Wilmington Trust, N.A., v. 5400 Raleigh Crabtree, LLC et al
Filing
191
MEMORANDUM OPINION AND ORDER: The Court has considered all of the arguments raised by the parties. To the extent not specifically addressed, the argumentsare either moot or without merit. For the foregoing reasons, the Receiver's motion to liqu idate mortgaged properties through a combination of deeds in lieu of foreclosure and/or receiver's sales is granted. The Receiver should submit a proposed order in seven business days. Any objection should be submitted fivebusiness days thereafter. Replies can be submitted three business days thereafter. Memoranda with any necessary explanation may be submitted along with the proposals. SO ORDERED. (Signed by Judge John G. Koeltl on 2/05/2024) (ama)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
───────────────────────────────────
WILMINGTON TRUST, N.A.,
Plaintiff,
- against -
20-cv-6089 (JGK)
MEMORANDUM OPINION
AND ORDER
5400 RALEIGH CRABTREE, LLC, ET AL.,
Defendants.
───────────────────────────────────
JOHN G. KOELTL, District Judge:
Pending before the Court is a motion by Mr. Jeffrey
Kolessar (the “Receiver”) for an order permitting him to
liquidate the mortgaged properties at issue in this action (the
“Properties”) through a combination of deeds in lieu of
foreclosure and/or receiver’s sales. ECF No. 164. The defendantborrowers (“Defendants”) object to such an order unless the
Court makes specific findings, among other things, that the deed
in lieu of foreclosure is not a prohibited transfer or an event
of default under either or both of the Mezzanine Loan Agreement
and the Mezzanine Guaranty Agreement. ECF No. 176. In its
papers, ACF L1-M, LLC (the “Mezzanine Lender”) objects to the
Receiver’s motion, alleging that the Court has no jurisdiction
over the Mezzanine Lender and that the Mezzanine Lender’s rights
will be compromised. ECF No. 181. At the argument of the motion,
however, the Mezzanine Lender did not object to the Receiver’s
application so long as it is clear that the order does not
extinguish the rights of the Defendants, the Mezzanine Lender,
or Guarantor under the Mezzanine Loan Agreement and Guaranty.
For the following reasons, the Receiver’s motion to liquidate
mortgaged properties through a combination of deeds in lieu of
foreclosure and/or receiver’s sales is granted.
I.
The following are the facts most relevant to the
disposition of the Receiver’s motion.
On June 28, 2017, the predecessor-in-interest of the
plaintiff Wilmington Trust, N.A. (the “Mortgage Lender”) entered
into a loan agreement (the “Mortgage Loan”) for $204 million
with the Defendants, which was secured by, among other assets,
mortgage liens on twenty-two properties owned by the Defendants.
Compl. ¶¶ 39, 43, ECF No. 1.
On the same day, certain entities that are the sole members
of the Defendants (the “Mezzanine Borrowers”) accepted a loan
from the Mezzanine Lender in exchange for a pledge of the
membership interests that the Mezzanine Borrowers own in the
Defendants, together with a collateral assignment of certain
purchase options. Declaration of Kimberly F. Aquino ¶ 2, ECF No.
177; see also id., Ex. 1, ECF No. 177-1. Additionally, the
Guarantor executed a Mezzanine Guaranty Agreement with the
Mezzanine Lender, under which the Guarantor agreed to guarantee
performance of certain of the Mezzanine Borrowers’ obligations
2
under the Mezzanine Loan Agreement. See id., Ex. 2, ECF No. 1772. Finally, the Mortgage Lender and the Mezzanine Lender entered
into the Intercreditor Agreement, which provides that the
Mezzanine Lender is entitled to fifteen business days’ written
notice of the Mortgage Lender’s acceptance of a deed in lieu of
foreclosure given by a Defendant with respect to any of the
Properties. Declaration of Joseph Caruso ¶¶ 13-14, ECF No. 182
(“Caruso Decl.”); see also id., Ex. 4, ECF No. 182-4.
On April 1, 2020, the Defendants defaulted in their payment
obligations under both the Mortgage Loan, see Compl. ¶ 75, and
the Mezzanine Loan, see Caruso Decl. ¶ 16. On August 4, 2020,
the plaintiff filed this action. ECF No. 1. On August 18, 2020,
the parties wrote jointly to inform that Court that the
Defendants consented -- after a “regrettable” delay -- to the
entry of an order appointing a receiver, after “negotiating the
consequences for Defendants’ consent to the receivership [with
the Mezzanine Lender].” ECF No. 28. In a Consent Order dated
August 19, 2020, this Court appointed Mr. Kolessar as the
Receiver. Consent Order Appointing Receiver, ECF No. 29; see
also Declaration of Jeffrey Kolessar ¶ 1, ECF No. 165 (“Kolessar
Decl.”). The Consent Order provides that “[t]he [Properties] and
Defendants’ Assets may be sold by way of public or private sale
or other disposition free and clear of all security interests,
liens, claims and other interests[;] all valid security
3
interests, liens, claims, and other interests, if any, shall
attach to the proceeds of such sale(s).” Consent Order
Appointing Receiver ¶ 22. The Receiver then began to market the
Properties for sale by soliciting and reviewing proposals,
listing agreements, and marketing plans; retaining a broker; and
overseeing two marketing campaigns. Kolessar Decl. ¶¶ 10-14. The
marketing campaigns were unsuccessful at locating a buyer. Id.
¶¶ 15-16.
Accordingly, on December 19, 2023, the Receiver filed the
current motion to liquidate the Properties through a combination
of deeds in lieu of foreclosure and/or receiver’s sales. ECF No.
164. The amount due on the Mortgage Loan as of November 30,
2023, is $262,989,455.80. Kolessar Decl. ¶ 20. The Receiver -who has acted as a receiver for and operated hotels since 1995
and has been the Receiver for the Properties in this case for
over three years -- reports that a sale of the Properties to
third parties would yield only a portion of the outstanding debt
and delay liquidation of the Properties, thereby causing the
parties to incur significant expense and delay. Id. ¶¶ 19, 2124.
II.
“A receiver, as an officer or arm of the court, is a
trustee with the highest kind of fiduciary obligations.” Phelan
v. Middle States Oil Corp., 154 F.2d 978, 991 (2d Cir. 1946).
4
The receiver “owes a duty of strict impartiality, of undivided
loyalty, to all persons interested” and “is bound to act fairly
and openly with respect to every aspect of the proceedings
before the court.” Id.
“A receiver has the affirmative duty to endeavor to realize
the largest possible amount for . . . [,]” id.; see also Golden
Pac. Bancorp. v. F.D.I.C., 375 F.3d 196, 201 (2d Cir. 2004), and
“protect the value of an asset that is the subject of
litigation,” United States v. Ianniello, 824 F.2d 203, 205 (2d
Cir. 1987). To that end, receivers are “granted broad powers to,
inter alia, . . . liquidate those assets . . . .” S.E.C. v.
Credit Bancorp., Ltd., 297 F.3d 127, 130 (2d Cir. 2002).
III.
A.
The Receiver initially argues -- and the Defendants and the
Mezzanine Lender do not dispute -- that the Receiver has the
authority to liquidate the Properties. Receiver’s Mot. 3-5, ECF
No. 171. As “an officer or arm of the court,” Phelan, 154 F.2d
at 991, receivers are granted broad powers, including the power
to liquidate assets, see Credit Bancorp., 297 F.3d at 130. In
this case, the Court, on the parties’ consent, granted the
Receiver the authority to dispose of all or a portion of the
Properties. See Consent Order Appointing Receiver ¶ 22; see also
Kolessar Decl. ¶¶ 7-8. In particular, “[i]f the Court determines
5
that appropriate circumstances exist for selling all or a
portion of the [Properties], the Court may enter an order
authorizing and directing the Receiver to sell the [Properties]
. . . by way of public or private sale or other disposition . .
. .” Consent Order Appointing Receiver ¶ 22. Accordingly, the
Receiver has the authority to sell the Properties.
The Receiver also argues that it is in the parties’ best
interest to dispose of the Properties through a combination of
deeds in lieu of foreclosure and/or receiver’s sales. Receiver’s
Mot. 5-8. A receiver “must endeavor to realize the largest
possible amount for assets . . . .” Golden Pac. Bancorp., 375
F.3d at 201. In so doing, “[a]ll the Receiver is required to
establish is that there are sound business reasons for selling
assets . . . .” Lawsky v. Condor Cap. Corp, 154 F. Supp. 3d 9,
22 (S.D.N.Y. 2015). “Once he makes such a showing, the
Receiver’s determination that [a sale] is in the best interest
of [the parties] is owed deference under the business judgment
rule.” Id. (citing Golden Pac. Bancorp.). In this case, the
Receiver has demonstrated why there are sound business reasons
for deeds in lieu of foreclosure. After expending a significant
amount of effort and resources over several years, the Receiver
and the parties determined in April 2023 that a deed in lieu of
foreclosure -- rather than the sale of the Properties to a
third-party purchaser -- was the best method to dispose of the
6
Properties. See Kolessar Decl. ¶¶ 16-17. The Receiver -- a
receiver for hotel properties since 1995 and the Receiver who
oversaw the marketing campaigns for the Properties for the past
three years -- observed that a third-party sale would yield
significantly less than the debt owed, increase the Defendants’
outstanding debt, and further delay disposal of the Properties.
See id. ¶¶ 19-20, 22; see also id., Ex. C. By contrast,
liquidation of the bulk of the Properties by deed in lieu of
foreclosure would provide the highest net present value recovery
for each property and obviate the need for further marketing and
accompanying court proceedings, thereby mitigating the
plaintiff’s losses and extinguishing the Defendant’s outstanding
obligations. See id. ¶¶ 23-24. This approach would also allow
the Receiver the flexibility to sell one or more of the
Properties through a nonjudicial foreclosure or receiver’s sale
should circumstances warrant a one-off sale, such as the
immediate need for substantial repairs and/or renovations. Thus,
the Receiver has made a showing that deeds in lieu of
foreclosure would be in the best interest of the parties, and
the Receiver’s determination is owed deference by this Court.
Cf. In re Chateaugay Corp., 973 F.2d 141, 144-45 (2d Cir. 1992)
(affirming a bankruptcy court’s approval of an asset sale
because it was supported by good business reasons, including the
risk that delay would reduce the value of the assets, the
7
debtor’s need for cash, and the opportunity to get a high prices
for the assets).
Finally, the Receiver, by filing the instant motion, has
provided fifteen days’ written notice pursuant to Section
14(b)(ii) of the Intercreditor Agreement. See Kolessar Decl. ¶
25; see also id., Ex. D § 14(b)(ii). Neither the Defendants nor
the Mezzanine Lender dispute the lapse of the fifteen days after
service of the Receiver’s motion. See Mezzanine Lender’s Opp’n
9-10, ECF No. 181. Accordingly, the Receiver has provided
required notice.
In summary, the Receiver has the authority to dispose of
the Properties, has made a showing that deeds in lieu of
foreclosure would be in the best interest of the parties, and
has provided notice as required by the Intercreditor Agreement.
B.
In its papers opposing the Receiver’s motion, the Mezzanine
Lender initially argued that the Court lacks jurisdiction over
the Mezzanine Lender because the Mezzanine Lender has not
consented to jurisdiction in New York. Mezzanine Lender’s Opp’n
9. However, as the Receiver correctly argues, the Mezzanine
Lender agreed in the Intercreditor Agreement to “irrevocably and
unconditionally submit[] to the jurisdiction of the United
States District Court for the Southern District of New York[.]”
Receiver’s Reply 8, ECF No. 184; see also Kolessar Decl., Ex. D
8
§ 17(g), ECF No. 165-4. The Mezzanine Lender attempts to argue
that the Intercreditor Agreement “does not apply under the
circumstances here” because “[t]he Mezz[anine] Loan Agreement
and the Guaranty do not arise out of the Intercreditor Agreement
and are not transactions contemplated under the Intercreditor
Agreement.” Mezzanine Lender’s Opp’n 9. But the issue here -deed in lieu of foreclosure -- clearly “relates to” the
Intercreditor Agreement and is a “transaction contemplated”
under the Intercreditor Agreement. See Kolessar Decl. ¶ 26; see
also id., Ex. D §§ 14(b) (repeatedly mentioning deed in lieu of
foreclosure or “DIL”), 17(g). Therefore, the Mezzanine Lender
consented to jurisdiction. In any event, the plaintiff has not
sought to join the Mezzanine Lender as a party and has not
sought any relief against the Mezzanine Lender, and the
Mezzanine Lender has not sought to join this lawsuit as a party.
Rather, the Receiver has provided notice to the Mezzanine Lender
as required by the Intercreditor Agreement, and the Mezzanine
Lender has submitted its views on the Receiver’s application.
The Mezzanine Lender argues that “the relief being sought
clearly impacts [the] Mezz[anine] Lender’s rights under the
Mezz[anine] Loan Agreement and Guaranty.” Mezzanine Lender’s
Opp’n 13. More specifically, the Mezzanine Lender contends that
allowing deeds in lieu of foreclosure “would not only deprive
[the] Mezz[anine] Lender of its right to bid on any individual
9
property at the required foreclosure sale, but also deprive
[the] Mezz[anine] Lender of its right to retain any equity over
and above the mortgages that might be realized at any
foreclosure sales.” Id. However, the Receiver’s motion “does not
seek to extinguish the rights of either Defendants or Mezzanine
Lender in relation to the mezzanine loan documents.” Receiver’s
Reply 7. First, as a practical matter, the Mezzanine Lender
already exercised its right to bid on the Properties, and its
low bid indicated that there would be no equity over and above
the mortgages. Arden Property Trust, LLC, the sole member of the
Mezzanine Lender, see Caruso Decl. ¶ 4, submitted bids for the
Properties well below the amount due to the plaintiff, see
Kolessar Decl. ¶ 13; see also id., Ex. A. Furthermore, the
Mezzanine Lender has failed to demonstrate that it has any right
to demand that the Properties be sold at a foreclosure sale. At
the argument of this application, the Mezzzanine Lender made it
clear that it did not oppose the Receiver’s application so long
as the order made it clear that nothing in the order
extinguished the rights of the Mezzanine Lender or Guarantor
under the relevant documents. The Mezzanine Lender’s position at
argument is consistent with the Receiver’s application.
The Defendants do not object in principle to the Receiver’s
motion. See Defs.’ Opp’n ¶ 22, ECF No. 176. However, the
Defendants ask that the Court include in its order various
10
conditions, including: an express finding that Defendants
objected to the deed in lieu of foreclosure transaction, an
express finding that the Receiver has directed the Mezzanine
Borrowers within the meaning of Section 5.14 of the Mezzanine
Guaranty Agreement to execute the transaction, an express
finding that the Mezzanine Lender is barred from bringing any
claims against the Mezzanine Borrowers and the Guarantor, and an
order confirming the scope of the Receiver’s authority as
“attorney-in-fact” for the Defendants. See id. ¶ 31. These
conditions appear to make representations about the Mezzanine
Loan documents and go beyond the relief that the Receiver has
sought.
In view of the fact that the Receiver’s motion does not
seek to affect the rights of the Mezzanine Lender, it is
sufficient to add a provision to the order that states what the
Receiver repeatedly states in his motion. “[T]he [m]otion does
not seek to extinguish the rights of either [d]efendants or
Mezzanine Lender in relation to the mezzanine loan documents.”
Receiver’s Reply 7. “[T]he [m]otion does not seek to extinguish
and/or seek determination as it relates to the mezzanine loan
agreement or guaranty.” Id. at 8. As the Defendants concede,
“[s]uch a confirmatory order would be consistent with the plain
language of Section 5.14 of the Mezzanine Guaranty Agreement,”
Defs.’ Opp’n ¶ 27, and therefore no express finding as to the
11
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?