Tel 212.867.4466 Fax 212.867.0709 Connecticut Office 495 Post Road East, 2nd Floor Westport, CT 06880 Tel 203.227.1534 Fax 203.227.6044 Please Note: This newsletter is intended for informational purposes only and should not be construed as providing legal advice. This newsletter provides only a brief summary of complex legal issues. The applicability of any or all of the issues described in this newsletter is dependent upon your particular facts and circumstances. Prior results do not guarantee a similar outcome. Accordingly, prior to attempting to utilize or implement any of the suggestions provided in this newsletter, you should consult with your attorney. This newsletter is considered Attorney Advertising under New York State court rules. Belkin Burden Wenig & Goldman, LLP 270 Madison Avenue New York, NY 10016