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Foreclosures—Since Subject Property Involved Investment Property Owned by an LLC, CEEFPA Is Inapplicable—Hardship Declaration Cannot Stop Foreclosure

New York Law Journal

This decision involved an action to foreclose a mortgage. The plaintiff had previously moved for summary judgment of foreclosure. That motion was granted upon the defendants’ default. The defendants thereafter moved to vacate their default. That motion was denied as “wholly without merit.” The plaintiff then moved for a judgment of foreclosure and sale. A defendant, as “purported mortgagor of the subject premises” (premises) filed a “hardship declaration” pursuant to the COVID-19 Emergency Eviction & Foreclosure Prevention Act, as amended effective Sept. 2, 2021 (CEEFPA).

The plaintiff rejected the hardship declaration on the ground that the “owner and mortgagor” of the premises is a limited liability company not a “natural person.” The plaintiff then sought a declaratory judgment that CEEFPA is inapplicable to the subject case.

The defendant LLC (LLC) had been formed in March 2018. An individual defendant (“A”) is the sole member of the LLC. In April 2019, the LLC purchased the subject premises. The mortgage identified the borrower as the LLC.

As part of “A’s” application for financing the purchase of the premises, “A” executed an “affidavit of occupancy,” which stated that the premises was “investment property—Not owner occupied. Purchased as an investment to be held or rented.” “A” had also executed in connection with the mortgage financing a “business purpose affidavit,” which stated that the “extension of credit in the above transaction is solely for business or commercial purpose. The loan is not extended primarily for personal, family or household use.”

Additionally, “A” executed an “occupancy affidavit” which provided that the premises will be “investment property. The property will not be occupied or claimed as a primary or secondary residence by any of the borrowers, and may produce revenue. Each borrower(s) now owns, resides, uses and claims another property or properties as borrower(s)’s primary residence.”

Notwithstanding the foregoing documents, “A” “in her individual capacity and not as a member of (the LLC)…signed a ‘mortgagor’s declaration of COVID-19 related hardship’” identifying herself as the mortgagor of the premises.

The court observed that CEEFPA, Part C, Subpart B, Section 1 provides:

“This section shall apply to any action to foreclose a mortgage relating to residential real property, provided the owner or mortgagor of such property is a natural person, regardless of how title is held, and owns ten or fewer dwelling units, whether directly or indirectly. The ten or fewer dwelling units may be in more than one property or building as long as the total aggregate number of ten units includes the primary residence of the natural person requesting such relief and remaining units are currently occupied by a tenant or are available for rent.”

Section 5 thereof provides “if the mortgagor provides a hardship declaration to the foreclosing party…the proceeding shall be stayed until January 15, 2022.”

The court found that the “owner and mortgagor of the…premises is not (“A”), but rather (the LLC).” Thus, the plaintiff argued that “A” may not invoke CEEFPA, because “she is neither owner or mortgagor of the premises, and the owner/mortgagor LLC is not a ‘natural person.’”

After reviewing the Limited Liability Company Law, the court stated that a “limited liability company such as (a LLC) is not a ‘natural person.’” The court inter alia, cited a prior court decision which held “that where the owner and mortgagor of mortgaged premises is a limited liability company, a member of the LLC residing therein may not avail herself of CEEFPA, Part C because the owner/mortgagor is not a ‘natural person’ as the statue specifically requires; and that result obtains even if the LLC member had executed a personal guarantee of the mortgage loan.”

After reviewing prior case law involving different statutes, the court opined that the “A” “was certainly entitled to avail herself of the benefits of the limited liability company law in acquiring title to the…premises, but, having done so, she may not seek CEEFPA protection that was specifically intended to benefit owners/mortgagors of residential property who are ‘natural persons.’”

The court further reasoned that “CEEFPA, unlike Banking Law §6-1, contains no escape hatch for a natural persons who, whether through fraud, subterfuge or other inducement, utilize a limited liability company to borrow money and acquire title to residential property.” Based on “A” sworn statements that the loan “was solely for business or commercial purposes” and that the “home will not be occupied or claimed by her as a primary or secondary residence,” the court held that “A” “may not invoke the protections of CEEFPA….” Thus, the court held that the hardship declaration was “invalid” and declined to stay the foreclosure action.

Comment: Adam Leitman Bailey, counsel for the plaintiff, asserted that this is the first New York case where a foreclosure was not stayed on the grounds that a “hardship application” involved an investment property.

Wilmington Savings Fund Society, FSB v. 6 Turtle Knoll, LLC, Pamela B. Lee, Supreme Court, Orange County, Case No. EF001634-2020, decided Nov. 16, 2021. Bartlett, J.

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