U.S. Bank National Association v. Sayona Hospitality, LLC

Filing 11

REPORT AND RECOMMENDATION re: 10 MOTION FOR ENTRY OF CONSENT ORDER APPOINTING RECEIVER filed by U.S. Bank National Association, and 6 Emergency MOTION to Appoint Receiver filed by U.S. Bank National Association. RECOMMENDATION: t hat Plaintiffs 6 Emergency Motionfor Immediate Appointment of Receiver be GRANTED and that Plaintiffs 10 Motion for Entry of Consent Order Appointing Receiver be GRANTED and that the District Judge enter the Consent Order Appointing Receiver alon g with Exhibit A 10 1&2 as submitted. Objections to R&R due by 6/26/2014 at 5:00 pm. Signed by Magistrate Judge Robert W. Trumble on 6/25/2014. (cwm) (Main Document 11 replaced on 6/25/2014) (cwm). Modified to regenerate NEF after document replaced per Magistrate Judge Trumble 6/25/2014 (cwm).

UNItED STATES DISTRICT COURT
FOR I LIE NORTHERN DISTRIC F OF WES I IRGINI4
MARTINSBURG DIVISION
U.S. BANK NATIONAL ASSOCIATION, AS
TRUSTEE. SUCCESSOR-IN-INTEREST
To BAN K OF AMERICA, N.A,, AS
TRUSTEE. SUCCESSOR BY MERGER TO
LASALLE BANK NATIONAL
ASSOCIATION, AS TRUSTEE, FOR TIlE
REGISTERED hOLDERS OFJ.P.
MORGAN CHASE COMPvIERCIAL
MORTGAGE SECURITIES TRUST 2006CIBC17, COMMERCIAL MORTGAGE
PASS-TIIROUG1I CERTIFICATES,
SERIES 2006-CIBCI7,
Plaintiff,
CIVIL ACTION NO. 3:14-cv-62-GMG
JUDGE GROII
SAYONA HOSPITALITY, LLC,
Defendant.

REPORT AND RECOMMENDATION

L

INTRODUCTION

On June 19, 2014. Plaintiff U.S. Bank National Association, as Trustee,

successor-in-interest to Bank of America. N.A., as Trustee. successor by merger to LaSalle Bank
National Association, as Trustee, for the registered holders of J.P, Morgan Chase Commercial
Mortgage Securities Trust 2006-C IBC 1 7, Commercial Mortgage Pass-Through Certificates,
Series 2006—CIBU 17 (“Plaintiff”) filed an Emergency Motion for Appointment of a Receiver

[ECF No. 6] requesting that the Court appoint EAWV Associates LLC, a West Virginia limited

liability company (heremafier “FAWV”) as recei er to manage and operate the Flotel and collect
the Rents during the pendenc of this action or until the Property is sold at foreclosure sale.’
Plaintiff is a secured lender with a tirst priontv seeurit interest in certain Properly
primaril\ comprised of a hotel known as the Holiday Inn F\press

\Iartinshurg North (the

“Hotel”). Plaintiffs collateral includes the profits generated by the hotel’s operations (as more

specifically defined in Plaintiff’s Verified Complaint, the “Rents”>.
Defendant Savona Hospitality. LL(’ (“Defendant”) owns and operates the Hotel.
Defendant is in dethult of its obligations o ed to the Plaintiff pursuant to that certain loan made
by the Plaintiff on or about September 26. 2006 and the Loan Documents e ideneing the same.
and that certain

Loan

Modification Agreement dated effective as of December 1 5. 2010. (“Loan

Documents.”) Among other things. Defendant has thiled to pa’ the regularly—scheduled
payments due under the Loan Documents and has failed to make deposits into a restricted
account pursuant to the terms of the loan documents since early April. 2014. Plaintiff has
provided Defendant with notice of its default and has accelerated the balance due on the unpaid
balance of the obligation owed all in accordance with the terms of the loan documents.
II.

FINDINGS OF FACT

Based on the Plaintiffs Verified Complaint. Plaintiffs Memorandum in Support of
Plaintiffs Emergency Motion for Appointment of Receiver and attachments [ECF No. 6] and on
Plaintffs Motion [ECE No. j. the Undersigned makes the following findings of thct by a
preponderance of the eidenee. See Miller v. Van Schaick,6 F. Supp. 633. 637 (S.D.N.Y. 1934).
I)

On or about September 2. 2006. DefCndant borrowed S3.750.000.00 (the “Loan”)
from JPMoi-gan Chase Bank. NA. (“Original Lender). The Loan is e’ idenced by that

On June 25, 2014, the Plaintiff also filed a Motion for Entry of(onsent Order Appointing Receier and filed a
“(onent Order \ppointlng Reeeier” signed by both parties.

certain Fixed Rate sote dated September 27. 2006 gi en by Defendant pa able to the

order of Original I ender in the original principal amount of the Ioan (the \ote).
2) The Loan is secured h. among other things. that certain Deed of Trust and Security
Agreement dated September 27. 2006 gi en by Defendant for the benefit of Original

Lender. recorded as Fransaction 200603 5896 in Deed of Trust Book 01995 at Page
0020 in the Berkeley Count, West Viruinia Clerk’s Office (the “Clerk’s Office”) on

September 28, 2006 (the Ded o1ru’)

3) The Loan is further secured by that certain assignment of leases and rents dated
September 27, 2006, gi\en by the Defendant wherein (a) Defendant absolutely and
unconditionalh assigned the Rents to Original Lender, and (b) Original Lender
granted Defendant a reocahle license to collect the Rents, Original Lender’s security
interest in the Personal Property, including the Leases and the Rents, was perfected by
filing a LCC Financing Statement with the West Virginia Secretary of State on
October 4, 2006 with file number 200600965715 (the “FinçigStateinent”).
4) Original Lender assigned the Loan and the Loan Documents to LaSalle Bank
National Association, as trustee tir the registered holders of J.P. Morgan Chase
Commercial Mortgage Securities Trust 2006-CIBC 17, Commercial Mortgage PassThrough Certificates. Series 2006-CIBC 17 (“Interim Holder”), as evidenced by that
certain Assignment of Deed of Trust and Security Agreement and Assignment of
Assignment of Leases and Rents gien by Original Lender to Interim Holder.
recorded as Fransaction 2007()l 7263 in Deed Book 00868 at Page 1)0227 in the
Clerk’s Office on May 11, 2007.

5) Bank of America.

.A., as successor by merger to Interim Holder. further assigned

the Loan and the Loan Documents to Plaintiff. Plaintiff is the present owner of all

right, title and interest in and to the Loan and the Loan Documents.
6) Beginning Febniary 1, 2010, Defendant failed to make the required payments of
principal and interest and other sums (along with other defaults, the “201 0 Defaults”).
As a result of the 201() Dethults, Bank of America. \.A., as successor by merger to
Interim Holder, accelerated the Loan and scheduled a nonjudiciai foreclosure sale.
The Loan was ultimately reinstated and modified pursuant to that certain
Modification Agreement dated effective as of December 15, 2010 (the “Modification
Agreemen”).
7) Pursuant to the Modilication Agreement, Defendant entered into that certain Cash
Management agreement dated as of December 15. 2010 (the “Cash Management
Aerepf’). Pursuant to the Cash Management Agreement, Defendant is required to
deposit the Rents into a clearing account (the

çjcted Account”) within two

business days of receipt.
8) Any Rents deposited into the Restricted Account are transferred to a separate account
(the “Cash Manatement Account”) from which the Rents are used to pay the items in
priority as set forth in the Cash Management Agreement, which items include.
operating expenses. taxes and insurance reserves, and the regularly-scheduled
installment payments of principal and interest due under the Loan Documents.
9) The Hotel is operated as a Holiday Inn Express pursuant to that certain Holiday Inn
Express Change of Ownership License A’eement dated March 24, 2004 between

4

Holiday Hospitality Franchising. Inc., as licensor. and Defendant, as licensee (the
LicenseAeement”). The License Agreement will expire on June 30, 2014.
10)

Defendant has not deposited any Rents into the Restricted Account since at the
latest) early-April (the “Diver

11)

Defau”).

As Rents x crc not deposited into the Restricted Account in accordance

ith the

Cash Management Agreement. there were insufficient ftinds in the Restricted
Account and the Cash Management Account to pay the regularly-scheduled payments
due under the Loan Documents on \lav 1, 2014 and June 1, 2014.

Further, the

Defendant has not made direct payments to the Plaintiffs (collectively, the “Paypcnt
Defaults”).
I 2) Plaintiff provided notice of the Di ersion Default and the Payment Defaults on May

29. 2014, pursuant to the terms of the loan documents and demanded that the defaults
he cured.
1 3) The Defindant has failed to cure the Diversion Default and the Payment Defaults.

By failing to make its regularly scheduled payment by May 7. 2014. the seventh

(7th)

calendar day after it was due, an event of default. Due to the said default the license
to collect the Rents was automatically revoked and Plaintiff was immediately entitled
to possession of the Rents.
14)

Fhe Plaintiff declared the entire unpaid balance of the Debt immediately due and
payable, and demanded that Defendant turnover to Plaintiff the Rents accruing on and
after May 7, 2014 (the “Post-Default Rents”), by letter dated June 13. 2014
(“Acceleration Letter”).

15) The Defendant failed to pay the entire unpaid balance of the Debt, as demanded in

the Acceleration Letter of S3.S27.2 ii .96.
16) The Hotel continues to operate and generate Post-Default Rents. Defendant has
failed to turn over the Post-Default Rents to Plaintiff
1 7) Defendant failed to pay the taxes assessed on the Personal Property for tax year

2013 (“ersonal Pmpyjc”). The Personal Property Taxes began to accrue late
payment penalties after April 30, 2014.

As of June 13, 2014, the total Personal

Late payment penalties continue to accrue.

Property Taxes Due were SI .436.3 1.

18) The fair market value of the Property, as appraised by the Berkeley County, West
Virginia Assessor’s Office, was approximately $3,202,636.67.
19) The unpaid balance of the Debt as of June 13. 2014 was at least S3.827.21 1.96.

Ill.

CONCLUSIONS OF LAW

Pursuant to its inherit equitable powers under federal common law, the United States
District Court derives the authority to appoint a receiver. See Liberte Capital Group, LLC v.

pyi1l, 462 F.3d 543, 551 (6th Cir. 2006), This authority is presumed by federal statute and
rule. See 28 U.S.C.

959 (requiring that an appointed receiver manage and operate the subject

property according to the requirements of the valid laws of the State in which such property is
situated); Fed. R. Civ. P. 66 (“These rules govern an action in which the appointment of a
receiver is sought.”).

Although Federal law governs whether to appoint a receiver in a diversity action. a state
statute may provide a vehicle for appointment of a receiver. çgnga Life Assur. Co. v. LaPeter,
563 F.3d 837. 843 (9th Cir. 2009). This Court has recently appointed receivers for distressed real
estate assets based on federal common law standards and West Virginia’s receivership statute.
6

53-61 ci seq. See First 1nitedB

\\est Virginia Code

k &Trust

.

TheSuareatFaflingRun.

tIC, No. 1:IICV3I, 2011 WL 1563108 (Max 31, 2011 N.D.WVa.) adopted by 2011 WE
1563027 Apri1 25. 2011 \.1).W,Vai (apph ing factors \ arious factors discussed helen): Lç
(‘hai[cs town Self Spagg,jLC. 3:l3-c-5l (May 13, 2013 N.D.W.Va)

Fund IL LI C

(appointing recei er based. in part. on West Virginia Code S 536-1 et gq.).
Pursuant

to

the express terms of the Modification :\greement. effective as of December

15. 2010. the Defendant Borrower consented to the entry of an Order of Appointment of
Receiver by a court of competent jurisdiction as additional security for the performance of the
Defendants singular obligations under the loan documents. Various federal courts have held that
a borrower’s contractual agreement to appointment of a recei er upon default is an independently
sufficient basis for appointment of a receiver. çç.

Britton v. Green. 325 F.2d 377. 382 (10th

Cir.1963) (holding that mortgagee was entitled to appointment of a receiver where the parties
had agreed in mortgage that mortgagee as entitled to appointment of receiver):

Am.

Bank&

Trust Co. v. Bondlnt[Ltd,, 06-CV-0317-CVE-FMH, 2006 WL 2385309 (N.D. OkIa. Aug. 17.
2006) (“Defendants.

.

.

have specifically agreed in the security agreement to the appointment of

a receiver in the event of a default. Defendants are in defliult of the Loan Documents.
Accordingly. [Plaintiff is entitled to the appointment of a receiver under the bargained-for
pro isions of the parties agreements.”).
Other courts have held that although the district court retains some level of discretion, the
contractual pros isions “strongly support” the appointment

of a receiver.

CitjbanlçN.A. yyland

39 F.2d Q3. 97 (2d Cir. 19X$) (“It is entirel\ appropriate thr a mortgage holder to
seek the appointment of a recei er where the mortgage authorizes such appointment, and the
mortgagee has repeatedly defaulted on conditions of the mortgage which constitute one or more
7

ecn1s of default.’); Fed. Nat. Morgg Ass

MapIetree ln’._estors Ltd. Phip. l0-CV-10381.

‘.

2O1OWL 1”53112 (ED. \lich. Apr. 30. 201()>.

Pursuant to paragraph thirteen (13> of the Modification Agreement effective December
15, 2010, Defendant has consented

to

the appointment of a receier upon an Eent of Default.

\1oreo er. as consideration tr Plaintitf’s agreement to reinstate the Loan after the 2010
Defaults, Defendant specifically consented to entry of a form recek ership order.
In Sqgire

this Court applied the following factors

in

determining whether

to appoint a recei\ er:
1.

inadequacy of the security to satisfy the debt:

2.

financial position of the debtor:

S.

fraudulent conduct on defendant’s part:

4.

inadequacy of legal remedies;

5.

imminent danger of the property being lost, concealed, injured, diminished in
value, or squandered:

6.

probability that harm to moving party by denial of appointment would outweigh
injury to parties opposing appointment;

7.

probability of moving party’s success in the action and the possibility of
irreparable injury to its interest in the property: and
whether moving party’s interests sought to be protected will in fact be well-served
by recei’ership.

Id.

(citing

Brill & Hajflgtp[nestments

V.

Vernon Savings and Loan Association. 787 F.

.
1
Sup 250. 253 54 (D.1).C. 19Q2)).
In this case, the property is inadequate to satisfy the debt, based on the Berkeley County’s
Assessment as to fair market value. Defendant has failed to make its payments pursuant to the
Loan l)ocuments. Defendant has failed to make the required deposits into the restricted account

8

as required by the (‘ash Management Agreement between the parties and no payments have been
made on the loan liar the months of May and June. 2() 14. As the Dctindant continues to operate
the hotel, there is imminent danger that the property (including the rents) vi1l he lost, concealed.
injured or diminished in value.
Additionally, Defendant has failed to pay the personal property taxes, which may result
in suspension of Defendant’s license to do business in West Virginia and assessment of
additional registration fees. W. Vi Code

11-2-li.

The franchise license expires June 30, 2014 and is vital to the value of the property. The
loss of a franchise license significantly decreases the value of the Property and makes it more
difficult to obtain a new franchise arrangement. Appointment of a receiver is necessary to
stabilize the Hotel and negotiate the transition of the Hotel to a new franchise.
As the primary source of recovery for the Plaintiff is the property. the Plaintiff’s legal
remedies are insufficient to Protect it’s interest without the

appointment

the Plaintiff from further diminishing the property’s value as

of a receiver. To protect

an operating entity. a receiver is

necessary to collect rents and operate the hotel. As the Defendant agreed to the appointment of a
receiver

in the Moditication Agreement. the probability of injury to the Defendant is non

existent.
Plaintiff’s probability of success on its breach of contract claim is high as is supported by
the loan documents.

IV.

RECOMMENDATION

For all otthc above reasons, it is RECOMMENDED that Plaintitis Emergency Motion
for Immediate Appointment of Receiver [ECE No. 6j be GRANTED. It is further

9

RECOMMENDED that Plaintitis \lotion for Fntr of Consent Order Appointing Receier

[ECF No, 10] be GRANTED and that the District Judge enter the “Consent Order Appointing
Receixer” along with Exhibit A [FCF No. 10-1 &2] as submitted.

Uhe parties ha e wai ed their right under S t.S.C.

636 to tile objections to this Report

and Recoimnendation.
The Court directs the Clerk of the Court to pros ide a copy of this Report and
Recommendation to all counsel of record. as pros ided in the Administrative Procedures for
Electronic Case Filing in the United States I)istriet Court fbr the Northern District of \Vest
Virginia.
Respectfully submitted this 25 day of June, 2014.

/

1OERT W.TUMBLE
UN ITED STATES \IAG I STRATE JUDGE

1 (3