11 E. 36TH LLC v. First Cent. Sav. Bank (In re 11 E. 36TH LLC), Case No. 13-11506 (JLG)

Decision Date20 May 2015
Docket NumberCase No. 13-11506 (JLG),Adversary No. 14-01819 (JLG)
PartiesIn re: 11 EAST 36TH LLC, et al., Debtors 11 EAST 36TH LLC, Plaintiff v. FIRST CENTRAL SAVINGS BANK, et al., Defendants
CourtU.S. Bankruptcy Court — Southern District of New York


Chapter 11

(Jointly Administered)




Attorneys for Plaintiff 11 East 36th LLC

One North Lexington Avenue

White Plains, New York 10601

By: Jonathan S. Pasternak, Esq.

Steven R. Schoenfeld, Esq.

Attorneys for Defendants 11 East 36th Note Buyer LLC and Griffon V LLC
800 Third Avenue

New York, New York 10022

By: Mark A. Frankel, Esq.


Attorneys for Defendants 11 East 36th Note Buyer LLC and Griffon V LLC
1900 Main Place Tower

350 Main Street

Buffalo, New York 14202

By: William F. Savino, Esq.

Bernard Schenkler, Esq.

The Honorable James L. Garrity, Jr. United States Bankruptcy Judge


Before the Court is the motion of Defendants 11 East 36th Note Buyer LLC ("Note Buyer") and Griffon V LLC ("Griffon") to dismiss portions of the amended complaint in the above-captioned adversary proceeding (the "Adversary Proceeding") and the Plaintiff's cross-motion for leave to file the amended complaint naming Griffon as a defendant nunc pro tunc. Note Buyer and Griffon argue that the amended complaint improperly revives a cause of action against Note Buyer that was previously dismissed, amends the original complaint beyond the scope permitted by the Court's prior order granting leave to amend, and fails to state a claim upon which relief can be granted as to two newly-pled causes of action. The Plaintiff contends that it has adequately pled the new causes of action, denies that the amended complaint runs afoul of prior orders of the Court, and argues that, to the extent its amended complaint exceeds scope of the Court's prior order granting leave to amend, the Court should grant retroactive relief to permit the filing of the amended complaint.

For the reasons set forth below, the motion to dismiss is GRANTED IN PART and DENIED IN PART. The Plaintiff's cross-motion for leave to file the amended complaint against Griffon nunc pro tunc is GRANTED.

I. The Claim Objections and Adversary Proceeding

On May 8, 2013, 11 East 36th LLC and Morgan Lofts LLC (collectively, the "Debtors") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in this Court. Together, the Debtors are the owners and developers of the Morgan Lofts condominium project located on East 36th Street in New York City. The project includes 20 residential units, two ground-floor commercial units, and one cellar unit. Each of the units was previously encumbered by a $10,000,000 note (the "Note") and blanket mortgage (the "Mortgage") dated March 20, 2008. The Note and Mortgage were previously held by Note Buyer as the assignee of First Central Savings Bank ("FCSB"), the original lender. The units were also encumbered by an approximately $2,900,000 judgment (the "Judgment") previously held by Griffon as assignee of Chinatrust Bank.

On September 12, 2013, Note Buyer and Griffon each filed proofs of claim in this case (Claim Nos. 5 and 6, respectively) for amounts allegedly due and owing under the Note and Judgment. As amended, Note Buyer's claim totaled $14,400,167, while Griffon's totaled $2,970,610. On October 17, 2013, the Debtors filed objections to those claims. The Debtors sought to reduce Note Buyer's claim by the sum of approximately $3,000,000 on account of allegedly excessive legal and management fees, charges for disputed protective advances and overstated interest charges, including charges for default interest. (See Motion Objecting to Claim 5 (the "Note Buyer Claim Objection") [ECF 431].) The Debtors also challenged approximately $250,000 of Griffon's claim on account of disputed protective advances, intereston those advances and excessive legal fees. (See Motion Objecting to Claim 6 (the "Griffon Claim Objection" [ECF 44], collectively with the Note Buyer Claim Objection, the "Claim Objections").) On December 31, 2013, Note Buyer and Griffon filed a joint opposition to the Claim Objections.

On February 7, 2014, while the Claim Objections were pending, Debtor 11 East 36th LLC (the "Plaintiff") filed a complaint against FCSB, Note Buyer, and Mission Capital Advisors LLC ("Mission Capital") initiating this Adversary Proceeding. (See Complaint (the "Complaint") [AP ECF 1].) In substance, the Plaintiff contended that FCSB breached the Note and Mortgage by unjustifiably withholding consent to the Plaintiff's proposed sale of the two ground-floor condominium units in October 2011.

According to the Complaint, at the same time the Plaintiff was seeking approval of the sale of the ground-floor units to a third party, FCSB was under pressure from its regulators to improve its capital base. As a result, FCSB had been attempting to sell off a pool of its loans, including the Note. If FCSB had allowed the Plaintiff's proposed sale to go through, the Plaintiff would have been able to pay down approximately 45% of the outstanding balance of the Note, hurting FCSB's marketing efforts. Accordingly, the Plaintiff alleges that FCSB "manufactured, arranged, and declared an artificial default" as an excuse to refuse the sale. (Compl. ¶ 41.) FCSB alleged that the Plaintiff had failed to pay real estate taxes, although it did not declare the Note in default and refused to inform the Plaintiff of the amount of the alleged default. FCSB deliberately kept the Plaintiff "in the dark" about the claimed default in order to prevent the Plaintiff from curing it. (Id. ¶ 28.) As a result, any purchaser of the loan portfolio from FCSB could immediately declare the Note in default - based on the circumstances created by FCSB - and begin collecting interest at the 24% default rate.

As originally pled, the Complaint contains five causes of action:

• Count 1 (against FCSB): Breach of contract;

• Count 2 (against FCSB): Breach of the implied covenant of good faith and fair dealing;

• Count 3 (against FCSB and Mission Capital): Fraud;

• Count 4 (against all Defendants): Declaratory judgment that, "as an assignee, Note Buyer 'stands in the shoes' of the assignor, FCSB," and "is also liable for the damages for the wrongful acts described [in the Complaint]"; and

• Count 5 (against all Defendants): Declaratory judgment that the Plaintiff remains the rightful owner of the two ground-floor commercial condominium units and that, to the extent those units had been sold, "the buyer's ownership or possession . . . is subject to liability, and to all of the Plaintiff's defenses, as a result of the wrongful acts described [in the Complaint]."

II. The First Motion to Dismiss the Complaint

On March 28, 2014, FCSB, Note Buyer, and Mission Capital each moved to dismiss the Complaint (collectively, the "First Motion") [AP ECF 8-11]. The Defendants challenged the legal sufficiency of the pleadings under Rule 12(b)(6) of the Federal Rules of Civil Procedure ("FRCP") and, in addition, contested the factual underpinnings of the Complaint. As relevant here, Note Buyer sought dismissal on the grounds that: (1) the Plaintiff had failed to satisfy the necessary conditions precedent to permit the sale of the two ground-floor condominium units in 2011, (2) the Plaintiff had, in fact, been in default of the Note at the time FCSB refused to consent to the sale; and (3) to the extent the Plaintiff sought to assert claims against Note Buyer in its capacity as assignee, those claims should fail to the same extent the claims fail against FCSB.

Prior to the hearing on the First Motion, the Plaintiff agreed to dismiss Counts 3 and 5 of the Complaint (fraud and one of the two declaratory judgment claims, respectively), including allclaims against Mission Capital. After hearing argument, the Court (Grossman, J.)2 denied the First Motion. (See Memorandum Decision (the "June 26 Decision") [AP ECF 21].3) As to the Defendants' arguments that the Plaintiff had not satisfied the conditions precedent to permit the sale and was actually in default of the Note, the Court held that the Plaintiff's version of events as pled in the Complaint was "plausible" and stated that it would not "choose between the version of events as offered by the [Plaintiff] and the version as offered by the Defendants." (Id. at 8.) Accordingly, the Court held that Counts 1 and 2 of the Complaint properly pled claims against FCSB for breach of contract and breach of the implied covenant of good faith and fair dealing, respectively. (Id. at 6-11.)

The Court next turned to Count 4 of the Complaint. Although Count 4 was denominated as a declaratory judgment action, in fact it sought "to hold Note Buyer liable on a contractual basis as purchaser and assignee of the Note and Mortgage." (Id. at 12 (citation omitted).) The Court held that Count 4 stated a claim for relief against Note Buyer:

The Court has found . . . that the [Plaintiff] has adequately pled counts 1 and 2 asserting claims for breach of contract and breach of the implied covenant of good faith and fair dealing against FCSB. To the extent that Note Buyer stands in FCSB's shoes as assignee of the Note and Mortgage Agreement, the [Plaintiff] has also adequately pled count 4 on a contractual theory only. Given that the requirement that the complaint need only plead a "plausible entitlement to relief" to survive a motion to dismiss, the [Plaintiff] need not re-plead count 4 as it adequately pleads a contractual claim against Note Buyer as assignee of the [N]ote and Mortgage.

(Id.) In its order denying the First Motion, the Court stated, in pertinent part, that "the...

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