NY foreclosure ban does not apply to shell companies, judge rules

Decision against owner who declared hardship paves way for foreclosures on mortgages held by LLCs

Tri-State /
Nov.November 19, 2021 07:00 AM
 Adam Leitman Bailey with 6 Turtle Knoll in Monroe (Adam Leitman Bailey Law Firm, Trulia)

Adam Leitman Bailey with 6 Turtle Knoll in Monroe (Adam Leitman Bailey Law Firm, Trulia)

As the pandemic drags on, New York’s foreclosure moratorium is starting to crack.

On Nov. 12, an Orange County judge ruled that Wilmington Savings Fund could foreclose on and sell the home at 6 Turtle Knoll in Monroe.

The ruling came as a surprise, given that its owner had filed a hardship declaration, which is supposed to keep people in their homes even if they fail to make their mortgage payments.

But in this case, the borrower wasn’t a person: it was a corporation.

In March 2018, Pamela Lee established 6 Turtle Knoll LLC. The following year, she took out a $332,500 mortgage to buy the property, listing the shell company as the borrower. Further, in her application for the loan, Lee specified that 6 Turtle Knoll was an investment property and wouldn’t be her actual home.

Wilmington Savings Fund bought the note in May 2019, three months before Lee allegedly stopped paying her bills. The lender moved to foreclose in February 2020, and a court approved the motion in July. But last month, in an attempt to pause the process, Lee filed a Covid hardship declaration. This time, she listed herself as the mortgagor.

Taking out a mortgage through an LLC can grant property owners certain protections, but as the LLC giveth, the LLC taketh away. Since Lee’s mortgage was technically borrowed by the shell company, the judge ruled that it wasn’t subject to the state’s emergency foreclosure moratorium, which is designed to protect people, not corporations.

“This wise, thoughtful decision by Judge Bartlett hopefully will be followed statewide,” said Adam Leitman Bailey, the attorney for Wilmington Savings Fund. Lawyers for Lee did not respond to requests for comment.

The decision appears to be one of the first times a court has nullified a homeowner’s Covid hardship declaration since the U.S. Supreme Court struck down parts of New York’s temporary ban on evictions and foreclosures on Aug. 12, opening the door for landlords and mortgagors to challenge the self-certifications in court.

But the courts began chipping away at foreclosure protections as early as May. A state judge on May 14 allowed First Republic Bank to foreclose on a condo at 444 East 57th Street, as “neither the owner nor the mortgagor of the premises is a ‘natural person,’” the order read.

Ten days later, a secondary mortgage lender received permission to foreclose on a condo at the Plaza despite the owner’s hardship declaration, as the technical owner and mortgagor was an LLC.

It’s not all bad news for borrowers: the state has received nearly $539 million in federal aid to be distributed to homeowners at the greatest risk of foreclosure. The court decisions, however, could impact investors, who have scooped up record numbers of homes in recent months.





    Related Articles

    arrow_forward_ios
    Clockwise from top left: Eric and Bridget Elkin, Diane Mollica, Liz and Lisa Gillooly and Sarah Frigo (Compass)
    Compass aims to grow its North Fork agent count fivefold
    Compass aims to grow its North Fork agent count fivefold
    Southampton Village mayor Jesse Warren (Getty Images, iStock, Illustration by Kevin Cifuentes for The Real Deal)
    Southampton Village allows owners to collect summer’s rent upfront
    Southampton Village allows owners to collect summer’s rent upfront
    (Top) 1580 Meadow Lane in Southampton NY and (Bottom) 2056 Montauk Highway in Amagansett NY (Zillow)
    A tale of two oceanfront Hamptons homes
    A tale of two oceanfront Hamptons homes
    Famed Architect Thierry Despont and 320 Majors Path in Southampton NY (Getty Images, iStock, Sotheby’s International Realty)
    Famed architect lists Southampton estate for $23M
    Famed architect lists Southampton estate for $23M
    Parkview’s Paul Rahimian and 1800 Avenue at Port Imperial (Parkview Financial, Handel Architects, Illustration by Kevin Cifuentes for The Real Deal)
    Chinese developer Hongkun faces foreclosure on luxury NJ condo
    Chinese developer Hongkun faces foreclosure on luxury NJ condo
    Richard Gere and 81 Lyndel Road in Pound Ridge (Getty Images, Ginnel Real Estate)
    Buyer found for Richard Gere’s $28M Westchester estate
    Buyer found for Richard Gere’s $28M Westchester estate
    Former Hudson Common Council member Rebecca Wolff (Facebook, iStock, DesignStudio/Public domain/Wikimedia Commons, Illustration by Kevin Cifuentes for The Real Deal)
    Airbnb listing backfires on Hudson Valley woman
    Airbnb listing backfires on Hudson Valley woman
    7 Madison Avenue in Park Ridge, Bergen County with Veris Residential CEO Mahbod Nia and James Gandolfini (LinkedIn, Realtor.com, Getty)
    Veris buys “Sopranos”-themed North Jersey apartments for $130M
    Veris buys “Sopranos”-themed North Jersey apartments for $130M
    arrow_forward_ios

    The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

    Loading...