Opinion
SCR 60571/09-1.
Decided April 21, 2010.
Howard M. File, Staten Island, NY, Plaintiff.
Fidelity National Title (underwriter for Summit Associates), Vincent Gallo, Esq., Staten Island, NY, Defendant.
Henry Ortiz, William Golding, Esq., Staten Island, NY, Defendant.
Victoria Hickson (pro se), Staten Island, NY, Defendant.
Claimant, Port Village HOA Inc., commenced this small claims action against the defendants, Summit Associates, Henry Ortiz, and Victoria Hickson, alleging that defendants jointly and severally owe homeowners' association dues. A trial was held on March 8, 2010. Claimant was represented by counsel. Fidelity Title Insurance Company, the underwriter for Summit Associates, provided counsel to appear on behalf of Summit Associates. Defendant Ortiz was represented by counsel. Defendant Hickson appeared without a lawyer.
Background:
Claimant, Port Village HOA Inc., alleges that the premises, 26 Port Lane, Staten Island, New York is a unit included in its homeowners' association. At the time in question the unit was initially owned by Emad Basha who went into title on or about August 25, 2006. At that time Basha executed a note and mortgage in favor of Mortgage Lenders Network USA, Inc., in the amount of $328,000.00. In August 2007, the assignee of the mortgage, US Bank National Association commenced a foreclosure action In Supreme Court, Richmond County (Index No. 103293/07), alleging that no payments had been made by Basha since April 1, 2007 and that $326,561.69 was due and owing for principal and interest on the original indebtedness. The premises was sold at a foreclosure sale for $286,400.00 on May 28, 2008 to US Bank NA. Defendant Henry Ortiz purchased the property after the foreclosure from US Bank National Association, As Trustee, by deed dated February 9, 2009. Subsequently Ortiz sold the property to defendant Victoria Hickson. On February 19, 2009, claimant herein filed a notice of lien for "unpaid common charges" with the Richmond County Clerk alleging that there were due and owing through February 1, 2009 $2,401.80. The notice of lien lists "Emad Basha" as the owner of the unit.
Claimant alleges that it was never named in the foreclosure therefore its rights were never cut off in that Supreme Court action. Claimant is also seeking the entire outstanding amount due for dues and assessments and not just the monies due from Hickson since she went into title. Claimant argues that the Real Property Law creates a lien in favor of the association which "runs with the land" and makes Hickson liable for all open charges as the present owner.
Legal Issues Presented: A. Who is the Claimant?
This action was commenced by "Port Village HOA, Inc." Unfortunately no such legal entity exists. The "Declaration of Protective Covenants, Conditions, Restriction, Easements, Charges and Liens" is dated March 25, 1996 and was filed with the Richmond County Clerk at Reel 6564 page 130. It indicates that the Sponsor "has incorporated Port Village Association, Inc." under the New York Not-For Profit Corporation Law. The document goes on to refer to that entity as the "Port Village Association, Inc." This document was in the possession of claimant and was submitted by claimant as an exhibit. A search of the Department of State, Division of Corporation records confirms that the name of the entity is the "Port Village Association, Inc." No entity with the name of the claimant has been filed with the Department of State. Nor has the claimant submitted any proof that it has filed a certificate of doing business under an assumed name. There can only be one conclusion. The named claimant lacks standing to bring this action. There is no legally formed entity with the name of the claimant.
Claimant's counsel in its post trial memorandum moves to amend the caption to the correct name of the corporation. This motion is denied. Counsel cites CPLR § 305 as permitting amendment of the summons and complaint or proof of service by the court in its discretion "if a substantial right of a party against whom the summons issued is not prejudiced." Unfortunately correcting the caption from the name of a non-existent entity to one that actually exists is not in the nature of an amendable defect. The error is not a pleading error. It is an existence error. In fact, claimant has commenced numerous actions in this court under the wrong name. Correcting it would substantially prejudice the defendants.
Similarly CPLR § 2001 permits a court to correct a "mistake, omission, defect or irregularity" only if a "substantial right of a party is not prejudice." In fact, based on the evidence adduced at trial, claimant has been operating for years under the wrong name. Claimant has been collecting monies from the owner of this unit and other residents in the association in the name of the wrong entity, depositing the monies in a bank account in the wrong name and by failing to "do its homework," deceiving the court into assisting it in this endeavor by obtaining judgments in this court and docketing them with the County Clerk in the wrong entity's name. The relief being sought is not to correct some "typographical error" recently made. It is a recurring mistaken course of conduct. Counsel brought this action in the name of the wrong party. This is a defect that cannot be corrected.
This action is dismissed on the merits. Claimant is not a legal entity and lacked the standing to commence this action.
B. Were Claimant's Rights to Collect Terminated by the Foreclosure?
Defendants asserted that claimant's right to collect any monies other than those currently due were terminated in the foreclosure action in Supreme Court, Richmond County (US Bank, NA v Emad Basha, et al, Index #103293/07). Claimant counters by asserting that neither it nor the correct entity was never named in that action, was not a party to it and therefore the lien for common charges remains in full force and effect against the defendants.
Real Property Law § 339-z states:
The board of managers, on behalf of the unit owners, shall have a lien on each unit for the unpaid common charges thereof, together with the interest thereon prior to all other liens except only (i) liens for taxes . . . (ii) all sums unpaid on a first mortgage of record,. . . .
Real Property Law § 339-aa states:
The lien provided for in . . . (RPL 339-z-reference added) shall be effective from and after the filing in the office of the recording officer in which the declaration is filed a verified notice of lien . . ., and shall continue in effect until all sums secured thereby, with interest thereon, shall have been fully paid or until expiration six years from the date of filing whichever occurs sooner.
First, this claimant lacks the standing to assert the existence of the statutory lien as it is not the proper party. Second, it appears that for several years, in any case during the period in question, the wrong entity was collecting the common charges and association dues. Therefore, Port Village HOA Inc., cannot have any statutory lien on the premises as it is not the entity with legal standing to which association dues were owed and could not collected the money.
Third, it appears that the notice of pendency in the foreclosure action was filed with the Richmond County Clerk on August 24, 2007. Assuming for the moment the correct entity was entitled to file a lien, there is no showing that the homeowners' association lien was ever filed with the County Clerk as required by RPL § 339-aa prior to the commencement of the foreclosure action. Claimant's "financial transactions" record shows that an initial judgment was entered against the then owner of this premises, Basha, on February 20, 2008 in an amount of $1,430.42 for the period through February 2007, as a result of an action in the small claims part of the Civil Court (SCR § 60765/07). This was six months after the foreclosure action was commenced. There is no independent evidence that a lien in regard to this money due and owing was ever entered by claimant with the County Clerk or that the Civil Court judgment was docketed against the real property in question any time prior to that date. A second judgment was entered for common charges in favor of claimant against Basha on February 5, 2009 in the amount of $2,532.34 (SCR 60743/08). This judgment was docketed with the County Clerk on February 19, 2009 in the amount of $2,401.80. There is no explanation for the difference in the judgment amount and the lien amount unless the lien does not include charges incurred after February 1, 2009.
Civil Practice Law and Rules § 6501 provides:
A notice of pendency may be filed in any action in a court of the state . . . in which the judgment demanded would affect the title to, or the possession, use or enjoyment of real property. The pendency of such an action is constructive notice, from the time of filing of the notice only, to a purchaser from, or incumbrance against, any defendant named in a notice of pendency. . . . A person whose conveyance or incumbrance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as a party.
This means that the "lien" being asserted by the "claimant" at the time it presumably was entered with the County Clerk was after the foreclosure action was commenced. The notice of pendency recorded in the foreclosure, by the statute then, had given claimant "constructive notice" of the foreclosure and claimant was "bound by all proceedings" in that action.
Fourth the summons and complaint in the foreclosure proceeding named as parties, according to the caption, "John Doe (Said name being fictitious, it being the intention of Plaintiff to designate any and all occupants of premises being foreclosed herein, and any parties, corporations or entities, if any, having or claiming an interest or lien upon the mortgaged premises.)" This language would appear to reflect the intent of the plaintiff in the foreclosure to give notice to third parties such as the claimant. However, an examination of the file maintained by the County Clerk in the Supreme Court action reveals that neither the claimant nor the correct entity, Port Village Association, Inc., was ever specifically named in the pleadings or served with process.
It is really incredible to believe that foreclosure counsel would accept a file and not have a title search done to determine the existence of any liens, homeowners or condominium associations. Had a title search been done, it would have revealed the existence of the Port Village Association, Inc., as it was created by the Declaration dated March 25, 1996 and recorded with the County Clerk. The court must also question who prepared the initial mortgage and loan documents in view of the fact that the mortgage is devoid of either a condominium or planned unit development rider which would put lenders on notice of the existence of the obligation to pay association dues and fees and the possible existence of a lien for these items in the event they remained unpaid. If this transaction is typical of what occurred in the residential real estate industry over the last few years is it any wonder the financial markets were flooded with uncollectible debts?
In addition the terms of the Judgment of Foreclosure and Sale issued in the Supreme Court, the referee was required to publish the "Notice of Sale" in the Staten Island Advance as provided for in RPAPL § 231. This was done on April 29, May 6, May 13, and May 20, 2008. This notice alerted the public of the impending foreclosure sale on May 27, 2008 and identified the premises by street address and block and lot and named Basha as a defendant. Because Basha was not paying his common charges as they came due, it should have alerted the association to the fact that he also might possibly not be paying his mortgage and to be more diligent in reviewing the foreclosure sale notices in the local newspaper.
Defendants have asserted that the proper remedy for the court would be to convert this to an action for "strict foreclosure" pursuant to RPAPL § 1352. Although this remedy would be available to Hickson as the purchaser of the premises, the court cannot do so in this proceeding. First, this is a small claims action and "strict foreclosure" is an equitable remedy which is not permitted in the small claims part. Second, none of the defendants filed a counterclaim which would have put the claimant on notice of the intention to seek some relief on their own. Third, Civil Court Act § 203(b) does give the Civil Court the authority to foreclose mortgage liens in the amount of $25,000.00 or less. The mortgage lien is in excess of the Civil Court's jurisdiction. The lien sought to be foreclosed is not "mortgage lien" but a "common charges lien." This court has previously ruled that the Civil Court lacks the jurisdiction to foreclose common charge liens because it has not been specifically granted that right by the legislature ( Board of Managers of Highview Condominium v Mahland, 177 Misc 2d 502).
The court believes a valid argument could be made that the claimant herein and the correct association had "constructive notice" of the foreclosure and are therefore precluded from asserting this claim based on the filing of the notice of pendency and the publication of the notice of sale in the newspaper. But to do so would be giving an imprimatur to the sloppy investigation and procedure of the plaintiff in the foreclosure action. This entire situation would have been obviated had there been a modicum of investigation by counsel for the foreclosing lender. Had the association been named in the foreclosure, any lien of the association would have been extinguished whether or not the lender knew of it ( Fleet Mortgage Corp. v Nieves, 272 AD2d 435).
The lien, if any, of the Port Village Association, Inc. has not been extinguished by the foreclosure action. Presumably, the proper association could still undertake to file the lien in the manner provided by the RPL. There does not exist any lien from the claimant herein because there is no such legal entity as the claimant, Port Village HOA Inc.
C. What is the Status of the Lien Filed Against the Premises?
Claimant on February 19, 2009 had a lien entered with the County Clerk against the premises for monies owed by Emad Basha, as the owner of the premises. The acknowledgment on the notice of lien is undated except for "February 2009." The recording cover page has the document as dated February 9, 2009 and the Preparation Date of February 12, 2009. Ironically, all of this activity took place after (emphasis added) the closing of title to defendant Ortiz and was apparently triggered by a request prior to or at closing for a clearance letter from the association in regard to open association dues from one or both of the attorneys representing Ortiz and Hickson in the transaction. It should be pointed out that at the Ortiz to Hickson closing on September 24, 2009 a check was made payable for common charges to the claimant in the amount of $1,370.44 for the period Ortiz was in title. This payment is reflected in the ledger maintained by the claimant generated for the trial on March 8, 2010.
The lien filed by Port Village HOA, Inc. is invalid. The entity filing it does not exist. Likewise the small claims judgments entered against this property are also invalid as there is no legal entity with the name of the claimant.
The County Clerk is directed to vacate the lien filed by Port Village HOA, Inc., in regard to Block 1086 Lot 136.
The Clerk of the Civil Court is directed to vacate any judgments entered in favor of Port Village HOA, Inc. against the owners of the premises 26 Port Lane, Staten Island, New York including but not limited to SCR 60765/07 and SCR 60743/08.
The County Clerk is directed to search its records of liens filed and is directed to vacate any and all liens entered in favor of the "Port Village HOA, Inc." or the "Port Village Homeowners' Association, Inc." as no such entity exists.
The Clerk of the Civil Court is directed to vacate any judgments entered in favor of "Port Village HOA, Inc." or "Port Village Homeowners' Association, Inc." as no such entity exists.
D. Is the Managing Agent in Compliance with New York Law?
The testimony in this case revealed that the claimant has retained T.W. Finnerty Property Management Inc., as the managing agent for the homeowners' association. It is apparent that Finnerty has been collecting monies, paying bills and maintaining litigation on behalf of a non-existing entity. It appears also that the taxes and all annual filings for the association have been filed for the wrong entity.
Finnerty represents many homeowners' associations on Staten Island. In the current case and in some others it has been disclosed that Finnerty maintains a "lock box" for the deposit of the checks issued by each associations' members for their common charges in a Georgia Bank. A check of the FDIC list of "failed banks" discloses that so far in 2010 fifty banks have failed. Of that fifty failures, seven were Georgia banks and two were New York banks. In 2009, there were one hundred-forty bank failures of which twenty-five were in Georgia and only one in New York. Based on these numbers, whatever benefit that is gained by using a Georgia bank is far outweighed by the risk for depositors. In fact, over the last two years Georgia has had the highest number of bank failures in the country.
The court also must object to the use of any out-of-state bank for these deposits. The funds collected and deposited are the homeowners' moneys. It is being paid pursuant to the RPL and the declaration and by-laws and is to be used for the maintenance of the common properties and for the benefit of the unit owners. The Board of Directors of the association is in a fiduciary relationship with the members and Finnerty, as the agent of the Board, is also a fiduciary in that regard. The deposits in the Georgia bank are beyond the jurisdiction of the New York courts and the regulatory authorities such as the New York Attorney General and the Banking Department. A judgment from this or any other court in New York could be ignored by the Georgia bank.
Condominiums and homeowners' associations did not exist at common law, they are creatures of statute, Article 9-B of the Real Property Law.
RPL § 339-w states:
The manager or board of managers, as the case may be, shall keep detailed accurate records, in chronological order, of the receipts and expenditures arising from the operation of the property. Such records and vouchers authorizing the payments shall be available for examination of the unit owners at convenient hours of weekdays. A written report summarizing such receipts and expenditures shall be rendered by the board of managers to all unit owners at least once annually.
Their formation is also governed by strict regulations and disclosures set forth in Article 23-A of the General Business Law, commonly known as the "Martin Act." To think that the legislature and the attorney general would put into place all of these consumer protections and disclosures and then permit the deposit of homeowners' monies in an out-of-state account is not credible.
Finnerty is directed to close all of his accounts maintained for New York entities in Georgia and any other state and re-open the accounts at banks with branches in New York State and subject to New York law.
E. Does Summit Associates or Fidelity Title Have Any Liability?
Assuming that the defects in this case are corrected, the issue remains do either Summit Associates or Fidelity Title have any liability to the claimant? The answer is no. Summit and Fidelity have no contractual relationship with the claimant or the homeowners' association. They have contractual obligation with either the seller or the buyer, depending on which of them retained the company. They may also have liability on an indemnity theory to either the seller or buyer for issues which arose out of the title search and were not properly disposed of by the title company or which subjected the seller or buyer to liability owing to either errors made by those entities in doing the search or in failing to properly pay an obligation. Summit and Fidelity have no obligation to the claimant or the association. If the association obtains a judgment against the seller or the buyer, Summit and Fidelity might have to indemnify those individuals, but not the association.
F. Does Counsel Have Any Responsibility to Check the Claimant's Status?
It is apparent that the claimant herein is not a legal entity. Claimant is represented by counsel in this action and in others in this court. Did counsel have an obligation to investigate the legal status of the claimant or can an attorney blithely just accept every client that walks through the door and pursues claims on their behalf? It must be concluded that as an officer of the court, counsel for claimant had an obligation to investigate the status of the claimant. Especially when, if successful in the litigation, the claimant would not only be obtaining a judgment against an individual defendant, with all of the negative connotations attached to that including impairment of a person's credit, but, as an entity entitled to lien against the defendant's real property pursuant to the RPL, the association could adversely affect the title to a homeowner's premises leading to the loss of the property at a foreclosure sale. Query. Do the actions of counsel, the managing agent and the board in entering and docketing judgments in the name of the wrong entity give rise to a claim for "slander of title" by a unit owner?
Further, because homeowners' associations are formed pursuant to the Not-For-Profit-Corporation Law, verifying the status of the claimant is readily accessible at the Department of State, Division of Corporations website. By checking that site, counsel would have learned that the entity in which counsel was bringing this and other litigation never existed. Counsel could have advised his client of the discrepancy and taken steps to either legalize the claimant or to have brought this and the other actions in the name of the correct entity. Because claimant is not a properly formed corporation, claimant is not permitted to maintain an action in the courts (Not-For-Profit Corporations Law § 202).
The Federal District Court, Eastern District, in Miller v Upton, Cohen Slamowitz, ___ F.Supp. 2d ___, 2009 WL3212556 (EDNY), recently analyzed to what extent an attorney must investigate the information provided by a client before sending a collection letter or commencing litigation. Although that and other cases have examined to what extent an attorney must investigate a file referred to him or her for collection in light of the Federal Debt Collection Practices Act (FDCPA), and this court has previously ruled that collection of homeowners' association dues is not a debt subject to the FDCPA ( Barry v Board of Managers of Elmwood Park Condominium II, 18Misc 3d 559 [2007]), they do point out some minimal inquires which would be expected of an attorney prior to commencing any litigation. The court stated:
Although neither error goes to the validity of Miller's alleged debt, Slamowitz's failure to inquire into such core issues implicates basic concerns of attorney competence and speaks directly to an appreciable lack of professional care in preparing the matter for debt collection and/or legal action. This court concluded that, in cases such as here, where an attorney commences suit in so uninformed manner that he is ignorant as to what law governs his suit it cannot be said that he has undertaken a level of review sufficient to satisfy even the most general requirements applicable to attorney conduct, let alone the more focused review requirements established by the FDCPA ( Miller v UCS @ 10).
In this litigation, counsel cannot feign ignorance of the correct name of the claimant. Counsel submitted as an exhibit at trial the Declaration recorded with the County Clerk listing the name of the entity as Port Village Association, Inc. Counsel also submitted as part of its post-trial memorandum of law the print-out from the Department of State listing the correct name of the entity. Counsel knew or upon reasonable review of the file that this action was being brought in the wrong name. Yet even if counsel did not actually commence this action by physically preparing the small claims summons and complaint (although counsel is listed as attorney for the claimant on the card generated by the clerk at the time of filing), it did appear and represent the claimant and in the past submitted judgments on its behalf and counsel filed liens with the County Clerk in regard to this property. A search of the court's records reveals fourteen other actions commenced in the wrong name some of which resulted in liens being entered in the wrong name with the County Clerk. The question remains as to whether counsel's actions amount to frivolous conduct pursuant to 22 NYCRR § 130-1.1 (c) (3) in that "it asserts material factual statements that are false," or, if because this is the "small claims part" of the Civil Court, counsel is exempt from the signing requirements of 22 NYCRR § 130-1.1-a?
If it is not understood by this counsel or other members of the bar, the court will articulate what it believes is the common sense rule. Counsel representing a corporation has an obligation to insure that the litigation is being brought in the name of the correct entity. Counsel has an obligation to check if a business is doing business under an assumed name and properly plead that information. Counsel has an obligation in landlord-tenant matters to check if the premises has a valid certificate of occupancy and is being used in conformity with the certificate of occupancy so that counsel would not be in violation of the New York City Administrative Code in that regard.
G. Does the Civil Court Have the Authority to Grant this Relief?
Civil Court Act § 212 provides: "In the exercise of its jurisdiction the court shall have all of the powers that the supreme court would have in like actions and proceedings." Clearly the Civil Court had the jurisdiction to entertain the original suit. This statute gives it the same authority to resolve the matter as would the supreme court.
Conclusion:
1. This action is dismissed on the merits. No such entity as the named claimant exists.
Summit Associates and Fidelity Title have no legal obligation to the claimant or the correct association.
2. The claimant's motion to amend the caption is denied on its merits.
3. The Clerk of this Court is directed to vacate any and all judgments entered in favor of Port Village Homeowners' Association, Inc. or Port Village HOA, Inc. as no such entity exists. The clerk is directed to simultaneously dismiss any and all of those actions and any actions currently pending before the court.
4. The Clerk of Richmond County is directed to vacate any judgments or liens docketed in favor of Port Village Homeowners' Association, Inc. or Port Village HOA, Inc., as no such entity exists.
5. T.W. Finnerty Property Management, Inc., is directed to close any and all bank accounts maintained for this entity or any other homeowners' association or condominium in a bank not located in New York State and to reopen those accounts in banks subject to New York State's jurisdiction.
Exhibits, if any, will be available at the office of the clerk of the court thirty days after receipt of a copy of this decision.
The foregoing constitutes the decision and order of the court.