Opinion
381809/2008.
Decided January 26, 2010.
Steven J. Baum, P.C., Plaintiff's counsel.
Justin L. Haines, Esq., Defendant's counsel.
This motion by plaintiff Aries Financial, LLC, for summary judgment against Wanda Burt and 2729 Claflin Avenue, LLC, in this foreclosure action, and for an order of reference, is denied. Defendant has offered sufficient evidence of issues of fact requiring trial as set forth below. The cross-motion by Wanda Burt as sole member of defendant 2729 Claflin Avenue, LLC, for dismissal of the above-captioned action is granted to the extent that the action is dismissed unless, prior to the time of trial, but no later than one year following the date of entry of this order, plaintiff obtains authority pursuant to Limited Liability Company Law to conduct business in the State of New York, including obtaining approval from the New York State Superintendent of Banks to use its name, and moves to amend its complaint to correctly identify its company status and the state of its formation.
Plaintiff, a limited liability corporation, is seeking to foreclose on a mortgage it holds on the property of defendant Wanda Burt ("Burt"). Burt is a homeowner residing with her brother and mother at 2729 Claflin Avenue, Bronx, New York (the "subject property"). The property is a two-family dwelling and Burt rents out half of the duplex. Burt purchased the property with an uncle on January 28, 1999 and has continuously resided there ever since. After some years, her uncle signed a quitclaim deed to the property and moved away. Burt began to have difficulty meeting the mortgage payments of $1780 herself, including the 6.25% interest on the principal charged by her lender. In December 2006 Burt owed a total of $255,400.41 on the mortgage and was behind in her payments by $12,460. She had made partial payments but they were returned to her by Washington Mutual, her lender at that time. The property was reportedly appraised at $538,461, which should have entitled Burt to a surplus in the neighborhood of $280,000 in the event of a foreclosure and sale. Nevertheless, Burt decided to try to refinance the loan. She sought help from a mortgage broker she knew, who referred her to another mortgage broker, a Mr. Steven Schwaty of Infiniti Capital.
In February 2007, Mr. Schwaty told Burt he had found a lender for her, the plaintiff herein. Burt maintains she was told at the time only that she would not have to make payments for the first year of the mortgage, she could try to refinance again during that first year and she should appear at an Access Title Insurance Company office in Scarsdale on February 28, 2007 for the closing. When Burt attended the closing, she was without an attorney and was given numerous documents to sign, including a deed and limited liability documents, none of which she had seen or had an opportunity to review previously. According to Burt, she was told the limited liability documents were for her protection, the purpose being to stop collection practices amounting to harassment by her previous lender.
Burt asserts that when she was finally able to review copies of the papers later that evening, she regretted the high costs of the transaction, but knew nothing about whether she had the right to rescind the loan. She had not been provided with prior good faith estimates of the terms or any other Truth-in-Lending information. Copies of documents signed at the closing show she transferred her deed for the subject property to a limited liability company with herself as the sole member, and that plaintiff treated the transaction as a commercial one instead of a consumer loan, consequently not complying with those federal and state laws and regulations requiring various consumer protection items of notice and prohibiting certain terms in homeowner and other consumer loans ( see Home Ownership Equity Protection Act [ 15 USC § 1639][purpose to limit predatory lenders from using loans to skim equity from older, minority and low-income homeowners]; Banking Law § 6- 1; General Business Law § 771-a; Real Property and Procedures Law § 1302).
Plaintiff lent Burt $350,000, of which $52,500 was placed in an escrow account to make interest-only payments to itself for the first year, the mortgage broker received $14,000, plaintiff kept $7,000 as a loan origination fee, and final settlement charges totaled $34,903.36, approximately 10% of the total loan amount. Burt received a check for $7196.23 from the mortgage proceeds. Terms of the loan included interest charges of 15% for the first year, 16% for the second year, 15% for the third year and 8% for the next four years, an average rate overall of more than 11%. At the 15% interest rate, the monthly payments were $4375. At the end of seven years, a balloon payment in the amount of $350,000 would be due, the entire principal amount of the loan. Repayment of the loan during the first year would subject the borrower to a 5% prepayment penalty.
In September 2008, plaintiff filed this foreclosure action against Burt and the other defendants. Plaintiff identifies itself in the first paragraph of its complaint as a "banking corporation duly organized and existing under and by virtue of the laws of the State of Delaware". Plaintiff's president, Al London, however, stated in an affidavit filed in a separate federal court case, that plaintiff is a limited liability company organized under the laws of Alaska and maintaining its principal offices in Boca Raton, Florida.
In May 2009, plaintiff made the instant motion for summary judgment of foreclosure against Burt and the other defendants and for an order of reference. Burt opposed the motion and cross-moved for summary judgment dismissing the plaintiff's complaint, arguing that plaintiff lacks standing because it is a foreign limited liability company doing business in New York State without having received a certificate of authority to do so and, therefore, may not maintain this action pursuant to Limited Liability Company Law § 802. Burt argues further that plaintiff is not entitled to sue under an exception to that provision granted to foreign banks under Banking Law § 200(4).
Summary judgment is appropriate when there is no genuine issue of fact to be resolved at trial and the record submitted warrants the court as a matter of law in directing judgment ( Andre v. Pomeroy, 35 NY2d 361). A party opposing a motion for summary judgment must come forward with admissible proof that would demonstrate the necessity of a trial as to an issue of fact ( Friends of Animals v. Associated Fur Manufacturers, 46 NY2d 1065). The court will accept as true the non-movant's allegations ( Weiss v. Garfield, 21 AD2d 156 [3d Dept 1964]) unless such allegations are proven by undisputed admissible evidence to be false.
Before doing business in New York State, a foreign limited liability company is required to submit an application to do so to the New York Department of State (Limited Liability Company Law ["LLCL"] § 802[a]). The application shall contain, among other things, the foreign limited liability company's name, which must be in compliance with LLCL § 204. That section provides that a limited liability company may not use a name containing the word "finance", or any abbreviation or derivative thereof, without written approval by the superintendent of banks attached to its articles of organization (LLCL § 204[f]).
Cases decided pursuant to Business Corporation Law ("BCL") § 1312 have defined the parameters of what constitutes "doing business" in the State of New York. That statute provides that a foreign corporation doing business in New York without authority may not maintain an action or special proceeding unless and until such corporation has been authorized to do so and paid all fees and taxes required (BCL § 1312[a]).
The mere presence of company activity in the State does not necessarily meet the definition of "doing business" within the meaning of the statute. A casual or occasional activity within the State does not constitute "doing business" ( FIA Card Services, NA v. Dilorenzo, 22 Misc 3d 1127[A][Dist. Ct., Nassau Cty 2009]). Rather, the company's activities must be so "systematic and regular" as to manifest continuity of activity within the jurisdiction ( id.; see also Highfill, Inc. v. Bruce Iris, Inc. , 50 AD3d 742 [2nd Dept 2008] [plaintiff found to be "doing business" in state where plaintiff regularly and continuously solicited potential costumers in New York in effort to persuade them to retain plaintiff to conduct "special sales", conducted 3 such sales totaling $1,750,000 in 2001 and 2002 and 6 sales in 6-month period in 2005 and 2006 totaling $4,850,000]; cf. Airline Exchange, Inc., v. Richard Bag et al., 266 AD2d 414 [2nd Dept 1999][3 to 4 loan transactions in New York over 8-year period not sufficient to show corporation doing business within meaning of Business Corporation Law § 1312]).
Just like a foreign corporation, a foreign limited liability company doing business in New York without a certificate of authority obtained pursuant to LLCL § 802 may not maintain any action, suit or proceeding in any court of the State unless and until it obtains a certificate of authority to do business in the State (LLCL § 808[a]). A foreign banking corporation, on the other hand, may bring an action to foreclose a mortgage on real property in the State, even though it is unlicensed to do business in the State (Banking Law § 200; First Wisconsin Trust Co. v. Hakimian 237 AD2d 249 [2nd Dept 1997]; Skylake State Bank v. Solar Heat and Insulation of Cent. Utah, Inc., 148 Misc 2d 32 [Sup Ct, NY Cty, 1990]).
"Banks" are defined in New York Banking Law as "banks, trust companies, savings banks, savings and loan associations and foreign banking corporations licensed . . . to maintain a branch in the state" (Banking Law, Article IV, § 190). A limited liability company may not be used for the creation of a bank ( see Bruce A. Rich, Limited Liability Company Law Practice Commentaries, Section 3, "Formation" [Art. II]). Any corporation seeking to foreclose a loan secured by a mortgage on property in New York must, therefore, either be authorized to do business in the State or qualify as a "foreign bank" ( Sutton Funding, LLC v. Parris et al. , 24 Misc 3d 889 [Sup Ct, Kings Cty 2009][plaintiff's complaint, failing to allege plaintiff was either a bank or authorized to do business in New York, dismissed unless plaintiff moved to amend within 30 days]).
In support of the cross-motion, Burt offered her mortgage documents, a printout of search results for Delaware entities; Delaware financial institutions and Delaware non-depository institutions from the Office of the State Bank Commissioner, including licensed lenders and mortgage brokers, none of which revealed a Delaware listing for plaintiff. A 2009 listing of the Alaska Directory of Banks and Financial Institutions also did not contain a listing for plaintiff. The 2009 list of Alaska Corporations, Business and Professional Licensing, on the other hand, showed plaintiff to be a limited liability company active and in good standing in that state since its formation on February 22, 2005, with principal office located in Boca Raton, Florida. Letters from the New York State Banking Department and the Division of Corporations in New York, both dated in March 2009, showed no listing for plaintiff either as a bank or with authority to do business in the state. An April 2009 printout of search results from the New York City Department of Finance, Office of the City Register, showed plaintiff had made a total of 51 mortgage loans in New York City alone since its inception in 2005 and 13 of those mortgages had been satisfied without showing the loan amounts. Of the remaining 38 outstanding mortgages in the City, the loans totaled over 12 million dollars.
In addition to these submissions, Burt offered an affidavit by Al London, president of Aries Financial, LLC, submitted by plaintiff in a separate federal case ( Peterson v. Aries Financial, LLC, Index No. 06-Civ-6663, US Dist Ct, EDNY) dated September 28, 2007. London acknowledged that plaintiff is a limited liability company organized under the laws of Alaska, with its principal office in Boca Raton, Florida., and a private lender in business since 2005. Within 2 and ½ years of its formation, plaintiff made 73 loans in New York State, 60% of those to Black or Hispanic borrowers. According to London, plaintiff did not market directly to potential borrowers, but rather worked through licensed New York mortgage brokers. The loans were typically refinancing made available to homeowners in financial distress with no more than 65% loan-to-value ratio, in other words, with at least 35% equity in their homes. They were 7-year, interest-only loans, with "lawful" interest rates and made only to limited liability companies formed at the time of closing with the help of the borrowers' attorneys, or by plaintiff's attorneys if the borrowers had no attorneys. This was, London stated, for the purpose of protecting both the borrowers and the lender from other debts the borrowers might incur individually during the term of the loan. Loan terms always included an escrow account of the first year's payments to be made to the plaintiff.
In opposition to the cross-motion, plaintiff argued that Banking Law § 200 allows foreign banks not authorized to do business in New York to make and enforce loans in New York and bring foreclosure actions, citing First Wisconsin Trust Company v. Hakimian, 237 AD2d 249 (2nd Dept 1997) and Skylake State Bank v. Solar Heat and Insulation of Central Utah, Inc., 148 Misc 2d 32 (Sup Ct., Bronx Cty 1990).
The cross-motion is granted to the extent set forth above because Burt has offered uncontested proof that plaintiff is a foreign limited liability company, doing business in the State of New York, without having received authorization to do so. Plaintiff did not deny that it is "doing business" in the state and that its business is unauthorized. At least seventy-three mortgage loans in the course of four years totaling well over 12 million dollars, offered through mortgage brokers in the state, easily constitutes "doing business" within the contemplation of the statute ( see Highfill, Inc. v. Bruce Iris, Inc. , 50 AD3d 742 ). Plaintiff is not entitled to the exception for foreign banks pursuant to Banking Law § 200 because plaintiff is not a bank licensed in New York, Alaska or even Delaware, as claimed in the complaint. The cases cited by plaintiff in support of this argument dealt with foreign banks, not foreign limited liability companies.
Plaintiff's motion for summary judgment and for an order of reference is denied. Even assuming plaintiff presently had standing to bring this action, there are issues of fact as to whether this mortgage was, in substance, an arm's length commercial transaction reached by negotiation between parties of equal bargaining power. The only limited liability company in existence before the date of the closing was plaintiff. Burt stated in an affidavit offered in opposition to the motion that she did not even realize she no longer owned her home as an individual after the closing papers were signed, putting the validity of the transfer of her deed into question. At the very least, whether plaintiff was entitled to dispense with the requirement of providing Burt with a prior written good faith estimate of mortgage costs and terms merely by anticipating she would later sign away her deed to a limited liability company is an issue of fact for a jury. In addition, whether this mortgage was purposefully structured to evade compliance with other state and federal consumer protection laws in order to prey on distressed homeowners holding at least 35% equity in their properties with the goal of gaining impermissibly high interest rates and/or stripping that equity from them is another issue of fact for a jury.
This constitutes the decision and order of the court.