Zombie Properties and a New Legislative Remedy

Nassau Lawyer

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September 2017

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Real Estate/Municipal Law

Zombie Properties and a New Legislative Remedy

Zombie properties, or properties encumbered with unforeclosed-upon delinquent mortgages, which the owner has abandoned, are found in astounding numbers across New York State.

Approximately one in three homes in the foreclosure process is abandoned prior to completion of the foreclosure.1 Zombie properties take blame for city and county blight, diminished surrounding home and neighborhood values, scenes of criminal activity and as refuge for squatters. They serve as a stark reminder of the fragility of what is arguably a cornerstone piece of the proverbial “American Dream,” homeownership.

In June 2016, with an eye toward preventing foreclosures, curbing zombie property community threats and helping people stay in their homes despite financial challenges, Governor Andrew M. Cuomo signed into law Chapter 73 of the New York Code, New York’s 2016 Zombie Property and Foreclosure Prevention Act (the “Act”). This sweeping legislation sets forth guidelines to aid in the inspection, securing and Nicole Lubell maintenance of vacant and abandoned residential real property;2 provides for an expedited application for judgment of foreclosure and sale for such vacant and abandoned property;3 and creates a municipally-accessible statewide electronic registry, whereby municipalities can most easily determine who is responsible for a property and whether the property is in foreclosure.4 This article concentrates on the Act’s abandoned property inspection and maintenance prong, with a specific focus on municipal enforcement authority, restrictions and liability risk.

Is It an Abandoned Property?

Pursuant to the Act, a servicer,5 who after conducting inspections pursuant to the Act,6 has a reasonable basis to believe that a property is vacant and abandoned, has to secure and maintain the property.7 In addition to the Act’s stringent requirements for maintenance, the servicer must perform such maintenance in a manner consistent with the standards set forth in the New York property maintenance code.8 Rendering a property eligible for an “abandoned property” label depends on the successful completion of the Act’s highly specific notice practices and occupancy-property monitoring.9 Should these requirements be met, the servicer then faces a rigorous maintenance deluge, ranging from changing locks and securing, replacing or boarding up broken doors and windows, to addressing plumbing and heating systems, providing for basic utilities, and removing and remediating any significant health and safety issues and code violations. All the while, the servicer must respond to government inquiries about the property condition and ensure the requisite notice remains in place and visible.10 These servicer obligations continue unless and until someone claims occu-

pancy, a borrower bankruptcy case is filed, the court orders no further property maintenance, the servicer can’t access the property, the property has been sold or transferred to a new owner, the servicer has released the property lien, or the mortgage note has been assigned, transferred or sold to another servicer.11

Enforcement Rights: Share the Wealth It is no wonder that given all the abandoned property “maintenance minutia” brought about by the Act and the New York Property Maintenance Code, servicer maintenance violations abound. Arguably no different than a standard code enforcement violation, abandoned property maintenance violations may be enforced by a hearing officer or court.12 And when civil penalties reach as much as five hundred dollars per day per property,13 no one can deny the substantial income source to the enforcing authority.

The Act authorizes two maintenance enforcement players: first, the New York State Department of Financial Services (“DFS”) and second, the municipality in which the subject abandoned property lies.

In this vein, the Act authorizes the DFS to adopt rules and regulations “for the effective implementation, administration, operation and enforcement of the Act.”14 Arguably, this rule-promulgating authority gives the State, via the DFS, the upper “enforcement hand,” because it controls the very rules by which it must abide. While its rules are meant to facilitate enforcement efforts,15 the absence of definitions concerning its own “pursuit of violations”16 is noteworthy and may leave a municipality on uneven “enforcement ground” with its state counterpart.

The DFS itself lends support for this very argument. In response to a DFS proposed regulations comment alleging an “unduly narrow” enforcement scope, the DFS responded that, “authority granted to the municipality is ‘in addition’ to the authority given to the Superintendent.”

As applicability of the Act takes shape over time, the DFS may be able to better define what it means to pursue violations and incorporate that definition into its rules and regulations. This would create a clearer understanding of the role of the DFS in relation to the municipality and would set a baseline for enforcement expectations.

Furthermore, the Act obligates the municipality to provide to the DFS ten days’ enforcement notice to the DFS Superintendent, who is primarily responsible for the efficient and non-duplicative enforcement of the statute.”17 However, the DFS is not required to supply similar enforcement notice to the municipality where the property is located, but rather only seven days’ notice to the servicer. This “one-way” notice requirement leaves the municipality at risk of expending resources for mistaken duplicative enforcement. Moreover, the state’s arguably advantageous enforcement position is cemented by the municipality’s equally restrictive rule-making power. A municipality cannot impose duties, penalties or monetary obligations in a manner that is inconsistent with the Act, including against lenders who are not covered by it.18 It also may not impose a local law, ordinance or resolution to maintain vacant and aban-

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doned property for which the provisions of the Act do not apply.19 While the Act precludes a municipality from imposing more stringent enforcement procedures than its State counterpart, both entities would benefit from receipt of the ten days’ enforcement notice requirement. Dual notice, to include municipality to DFS and vice versa, would drastically reduce the chance of duplicative enforcement,

thereby saving personnel and monetary resources. The future expansion of the Act’s newly-created Section 1310, which currently provides for a municipally-accessible statewide electronic registry aimed at correcting the prior lack of information concerning the existence of vacant and abandoned properties,20 may conceivably also include See ZOMBIE PROPERTIES, Page 24

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Zombie Properties Continued From Page 5

all enforcement related information.

Such enforcement data may include inspection dates, status and court-related information. Also, this database may prove immensely helpful to the Superintendent in ensuring enforcement and financial efficiency.

Walking the Municipal Liability and State Law Tightrope Aside from preemption issues raised

by Federal laws, court orders, investor and insurer guidelines, and abandoned property-associated bank agreements,21 it is impossible to ignore the issue that the Act may create between state and local law.

New York law grants broad powers to local governments to make their own laws “to the extent that they are not inconsistent with either the State Constitution or any general law.22 This includes a general police power to adopt local laws relating to “the government, protection, order, conduct, safety, health and well-being of person or property.”23 The New York Court of Appeals has held that a local law is preempted “where there is a direct conflict with a state statute (conflict preemption) or where the local law is inconsistent with state law because it prohibits what would be permissible under State law or imposes prerequisite additional restrictions on rights under state law, to inhibit the operation of the State’s general laws.”24 Despite preemption issues, which the act and DFS regulations seek to avoid,

Guide to Federal Register Continued From Page 6

FRNS that included waivers and alternative requirements issued responsively as the “wrinkles” of the law and the earliest FRNs started to appear.

For the CDBG-DR funding stream, the FRNs respected and reacted to the parameters of PL 113-2 and then addressed realistic obstacles through regulatory flexibility. Through the FRNs, crucial project deadlines were extended and additional initiatives were approved. For example, PL 113-2 required that funds must be expended

by September 30, 2017; subsequently, extensions have been authorized via FRNs responsive to the realities of the complexity of the rebuild.10 While PL 113-2 provided broad strokes, the FRNs that followed inter-

President’s Column Continued From Page 4

C. The Nassau County Bar Association should he heard on this important question The Mission Statement of the Nassau County Bar Association12 provides that the Association’s purposes are, among others: • to protect and improve our sys-

an important fact remains. Unlike the state agency, a municipality faces a twofold liability risk because of enforcing the state law. These risks stem from statutorily-granted municipal authority to enter upon property to repair emergent conditions that threaten the public health, safety and welfare.

The first liability risk concerns notice.

The electronic registry doesn’t account for the emergent circumstances that prompt a municipality to respond to an abandoned property. These conditions may exist long before the property is reported to the registry as abandoned.

Further, the municipality does not benefit from the elongated inspection rights that the servicer enjoys in determining whether a property indeed carries an abandoned status, a finding that is meant to protect the rights of occupants to stay and enjoy privacy in their homes.

Second, a municipality’s inspection of a property to confirm the emergent condition, and subsequent action to correct it or failure to do so, may also trigger tort liability issues. In William O’Connor et al. v. City of New York, a case involving a deadly and devastating gas explosion where a city inspector erroneously approved a gas hookup, contributing in large part to the tragedy, the court held that absent a special relationship creating a municipal duty to exercise care for the benefit of a particular class of individuals, no liability may be imposed upon a municipality for failure to enforce a statute or regulation.25 While it is well established that the law provides extensive immunity to a municipality in the case of civil tort liability, it is noteworthy that the law is not clear-cut with respect to municipal liability in the case of inspections and

repairs of abandoned properties exhibiting emergent conditions. The question of whether a “special relationship” is created between those living within proximity of such properties is a factual one, based at least in part on whether the statutes and ordinances involved create such a relationship.26 Certainly, municipalities will continue to put the health, safety and welfare of the community at the forefront, while the law in this specific area develops over time.

preted, narrowed, expanded and implemented the law to reflect a realistic timetable in light of the complexity of the infrastructure projects in particular.

Rarely does an FRN revoke an earlier FRN; rather, the earlier FRNs are considered “Prior Notices” and remain available and in play.11 Eligible grantees can apply for waivers that are approved via FRN. For example, the earliest PL 113-2 FRNs prohibited funding to private utilities.

New Jersey, however, applied for and received a “waiver of the prohibition on assistance to businesses that do not meet the SBA definition of a small business and the prohibition on assistance to privately owned utilities for its planned $200 million CDBG–DR investment in the New Jersey Energy Resilience Bank (ERB).”12 CDBG-DR funding is “last resort” funding, which means that other revenue sources must be utilized first.

With infrastructure, for example, Federal Emergency Management Agency (FEMA) and Army Corp of Engineering (USACE) funds had to be expended first; duplication of benefits is strictly prohibited.13 Although the duplication of benefits FRN issued in 2011, it continues to govern CDBGDR because of the following language, “This Notice clarifies the duplication of benefits requirements under the Stafford Act for all active Community Development Block Grant (CDBG) disaster recovery grants, and all future CDBG disaster recovery grants.”14

tem of justice and its institutions, in order to promote the fair, swift and sure administration of justice; and • to inspire among all citizens respect for the law and the governing principles of our democracy, by personal and professional example and by public education; A Constitutional Convention could result in significant changes to the operation of State and local government, the structure of the court system, and the

rights of individuals. The question is presented to each generation of voters only once. Consistent with our mission, we should make our voice heard on these important issues that affect the administration of justice and the practice of law, and help the public to make an informed decision.

Positive Signs on a Statutory Road Less Traveled New York’s 2016 Zombie Property and Foreclosure Prevention Act brings with it very positive changes for the benefit of homeowners, servicers, municipalities and New York State.

As with any new legislation, the law surrounding it will form over time, its application and court decisions slowly clarifying its true meaning. Clearly, the Act authorizes and impacts the municipality in a unique way not true of any other entity; it is both an enforcer of the law and a remediator of its violations.

Specifically, it jumps into the servicer capacity to remedy emergent conditions on abandoned properties, but also shares the DFS’ legal rights, subject to the restrictions discussed here, to collect civil penalties for violations. For the municipality, this is largely uncharted territory.

However, the institution of joint access to the most complete enforcement information possible can ensure open communication and success for everyone. Without question, as the Act takes more life over time, its ultimate purpose to keep people in their homes, in the safest and most aesthetically pleasing neighborhoods possible, will become a reality.

Martha Krisel is the Immediate Past President of the NCBA and a Deputy County Attorney at the Office of the Nassau County Attorney. She serves as Special Counsel to the Department of Social Services and the FOIL Officer for the County Executive and the Sheriff.

1 E.g., on June 19, 2017, agencies contributing included Agriculture Marketing Service through Western Area Power Administration.

1 N.Y. Const. art. XIX, § 2.

2 The report reflected the positions of the Committee as an entity, and not necessarily those of its individual members, some of whom abstained from the vote.

3 Special Commission on the Future of New York

Nicole Lubell is the Settlement Conference Coordinator for the NCBA Pro Bono Mortgage Foreclosure Project, and a former Assistant City Attorney for the cities of Miami and West Palm Beach, Florida.

1 Press Release, NYS Governor website, Governor Cuomo Signs Sweeping Legislation to Combat the Blight of Vacant and Abandoned Properties (June 23, 2016). https://www.governor.ny.gov.

2 RPAPL § 1308.

3 RPAPL § 1309.

4 RPAPL § 1310.

5 “Servicer” refers to any of the parties responsible for the mortgage and note, including the lender, assignee, mortgage loan servicer, plaintiff and agent.

6 Within ninety days of a borrower’s delinquency, the servicer shall complete an exterior inspection of the subject property, and thereafter, every twenty-five to thirty-five days, at different times of the day.

7 RPAPL § 1308 (2).

8 §§ 302, 304.1, 304.3, 304.7, 304.10, 304.12, 304.13, 304.15, 304.16. 307.1, 308.1 and 310.

9 RPAPL § 1308 (3) requires the notice be posted within seven business days of the vacant and abandoned determination, on an easily accessible part of the property where it is plainly visible.

10 RPAPL § 1308 (4).

11 RAPL § 1308(6).

12 RPAPL § 1308 (8)(a).

13 RPAPL § 1308 (8)(a).

14 RPAPL § 1308(8)(d).

15 DFS Adoption of Part 422 of the Superintendent’s Regulation, Summary of Public Comments.

16 RPAPL § (8)(b).

17 DFS supra note 20.

18 RPAPL § 1308 (13).

19 RPAPL § 1308 (13).

20 The law requires the DFS to maintain the electronic registry. The servicer must submit information within 21 days of when it “learns, or should have learned, that such property is vacant and abandoned.”

21 RPAPL § 1308 (11).

22 New York Pet Welfare Association, Inc. v. City of New York, New York, 850 F.3d 79 (2017); 2017 U.S. App. LEXIS 3763, citing Eric M. Berman, P.C. v. City of New York, 25 NY3d 684 (2015).

23 Id. citing N.Y. Const. at IX, § 2(c)(10).

24 Id. citing Berman, 25 N.Y.3d. at 690.

25 William O’Connor et al v. City of New York, Consolidated Edison Co. et al, 460 NY2d 485 (1983).

26 O’Connor at 487 citing Sanchez v. Village of Liberty, 42 NY2d 876, 878 (1977).

2 http://bit.ly/2iNz1sY. 3 Office of the Federal Register, fedreg@listserv1. access.gpo.gov.

4 See, e.g., 60-Day Notice of Proposed Information Collection: State Community Development Block Grant (CDBG) Program. http://bit.ly/2uO0m0T 5 This is a common caveat: “The requirements of the prior notices continue to apply, except as modified by this notice.” http://bit.ly/2w0ZWbc. 6 82 Fed. Reg. 27831 (June 19, 2017).

7 Jan. 29, 2013, 127 Stat. 15.

8 http://bit.ly/2uIbSyW. 9 Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. § 5121 et seq.

10 This Notice advises Community Development Block Grant disaster recovery (CDBG-DR) grantees with grants pursuant to the Disaster Relief Appropriations Act, 2013 (the Appropriations Act) of the process and requirements associated with grantee requests for an extension of the 24-month expenditure deadline for specific portions of funds obligated under the Appropriations Act. http://bit. ly/2fKLQnS. 11 The Prior Notices are available at: http://bit. ly/2fJDOvq, http://bit.ly/2i5BaBc, and http://bit. ly/2vCPB4p. To search the Federal Register generally, visit www.federalregister.gov.

12 http://bit.ly/2w0ZWbc. 13 http://bit.ly/2vI2GaU. 14 Emphasis added.

State Courts, A Court System for the Future: The Promise of Court Restructuring in New York State 8 (2007), available at http://www.courts.state. ny.us/reports/courtsys-4future_2007.pdf.

4 Appellate Division, Second Judicial Department, http://www.courts.state.ny.us/courts/ad2/ (last visited Aug. 28, 2017).

5 N.Y. Const. art. XI, § 1.

6 N.Y. Const. art. I, § 8.

7 N.Y. Const. art. IV, § 1.

8 N.Y. Const. art. XVII, § 1.

9 N.Y. Const. art. I, §§ 17, 18.

10 N.Y. Const. art. XIX, § 2.

11 N.Y. Const. art. III, § 6.

12 Mission Statement, Nassau County Bar Association (last visited Aug. 28, 2017), www.nassaubar.org/About%20Us/Mission%20Statement.aspx.