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Plaintiff Judgment-Creditor’s Action Under the Debtor Creditor Law to Recover Payment Made to a Limited Partner Time-Barred by Three-Year Statute of Limitations in the Revised Limited Partnership Act (RPLA)

In a detailed and fact-specified full-fledged opinion by Justice Acosta, in an action under the Debtor and Creditor Law (DCL), the First Department, determined plaintiff, a judgment creditor with an unpaid judgment against a partnership, could not reach a $425,000 payment made by the partnership to a limited partner. The court held the payment was not fraudulent, constituted a partnership distribution, and was subject to the three-year statute of limitations in the Revised Limited Partnership Act (RPLA), not the six-year statute of limitations in the Debtor and Creditor Law (DCL). Therefore, plaintiff’s action seeking the recover the payment was time-barred;

RLPA (Partnership Law) § 121-607 prohibits limited partnerships from making distributions “to a partner to the extent that, at the time of the distribution, after giving effect to the distribution, all liabilities of the limited partnership. . . exceed the fair market value of the assets of the limited partnership” (Partnership Law § 121-607[a]) … . A limited partner who knowingly receives a prohibited distribution is liable to the partnership in the amount of the distribution (§ 121-607[b]). However, “a limited partner who receives a wrongful distribution . . . shall have no liability under this article or other applicable law for the amount of the distribution after the expiration of three years from the date of the distribution” (§ 121-607[c]). … [T]he Limited Liability Company Law (LLCL) contains a similar limitation on distributions to members (LLCL §§ 102[i], 508[a]). Peckar & Abramson, P.C. v Lyford Holdings, Ltd., 2015 NY Slip Op 08363, 1st Dept 11-17-15

 

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Transfer of Assets to Qualify for Medicaid Constituted a Breach of the Defendants’ Contract with Plaintiff Continuing Care Retirement Community

The Third Department, in a full-fledged opinion by Justice Lynch, determined the defendants’ (the Yezzis’) transfer of funds in order to qualify for Medicaid constituted a breach of the contract with the plaintiff (GSV), a continuing care retirement community (CCRC), as well as a fraudulent transfer under the Debtor-Creditor Law:

… [T]he essence of the CCRC financial model requires a tradeoff between the resident and the facility, in which the resident must disclose and spend his or her assets for the services provided, while the facility must continue to provide those services for the duration of the resident’s lifetime even after private funds are exhausted and Medicaid becomes the only source of payment. With this long-term commitment, the facility necessarily must evaluate the financial feasibility of accepting a resident in the first instance.

Pertinent here, the contract provided that the Yezzis could “not transfer assets represented as available in [their] application to be a [r]esident of [GSV] for less than fair market value, unless the transfer [would] not impair [their] ability to pay [their] financial obligations to [GSV].” The contract further required the Yezzis to “make every reasonable effort to meet [their] financial obligations” to GSV and prohibited them from making “any transfers or gifts after actual occupancy, which would substantially impair [their] ability or the ability of [their] estate to satisfy [their] financial obligations to [GSV].” Further, the contract specifies that the financial information disclosed with their application was “a material part of this [contract], . . . [that was] incorporated as a part of this [contract].” Although, as defendants correctly contend, the contract does not affirmatively state that the Yezzis must expend the private resources identified with their application, it does expressly preclude the transfer of such resources without fair consideration.

Given the long-term nature of the contract, which expressly embraced the prospect of nursing facility care, we agree with Supreme Court that the admission agreement is supplemental to, and does not supercede, the contract. We recognize that, under the admission agreement, the Yezzis were required to “pay for, or arrange to have paid for by Medicaid, . . . all services provided by [GSV]” (emphasis added). We are not, however, persuaded by defendants’ interpretation that this disjunctive provision required plaintiff to accept Medicaid as an alternative payment source. Construed together, the contract and admission agreement are actually compatible in that the CCRC financial model anticipates that, upon depletion of a resident’s personal resources, Medicaid will be the ultimate source of payment — and plaintiff is contractually obligated to accept Medicaid while continuing to provide the same services. Consistently, addendum X to the admission agreement specifies that, “[i]t is the responsibility of residents, and those who assist them, to use the residents’ assets and income to pay the costs associated with their residency and health care.” Good Shepherd Vil. at Endwell, Inc. v Yezzi, 2015 NY Slip Op 08031, 3rd Dept 11-5-15

 

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Pleading Requirements for “Goods Sold and Delivered” Cause of Action Succinctly Explained

In affirming Supreme Court’s grant of summary judgment to plaintiff on its “goods sold and delivered” cause of action, the Fourth Department explained the pleading requirements:

… [P]laintiff’s complaint, with its attached invoices, satisfied the pleading requirements of CPLR 3016 (f) … . The invoices provided the requisite degree of specificity inasmuch as they permitted defendant ” to respond in a meaningful way on an item-by-item basis’ ” … . Each invoice set forth the date of the order, the specific items ordered and delivered, the quantity ordered and delivered, as well as the price per unit and the total price for the quantity ordered … . Defendant was thus required to indicate specifically in its verified answer “those items [it] dispute[d] and whether in respect of delivery or performance, reasonable value or agreed price” (CPLR 3016 [f]). Defendant failed to do so and, therefore, Supreme Court properly granted that part of plaintiff’s motion on the cause of action for goods sold and delivered … . Erie Materials, Inc. v Central City Roofing Co., Inc., 2015 NY Slip Op 07137, 4th Dept 10-2-15

 

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Fees Owed by Seller to “Financial Advisor” Hired by Seller to Facilitate the Sale Were Excluded from the Asset Purchase Agreement (APA)—Doctrine of “De Facto Merger” Did Not Apply in Absence of “Continuity of Ownership”

The First Department, in a full-fledged opinion by Justice Friedman, over a full-fledged dissenting opinion by Justice Manzanet-Daniels, determined that the buyer of a business (TBA Buyer) did not assume the seller’s (TBA Seller’s) obligation to pay a financial advisor (Fidus) hired by TBA Seller to find a buyer and facilitate a sale. The opinion focused on the precise language of the asset purchase agreement (APA) and held that any monies owed by TBA Seller to Fidus were excluded, by the terms of the APA, from the assets and liabilities TBA Buyer purchased. Much of the opinion addresses the arguments made by the dissent. With respect to the dissent’s argument that TBA Buyer assumed TBA Seller’s obligation to pay Fidus under the “de facto merger” doctrine, the majority wrote:

While the general rule is that, absent a merger or consolidation, an entity purchasing the assets of another entity does not thereby acquire liabilities of the seller not expressly transferred in the sale …, a purchase-of-assets transaction may be deemed to constitute a de facto merger between seller and buyer, even if not formally structured as such, under certain conditions … . We have recognized, however, that “the essence of a merger” … is the element of continuity of ownership, which

“exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation as the result of the successor’s purchase of the predecessor’s assets, as occurs in a stock-for-assets transaction. Stated otherwise, continuity of ownership describes a situation where the parties to the transaction become owners together of what formerly belonged to each'” … . * * *

… [U]nder New York law, continuity of ownership is “the touchstone of the [de facto merger] concept” and “thus a necessary predicate to a finding of de facto merger” … . The purpose of requiring continuity of ownership is “to identify situations where the shareholders of a seller corporation retain some ownership interest in their assets after cleansing those assets of liability” … . Stated otherwise, “[t]he fact that the seller’s owners retain their interest in the supposedly sold assets (through their ownership interest in the purchaser) is the substance’ which makes the transaction inequitable” … . By contrast, where a “buyer pays a bona fide, arms-length price for the assets, there is no unfairness to creditors in . . . limiting recovery to the proceeds of the sale — cash or other consideration roughly equal to the value of the purchased assets would take the place of the purchased assets as a resource for satisfying the seller’s debts” … . Thus, “allowing creditors to collect against the purchasers of insolvent debtors’ assets would give the creditors a windfall by increasing the funds available compared to what would have been available if no sale had taken place” … .

In this case, there is no continuity of ownership between TBA Seller and TBA Buyer because, as the record establishes (and Fidus does not dispute), none of TBA Seller’s owners acquired a direct or indirect interest in TBA Buyer (and thus in the transferred assets) as a result of the asset purchase transaction … .  Matter of TBA Global, LLC v Fidus Partners, LLC, 2015 NY Slip Op 06698, 1st Dept 9-1-15

 

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Purported Deed Was Actually an Usurious Mortgage—All Related Transfers and Encumbrances Void

The Second Department determined a deed purporting to transfer property was actually an usurious mortgage and therefore void.  All further attempted transfers of the property were therefore a nullity.  The deed was provided in return for a $200,000 loan requiring repayment of $220,000 in 90 days. The transaction was therefore an illegal mortgage with a 40% annual interest rate:

Real Property Law § 320 provides, in pertinent part, that a “deed conveying real property, which, by any other written instrument, appears to be intended only as a security in the nature of a mortgage, although an absolute conveyance in terms, must be considered a mortgage” (Real Property Law § 320…). In determining whether a deed was intended as security, ” examination may be made not only of the deed and a written agreement executed at the same time, but also [of] oral testimony bearing on the intent of the parties and to a consideration [of] the surrounding circumstances and acts of the parties'” … . Thus, ” a court of equity will treat a deed, absolute in form, as a mortgage, when it is executed as a security for a loan of money. That court looks beyond the terms of the instrument to the real transaction; and when that is shown to be one of security, and not of sale, it will give effect to the actual contract of the parties'”… .  * * *

Real Property Law § 245 provides that a “greater estate or interest does not pass by any grant or conveyance, than the grantor possessed or could lawfully convey, at the time of the delivery of the deed.” Thus, “conveyances of land to which the grantors had no title convey no interest to the grantees” … . Likewise, “[i]f a document purportedly conveying a property interest is void, it conveys nothing, and a subsequent bona fide purchaser or bona fide encumbrancer for value receives nothing”… . Bouffard v Befese LLC, 2013 NY Slip Op 07925, 2nd Dept 11-27-13

 

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County Clerk Not Authorized to Enter Judgment Where the Underlying Stipulation Required Notice Prior to Entry and Extrinsic Evidence Was Required to Calculate the Amount

The Second Department vacated a clerk’s judgment which had been entered based upon defendant’s alleged violation of a stipulation requiring monthly installments to pay off a judgment. The stipulation allowed the entry of judgment only “upon ten (10) days notice” and extrinsic evidence was necessary to calculate the amount of the judgment:

… [T]he … County Clerk did not have authority to enter a clerk’s judgment against Wielgus pursuant to CPLR 3215(i)(1). This statute states, in relevant part, that “[w]here . . . a stipulation of settlement is made, providing, in the event of failure to comply with the stipulation, for entry without further notice of a judgment in a specified amount, . . . the clerk shall enter judgment on the stipulation and an affidavit as to the failure to comply with the terms thereof, together with a complaint or a concise statement of the facts on which the claim was based” (CPLR 3215[i][1] [emphasis added]). Although the stipulation provided that [plaintiff bank] could enter a money judgment against [defendant] in the event of a default, it permitted entry of such a judgment only “upon ten (10) days notice” to [defendant]. Thus, the stipulation was not one which provided for entry of a judgment upon default “without further notice.” Moreover, the stipulation did not provide for entry of a judgment “in a specified amount.” Rather, it provided that the judgment to be entered upon [defendant’s] default would be calculated so as to “credit [defendant] for all payments made on account.” The stipulation thus did not specify the exact principal sum of the judgment that [plaintiff bank] would have the right to enter based on a default … under the stipulation; rather, it provided for a formula that required reference to extrinsic proof … .

Furthermore, as a general rule, a clerk’s judgment should not be entered where, as here, the amount of the judgment can be determined only by reference to extrinsic proof … . Generally, a judgment should be entered on application to the clerk only where “there can be no dispute as to the amount due”… . Under these circumstances, HSBC was required to apply to the court, rather than to the clerk, for an order enforcing the stipulation and granting leave to enter an appropriate judgment … . HSBC Bank USA, N.A. v Wielgus, 2015 NY Slip Op 06494, 2nd Dept 8-12-15

 

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International Bank With a Branch in New York Was Required to Comply with an Information Subpoena—“Separate Entity Rule” Which Prevents New York Courts from Enforcing Restraining Notices and Turnover Orders Directed to Branches of Foreign Banks Located Outside New York, Does Not Prevent New York Courts from Directing the New York Branch of a Foreign Bank to Comply with an Information Subpoena, Even though the Information Sought Relates to Foreign Branches–The Information Sought Is Available Through Electronic Searches Made by the New York Branch of the Bank

The First Department, in a full-fledged opinion by Justice Acosta, determined that defendant international bank, Mega (based in Taiwan with branches in 14 countries), was required to comply with an information subpoena issued to its New York branch. The essence of the action is the collection of a $39 million judgment. It was alleged that Mega was aiding the judgment debtor in preventing collection. Because the information requested was available to Mega through electronic searches conducted from the New York branch, and because Mega had consented to the necessary regulatory oversight in return for permission to operate in New York, Mega was directed to comply with the information subpoena:

The issue is whether the separate entity rule bars New York courts from compelling Mega’s New York branch to produce information pertaining to Mega’s foreign branches.

The separate entity rule is that “each branch of a bank is a separate entity, in no way concerned with accounts maintained by depositors in other branches or at the home office” … . The continuing validity of this arcane rule was recently upheld by the Court of Appeals … , solely with respect to restraining notices and turnover orders affecting assets located in foreign branch accounts  * * *. … [T]he rule does not bar the court’s exercise of jurisdiction over Mega to compel a full response to the information subpoena.

Moreover, public policy interests and innovations in technology support such an exercise of jurisdiction. … “[B]road post-judgment discovery in aid of execution is the norm in federal and New York state courts” … , and “New York law entitles judgment creditors to discover all matters relevant to the satisfaction of a judgment” … . * * *

“The information requested by the Information Subpoena can be found via electronic searches performed in [the bank’s] New York office, and [is] within this jurisdiction” … . Matter of B&M Kingstone, LLC v Mega Intl. Commercial Bank Co., Ltd., 2015 NY Slip Op 06482, 1st Dept 8-11-15

 

Naming an Entity Other than the Lender as Mortgagee Did Not Render the Mortgage Null and Void

The Second Department rejected plaintiff’s argument that the naming of an entity other than the lender as the mortgagee rendered the mortgage null and void:

… [T]he plaintiff borrowed the sum of $671,250 from Webster [Bank], as evidenced by an adjustable rate note payable to Webster. Together therewith, the plaintiff executed a mortgage, securing the loan with her home … (hereinafter the subject property). As is relevant to this appeal, the mortgage defined the plaintiff as the “Borrower,” Webster Bank N.A. as the “Lender,” and “MERS” as Mortgage Electronic Registration Systems, Inc., “a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns” and “FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.” The loan is serviced by the defendant Bank of America, N.A. (hereinafter Bank of America).

The plaintiff erroneously contends that the naming of MERS as the mortgagee, even though Webster was the payee designated on the note, constituted a violation of the clear prohibition against separating the collateral from the debt and, as such, the mortgage instrument was rendered null and void … . The plaintiff relies upon the Court of Appeals decision of Merritt v Bartholick (36 NY 44), wherein the Court stated: “As a mortgage is but an incident to the debt which it is intended to secure, the logical conclusion is, that a transfer of the mortgage without the debt is a nullity, and no interest is acquired by it. The security cannot be separated from the debt and exist independently of it” (id. at 45; citations omitted).

The use of the term “nullity” by the Court in Merritt, however, does not mean, as the plaintiff argued, that the mortgage instrument itself was rendered null or void, but rather, that the enforceable interest which was intended to be transferred by the assignment of the mortgage alone was ineffective, as “no interest is acquired by it” … . Ruiz v Mortgage Elec. Registration Sys., Inc., 2015 NY Slip Op 06325, 2nd Dept 7-29-15

 

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Requirements for Preservation of Collateral (Security for a Promissory Note) Explained

In an action alleging the failure to preserve collateral which secured a promissory note, the Second Department determined summary judgment on the underlying promissory note should not have been granted because plaintiffs raised a question of fact about the commercial reasonableness of the handling of the collateral:

“Under both the common law and the Uniform Commercial Code, a secured party has a duty to exercise reasonable care in the custody and preservation of collateral in its possession. The obligation remains the same regardless of whether the secured party came into possession of the property before or after the debtor’s default” … .

“After default, a secured party may sell, lease, license or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing” (UCC 9-610[a]). “Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable” (UCC 9-610[b]). A secured party that disposes of collateral under section 9-610 is required to send to, among others, the debtor and any secondary obligor, notification of disposition (see UCC 9-611[b], [c]). Nugent v Hubbard, 2015 NY Slip Op 06226, 2nd Dept 7-22-15

 

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Local Law, Which Regulates the Conduct of Attorneys Who Regularly Engage in (Nonlegal) Activities Traditionally Performed by Debt Collectors, Not Preempted by the Judiciary Law

The Court of Appeals, over a two-judge dissent, answering a certified question from the Second Circuit, determined that New York City’s Local Law 15, which regulates debt-collection practices, including some debt-collection practices used by attorneys, was not preempted by the Judiciary Law. The Local Law only reaches attorneys who regularly engage in activities traditionally performed by debt collectors. The court found no conflict between the Local Law and the Judiciary Law (no “conflict” preemption). And the court found that the Judiciary Law does not evince an intent to preempt the field of regulating nonlegal services performed by attorneys (no “field” preemption):

Local Law 15, enacted in 2009, amended the debt collection legislation in several ways. Significantly, it expanded the definition of “debt collection agency” to “include a buyer of delinquent debt who seeks to collect such debt either directly or through the services of another by, including but not limited to, initiating or using legal processes or other means to collect or attempt to collect such debt” (Administrative Code of City of NY § 20-489 [a]). The amendments continued a limited exemption for attorneys or law firms that were “collecting a debt in such capacity on behalf of and in the name of a client solely through activities that may only be performed by a licensed attorney” (Administrative Code of City of NY § 20-489 [a][5]). The exemption, however, did not cover “any attorney-at-law or law firm or part thereof who regularly engages in activities traditionally performed by debt collectors, including, but not limited to, contacting a debtor through the mail or via telephone with the purpose of collecting a debt or other activities as determined by rule of the commissioner” (Administrative Code of City of NY § 20-489 [a][5]). * * *

Plaintiffs assert both conflict and field preemption in connection with the argument that Local Law 15 is preempted by the Judiciary Law. The Local Law, by its terms, governs the conduct of debt collection agencies. Although attorneys that are acting in a debt collecting capacity may fall within its penumbra, it does not purport to regulate attorneys as such. In fact, it clearly states that it does not pertain to attorneys who are engaged in the practice of law on behalf of a particular client. There is no express conflict between the broad authority accorded to the courts to regulate attorneys under the Judiciary Law and the licensing of individuals as attorneys who are engaged in debt collection activity falling outside of the practice of law and, thus, the Local Law does not impose an additional requirement for attorneys to practice law. Rather, the regulatory schemes can be seen as complementary to, and compatible with, one another. * * *

The courts’ authority to regulate attorney conduct does not evince an intent to preempt the field of regulating nonlegal services rendered by attorneys. “Intent to preempt the field may ‘be implied from the nature of the subject matter being regulated and the purpose and scope of the State legislative scheme, including the need for State-wide uniformity in a given area'” (People v Diack, 24 NY3d 674, 679 [2014] [citations omitted]). Although the courts may have preempted the field of regulating attorney misconduct, that authority does not extend to all nonlegal aspects of attorney behavior, which can be governed by both civil and criminal law, including regulatory proscriptions. To the extent that the courts have exercised some authority over nonlegal services provided by attorneys (see Rules of Professional Conduct 5.7), the regulation in that area is not “so detailed and comprehensive so as to imply that” the field has been preempted … . Eric M. Berman, P.C. v City of New York, 2015 NY Slip Op 05594, CtApp 6-30-15

 

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