Lincoln St. Mezz II, LLC v One Lincoln Mezz 2 LLC

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Lincoln St. Mezz II, LLC v One Lincoln Mezz 2 LLC 2021 NY Slip Op 32635(U) December 8, 2021 Supreme Court, Kings County Docket Number: Index No. 530492/2021 Judge: Leon Ruchelsman Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. [*FILED: 1] KINGS COUNTY CLERK 12/08/2021 03:23 PM INDEX NO. 530492/2021 NYSCEF DOC. NO. 32 RECEIVED NYSCEF: 12/08/2021 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF KINGS : CIVIL TERM: COMMERCIAL 8 --·---· . --·--. ·------- .-----·-----·-. - ,---... ---.x LINCOLN STREET MEZZ II, LLC, Plaintiff, Decision ahd order Ihde~ No. 5i0492/2021 - against ,... ONE LINCOLN MEZZ 2 LLC, December 8 1 :2021 De.f endant, ·-· --. ·---- ·---- .---·---. - ··--------- ·-----·--·x PRESENT: HON. LEON RUCHELSMAN The plaihtiff has moved by order to show cause seeking to enjoih the defendant from ehga.gin:g in a ucc sale of the member and equity interest in One Lincoln Mezz I I LLC Or from taking any action to effectt1ate such sale. motion. The defendant opposes the Papers were submitted by the parties and .arguments held. After reviewing all the arguments this court now makes the following determination. According to the complaint, the property in: this case, the State Street Financial Center in Boston, Massachusetts is owned by non--,-party Fortis Property Group LLC through its affiliates. Currently, there are four loans oh the property, a mortgage loan administered by Morgan Stanley Mortgage Capital Holdings LLC in the .amount of $535,000,000 .and ~hree subordinate mezzanine loans. The lender of t.he first mezzanine loan in the amount of $125,000,000 is GPPIB credit Investments I.I Inc.. the .second mezzanine loan .in the amount of $i25, The lender of ood, 000 de:fendant who acquired the loan on June ...24, 20.21. is the The th.ird mezzanine Tender in the amount of $1Q0,00O,D00 is KTB CRE Debt 1 of 14 [*FILED: 2] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 Fund No. 7, A Korean Investment Trust. AlthoLigh the plaintiff had be~n negotiating with others to refinance the loans and secured refinancing for a :majority of the outstandipg debt the plaintiff defaulted on the loan on November 10, 2021. The following _day the defend9 nt sent a notice pursuant to Article 9 of the Uniform Commercial Code for the sale of collateral, namely the one hundred percent equity interest in defendant corporation pursuant toa Pledge and Security Agreement executed when the defendant purchased the loan on June 24. sale has been scheduled for December 20, 2021. The It should be noted the third mezzanine lender, KTB has scheduled a UCC foreclosure sale for December 21, 2021. The plaintiff has now moved seeking to stay the foreclosure sale noticed by the defendant. The defendant opposes the motion. Conclusions of Law CPLR §6301, as it pertains to this case, permits the court to issue a prelimin'ary injunction "in any action ... where the plaintiff has demanded and would be entitled to a judgement restraining defendant from the commission or the continuance of an act, which, if committed or continued during the pendency of the action, would produce injury to the plaintiff" (id). A party seeking a preliminary injunction "must demonstrate a probability of success on the merits, danger of irreparable injury in the 2 2 of 14 [*FILED: 3] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 absence of the injunction and a balance of the equities in its favor" (Nobu Next Door, LLC v. Fine Arts Hosing, Inc., 4 NY3d 839, 800 NYS2d 48 [2005], see also, Alexandru v. Pappas, 690, 890 NY2d 593 [2d Dept., 2009]) . 68 Ad3d Further, each of the above elements must be proven by the moving party with "clear and c:onvincing. evidence" (Liotta v. Mattone, 71 AD3d 741, 900 NYS2d 62 [2d Dept., 2010]). The plaintiff argues it has established a likelihood of success on the merits by demonstrating the de-fendant failed to satisfy §9-627(b) of the Uniform Commercial Code. That rrovision requires that the "disposition of the collateral" must be "made in a commercially reasonable manner;' whereby it is done "in conformity with rea,sonable commercial practices arnong dealers in the type of property that was the subject of the disposition" (id) . The plaintiff provides three .reasons why the proposed foreclosure sale date of December 20, 2021 is not commercially reasonable. First, the defendants present an affidavit from Alan Tahtleff, an expert in Commercial real estate who asserts the sale notice is not commercially reasonable for four reasons. Mr. Tantleff contends that ''the timeline mandated in the Terms of Sale is convoluted and confusing" the "timelin.e is complicated by the Christmas and New Year's Eve holidays as the Scheduled Sale is being conducted at .a time when many qualified bidders are likely to be on vacation; no va.lue""maxim.:iz:i,ng seller tifoulq choose 3 3 of 14 [*FILED: 4] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 this date as such timing will certainly minimize attendance and chill bidding" the "'tirrieframe between the Notice of Sale and: the Scheduled Sale is too short to allow for the necessary diligence of a very significant and complex asset" anci that "by scheduling the Scheduled Sale within one day of the Third Mezz Scheduled Sa1e, the Secured Party has created: the opportunity for confusion, which will ultimately chill bidding" (see, Affidavit of Alan Tant le ff, 'Il 2 6) . The second reason offered why the sa h~, is commercially 1.mreasonable, and addressed by Mr. Tantlef f; is the defendant is seeking to ''.rush'; the sale to take place one day prior to KTB's scheduled sale. There is no basis for this accelerated schedule; argues the plaintiff, since in any event KTB is subordinate to the defendant's loan. The third reason offered, also raised by Mr. Tantleff, is that the sale is scheduled to take place right before and indeed during the holiday season and this provides insufficient time for potential buyers to obtain the necessary financing. An examination of these reasons is now necessary. In New York a disposition of collateral is commercially reasonable if made "in the usual matter on any recognized market ... at the price current in any recognized rriarket at the time bf the dispositioh ... or otherwise in: conformity with rea_sonable .commercial. practices ~rnong dea.lers in the. type of property that was the subject of the disposition" (see, NY UCC 4 4 of 14 [*FILED: 5] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 §9-627(b). Further, pursuant to NY UCC §9-610(b) "every aspect of a dLsposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable// ( id) . Inc., Therefore, in Bankers Trust Company v. J .V. Dowler Company 47 NY2d 128, 417 NYS2d 47 [1979] the court explained that since the statute do~s not provide further particularization about Commercia 1 reasonableness, therefore, accepted business practices must be a guide when evaluating such reasonableness. Thus, ''customs and usages that actually govern the members of a business calling day-in and day-out not only provide a creditor with standards that are well recognized, but tend to reflect a practical wisdom born of accumulated experience" (id). The court further offered two reasons inherent in the mechanisms noted, either to achieve the< highest possible price or to insure proper procedures are employed. However, prior to the s_ale the only considerations that must be examined are whether the procedures were proper. Mr. Tantleff argues that scheduling the sale the day before the third mezzanine lender's proposed sale date creates confusion which could chill bidding. This is true because "a potential bidder tna:y incorrectly assume. several things such as.: iJ that the notice qf the Soheo.uied Sale is simpl¥ a re-noticing of the Third Mezz $chl:ld1,1led Sale; ii) that. the Third M.e.z:z Scheduled Sale was moved to a day earlier; iii) that its participation ..in the Third 5 5 of 14 [*FILED: 6] KINGS COUNTY CLERK 12/08/2021 03:23 PM INDEX NO. 530492/2021 NYSCEF DOC. NO. 32 RECEIVED NYSCEF: 12/08/2021 Mezz Scheduled Sale would automatically register i t as a participant in the Scheduled Sale; or iv) the total disregard of the notice. There could be confusion as to the dates by which bidders need to register or post deposits as a precursor to bidding. Unfortunately, such opportunity for confusion could erroneously lead a potential bidder to be excluded from participation in. the Scheduled Sale and a deleterious effect on . the auction" (see, Affidavit of Alan Tantleff, 'I[ 62) . In truth, it is difficult to imagine a sophisticated bidder, and only a sophisticated bidder would be interested in such an expensive property, could make such elementary and easily verifiable mistakes. The fears offered and assumptions raised that could confuse a bidder are not likely to exist given the magnitude and scope of the loahs under consideration. Only extremely well :ftmded and well counseled bidders have the wherewithal to participate in these bids. Such individuals are unlikely to be confused by the issues raised by Mr. Tantleff. There is ::::;urely no likelihood of such mistakes sufficient to argue the notic~s served .were improper as a matter of law. Concerning the argument the date of the hearing occurs during the holiday season, there are cases that hold service during the holiday .season raises questions whether the notice was commercially reasonable. In Commercial Credit Group Inc.; v. Barber, 682 SE2d 760, 199 N.C.App 731 [Court of Appeals of North 6 6 of 14 [*FILED: 7] KINGS COUNTY CLERK 12/08/2021 03:23 PM INDEX NO. 530492/2021 NYSCEF DOC. NO. 32 RECEIVED NYSCEF: 12/08/2021 Caro1.ina, 19"9.9] th_e court held th~t, scheduling· an a.µctio11 two days after Christmas and proy_iding notice.s a mere t:wo day_s beforehand was not commercially rea~onable. However, the court s.pecifically .riot.ed the .colla:teral in that case. was a "highly specialized. ~nd expensive piece of inoperable machineryu ibat had a "irarrow t:·omtnerc·i,al us.e·.,, and the notices therefore did not "enhance coirt:petitive bidding-"· (ici) • Further, i-.n Highland CDO oppurturiity Master FUhd LP v. Citibank N'.A., 2016 [S. D,.N. Y. 20.16] W:L 1267781 a party introduced an e'X:pert af'fidavit thai; OJ?ined that bids· due on December 31 was c·omm:e-rcially· t.uid~-asonabl·e becau,se on the last day of the year "'most br;oker;...deale rs and investors are pn.ly partially s.taf·f·e.d, ,, 'l.mlany or most o:f- the senior personnel t;;ike the o.ay off,. and typic2J.lly a -s:kele.ton cr~w is in place to conduct a.hy minor business tha't may come up'; moreove-r, 'most buy-side· (in.ve.stment) firms close their honks well before Christmas,. year after y_ear' and thus 'most potential bidders for an auction held on th.e last day of the· year would not have been able to. participate'·" ' (id). The cou:;:-t held thi§!: rais.ed questions of fact whether the notice was cotnmetcially reasonable. In thi.s case.-, however, .the notices·. were public-i:·zed a:n Nov.ember 11, .Z021; well pefore any ho_liday season_._ Th~ mer-.e fact the actual sale is a few days before a holiday and might 1.ntextere with an overarchi·ng and extended holiday se-a·son does not mean t;:.he s_.ale is commercial,.ly unr_E;!ason.able as a matter of 7 7 of 14 [*FILED: 8] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 law. INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 Thus, detailed information about vacation habits, flight availability and reduced work hours do not have any bearing on notices sent in early November. To argue otherwise would virtually eliminate most of the yea.r as- appropriate for scheduling a sale, afte.r all, holidays and vacations are always approaching and can interfere with a steady and uninterrupted work flow. That is precisely why the few courts that have ft>Und such unieasonable notice dates as .noted above, were instances where the dates were literally within a day or two of a holiday, objectively comro.ercially unreasonable dates. Lastly; the agreement between the parties does not dictate certain periods of time where the sc_heduling of arty foreclose sale tnay not occur. Surely, in this case there is no likelihood of success that such schedule is unreasonable as a matter of law. Furthermore, the mere fact the defendant has scheduled the sale a day before the third mezzanine lender KTB does not mean the schedule is commercially unreasonable. Indeed, the plaintiff has failed to demonstrate the precise unreasonableness of the schedule. Other than assertions of confusion which, as noted, the court finds unpersuasive, Mr. Taritleff proffers that he is "not cl.Ware o.f a legitimate commercial. reason fdr such scheduling"' (see~ Affidavit of Alan -'ta:ntl€=ff, 1i! 61) . Wrieth.er there is q le9itimate comni.e,rcial reason for scheduling the sa.le a day before KTB' s does not .mean such schedule is. commercially unreasonable as 8 8 of 14 [*FILED: 9] KINGS COUNTY CLERK 12/08/2021 03:23 PM INDEX NO. 530492/2021 NYSCEF DOC. NO. 32 RECEIVED NYSCEF: 12/08/2021 a matter of law or that there is a likelihood such schedule is commercially unreasonable. Even if the plaintiff could establish a likelihood of success, the plaintiff would also be required to demonstrate a irreparable harm. In order to satisfy the second prong.of irreparable harm it must be demonstrated that monetary damages are insufficient (DiFabio v. Omnipoint Communications Inc., 66 AD3d 635, 887 NYS2d 168 [2d Dept., 2009]) . The plaintiff presents two reasons why the harrn they coulci ~uffer is not merely monetary. First, they assert the agreem.ent provides that where the lender has acted unreasonably then the ~'borrower's sole remedy shall be limited to commencing an action seeking injunctive relief or declaratory judgme:nt" (see, Amended ahd Restated Second Mezzanine Loan Agreement, §11.12) rendering any monetary award unavailable. However, that provision necessarily requires a finding the defendant acted "unreasonably" (id). The plaintiff does not explain the unreasonable "claim or adjudicationu (id) that would permit injunctive relief except to note that the injunction is permitted ~'to halt the µn1awful conduct" (see, Affirmation in Support, page 10). Indeed, in the complaint the plaintiff elides this requirement by simply asserting th.at it: ~'has. no other ef.fe.ctive remedy besides an injunction to protect its :r;ights because :i.t cannot recove.r money damages from Defendant" (see, Complaint, 'll 34). 9 9 of 14 In Omni [*FILED: 10] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 Berkshire Corporation. v. Wells Fargo Bartk, N .A., 2003 WL 1900822 [S.D.N.Y. 2003] upon which the plaintiff relies, the borrower, Omni, sued and sought an injunction preventing the defendant W.e1ls Fargo fxom pµrchasing terrorism insurance and then charging the plaintiff for the premiums. The agreement in that case contained a provision similar to §1.1.12 in this case whi:ch foreclosed any action for monetary dama'ges and only allowed injunctive reli.ef. The court granted the injunction holding that »even though the threatened injury-the cost of premium~'--,is one that ordinarily would be fully compensable by money damages, §10.12 of the Agreement appears to preclude Omni from suing Wells Fargo for money damages. Section 10.12 provides that where a claim is made that the Lender or its agents actecl 'unreasonably,' neither Lender nor any of its agents is liable for money damages and Omni's 'Sole' remedy is to seek injunctive or declaratory relief. As One of the principal issues presented is whether Wells Fargo's request that omni obtain terrorism insurance is reasonable, it would appear that Omni would not be able to recover t:he cost of premiums as damages if it turns out, upbn a trial on the ·merits, that it is not required to obtain terrorism in .s.urance . Hence, Omni wi 11 suffer i r.reparab le ha rm" ( id) . In this case there is no aliegation o,r c;:laim. the. defendant . acted unreasonablyr a ne.cessary precondition to avail itself of injunctive relief.. To the ext en:t the. uri.rea.sonabl e conduct is the io 10 of 14 [*FILED: 11] KINGS COUNTY CLERK 12/08/2021 03:23 PM INDEX NO. 530492/2021 NYSCEF DOC. NO. 32 RECEIVED NYSCEF: 12/08/2021 notice date of the foreclosure sale, it has already been determined that was riot unreasohable. Moreover, arguing that an irreparable injury exists because there is a likelihood of success on merits on the very grounds that gives rise to tfle irreparable injury impermissibly conflates these two prongs of tne preliminary injunction standard (Floyd v. City of New York, 959 F.Supp2d 691 [S.Q.N.Y. 2013]). Therefore, the agreement itself does not provide any basis that any money damages is insufficient. Next, the plaintiff argues it must be entitled to injunctive relief because the foreclosure sale will res.ult in a loss of property which cannot be replaced with any money damages. However, the plaintiff does not own the real prope.:rty. The plaintiff owns one hundred percent of the shares of a corporation that indirectly owns the property. There are no cases that hold that ownership interests in such an entity is the equivalent of an ownership interest in real property sufficient to render the interest unique and thereby entitle the party to injunctive relief. On the contrary, the authority a mezzanine loan does. not confer any ownership in real property abounds. Thus;- "in the real estate industry a mezzanine financing refers to a loan .se.cu.red principally by the borrow.er' s equity in _other entities. OnlikE:! co_nvent:iorial mortgage financing where_ th.e borrower o~ns real est,ate, a mezzanine borro.we:i:: does11' t directly own ~my re.al 11 11 of 14 [*FILED: 12] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 property nor does it operate any business-it acts merely as a sort of holdirrg company. A mezzanine borrower typically only owns equity in a family o.f 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" (see, Andrew Berman, Once .a Mortgage, Always a Mortgage"....,.The Use (and Misuse of) Mezzanine Loans and Preferred Equity Investments, 114 [Autumn 2005]). 11 Stan. J.-L. Bus. & Fin. 76, 79, 106-107; Further, in Hotel 71 Mezz Lender LLC v. Falor, 14 NY3d 303, 900 NYS2d 698 [2010] the court noted that such loans are "secured not by the real property itself, but by stock of or some ownership interest in the company that owns the real property" (id at Footnote 1). V; Again, in Gaia I-louse Mezz LLC State Street Bank and Trust Company, 720 F3d 84 [2d Cir. 2013] in footnote. 1 the court explained that "a mezzanine loan is junior loan secured by a pledge of equity interests in a particular company" (id}. In William Rothschild, Mezzanine Loans: The Lesser of Two Evils?, 31 No.. S Prac. Real Est. Law. 55 [September 2015] the author explains that "th.e mezzanine borrower is typically a single asset entity, whose s.ole .asset is its ownership interest in the mortgage borrower. The mezzanine loan is seourect by a pledge in favor .of the mezzanine lender of the. mezzanine b.0rrower' s equity interests .in the mortgage borrower.. 12 12 of 14 [*FILED: 13] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 The mezzanine loan is not secured by a lien on the real property, an assignment of leases and rents or any other asset which is collateral for the mortgage loan" (id}. Therefore, there is no basis for the plaintiff to argue that it maintains an interest in property that is unique that cannot consequently be compensated irt money damages. The plaintiff further argues that "the plaintiff ultimately owns the State Street Owner, the entity that awns and operates the State Street Financial Center. If the Foreclosure happens as planned, plaintiff will i:rnrnediately lose its valuable control and rnanagement rights over all the State Street Financial Center operations, which in and of itself constitutes irreparable harm. Plaintiff's loss of control over operations of the 'Property will also eliminate its abilit:,y to control public perception of the State Street Financia,l Center name,; (see, Affirmation in Support, page 13}. That argument, however, is the same argument already raised, namely that the plaintiff maintains an ~wnership interest in the real property sufficient to confer irreparable harm. noted, the plaintiff maintains no such interest.. As The interest the plaintiff maintains was negotiated between the parties and the plaintiff was fully aware of the limits, parameters and 1:ienefits of a .mezz 9 ninE;: loan. No such irreparable ha.rm can result if the foreclosure auction takes place. Therefore, based oh the foregoing;. the motion seeking an 13 13 of 14 [*FILED: 14] KINGS COUNTY CLERK 12/08/2021 03:23 PM NYSCEF DOC. NO. 32 INDEX NO. 530492/2021 RECEIVED NYSCEF: 12/08/2021 injunction staying the foreclosure sale is denied. So ordered. ENTER: Dated: o~cember 8, 2D21 Brooklyn, N.Y. Hon. Leon Ruchelsm.an JSC 1.4 14 of 14

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