Lebedowicz v Meserole Factory LLC

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[*1] Lebedowicz v Meserole Factory LLC 2011 NY Slip Op 52260(U) Decided on December 20, 2011 Supreme Court, Kings County Schmidt, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 20, 2011
Supreme Court, Kings County

Jerry Lebedowicz and Lucy Lebedowicz,, Plaintiffs,

against

Meserole Factory LLC, Israel Perlmutter, Menachem Stark, and Eugene Mendlowitz, Defendants.



20293/10



Plaintiff Attorney: Tenebaum, Berger, & Shivers, 26 Court Street, Brooklyn, NY 11242

Defendant Attorney: Leo Fox, 630, Third Avenue, New York, NY 10017

David Schmidt, J.

The following papers numbered 1 to 7 read herein:Papers Numbered

Notice of Motion/Order to Show Cause/

Petition/Cross Motion and

Affidavits (Affirmations) Annexed ___________1-3

Opposing Affidavits (Affirmations)___________4-6

Reply Affidavits (Affirmations) ______________7

Fundamentally at issue in this matter is whether the plaintiffs Jerry Lebedowicz and Lucy Lebedowicz (the plaintiffs) have a security interest in the membership interests of the defendant Meserole Factory LLC, a New York limited liability company (the LLC), owned by its members — the defendants Israel Perlmutter, Menachem Stark, and Eugene Mendlowitz (the individual defendants). After joinder of issue, but before any discovery commenced, the plaintiffs have moved for summary judgment on their complaint declaring that they are entitled to the individual defendants' membership interests in the LLC; for an order striking the answer and affirmative [*2]defenses; and for the appointment of a referee to ascertain and compute the amount due to the plaintiffs (motion sequence No. 1).For the reasons set forth herein, the plaintiffs' motion is denied in its entirety.

Background

On November 4, 2005, the LLC purchased certain commercial real property located at 239 Banker Street in Brooklyn (Block 2593, Lot 1) from nonparty Meserole Avenue, LLC, an entity owned by the plaintiffs. The purchase price was $8.25 million. To finance the purchase, the LLC and the individual defendants borrowed $4.95 million from nonparty Broadway Bank (the bank), and the LLC granted a mortgage on the real property to the bank (see records for the subject property at Automated City Register Information System).[FN1]

Additional financing was obtained by the LLC in the form of a mezzanine loan in the principal amount of $3.5 million, purportedly secured by a lien on the LLC interests. At the closing, the LLC executed and delivered a Mezzanine Purchase Money Note, dated November 4, 2005 (the Mezzanine Note), in favor of the plaintiffs in the face amount of $3.5 million. The signature lines on the Mezzanine Note (on page 10 thereof) appear as follows (the term "Mezzanine Borrower" is defined on page 1 of the Mezzanine Note as the LLC):

"MEZZANINE BORROWER:

MESEROLE FACTORY LLC,

a New York limited liability company

By:[manual signature]

Name: Menachem Stark

Title:Member

By:[manual signature]

Name: Israel Perlmutter

Title:Member

By:[manual signature]

Name: Eugene Mendlowitz

Title:Member"

The Mezzanine Note recites (in § 7 thereof) that it is a secured note. In particular, the Mezzanine Note states that:

"The debt evidenced by this Note is to be secured by, among other things, the [Mezzanine] Loan [and Security] Agreement and the Pledge therein of all the Member Interests and Member Certificates of the Mezzanine Borrower limited liability company to and for the [*3]benefit of the [plaintiffs]" (emphasis added).

At the closing, the LLC and the plaintiffs entered into a Mezzanine Loan and Security Agreement, dated as of November 4, 2005 (the Mezzanine Security Agreement). At the signature lines (page 49 of the Mezzanine Security Agreement), there are two columns. The first column is designated for the "Borrower," which is defined in the Mezzanine Security Agreement (on page 1 thereof) as the LLC. The second column is designated for the "Mezzanine Lender," which is collectively defined in the Mezzanine Security Agreement (also on page 1 thereof) as the plaintiffs. The "Borrower" column reads in its entirety as follows:

"BORROWER:

MESEROLE FACTORY LLC,

a New York limited liability company

By:[manual signature]

Menachem Stark, Member

By:[manual signature]

Israel Perlmutter, Member

By:[manual signature]

Eugene Mendlowitz, Member"

As is relevant to this action, section 9.1.1 of the Mezzanine Security Agreement (on page 28 thereof) provides, in relevant part:

"CREATION OF SECURITY INTEREST. In consideration of and as security for the full and punctual payment and performance of the Mezzanine Purchase Money Note of even date herewith and all the Obligations (Mezzanine) when due . . ., Borrower, as pledgor, hereby pledges, assigns, hypothecates, transfers and delivers to Mezzanine Lender and hereby grants to Mezzanine Lender a continuing first priority on and security interest (pursuant to NY U.C.C. Article 9) in, to and under, all of the right, title and interest of and to Borrower limited liability company, all Member Interests and/or Member Certificates of and to Borrower limited liability company, and all of Borrower's claims, rights, powers, privileges, authority, options, security interests, liens and remedies, if any, under or arising out of the Borrower's limited liability company . . ." (emphasis added).

Neither the italicized term "Member Interests," nor its component words "Member" and "Interests" are defined in the Mezzanine Security Agreement.[FN2] Although the italicized term [*4]"Member Certificates" is likewise not defined in the Mezzanine Security Agreement, its component word "Certificate" is defined (on page 2 thereof) as "any and all certificates issued by the Borrower limited liability company evidencing an interest therein." The phrase "Borrower limited liability company" is undefined, while the term "Borrower" is defined as the LLC, in the Mezzanine Security Agreement. In this regard, the Mezzanine Security Agreement draws a distinction between these two terms: the "Borrower limited liability company" on the one hand, and the "Borrower" on the other hand. Such distinction is particularly noticeable in the definition of the term "Pledge," which is defined in the Mezzanine Security Agreement (on page 6 thereof) as the "Borrower's 100% membership . . . interests of the Borrower limited liability company to [the plaintiffs]" (emphasis added).

At the closing, the individual defendants executed a Certificate of Authority, dated November 4, 2005. The Certificate of Authority recites (in § 6 thereof) that the individual defendants were duly authorized by the LLC to "execute all documents necessary to effectuate the proposed sale or mortgage, and that the signature set forth opposite his[ ] name [was] his[ ] genuine signature." The Certificate of Authority further recites (in § 7 thereof) that it was "made and delivered in order to induce [the plaintiffs] to loan to the [LLC] $3,500,000 in connection with the conveyance by Meserole Avenue LLC of its fee interest in the real property . . . to the [LLC]."

On April 21, 2010, the plaintiffs served the LLC with a ten-day notice to cure the payment defaults for the period of November 2007 through November 2009.

On August 16, 2010, the plaintiffs instituted the instant action by filing a summons and complaint.[FN3] In explaining the factual predicate of their claims, the plaintiffs allege (in ¶¶ 4-6, 8 of their complaint) that:

(a) the individual defendants have "granted, pledged and assigned to [the plaintiffs] as secured collateral, inter alia, all [of their respective] rights, title and interest of and to Borrower, and all [of their respective] member interests and/or member certificates of and to Borrower"; and

(b) "the Borrower, through its members, granted, pledged and assigned to Lender as secured collateral, inter alia, all members' rights, title and interests of and to Borrower, and all members' interests and/or member certificates of and to Borrower, to and for the benefit of the [*5][plaintiffs]" (emphasis added).

After quoting the aforementioned section 9.1.1. of the Mezzanine Security Agreement, the plaintiffs assert (in ¶ 10 of their complaint) that they have "a valid and perfected first priority Lien upon and security interest in the Borrower, and that [they] may exercise all of the rights and remedies of a secured party under the UCC" (emphasis added). The plaintiffs further assert (in ¶ 22 of their complaint) that in accordance with the Mezzanine Security Agreement they now have the right to sell "any or all of the Borrower, Member Interests and/or Member Certificates of Borrower limited liability company . . . at public or private sale . . ." (emphasis added).

The plaintiffs assert three causes of action, which the court construes as all being directed toward compelling the individual defendants to deliver the LLC interests to them. The plaintiffs in their first cause of action (in ¶¶ 34-36) seek a judgment declaring that:

(a) "the amounts due to the plaintiffs . . ., as provided for in [the Mezzanine] Loan Documents, and that defendants . . . subsequent to the commencement of this action and every other person or corporation whose right, title, conveyance or encumbrance is subsequent to or subsequently recorded, may be barred and forever foreclosed of all right, claim, lien and equity of redemption in said secured collateral";

(b) "pursuant to the [Mezzanine] Loan Documents, . . . Borrower transfer to plaintiffs all of the right, title and interest of and to the Borrower limited liability company, all Member Interests and/or Member Certificates of and to Borrower limited liability company, and all of the Borrower's claims . . . under or arising out of the Borrower's limited liability company . . .; that defendants execute any and all documents necessary to effect the transfer of Borrower's interests in the defendant LLC; and that plaintiffs be decreed to be owners of the defendant LLC . . ."; and

(c) "such transfer to plaintiffs of the rights, title and interests in the defendant LLC shall cancel the amounts due to the plaintiffs for principal, interest, costs, expenses and reasonable attorney's fees; or, in the alternative, in the event that a valuation and appraisal of the defendant LLC be had, that the value thereof be applied to the principal, interest, costs, expenses and reasonable attorney's fees incurred in connection herewith, which . . . shall be secured by the [Mezzanine] Loan [and Security] Agreement . . ." (emphasis added).

As the emphasized language indicates, the plaintiffs interchangeably use the terms "Borrower," "Borrower limited liability company," and "defendant LLC" in their first cause of action.

The plaintiffs in their second cause of action (in ¶ 40) seek "specific performance by defendants of [their] obligation under the Mezzanine Loan Documents that Borrower transfer to [the plaintiffs] all of the right, title and interest of and to the defendant limited liability company, all Member Interests and/or Member Certificates of and to Borrower limited liability company . . .; and . . . that defendants execute any and all documents necessary to effect[uate] the transfer of Borrower's interests in the defendant LLC" (emphasis added). As the emphasized language indicates, the plaintiffs, while continuing to use interchangeably the terms "Borrower," "Borrower limited liability company," and "defendant LLC," have now added another term, "defendant limited liability company." [*6]

The plaintiffs in their third and final cause of action (in ¶ 43) request a preliminary and permanent injunction against the defendants that, pursuant to the Mezzanine Security Agreement, the "defendants execute any and all documents necessary to effect[uate] the transfer of Borrower's interests in the defendant LLC" (emphasis added).

On January 3, 2011, the LLC and the individual defendants interposed a joint answer in which they denied the material allegations of the complaint and referred the court to the terms of the Mezzanine Security Agreement for the terms thereof. In their answer, the defendants also asserted a host of affirmative defenses.

On March 1, 2011, the plaintiffs served the instant motion for summary judgment on their complaint, striking the defendants' joint answer and affirmative defenses, and appointing a referee to ascertain and compute the amount due to the plaintiffs. The motion was fully submitted on September 6, 2011, and the decision was reserved.

The Parties' Principal Contentions

Plaintiffs' Motion

In their motion, the plaintiffs assume, without any analysis, that they have a valid lien on the LLC interests as alleged in their complaint. They do not cite in their motion to any provision of the Mezzanine Security Agreement, except for § 2.5.3 thereof ("Satisfactory Collateral"), a pre-closing condition precedent that is no longer relevant after the closing. Rather than focusing on their prima facie case, the plaintiffs choose to ground their attack in disparagement of the defendants' answer and affirmative defenses.

Defendants' Opposition

In opposition, the defendants contend that the plaintiffs are entitled to no relief. Specifically, they contend that the LLC cannot deliver the LLC interests to the plaintiffs because it does not own (and has no right nor power to transfer) such interests. The defendants maintain (in ¶ 5 of their counsel's opposition), that "[o]nly the members of the LLC, and not the LLC, own the interests of the LLC, and the Plaintiffs have presented no documentation or other proof that the members individually agreed to personally oblig[at]e themselves to transfer[ ] these interests to the Plaintiffs in the event of default." The defendants point out that both the Mezzanine Note and the Mezzanine Security Agreement are signed by the LLC as borrower by its three members, rather than on behalf of the individual defendants personally. They also point out that the Certificate of Authority is likewise signed by the individual defendants on behalf of the LLC. In the alternative, the defendants argue that summary judgment is premature and that, in any event, on this record, issues of fact exist.

Plaintiffs' Reply

In reply, the plaintiffs contend that, pursuant to the Mezzanine Security Agreement, they hold a valid lien on the LLC interests. The plaintiffs assert (in ¶ 5 of their counsel's reply affirmation) that "the clear and unambiguous language, nature and intent of the [Mezzanine] Security Agreement was for the members to pledge their membership interests as security to be transferred to plaintiffs upon an event of default, and it is only in that capacity that the defendants members could and did sign the [Mezzanine] [S]ecurity [A]greement." The plaintiffs contend (in ¶ 6 of their counsel's reply affirmation) that "only one signature block on the [Mezzanine] loan documents was needed for each individual member to grant his interests as security." They use an exclamation point to emphasize that "[the individual defendants] were not signing to bind the LLC but to bind themselves as members!" (Reply Aff., ¶ 6). They point out that it would be illogical for the individual defendants [*7]to sign both the Mezzanine Note and the Mezzanine Security Agreement solely on behalf of the LLC, when the two documents have different purposes: whereas the Mezzanine Note reflected a debt obligation of the LLC, the Mezzanine Security Agreement granted a corresponding lien on the individual defendants' membership interests in the LLC. According to the plaintiffs, the individual defendants signed the Mezzanine Security Agreement in a dual capacity: first, in a personal capacity, as the grantors of the lien on their LLC interests, and, second, in a representative capacity on behalf of the LLC to acknowledge this lien (Reply Aff., ¶ 7). The plaintiffs conclude that not only have they established their case as a matter of law through the production of the Mezzanine Note, the Mezzanine Security Agreement, and the evidence of default, but also the defendants cannot raise a triable issue of material fact (¶ 15).

Discussion (a)

UCC article 9 governs the attachment, perfection and priority of liens on most types of personal property serving as collateral."A membership interest in the limited liability company is personal property" (Limited Liability Company Law § 601). Under UCC article 9 as enacted in New York law, a security interest in personal property does not attach and is not enforceable until the "debtor" has rights in the "collateral" (see UCC 9-203 [a], [b] [2]).[FN4] Here, the "debtor" is the LLC, and the purported "collateral" is the membership interests in the "Borrower limited liability company." In accordance with the Mezzanine Security Agreement (in § 9.1.1. thereof), the "Borrower" granted the plaintiffs a lien on its interests in the "Borrower limited liability company." The term "Borrower," which is defined in the Mezzanine Security Agreement as the LLC, could not be subsumed within the undefined term "Borrower limited liability company" because the Borrower cannot hold its own LLC interests and, therefore, could not grant the plaintiffs a lien on its own LLC interests.

(b)

A member of a limited liability company is generally personally immune from liability for his company's debt (see Limited Liability Company Law § 609; see also Panasuk v Viola Park Realty, LLC, 41 AD3d 804, 805 [2d Dept 2007] ["A member of a limited liability company may not be held personally liable on contracts entered into by his . . . company, provided he . . . did not purport to bind himself . . . individually under such contracts."]). Here, the Mezzanine Security Agreement indicates that the transaction was between the LLC and the plaintiffs. The introductory paragraph of the Mezzanine Security Agreement states:

"THIS MEZZANINE LOAN AND SECURITY AGREEMENT . . . between MESEROLE FACTORY LLC, a New York limited liability company ( BORROWER') . . . and JERRY LEBEDOWICZ and LUCY LEBEDOWICZ . . . (. . . MEZZANINE LENDER')."[FN5] [*8]

The general term "Borrower" to mean the LLC is utilized throughout the Mezzanine Security Agreement. The individual defendants' signatures appear in the location designated for the LLC in the Mezzanine Security Agreement. Their names do not appear anywhere else on the Mezzanine Security Agreement, except in § 19.16 ("Notices") to indicate that notice to the Borrower (Meserole Factory LLC) was to be addressed to the attention of the individual defendant Menachem Stark. The individual defendants, as owners and representatives of the LLC, had agency authority to execute these documents on behalf of the LLC (see Certificate of Authority). The individual defendants signed the Mezzanine Security Agreement as members solely on behalf of the LLC. Significantly, the individual defendants did not separately sign the Mezzanine Security Agreement in their personal capacity so as to grant the plaintiffs a lien on their LLC interests. Thus, the Mezzanine Security Agreement plainly means the individual defendants solely as members on behalf of the LLC. Since there was no separate, personal obligation running from the individual defendants to the plaintiffs in the Mezzanine Security Agreement, the individual defendants did not grant the plaintiffs a lien on their LLC interests pursuant to Mezzanine Security Agreement.

(c)

Contrary to the plaintiffs' protestations, the court's interpretation of the Mezzanine Security Agreement does not render it meaningless. As explained by one commentator: "In the real estate industry a mezzanine financing refers to a loan secured principally by the borrower's equity in other entities. Unlike conventional mortgage financing where the borrower owns real estate, a mezzanine borrower doesn't directly own any real property nor does it operate any business — it acts merely as a sort of holding company. A mezzanine borrower typically only owns equity in a family of other subsidiaries, and these other subsidiaries actually own the underlying real property. Therefore, the value of the mezzanine borrower's collateral is derived solely from its indirect ownership of the underlying real property.. . . In a mezzanine loan, neither the mezzanine borrower nor lender actually holds any direct real property interest in the underlying land serving as collateral. Rather, their respective interests are derived solely from the mezzanine borrower's (direct or indirect) ownership of the equity in the underlying mortgage borrower. The mezzanine borrower grants to the mezzanine lender a lien on its equity in the mortgage borrower pursuant to a written instrument (typically a security agreement), and thereafter the mezzanine lender holds an effective lien on the collateral at least vis-à-vis the mezzanine borrower.. . . Since the mezzanine lender's collateral is equity in another entity, the collateral is technically personal property; therefore Article 9 of the Uniform Commercial Code (UCC) applies rather than local mortgage law.. . . Unlike a mortgage loan that is directly secured by land, the only collateral for a [*9]mezzanine loan is the mezzanine borrower's pledge of its ownership interest in another subsidiary entity. The value of the lender's collateral, therefore, derives solely from the mezzanine borrower's (typically indirect) ownership and control of the subsidiary that owns the underlying real property."

Berman, "Once a Mortgage, Always a Mortgage" — The Use (and Misuse of) Mezzanine Loans and Preferred Equity Investments, 11 Stan. J.L. Bus. & Fin. 76, 79, 106-107, 114 [Autumn 2005] [footnotes omitted; emphasis added]).

If the traditional mezzanine loan structure had been followed in this case, a separate holding company would have been formed to own the LLC, and the LLC, rather that the individual defendants, would have granted the plaintiffs a lien on its interests in that newly formed entity. In fact, it appears that the parties originally intended to use the traditional mezzanine loan structure. Specifically, according to the express terms of the Mezzanine Security Agreement, the "Borrower" was to grant a lien on its interests in the "Borrower limited liability company." Obviously, the Borrower could not grant a lien on its own membership interests, and, therefore, a "Borrower limited company" was to be formed. The record is silent regarding whether or not such entity was ever formed.

Conclusion

Since the plaintiffs have failed to make the required prima facie showing, the branch of their motion which is for an order, pursuant to CPLR 3212 (b), granting them partial summary judgment on their complaint is denied regardless of the sufficiency of the opposing papers (see Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]). In light of this disposition, the remaining branches of the plaintiffs' motion are also denied.

This constitutes the decision and order of the court.

The defense counsel shall serve a copy of this decision and order with notice of entry upon the plaintiffs' counsel and shall file proof of service with the County Clerk.

E N T E R,

J. S. C. Footnotes

Footnote 1:The County Clerk's records indicate that on July 10, 2009, the bank commenced a proceeding to foreclose the purchase money mortgage as well as its subsequent junior mortgage on the subject property. The proceeding is against the LLC, the individual defendants, and a holder of mechanic's lien (see Broadway Bank of Chicago v Meserole Factory, LLC, index No. 17288/09 [Sup Ct, Kings County]).

Footnote 2:Limited Liability Company Law § 102 (q) defines a "member" as "a person who has been admitted as a member of a limited liability company in accordance with the terms and provisions of this chapter and the operating agreement and has a membership interest in a limited liability company with the rights, obligations, preferences and limitations specified under this chapter and the operating agreement." Limited Liability Company Law § 102 (r) defines a "membership interest" as a member's aggregate rights in a limited liability company . . . "

Footnote 3:Concurrently, the plaintiffs filed a notice of pendency against the property. The court notes, in passim, that the plaintiffs' notice of pendency is improper under CPLR 6501 because the dispute does not affect "the title to, or the possession, use or enjoyment of, real property" as required by CPLR 6501, but instead involves the plaintiffs' alleged personal interest in the LLC which owns the real property (see Sealy v Clifton, LLC, 68 AD3d 846, 847 [2d Dept 2009] [the interests in an LLC constitute personal, rather than real, property]). Since the defendants have not moved to cancel the notice of pendency, however, the court will not do so sua sponte (see CPLR 6514 [a] and [b] [providing, in each instance, for cancellation of a notice of pendency "upon motion of any person aggrieved and upon such notice as it may require"]).

Footnote 4:The "debtor" is defined to include "a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor" (UCC 9-102 [a] [28]), and the "collateral" is defined as "the property subject to a security interest" (UCC 9-102 [a] [12]).

Footnote 5:Likewise, the introductory paragraph of the Mezzanine Note states:

"FOR VALUE RECEIVED, MESEROLE FACTORY LLC ( Mezzanine Borrower') . . . promises to pay to JERRY LEBEDOWICZ and LUCY LEBEDOWICZ ( Mezzanine Lender' or Holder') . . . "