U.S. Bank National Association v. LG-328 Huntsville, AL, LLC et al
MEMORANDUM OPINION and ORDER denying 2 MOTION to Appoint Receiver MOTION Injunctive Relief filed by U.S. Bank National Association; denying 5 MOTION to Appoint Receiver filed by U.S. Bank National Association; Presently before the court is U.S. Bank's Motion for the Appointment of Receiver and Injunctive Relief 5 , and an identical request made in the Complaint, 2 , which are now fully briefed, and ripe for review; Upon consideration of the parties' briefs and evidentiary submissions, both requests are due to be denied; As stated within the court finds that the appointment of a receiver is unwarranted, and therefore declines to reach the issue of the injunctive relief necessary to effectuate the purpose of the receivership; U.S. Banks's motion to appoint receiver 5 , and the identical request included in the complaint 2 , are DENIED. Signed by Judge Abdul K Kallon on 11/27/2017. (KBB)
2017 Nov-27 AM 10:36
U.S. DISTRICT COURT
N.D. OF ALABAMA
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
U.S. BANK NATIONAL
LG-328 HUNTSVILLE, AL, LLC, et )
Civil Action Number
MEMORANDUM OPINION AND ORDER
This case arises out of the default of ten cross-collateralized commercial
loans secured by, among other things, mortgages on income-producing properties
leased to Logan’s Roadhouse and serviced by U.S. Bank National Association, as
Trustee, successor in interest to Bank of America, National Association, as
successor by merger to LaSalle Bank, National Association, as Trustee for the
registered holders of J.P. Morgan Chase Commercial Mortgage Securities Trust
2007-LDP11, Commercial Mortgage Pass-Through Certificates, Series 2007LDP11, acting by and through C-III Asset Management LLC, solely in its capacity
as special servicer (U.S. Bank). Presently before the court is U.S. Bank’s Motion
for the Appointment of Receiver and Injunctive Relief, doc. 5, and an identical
request made in the Complaint, doc. 2, which are now fully briefed, docs. 6; 31;
and 32, and ripe for review.
Upon consideration of the parties’ briefs and
evidentiary submissions, both requests are due to be denied.
STANDARD OF REVIEW
“A receiver is a neutral court officer appointed by the court, usually to ‘take
control, custody, or management of property that is involved in or is likely to
become involved in litigation for the purpose of . . . undertaking any  appropriate
action.’” Sterling v. Stewart, 158 F.3d 1199, 1201 n.2 (11th Cir. 1998) (quoting 12
Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and
Procedure § 2981, at 5 (1973)). In the Eleventh Circuit, it is settled that “federal
law governs the appointment of a receiver by a federal court exercising diversity
jurisdiction.” Nat’l P’ship Inv. Corp. v. Nat’l Hous. Dev. Corp., 153 F.3d 1289,
1292 (11th Cir. 1998). Accordingly, this court looks to Rule 66 of the Federal
Rules of Civil Procedure which provides that “[t]hese rules govern an action in
which the appointment of a receiver is sought . . . [b]ut the practice in
administering an estate by a receiver . . . must accord with the historical practice in
federal courts or with a local rule.” FED. R. CIV. P. 66.
Typically, the party seeking a receivership over certain property must “show
that he or she has some legally recognized right in that property that amounts to
more than a mere claim against [the] defendant.” 12 Charles Alan Wright, Arthur
R. Miller & Richard L. Marcus, Federal Practice and Procedure Civil § 2983 (2d
ed. 1997); see also Piambino v. Bailey, 757 F.2d 1112, 1131 n.46 (11th Cir. 1985).
The decision to appoint a receiver is an equitable one which rests “in the sound
discretion of the court,” Hutchinson v. Fidelity Investment Ass’n, 106 F.2d 431,
436 (4th Cir. 1939). While the inquiry is not governed by rote application of
particular criteria, federal courts consider a number of factors regarding the
propriety of establishing a receivership including: (1) “the probability that
fraudulent conduct has occurred or will occur;” (2) the validity of the “claim by the
party seeking the appointment;” (3) whether there is an “imminent danger that
property will be concealed, lost, or diminished in value;” (4) the “inadequacy of
[alternative] legal remedies;” (5) the “lack of a less drastic equitable remedy;” and
(6) the “likelihood that appointing the receiver will do more good than harm.”
Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316–17 (8th Cir.
1993); see also IP Co., LLC v. Cellnet Tech., Inc., No. 1:06-cv-3048, 2008 WL
11337779, at *1 (N.D. Ga. Dec. 18, 2008) (Carnes, J.) (applying similar factors);
12 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice
and Procedure Civil § 2983 (2d ed. 1997.) (listing “fraudulent conduct on the part
of the defendant; the imminent danger of the property being lost . . . or squandered;
the inadequacy of the available legal remedies; the probability that harm to [the]
plaintiff . . . would be greater than the injury to the parties opposing appointment;
and, in more general terms, plaintiff’s probable success in the action and the
possibility of irreparable injury to [her] interests in the property” as factors to
consider in appointing a receiver).
The creation of a receivership “is an extraordinary remedy that should be
employed with the utmost caution,” Netsphere, Inc. v. Baron, 703 F.3d 296, 305
(5th Cir. 2012) (citation omitted), but “there is no general requirement of a hearing
in Rule 66, and the court may approve of the appointment of a receiver without a
hearing where the record discloses sufficient facts to warrant it.”
Mobile Gathering, Inc. v. Watkins, 934 F.2d 1180, 1189 (11th Cir. 1991).
The Defendants, a collection of limited liability corporations based in
Alabama, and seven other states, obtained ten individual loans from Natixis Real
Estate Capital, Inc. (Natixis) in April 2007. Doc. 6 at 2–3. The loans were secured
by, among other things, mortgages on ten income-producing properties leased by
the Defendants to Logan’s Roadhouse, a restaurant chain. Id. at 2. The properties
were also subject to Deposit Account Agreements, which require the direct
submission of rental payments “to a lockbox under the exclusive control of
Plaintiff.” Doc. 31 at 9; see also Docs. 6 at 5, 18; 1-20 at 2–5.1
Roughly three months after executing the original loan agreements, the
Defendants entered into a Note Splitter and Modification Agreement with Natixis.
The parties have not pointed out any relevant distinctions among the various loan documents
signed by the individual entities in this case. So, for purposes of this opinion, the court assumes
that the underlying loan documents are substantively identical.
Doc. 1 at 14.
This agreement split the principal amount of each of the original
notes in half and divided that amount evenly between two new notes, the “A-1
Note” and the “A-2 Note.” Id. at 14–15. The split notes remained secured by the
previously executed loan documents, but the note tiers were combined and
transferred into two separate trusts for securitization pursuant to an intercreditor
agreement between Natixis and two other entities. Id. at 15–17; Doc. 6 at 6–8.
The intercreditor agreement provides that the A-1 noteholder maintains “exclusive
custody of and record title under the Mortgages” and generally makes all the
decisions necessary to administer and service the loans, but that the split notes are
of equal priority and received payments and recoveries are distributed evenly
between the A-1 and the A-2 noteholders. Doc. 1 at 16, 18–19. The split notes are
cross-defaulted and cross-collateralized effectively functioning as a single lien
placed across all the properties as security for both the A-1 and A-2 notes. Id. at
19; Doc. 6 at 9. In other words, a default under any of the split notes or mortgages
constitutes a default under all of the split notes and mortgages. Docs. 6 at 9; 1 at
19–20. A failure to satisfy the full amount due under the loan documents on the
maturity date constitutes a default. Doc. 1 at 20; see also Doc. 1-1 at 68.
The day after the loans matured, U.S. Bank sent a letter to each Defendant
notifying them that they were in default and demanding immediate payment of all
amounts due and owing. Doc. 1 at 20; see also Doc. 1-29 at 2–5. To date, those
amounts remain unpaid. Doc. 1 at 21. The loan documents provide that, in the
event of a default, U.S. Bank may seek the appointment of a receiver to administer
the properties. Id. at 21–22; see also Doc. 1-12 at 9. In light of this provision,
U.S. Bank has filed a motion requesting the appointment of a receiver and
additional injunctive relief to enable the receiver to function effectively. Docs. 6 at
10–11; 1 at 24–30.
Based on its contention that the loan documents provide an express right to
the appointment of a receiver in the event of a default, U.S. Bank argues that it is
contractually entitled to a court-appointed receiver. Setting aside whether such an
agreement is even enforceable,2 the court notes that the loan documents do not
indicate that the Defendants ever consented to the automatic appointment of a
receiver. Rather, the loan documents provide only that U.S. Bank may “apply for
the appointment of a receiver . . . without notice and without regard for the
adequacy of the security for the Debt.” Doc. 6 at 14; see also Doc. 1-12 at 9. In
other words, contrary to U.S. Bank’s initial contention in this matter, the relevant
Courts have reached different resolutions to this difficult issue. See Am. Bank & Trust Co. v.
Bond Int’l Ltd., No. 06-CV-0317, 2006 WL 2385309, at *8 (N.D. Okla. Aug. 17, 2006) (holding
that a lender was “entitled to the appointment of a receiver under the bargained-for provisions of
the parties’ agreement”); but see PNC Bank, N.A. v. Presbyterian Ret. Corp., No. 14-0461, 2014
WL 6065778, at *4 (S.D. Ala. Nov. 13, 2014) (opining that “the discretionary, equitable nature
of the receivership remedy . . . would be destroyed if a plaintiff could lock in a positive legal
right to appointment of a receiver . . . [accordingly] Rule 66 . . . is not supplanted by a . . .
contract enforcement approach”).
contractual language does not reflect the existence of an affirmative right to a
receiver as a remedy for default. Thus, the court turns to the equitable principles
traditionally governing the receivership remedy.
“[T]he appointment of a receiver is not automatic . . . [and is a] remedy
[that] should be . . . granted only when clearly necessary to protect plaintiff’s
interests in the property.” Citibank, N.A. v. Nyland (CF8) Ltd., 839 F.2d 93, 97 (2d
Cir. 1988). To obtain this relief, U.S. Bank has the burden of demonstrating the
necessity of a receiver to preserve its rights in the subject property. See, e.g.,
Sterling Sav. Bank v. Citadel Dev. Co., 656 F. Supp. 2d 1248, 1262 (D. Or.2009).
In that respect, the court notes that many of the factors traditionally governing the
appointment of a receiver are not in dispute. For example, the Defendants do not
contest that they are in default, or that U.S. Bank is virtually certain to prevail on
the merits of its breach of contract claim. Doc. 31 at 3, 12. Similarly, there is no
question that, as a creditor with a security interest in real property, U.S. Bank
“[has] an interest in the property . . . that may provide a basis for convincing the
court to appoint a receiver.” Baron, 703 F.3d at 306 (citation omitted).
On the other hand, U.S. Bank does not allege that fraud has occurred or that
it is likely to occur. This factor weighs strongly against the appointment of a
receiver as it has a direct bearing on the touchstone of the receivership inquiry—
whether the appointment is “clearly necessary to protect plaintiff’s interests in the
property.” Nyland, 839 F.2d at 97; Gordon v. Washington, 295 U.S. 30, 37 (1935)
(noting that the core purpose of a receivership is “to preserve and protect the
property pending its final disposition”).3
Here, U.S. Bank asserts primarily that a receivership is warranted because
the subject properties are in danger of diminishing in value or being squandered.
More specifically, U.S. Bank contends that (1) the properties have incurred
significant amounts of deferred maintenance totaling more than $400,000; (2) that
the Defendants have failed to provide requested financial information to either U.S.
Bank, or to the marketing firm engaged by the Defendants to liquidate the subject
U.S. Bank asserts correctly that courts “[have] appointed receivers even where there was no
evidence of fraud.” D.B. Zwirn Special Opportunities Fund, L.P. v. Tama Broad., Inc., 550 F.
Supp. 2d 481, 491 (S.D.N.Y. 2008). However, one of the cases U.S. Bank cites for this
proposition, United States v. Trusty Capital, Inc., No. 06-CV-8170, 2007 WL 44015 (S.D.N.Y.
Jan. 5, 2007), falls within the specialized regulatory context of the Small Business Investment
Act, as amended, codified at 15 U.S.C. §§ 661 et seq. Given that unique posture, the court finds
the case distinguishable. The other cited case, Tama Broadcasting, primarily involved a motion
to remand. The court does discuss the propriety of granting a receivership in the case, but it
never actually does so. Tama Broad., 550 F. Supp. 2d at 489. Thus, it is also distinguishable
from the situation presently before this court. And, even if these cases were otherwise
persuasive, they uniformly involve substantially more dire financial situations than the one
presently facing the court. See Tama Broad., 550 F. Supp. 2d at 492 (noting that the Defendant
“will soon lose all of its assets” and that its ability to continue operations was at risk based on
FCC violations); Trusty Capital, 2007 WL 44015, at *3, 7–8 (noting that it was “unquestionable
that Defendant has violated federal rules and regulations” in addition to the mere default of
payment obligations and further emphasizing the specialized statutory schema governing the
case under the Small Business Investment Act); see also U.S. Bank Nat’l Ass’n v. Nesbitt
Bellevue Prop. LLC, 866 F. Supp. 2d 247, 251–54 (S.D.N.Y. 2012) (appointing a receiver based
on the “inexorable” diminution of the value of the subject properties based on the likely
termination of the tenant’s franchise license). Thus, in accord with the historical practice of
federal courts, this court finds that the absence of fraud or potential fraud bears significantly on
the equities of the receivership appointment. Aviation Supply, 999 F.2d at 317 (relying heavily
on potentially fraudulent conduct involved in the case to justify appointment a receiver); see also
Watkins, 934 F.2d at 1189 (noting that “in light of the egregious nature of appellants’ actions,”
transferring assets from entities in an attempt to evade collection efforts, the district court did not
err in appointing a receiver without an evidentiary hearing).
properties; and (3) that the private broker engaged by the Defendants to liquidate
the properties has made little progress in generating sales. Doc. 32-1 at 3–6. For
the reasons stated below, none of these contentions warrant the appointment of a
First, as to the deferred maintenance issue, appointment of a receiver is only
appropriate if there is an “imminent danger of the diminution of the value of the
properties.” U.S. Bank Nat’l Ass’n v. Nesbitt Bellevue Prop. LLC, 866 F. Supp. 2d
247, 250–51 (S.D.N.Y. 2012) (allowing the appointment of a receiver because the
properties at issue faced an “inexorable” diminution in value based on the
imminent loss of a franchise license). The court cannot make such a finding here
because U.S. Bank controls the rental receipts and does not dispute that the
properties provide significant cash flows, see docs. 1 at 27; 33 at 25; 6 at 17.
Indeed, the record indicates that the subject properties are fully operational and that
U.S. Bank, as well as a third party broker, expect the properties to generate strong
revenues into the future. See Docs. 6 at 17; 33 at 25. Moreover, the evidence
suggests that Logan’s Roadhouse has generally complied with its responsibilities
under the lease and resolved most of the maintenance issues U.S. Bank’s review
Doc. 33 at 19–20.
In short, there is no suggestion that deferred
maintenance expenses pose any imminent risk to the value of the properties.
Second, although the record supports U.S. Bank’s contention regarding
various communication issues between the parties concerning Logan’s financial
situation and the development of a concrete repayment plan, it seems the
Defendants and Logan’s Roadhouse have made substantial progress in
ameliorating those concerns. For example, Logan’s Roadhouse has now provided
the Defendants with financial statements related to its recent emergence from
Chapter 11 bankruptcy proceedings, and the Defendants in turn provided that
information to the broker they have engaged to liquidate the properties. Doc. 31 at
10–11. Moreover, the Defendants have retained a consulting firm to interface with
U.S. Bank, and have recently presented U.S. Bank with a Loan Resolution
Proposal outlining a plan for liquidating the properties and paying off the defaulted
loans in full. Doc. 33 at 6, 22–25.
Third, the record belies U.S. Bank’s contention that the Defendants and their
broker have made insufficient progress in selling the properties at issue. In fact, in
just over a month, one of the Defendants has entered into a purchase agreement to
sell its property, and two other Defendants have executed letters of intent and are
in the process of negotiating purchase agreements. Doc. 31 at 11. Given this
recent progress, it is evident that the Defendants are actively taking steps to fulfill
their obligations under the loan agreements by liquidating the subject properties.
The record simply does not support U.S. Bank’s contention that a receiver is
necessary to facilitate this ongoing process.
In addition to the evidence discrediting U.S. Bank’s contentions, the intricate
involvement of a third party tenant, Logan’s Roadhouse, also militates against the
appointment of a receiver. The court is not convinced that a receiver would
resolve the underlying issues in this case given that Logan’s Roadhouse is
responsible under its lease for maintenance of the subject property and is required
to administer any funds released by either U.S. Bank, or a receiver, for
maintenance purposes. Docs. 31 at 9–10; 32 at 11; 32-1 at 4; 33 at 6. Indeed, as
U.S. Bank explains, the lack of tenant financial information due to Logan’s
Roadhouse’s recent Chapter 11 filing is what has hindered the Defendants’
marketing efforts, a situation the parties have since resolved. Docs. 31 at 10–11;
32-1 at 5, 32. In essence, the receiver would step into the shoes of the Defendants
with respect to dealing with a non-party that controls the maintenance of the
subject properties and has failed to provide financial information in a timely
fashion. Therefore, because “[t]he summary remedy by receivership, with the
attendant burdensome expense, should be resorted to only on a plain showing of
some threatened loss or injury to the property, which the receivership would
avoid,” Washington, 295 U.S. at 39, the court declines to appoint a receiver absent
any showing that the receiver would be in a better position than the Defendants to
resolve the issues in this case.
The court also declines to appoint a receiver because of the significant
administrative costs—in this case, at least, a total of $65,000 for the first six
months and $7,500 for each subsequent month, plus the costs associated with
collecting and assembling the various records pertaining to the administration of
each property. Doc. 1 at 26–27; see also Cellnet Tech., 2008 WL 11337779, at *2
(recognizing the “cumbersome” nature of the receivership procedure); Waag v.
Hamm, 10 F. Supp. 2d 1191, 1195 (D. Colo. 1998) (recognizing the complications
posed by appointment of a receiver and the likely “significant” expense such an
appointment would incur). U.S. Bank is correct to note that the properties generate
sufficient rental income to cover these costs. Doc. 1 at 27. However, from the
court’s perspective, this fact weighs against appointing a receiver.
previously, U.S. Bank already has control over this income stream and has offered
no credible contention supporting the existence of an immediate threat to that
income, or to the overall value of the subject properties.
The addition of a
receiver, paid by funds already controlled by U.S. Bank, would only create
duplicative administration fees and further increase the risk of confusion among
the various entities involved in this case while potentially impeding recently
generated sales momentum.
Finally, the court declines to appoint a receiver due to U.S. Bank’s failure to
demonstrate convincingly the absence of an adequate legal remedy. See United
States v. Bradley, 644 F.3d 1213, 1310 (11th Cir. 2011) (explaining that as an
equitable remedy a receivership is properly imposed only when “there is no
remedy at law or the remedy is inadequate”); see also United States v. Jefferson
Cty., Nos. CV-75-S-666-S, CV-74-S-17-S, 2013 WL 4482970, at *15 (N.D. Ala.
Aug. 20, 2013) (collecting cases suggesting that a receivership is typically a
remedy of last resort and only appropriate when other remedies are unlikely to be
successful). This is a plain vanilla breach of contract case in which liability is
undisputed. The case is ripe for early summary disposition, and once U.S. Bank
moves for summary judgment, it would likely obtain a judgment along with the
right to utilize all available methods to collect on that judgment. See Doc. 1-12 at
9 (explaining that in the event of default the non-defaulting party may “recover
judgment on the Note either before, during or after any proceeding for the
enforcement of this mortgage”). There is no showing that the use of the regular
judicial process to resolve this case would impair the value of the properties or
otherwise waste the underlying assets at issue.
CONCLUSION AND ORDER
“Under federal law, appointing a ‘receiver is an extraordinary equitable
remedy,’ which should be applied with caution.” Canada Life Assurance Co. v.
LaPeter, 563 F.3d 837, 844 (9th Cir. 2009) (quoting Aviation Supply Corp., 999
F.2d at 316). U.S. Bank’s contention that the Defendants have taken inadequate
steps to preserve and liquidate the subject properties, and that to the extent the
Defendants have taken such actions they have inadequately communicated them to
U.S. Bank, is simply insufficient to demonstrate that the equities warrant the
application of such an extraordinary remedy. See id. This is specifically the case
where, as here, the Defendants have not sought to avoid their obligations under the
lease or to otherwise defraud U.S. Bank, and where the properties are not in any
imminent danger of diminution in value. Accordingly, the court finds that the
appointment of a receiver is unwarranted, and therefore declines to reach the issue
of the injunctive relief necessary to effectuate the purposes of the receivership.
U.S. Bank’s motion to appoint receiver, doc. 5, and the identical request included
in the complaint, doc. 2, are DENIED.4
To the extent U.S. Bank’s request in its initial complaint for injunctive relief to “bolster the
Receiver’s powers,” doc. 1 at 27, is a request for preliminary injunctive relief even absent the
appointment of a receiver, the request is denied. Among other things, a preliminary injunction
requires a showing that “irreparable injury will be suffered unless the injunction issues.” Siegel
v. LePore, 234 F.3d 1163, 1176 (11th Cir. 2000) (en banc). Indeed, “the absence of a substantial
likelihood of irreparable injury . . . standing alone, make[s] preliminary injunctive relief
improper.” Id. For the same reasons outlined above, the record simply does not indicate that,
absent injunctive relief, U.S. Bank will suffer a concrete, irreparable injury. And, even if the
record did reflect an immediate risk of monetary losses, or the diminution in the value of the
subject property absent an injunction, “[a]n injury is ‘irreparable’ only if it cannot be undone
through monetary remedies.” Ne. Fla. Chapter of Ass’n of Gen. Contractors of Am. v. City of
Jacksonville, 896 F.2d 1283, 1285 (11th Cir. 1990). U.S. Bank’s asserted injuries are entirely
economic, and, as such, they cannot amount to an irreparable injury as a matter of law.
DONE the 27th day of November, 2017.
ABDUL K. KALLON
UNITED STATES DISTRICT JUDGE
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