Summary
noting that it was not "holding that bankruptcy may never rise to the level of 'special circumstances' [but that] under the facts presented in this case, the court is constrained to hold plaintiff to its election of remedies and deny its request" for leave
Summary of this case from U.S. Bank NA v. Perlmutter (In re South Side House LLC)Opinion
January 7, 1991
Hofheimer Gartlir Gross for plaintiff.
Bachner, Tally, Polevoy Misher for VMS Realty Partners, defendant.
This motion by the plaintiff brought by order to show cause for an order severing the action of plaintiff against defendant VMS Realty Partners from the foreclosure action against defendants 400 Garden City Associates and the State of New York, and granting plaintiff leave pursuant to RPAPL 1301 (3) to pursue its action to recover under the guarantee from defendant VMS is determined as follows.
Plaintiff, Manufacturers Hanover Trust Company (MHT), is the holder of two mortgages made and executed by defendant 400 Garden City Associates to secure payment for loans in excess of $25,000,000. The mortgage loans are secured by office building premises located at 400 Garden City Plaza, Garden City, New York. Simultaneously with the execution of the mortgages and notes, the defendant VMS Realty Partners (VMS) executed and delivered to plaintiff a guarantee pursuant to which VMS bound itself to pay MHT all accrued and unpaid interest on the notes, all real estate taxes and general or special assessments. In addition, pursuant to the guarantee, VMS also agreed to reimburse MHT for all expenses incurred by MHT in enforcing its rights under the guarantee and in collecting the amounts subject to the guarantee.
In May of 1990, MHT commenced this action to foreclose upon the above described mortgages, which have a principal balance in excess of $21,000,000. A receiver was appointed to collect the rent and operate the building during the pendency of this action.
On August 17, 1990, defendant 400 Garden City Associates filed a voluntary petition under chapter 11 of the Bankruptcy Code ( 11 U.S.C. § 1101 et seq.), thereby staying the foreclosure.
In September 1990, upon a motion by 400 Garden City Associates, United States Bankruptcy Court entered an order ousting the foreclosure receiver and returning control to 400 Garden City Associates as debtor in possession.
Plaintiff seeks to sever the action and to be granted leave to proceed against VMS on the note. For the reasons set forth, plaintiff's motion is denied.
The filing of a bankruptcy petition under chapter 11 of the Bankruptcy Code automatically stays any foreclosure action pending against the debtor and the property of the debtor ( 11 U.S.C. § 362 [a]).
Defendant 400 Garden City Associates has filed for bankruptcy, thereby staying the foreclosure action commenced by plaintiff. The court agrees with plaintiff that ordinarily, the automatic stay provisions of the Bankruptcy Code do not operate to protect third-party nonbankrupt guarantors (see, e.g., In re Larmar Estates, 5 B.R. 328 [Bankr, ED N Y 1980]). However, while VMS is not protected by the automatic stay, the property is. "[T]he automatic stay provisions of § 362 (a) stay actions only against the debtor and property of the estate" (supra, at 330).
Therefore, while plaintiff is stayed from proceeding with its foreclosure action, which by operation of section 362 includes its foreclosure action against VMS, it is not prohibited by the United States Bankruptcy Code from proceeding at law against VMS to recover on the note. Since plaintiff is not stayed by the Bankruptcy Code from proceeding at law against the guarantor VMS, this motion is properly before this court. Plaintiff need not, as argued by VMS, seek approval by Bankruptcy Court to lift the automatic stay because VMS is not subject to the stay on the note.
In New York, where a mortgagor defaults, a mortgagee must elect between pursuing a legal remedy or foreclosing on the property, but may not prosecute both actions without leave of court (RPAPL 1301; TBS Enters. v Grobe, 114 A.D.2d 445 [2d Dept 1985]; see, United States v Whitney, 602 F. Supp. 722 [WD N Y 1985]). This "election of remedies" rule applies to actions on the guarantee of a note (TBS Enters. v Grobe, supra).
Whether a court should grant leave to commence a separate legal action against a mortgagor where an equitable foreclosure action has already been commenced, "is conditioned upon the applicant demonstrating that special circumstances exist to justify a separate proceeding at law. (National City Bank v Gelfert, 284 N.Y. 13; Equitable Life Ins. Soc. v Stevens * * * [ 63 N.Y. 341]; Matter of Warner, 267 App. Div. 775; Wachtell v Tantleff, 255 App. Div. 867.) The question as to whether special circumstances have been shown is regulated by consideration of equitable principles on a case-by-case basis, and generally the focus of inquiry is upon whether the plaintiff could have obtained all the relief it was entitled to in the foreclosure action without the undue burden of commencing an action on the debt" (Stein v Nellen Dev. Corp., 123 Misc.2d 268, 271 [Sup Ct, Suffolk County 1984]).
Plaintiff, having already commenced a foreclosure action against VMS, may not commence a separate action to recover on the note absent "special circumstances". Whether a mortgagor's filing for bankruptcy may rise to the level of "special circumstances" necessary to relieve a mortgagee of its election of remedies, appears to be one of first impression.
Without holding that bankruptcy may never rise to the level of "special circumstances" under the facts presented in this case, the court is constrained to hold plaintiff to its election of remedies and deny its request to proceed against VMS on the note.
Every case cited by plaintiff to support this motion which allows a mortgagee to proceed in a separate legal action where a foreclosure action was already commenced, involves a situation where the mortgagee was permanently frustrated in foreclosure. At bar, there is only a temporary stay of plaintiff's foreclosure action. Moreover, despite plaintiff's fear of a deteriorating real estate market and the future solvency of VMS, there is nothing before this court to indicate that the value of the mortgaged property does not provide adequate security for the mortgages.
Plaintiff provides no appraisal of the property and while it attacks defendant's hearsay affirmation that claims the appraised value of the property is $27,000,000, it is plaintiff's burden to show that its equity cushion is inadequate.
Accordingly, plaintiff's motion for an order severing this action and allowing it to proceed against VMS is denied with leave to renew should circumstances so warrant.