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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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The Guardian of an Incapacitated Person May Not, After the Incapacitated Person’s Death, Use Guardianship Funds to Pay a Debt Incurred by the Incapacitated Person Prior to Death (Here a Debt Owed the Nursing Home Where the Incapacitated Person Was Cared For)

The Court of Appeals, in a full-fledged opinion by Judge Fahey, determined Mental Hygiene Law 81.44 does not permit “a guardian to retain property of an incapacitated person after the incapacitated person has died for the purpose of paying a claim against the incapacitated person that arose before such person’s death.” “… [T]he issue [here was] whether property held by … [the] guardian at the time of [the incapacitated person’s] death automatically became the property of her estate or could be withheld by [the guardian] for the purpose of paying the claim, out of the guardianship account, that [the nursing home] had noticed before [the incapacitated person] died.” Based upon the legislative history of Mental Hygiene Law 81.44, the court determined that, after an incapacitated person’s death, the guardian may use guardianship funds only to pay claims related to the administration of the guardianship, and may not use them to pay debts incurred by the incapacitated person:

The plain language of subdivision (d) of Mental Hygiene Law § 81.44 requires that it is to be read in conjunction with subdivision (e) of the same section, which considers the property a guardian may retain following the death of an incapacitated person. Further, our precedent requires such a review … . In subdivision (e) of section 81.44, the Legislature allowed a guardian to retain from the estate of a deceased incapacitated person “property equal in value to the claim for administrative costs, liens and debts” (emphasis added). That construct suggests that the Legislature meant to permit the retention only of property equal in value to the expenses incurred with respect to the administration of the guardianship, i.e., property needed to satisfy administrative costs, administrative liens, and administrative claims. * * *

…[The legislative history] compels the conclusion that the Legislature did not intend for section 81.44 to permit a guardian to retain funds following the death of an incapacitated person for the purpose of paying a claim (other than a claim related to the administration of the guardianship) against the incapacitated person that arose before that person’s death. Inasmuch as [the nursing home’s] claim for medical services rendered to [the incapacitated person] is unrelated to the administration of her guardianship, we conclude that Mental Hygiene Law § 81.44 does not allow [the guardian] to withhold from [the incapacitated person’s] estate funds to pay [the incapacitated person’s] debt to [the nursing home]. Matter of Shannon, 2015 NY Slip Op 04789, CtApp 6-10-15

 

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Pursuant to the Public Authorities Law, Interest on a Judgment To Be Paid by the New York City Transit Authority Cannot Exceed 3%

The First Department noted that, although plaintiff procured a judgment (after trial) for past lost earnings against the city, the judgment will ultimately be paid by non-party New York City Transit Authority.  Therefore, pursuant to Public Authorities Law 1212(6), the interest on the judgment cannot exceed 3 %.  Soltero v City of New York, 2015 NY Slip Op 04770, 1st Dept 6-9-15

 

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Where Proof of the Fair Market Value of Foreclosed Property (Offered in Support of a Motion for a Deficiency Judgment) Is Insufficient, Rather than Deny the Motion Outright, the Court Should Direct the Bank to Submit Additional Proof

The Court of Appeals, in a full-fledged opinion by Judge Pigott, determined Supreme Court properly failed to award a post-foreclosure-sale deficiency judgment to the bank because the bank’s proof of the fair market value of the foreclosed property, although uncontested, was insufficient.  However, Supreme Court should have allowed the bank to present additional proof establishing the fair market value:

RPAPL 1371 (2) directs that, when a lender makes a motion for a deficiency judgment,

“the court, whether or not the respondent appears, shall determine, upon affidavit or otherwise as it shall direct, the fair and reasonable market value of the mortgaged premises as of the date such premises were bid in at auction or such nearest earlier date as there shall have been any market value thereof and shall make an order directing the entry of a deficiency judgment” … .

This provision is a directive that a court must determine the mortgaged property’s “fair and reasonable market value” when a motion for a deficiency judgment is made. As such, when the court deems the lender’s proof insufficient in the first instance, it must give the lender an additional opportunity to submit sufficient proof, so as to enable the court to make a proper fair market value determination. * * *

It is, of course, within the court’s discretion to elucidate the type of proof it requires so it can render a proper determination as to fair market value. The court may also order a hearing if it deems one necessary. In proceedings that are governed by section 1371, the court is in the best position to determine the type of proof that will allow it to comply with the directives of that section. Lenders seeking deficiency judgments, however, must always strive to provide the court with all the necessary information in their first application.  Flushing Sav. Bank, FSB v Bitar, 2015 NY Slip Op 04678, CtApp 6-4-15

 

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Note Which Was Extended and Consolidated with Other Debts Was Not Extinguished by the Consolidation, Extension and Modification Agreement (CEMA)—the Agreement, Therefore, Did Not Commence the Running of the Statute of Limitations for an Action on the Note

The Third Department, reversing Supreme Court, determined a Consolidation, Extension and Modification Agreement (CEMA) did not extinguish a note which was extended and consolidated under the agreement. Therefore the statute of limitations for action on the note did not commence running when the agreement was entered:

We agree with plaintiff that the plain language of the CEMA does not support Supreme Court’s conclusion that the CEMA extinguished the 1992 note and thereby recommenced the running of the statute of limitations. “It is well established that a subsequent note does not discharge the original indebtedness secured unless there is an express agreement between the parties” … . Defendant points to no express agreement and cites no authority supporting its claim that the CEMA operated to extinguish the 1992 note. Rather, the record makes clear that defendant still owed approximately $169,000 on the 1992 note at the time that the CEMA was executed. That debt was consolidated with two other debts into a new note and the mortgage liens were “coordinated, consolidated, combined and extended” to form a single lien. “Where, as here, balances of first mortgage loans are increased with second mortgage loans and CEMAs are executed to consolidate the mortgages into single liens, the first notes and mortgages still exist” … . Bechard v Monty’s Bay Recreation, Inc., 2015 NY Slip Op 04711, 3rd Dept 6-4-15

 

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Promissory Note Reflecting a Loan to a Limited Liability Company Was Criminally Usurious As Well As Void Under the General Obligations Law—Provision Purporting to Reduce the Interest Rate to a Non-Usurious Rate If the Original Rate Were Found to be Usurious Did Not Save the Note

The Second Department determined a promissory note imposing an annual interest rate of more than 25% (60% here) was criminally usurious (Penal Law 190.40) and could not be saved by a provision purporting to reduce the interest rate to a non-usurious rate if the original rate were found to be usurious. The court noted that, although a limited liability company (the defendant here) cannot assert the defense of civil usury, a limited liability company can assert the defense of criminal usury.  In addition, the note was void under General Obligations Law 5-511 because the interest rate exceeded 16%. Fred Schutzman Co. v Park Slope Advanced Med., PLLC, 2015 NY Slip Op 04447, 2nd Dept 5-27-15

 

Sale of Notes Was Champertous—Seller Subcontracted Out Its Litigation for Political Reasons In Violation of Judiciary Law 489 (1)

The First Department determined plaintiff’s purchase of notes was champertous. Champerty “is the purchase of claims with the intent and for the purpose of bringing an action that [the purchaser] may involve parties in costs and annoyance, where such claims would not be prosecuted if not stirred up . . . in [an] effort to secure costs”. Champerty is prohibited by Judiciary Law 489 (1). Although purchases of claims for more than $500,000 are not subject to the champerty prohibition (Judiciary Law 489 (2)), the First Department held that the $500,000 must actually be paid.  Here the price was set at $1,000,000 but nothing had been paid. The court determined the seller of the notes had subcontracted out its litigation to plaintiff for political purposes:

The purported sale of the notes is champertous since [the seller] maintained significant rights in the notes and expected the lion’s share of any recovery from defendants … . There is every indication that plaintiff entered into the Purchase Agreement with the intent of pursuing litigation on [the seller’s] behalf in exchange for a fee; plaintiff’s intent was not to enforce the notes on its own behalf …. Indeed, plaintiff could not enforce all of the rights under the notes, since, as the motion court noted, “No reasonable finder of fact could conclude that [plaintiff] was making a bona fide purchase of securities.” On the contrary, “[t]he only reasonable way to understand the [Purchase Agreement] is that [the seller] was subcontracting out its litigation to [plaintiff] for political reasons.” Accordingly, the sale of the notes violated Judiciary Law § 489(1). Justinian Capital SPC v WestLB AG, 2015 NY Slip Op 04381, 1st Dept 5-21-15

 

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Attorney Discharged without Cause Entitled to Fee as an Account Stated

The Third Department determined an attorney had been discharged without cause and was entitled to a charging lien and a retaining lien.  The client had signed a retainer agreement and had not expressed any objection to the detailed itemized bill submitted by the attorney.  The amount of the bill was therefore deemed an account stated.  In explaining the options available to an attorney who has been discharged without cause, the court wrote:

…[A]n attorney who has been discharged without cause may pursue the following cumulative remedies: (1) a charging lien, (2) a retaining lien, and/or (3) a plenary action in quantum meruit … . A charging lien is a statutory remedy — codified in Judiciary Law § 475 — that grants the attorney “a security interest in the favorable result of [the] litigation” … . A retaining lien, on the other hand, permits the discharged attorney to retain the contents of the client’s file until such time as the attorney has been paid or “the client has otherwise posted adequate security ensuring [the] payment [there]of” … . With respect to either lien, a hearing may be required to determine the amount of compensation due and owing to the discharged attorney. Here, however, we have no quarrel with Supreme Court’s finding that the firm was entitled to an award of $10,884.14 based upon an account stated. Roe v Roe, 2014 NY Slip 03317, 3rd Dept 5-8-14

 

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Replevin and Order of Seizure (Asserting a Superior Right to Property) Explained

The Second Department, in determining an order of seizure had been properly granted, explained the law of replevin and an order of seizure:

“The action of replevin is essentially possessory in its nature.”… . “A cause of action sounding in replevin must establish that the defendant is in possession of certain property of which the plaintiff claims to have a superior right” … .

“An order of seizure is not a final disposition of a matter but is a pendente lite order made in the context of a pending action where the movant has established, prima facie, a superior right in the chattel” … . Pursuant to CPLR 7102, an application for an order of seizure must be supported by an affidavit that “clearly identif[ies] the chattel to be seized” and states, among other things, facts demonstrating “that the plaintiff is entitled to possession” of the chattel, that “the chattel is wrongfully held by the defendant,” and that “no defense to the claim is known to the plaintiff” (CPLR 7102[c]…). Southeast Fin LLC v Broadway Towing Inc, 2014 NY Slip Op 03254, 2nd Dept 5-7-14

 

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