Opinion
8982/09.
Decided January 28, 2010.
Zachery Murdock, Esq., Lazer, Aptheker, Rosella Yedid, PC, Melville, New York, Attorney for Plaintiff.
Joseph Zelmanovitz, Esq., Evan Newman, Esq., Stahl Zelmanovitz, New York, NY, Attorney for Defendants.
In this action seeking foreclosure on commercial property situated at 462 Kent Avenue, Brooklyn, NY, Block: 2134, Lot: 1 (the "property" or "subject premises"), plaintiff/mortgagee, Capital One, N.A., ("Capital") successor by merger to North Forth Bank, moves, pursuant to CPLR 3212, for summary judgment finding defendants Waterfront Realty Co.("Waterfront"), a partnership of co-defendants Isack and Abraham Rosenberg, and Waterfront Realty II LLC ("Waterfront II") in default under a mortgage between the parties dated March 13, 2003. Plaintiff also moves to strike the answer and dismiss or sever the counterclaims of the answering defendants Waterfront, Waterfront II, Isack Rosenberg and Abraham Rosenberg. Furthermore, plaintiff moves for a default judgment against all other non-appearing defendants and the appointment of a referee. Defendants Waterfront and Waterfront II cross-move to stay the action based upon the bankruptcy petitions filed by Isack and Abraham Rosenberg. For the reasons set forth below, plaintiff's motions are adjourned and defendants' cross motion is granted to the adjourned date.
Background
It is not disputed that plaintiff Capital is the successor by merger to North Fork Bank ("North Fork"). On March 13, 2003 North Fork and Waterfront entered into a Mortgage Modification Consolidation and Security Agreement (the "Consolidation Agreement" or "consolidated mortgage"). As stated in the Consolidation Agreement, Waterfront and North Fork agreed to consolidate a new mortgage and modify the liens of a series of pre-existing mortgages against the subject premises which were all assigned to North Fork from various predecessor mortgagees, into a single mortgage totaling $4,500,000. On the same date, March 13, 2003, Waterfront executed a new promissory note to North Fork reflecting the $4,500,000 indebtedness (the "Note"). (The Note and Consolidation Agreement or consolidated mortgages may collectively hereinafter be referred to as the "mortgage," "consolidated mortgages" or "loan"). Defendant Isack Rosenberg signed on behalf of Waterfront as its general partner. On the same date both Isack Rosenberg and Abraham Rosenberg executed a guaranty of the Note. (Exhibit CC to the Savino Affirmation).
For the sake of brevity and clarity the Court will not go into great detail on the history of mortgages and assignments related to the property. However, the Court notes that the Appendix to the Consolidation Agreement as well as plaintiff's motion meticulously tracks the recording of the mortgages and various assignments.
However, to summarize, between 1981 and 1985 Waterfront and Rosenberg entered into three separate mortgages on the subject premises. The first, recorded in 1981 was for $833,900 ("Mortgage 1"), the second, also recorded in 1981, was for $499,000 ("Mortgage 2") and the third for $1,058,858 was recorded in 1985 ("Mortgage 3"). Mortgages 1, 2 and 3 were assigned to Manufacturers Trade and Trust ("Manufacturers"), the assignments recorded on December 31, 1985. ( See Exhibits D, G, I to plaintiff's motion). However prior to recording the assignments Waterfront and Manufacturers entered into an agreement, dated November 20, 1985, consolidating Mortgage 1, 2 and 3 (Exhibit J to plaintiff's motion). This consolidation agreement was assigned to Great Neck Enterprises ("Great Neck") (Exhibit K to plaintiff's motion, assignment recorded on February 3, 1997). Great Neck, in turn, assigned the consolidated mortgages to M T Real Estate, Inc. ("M T") (Exhibit M to plaintiff's motion, assignment recorded on 2/3/1997). M T then assigned the three consolidated mortgages back to Great Neck (Exhibit N to plaintiff's motion, assignment recorded on 3/27/2001). Subsequently, Great Neck assigned the same to a partnership ( see Exhibit O to plaintiff's motion, assignment recorded on 3/27/01) which then assigned the three mortgages to North Fork Bank (Exhibit P to plaintiff's motion, assignment recorded on 4/18/03).
Finally, concurrent with the assignments of the original three mortgages, Helenspring Estate Inc. ("Helenspring") and Franklin Properties Inc. ("Franklin") entered into blanket mortgage on five other properties totaling $2,300,000. ( See Exhibit T to plaintiff's motion). By "Spreader Agreement" dated March 13, 2003, the blanket mortgage was expanded to include the subject premises, the other five properties released, and the Spreader Agreement assigned to North Fork Bank ( see Exhibits U, V, W to plaintiff's motion). Finally, on March 13, 2003 North Fork Bank and Waterfront entered into the Consolidation Agreement which is the subject of plaintiff's motion and encompasses the three original mortgages and the Helenspring Blanket mortgage.
The amount of $4,500,000 was derived from $3,915,251.20, the unpaid balance of the pre-existing mortgages on the property plus a $584,748.80 gap note and mortgage executed on the same date as the Consolidation Agreement ( see Exhibit X to plaintiff's motion).
The Note allowed for an extension of its payment period:
Provided (i) Maker and each Guarantor is not in default under any of the documents executed by them in connection with this Note and the debt evidenced hereby (the "Loan Documents") as of the date that the extension option is exercised, up to and including the date that the Extension Period (as hereinafter defined) commences, (ii) the appraised value of the Mortgaged Property (as hereinafter defined) is not more than a 60% loan to value ratio, as determined by Payee in its sole and absolute discretion, (iii) the leases reflected in a certified rent roll as of the date that the Extension Period commences provide a minimum debt service coverage ratio (which ratio shall be determined by Payee in its sole discretion) of 1.30 to 1.00 based on the Extension Interest Rate (as hereinafter defined), an (iv) Maker has not been late in making monthly installment payments of principal and interest during the initial five (5) year term of this Note more than three (3) times in any consecutive twelve (12) month period, then, Maker may, at its option, no less than sixty (60) days nor more than ninety (90) days prior to the Maturity Date, elect to extend the term of this Note for an additional five (5) year period (the "Extension Period") on all the same terms and conditions, except as specifically set forth herein, provided Maker sends written notice of its election to so extend together with payment of the sum of $125.00 for a property inspection fee, the Maker shall execute and deliver to the Payee an extension agreement with respect to this Note and the Mortgage and there shall be a closing of the extension and an endorsement of the title insurance policy insuring the lien of the Mortgage.
(Savino Affirmation in Support, Exhibit Z, Note at 2). The Note also provided that "This Note may not be changed, extended or modified nor may any term or provision hereof be waived, except by an instrument in writing signed by Maker and Payee." ( Id. at 3).
By deed dated September 28, 2004, Waterfront transferred title to the subject premises to Waterfront II, its undisputed sucessor in interest and, subsequently, on July 1, 2008, in accordance with the extension provisions of the Note, Waterfront II and Capital executed a Modification and Extension Agreement (the "July Extension") signed by Abraham Rosenberg on behalf of Waterfront II. The extension agreement acknowledged that "as of the date hereof the unpaid principal balance now due and owing on [the Note] is [$3,832,708.41]" and extended the time for payment of the existing Note to November 1, 2008 (Savino Affirmation, Exhibit AA). The July Extension also expressly provided, as is relevant, that:
1. The provisions of Existing Note [the Note as referred to in this decision] providing for the Mortgagor's right to extend the term of the Note is hereby deleted.
. . .
3. [Waterfront II, defined in the July Extension as "Mortgagor"] does hereby covenant and agree to pay the principal sum and interest at the times and in the manner her in above set forth as the same is hereby extended, and to comply with all the other terms and provisions hereof and to perform all of the covenants and conditions of the Existing Note [the Note] and Existing Mortgage [the mortgages referenced in the Consolidation Agreement] as herein modified.
. . .
5. Except as modified by the terms of this Agreement, all of the other terms, conditions and provisions of the Existing Note and Existing Mortgage are hereby ratified and confirmed and remain in full force and effect.
(Savino Affirmation, Exhibit AA, emphasis added).
Finally, on the same day, July 1, 2008, both Abraham and Isack Rosenberg executed an affirmation of the March 13, 2003 guaranty of the Note.
On November 1, 2008, Capital and Waterfront II entered into a second extension agreement that extended the time for payment of the remaining sum due under the Note (at that time $3,755,699.24) to February 1, 2009 (the "November Extension"). Isack Rosenberg signed on behalf of Waterfront II. The November Extension similarly provided that:
2. [Waterfront II, defined in the July Extension as "Mortgagor"] does hereby covenant and agree to pay the principal sum and interest at the times and in the manner her in above set forth as the same is hereby extended, and to comply with all the other terms and provisions hereof and to perform all of the covenants and conditions of the Existing Note [the Note] and Existing Mortgage [the mortgages referenced in the Consolidation Agreement] as herein modified.
. . .
3. The security of the Existing Note and Existing Mortgage shall not be impaired by anything herein contained, but the terms, provisions, covenants and conditions of this Agreement shall control and prevail over any and all of the terms, provisions, covenants and conditions of the Existing Note and Existing Mortgage and any prior agreements.
. . .
4. Except as modified by the terms of this Agreement, all of the other terms, conditions and provisions of the Existing Note and Existing Mortgage are hereby ratified and confirmed and remain in full force and effect.
(Savino Affirmation, Exhibit BB, emphasis added).
Pursuant to the terms of the November Extension, the mortgage balance matured on February 1, 2009. By letter dated March 24, 2009, counsel for plaintiff notified Isack Rosenberg that the amount outstanding under the Note was immediately due and payable as of February 1, 2009. Demand was made for immediate payment. (Exhibit EE to Savino Affirmation). The letter also provided that "due to the default, Capital One exercised its right to set off on March 24, 2009 against the Borrower's checking account in the sum of $158,540.00." ( Id. at 2).
Defendants did not pay the remaining balance due under the Note and, on April 13, 2009, plaintiff commenced this foreclosure action. On June 15, 2009, Waterfront, Waterfront II, Abraham Rosenberg and Isack Rosenberg served a Verified Answer to the complaint asserting counterclaims for breach of contract, specific performance, breach of the covenant of good faith and fair dealing, and a request for a declaratory judgment suspending the loans under the doctrine of temporary commercial impracticability. On July 2, 2009, plaintiff served its Verified Reply to the counterclaims. Subsequently, on July 9, 2009, the City of New York served its notice of appearance and claim to surplus monies. On August 24, 2009, defendant 32nd Street Investors III, LLC served its notice of appearance and claim to surplus monies as well.
2nd Street Investors III, LLC is the mortgagee of a separate $6,000,000 mortgage dated November 8, 2007 on the property between 32nd Street Investors and Boro Park Home Center Corp, a non-party. The ACRIS report for the property reveals that, on December 17, 2008, 32nd Street Investors and Capital entered into a subordination agreement whereby 32nd Street Investors mortgage was made subordinate to Capital's mortgage. As a result, 32nd Street Investors' notice of appearance states that, should plaintiff move for a Judgment of Foreclosure and Sale, 32nd Street Investors will cross-move to appoint a referee to compute any surplus movies due and owing to 32nd Street Investors. (Exhibit JJ to the Savino Affirmation).
In the interim, on July 28, 2009, the Rosenberg defendants filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Eastern District of New York ( see In re Abraham Rosenberg, Case No. 1-09-46327[CEC] and In Re Isack Rosenberg, Case No. 1-09-46326 [CEC]), triggering an automatic stay of any proceedings against the Rosenbergs pursuant to 11 USC § 362. By Notice of Motion dated August 28, 2009, plaintiff made the instant application for summary judgment. On December 22, 2009, Waterfront and Waterfront II cross-moved, in this Court, to extend the bankruptcy stay to the Waterfront entities, arguing that the stay should be extended because the Rosenbergs wholly own Waterfront and Waterfront II, the current deed holder of the property.
Discussion
Section 362 of the Bankruptcy Code expressly stays any action which is intended to exercise control over any estate of the bankruptcy debtor/petitioner. ( 11 USC § 362; In re Crawford, 388 B.R. 506, 517 (SDNY 2008). However, the automatic stay, generally, is limited to the debtor's estate and does not apply to non-bankrupt co-defendants ( Gucci America, Inc. v Duty Free Apparel, Ltd., 328 F.Supp2d 439, 441 [SDNY 2004]; In re Sheu, 2009 WL 1794473 * 2 [EDNY June 16, 2009]). While a bankruptcy court has the power to enjoin a civil proceeding under Bankruptcy Code § 105(a) ( see 11 USC § 105[a]["the court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title]; see also In re Calpine Corporation, 365 BR 401, 409 [SDNY 2007]), federal courts have only extended the stay to a debtor's wholly owned business entity in extraordinary circumstances, usually when there is a threat to the debtor's "reorganization in the form of immediate adverse economic consequences for the debtor's estate." ( Gucci, 328 F.Supp2d at 442; see also, Queenie, Ltd. v Nygard International, 321 F.3d 282, 287 [2d Cir 2003]; Calpine, 365 BR at 408).
While consistent with federal bankruptcy precedent, the New York State Supreme Court, Appellate Division, Second Department, in denying extension of the section 362 stay to a co-defendant, has repeatedly held that the liability of a non-bankrupt guarantor of the debt of the bankruptcy petitioner is not affected by a bankruptcy petition simply because of the relationship between the bankruptcy petitioner and the non-bankrupt defendant ( Seidenberg v Ostojic, 79 AD2d 1020 [2d Dept 1981][finding that plaintiff was entitled to judgment against individual defendant guarantor despite the bankruptcy petition filed by corporate co-defendant]; Fleet National Bank v Marrazzo , 23 AD3d 337 , 338 [2d Dept 2005][holding that the Supreme Court improvidently exercised its discretion in granting defendant guarantor's cross-motion to stay the proceedings because the bankruptcy filing involving the corporation that defaulted on subject promissory note did not affect guarantor's liability]; Mel Wood Products, Inc. v Al Kores, 81 AD2d 830, 831 [2d Dept 1981]["The liability of a guarantor of a corporate debt is not affected by the institution of bankruptcy proceedings involving the corporation"]), the instant action presents the converse situation: the individual guarantors are the bankruptcy petitioners seeking to extend the stay to their wholly-owned property. Thus, there is no dispositive state court authority on the point. In any event, the determination as to whether to extend the stay is a matter of federal bankruptcy law.
In Queenie, Ltd. v Nygard International, the case relied on by defendants in support of their argument for an extension of the stay, Mark Gardner, one of the plaintiffs in the dispute, was the sole shareholder of co-plaintiff Queenie Ltd. After trial, defendant had been awarded a judgment of punitive damages on its counterclaim of $250,000 against Queenie and $500,000 against Gardner. Plaintiffs filed an appeal and, in the interim, Gardner filed for bankruptcy ( Queenie, 321 F.3d at 286). Gardner moved to extend his automatic section 362 bankruptcy stay to Queenie Ltd. The United States Court of Appeals for the Second Circuit granted Gardner's application finding that "an adjudication of a claim against [Queenie] will have an immediate adverse economic impact on Gardner" ( Id. at 288).
As defendants argue, the debtors here, Isack Rosenberg and Abraham Rosenberg, like Gardner in Queenie, wholly own the Waterfront entities. In Queenie, defendant Gardener proffered evidence that the affirmance of the contingent liability verdict at trial would have an "immediate adverse economic impact" on his reorganization efforts since Queenie Ltd, his wholly owned asset, was also liable under the judgment. Similarly, here, the reorganization efforts of the Rosenbergs may be frustrated by the foreclosure of the mortgage on 462 Kent Avenue as the Waterfront entities are their wholly owned assets.
In contrast to the Queenie decision, however, the Eastern District Bankruptcy Court very recently denied a motion to extend a Chapter 13 Bankruptcy stay in a case very similar to that at bar ( In re Sheu, 2009 WL 1794473 * 1 [EDNY June 16, 2009]). In Sheu, a Judgment of Foreclosure and Sale had been issued by the New York State Supreme Court and sale of the property was to be conducted on the day after Sun-Ming Sheu, the bankruptcy debtor, filed for bankruptcy. Upon the debtor's application by Order to Show Cause, the Bankruptcy Court issued a temporary injunction staying the sale while it considered debtor's application to extend the bankruptcy stay to his wholly owned corporation which held title to the real property. In ultimately declining to extend the stay, the Court held that,
even were this Court to find that the debtor is the sole shareholder of QQ Network, that finding alone would not result in a ruling in the debtor's favor. In forming a separate entity, the debtor revealed his intent to treat the QQ Network entity as distinguishable from himself so he could protect his personal assets from QQ Network's creditors and QQ Network's assets from his personal creditors.
( Sheu, 2009 WL 1794473 at *2).
The Queenie and Sheu cases present conflicting authority. While this Court has the discretion under CPLR 2201 to "grant a stay of proceedings in a proper case," defendants do not move pursuant to CPLR 2201, but rather seek to extend the automatic stay of Bankruptcy Code § 362. The application of section 362 in a particular case is vested in the sound discretion of the federal Bankruptcy Court ( see Calpine, 365 BR at 409). Specifically, section 105 of the Bankruptcy Code authorizes the Bankruptcy Court to "issue any order, process, or judgment appropriate to carry out the provisions of this title" ( 11 USC § 105; see Calpine, 365 BR at 409). Thus, the Waterfront defendants' application is more appropriately directed to the Bankruptcy Court, as only that Court has the authority, and is best situated, to determine whether a judgment against the Waterfront entities will affect the Rosenbergs' bankruptcy reorganization efforts. Accordingly, this Court defers to the Eastern District Bankruptcy Court hearing the Rosenbergs' petition. The cross-motion to stay the action is granted to the extent that this action is stayed for thirty (30) days to allow defendants or plaintiff, if it is so-advised, to make application to that court to extend or lift the automatic section 362 stay as to the Waterfront entities. Upon defendants' failure to seek such relief in the Bankruptcy Court, plaintiff's application before this Court will proceed against the primary obligors, the Waterfront entities, upon the reasoning set forth in Sheu.
Plaintiff's motion for summary judgment against the defendants, to strike defendants' answer, dismiss the counterclaims asserted in the answer, hold the non-appearing defendants in default and appoint a referee to compute the outstanding balance under the mortgage is adjourned.
Conclusion
Defendants' cross-motion to stay the action is granted for thirty (30) days from entry of this Order. Plaintiff's motion is held in abeyance pending such stay. A control date in this matter is set for April 7, 2010 to determine the status of the action based upon proceedings before the Bankruptcy Court.
The foregoing constitutes the decision and Order of the Court.