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NY foreclosure ban does not apply to shell companies, judge rules

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As the pandemic drags on, New York’s foreclosure moratorium is starting to crack.

On Nov. 12, an Orange County judge ruled that Wilmington Savings Fund could foreclose on and sell the home at 6 Turtle Knoll in Monroe.

The ruling came as a surprise, given that its owner had filed a hardship declaration, which is supposed to keep people in their homes even if they fail to make their mortgage payments.

But in this case, the borrower wasn’t a person: it was a corporation.

In March 2018, Pamela Lee established 6 Turtle Knoll LLC. The following year, she took out a $332,500 mortgage to buy the property, listing the shell company as the borrower. Further, in her application for the loan, Lee specified that 6 Turtle Knoll was an investment property and wouldn’t be her actual home.

Wilmington Savings Fund bought the note in May 2019, three months before Lee allegedly stopped paying her bills. The lender moved to foreclose in February 2020, and a court approved the motion in July. But last month, in an attempt to pause the process, Lee filed a Covid hardship declaration. This time, she listed herself as the mortgagor.

Taking out a mortgage through an LLC can grant property owners certain protections, but as the LLC giveth, the LLC taketh away. Since Lee’s mortgage was technically borrowed by the shell company, the judge ruled that it wasn’t subject to the state’s emergency foreclosure moratorium, which is designed to protect people, not corporations.

“This wise, thoughtful decision by Judge Bartlett hopefully will be followed statewide,” said Adam Leitman Bailey, the attorney for Wilmington Savings Fund. Lawyers for Lee did not respond to requests for comment.

The decision appears to be one of the first times a court has nullified a homeowner’s Covid hardship declaration since the U.S. Supreme Court struck down parts of New York’s temporary ban on evictions and foreclosures on Aug. 12, opening the door for landlords and mortgagors to challenge the self-certifications in court.

But the courts began chipping away at foreclosure protections as early as May. A state judge on May 14 allowed First Republic Bank to foreclose on a condo at 444 East 57th Street, as “neither the owner nor the mortgagor of the premises is a ‘natural person,’” the order read.

Ten days later, a secondary mortgage lender received permission to foreclose on a condo at the Plaza despite the owner’s hardship declaration, as the technical owner and mortgagor was an LLC.

It’s not all bad news for borrowers: the state has received nearly $539 million in federal aid to be distributed to homeowners at the greatest risk of foreclosure. The court decisions, however, could impact investors, who have scooped up record numbers of homes in recent months.

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