In re 1111 Myrtle Ave. Grp., LLC

• Decision Date: 14 February 2019
• Docket Number: Case No. 15-12454 (MKV)
• Citation: 598 B.R. 729
• Parties: IN RE 1111 MYRTLE AVENUE GROUP, LLC, Debtor
• Court: U.S. Bankruptcy Court — Southern District of New York

598 B.R. 729

IN RE 1111 MYRTLE AVENUE GROUP, LLC, Debtor

Case No. 15-12454 (MKV)

United States Bankruptcy Court, S.D. New York.

Signed February 14, 2019

DAVIDOFF HUTCHER & CITRON LLP, Attorneys for Secured Creditor, Preferred Bank f/k/a United International Bank, 605 Third Avenue, New York, New York 10158, By: David H. Wander, Esq. (agued), Taylor D. Kopelan, Esq.

GOLDBERG WEPRIN FINKEL GOLDSTEIN LLP, Attorneys for the Debtor, 1501 Broadway, 22nd Floor, New York, New York 10036, By: J. Ted Donovan, Esq., Kevin J. Nash, Esq. (argued)

MEMORANDUM OPINION AND ORDER GRANTING LENDER'S MOTION FOR PAYMENT OF DEFAULT INTEREST

MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE

In this confirmed Chapter 11 case, Preferred Bank f/k/a United International Bank (the "Lender") seeks payment by 1111 Myrtle Avenue Group, LLC (the "Debtor") of default interest and legal fees and expenses, pursuant to the terms of a Mortgage Modification and Extension Agreement (the "Mortgage Agreement" or "Mortgage") and a Restated Mortgage Note (the "Mortgage Note" or "Note"), both dated December 30, 2014 (together, the "Loan Documents" or "Documents").

On September 1, 2015, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. ECF No. 1. After entering judgment in favor of the Debtor in its adversary proceeding for breach of contract against a purchaser under a real estate contract with respect to property owned by the Debtor (Adversary Proceeding No. 15-01348 ("Adv. Pro."), Dkt. No. 38), the Court confirmed the Debtor's Plan of Reorganization. ECF No. 128. One week later, as contemplated by the Plan, the Lender filed a Motion to Allow Payment of Default Interest and Legal Fees, pursuant to Section 506(b) of the Bankruptcy Code (the "Motion") [ECF No. 130].¹ In opposition to the Motion, the Debtor filed a Memorandum of Law (the "Debtor's Memo") [ECF No. 142] and the manager of the Debtor filed a declaration attaching exhibits (the "Ambalu Decl.") [ECF No. 141]. In response, the Lender filed a Reply Memorandum of Law (the "Lender's Reply") [ECF No. 143] and counsel to the Lender filed a declaration [ECF No. 144].

The Court subsequently entered an Order Authorizing Depositions and Directing Production of Documents [ECF No. 149], allowing the Debtor to obtain discovery from those representatives of the Lender who had submitted declarations in support of the Motion on the limited issue of whether the Debtor's bankruptcy filing had adverse consequences for the Lender and participating banks. See ECF No. 147. Thereafter, the Debtor filed a Supplemental Memorandum of Law ("Debtor's Supp. Memo") [ECF No. 155] addressing the evidence adduced during the limited discovery. In response, the Lender filed a further Reply Memorandum of Law ("Lender's Supp. Reply") [ECF No. 160].

Following oral argument on the Lender's Motion (the "Hearing"), the Court issued an order (a) ruling that the Lender is entitled to payment of legal fees and expenses pursuant to the Loan Documents in an amount to be determined and ordering Lender's counsel to submit an amended application that better detailed the reasonableness of the requested fees and (b) reserving decision on the default interest issue. ECF No. 162. After considering the merits of each party's argument, the Court concludes that the Lender is entitled to payment of default interest. The portion of the Lender's Motion previously taken under submission is granted.

BACKGROUND

The Pre-Petition Loan

On December 30, 2014, the Debtor and Lender executed the Loan Documents, including the Mortgage Agreement [ECF No. 130, Exh. C at 1-12] and Mortgage Note [id. at 13-60], pursuant to which the Lender agreed to loan the Debtor $ 6,283,544.55. See id. at 7. The loan was secured by a first mortgage lien against certain commercial property located at 1123 Myrtle Avenue, 1103 Myrtle Avenue and 1101 Myrtle Avenue, all in Brooklyn, New York (the "Property").Id. at 20. At the time of filing, the Property had an estimated value of $ 20.5 million. See Ambalu Decl. ¶ 7; ECF No. 1 at 6 ¶ 12 (Debtor's 1007 Declaration); ECF No. 117 (Debtor's Disclosure Statement), at 4.

The Note established a non-default interest rate of 2% over the highest prime rate as published in the "Money Rates" column of The Wall Street Journal (the "Non-Default Rate"). ECF No. 130, Exh. C at 7-8. The Note further provided that in the event of default, the applicable interest rate would be raised to 7% above the Non-Default Rate (the "Default Rate"):

10. If the principal sum outstanding shall remain unpaid after the Extended Maturity Date, or in the event that the Maker is in default under the terms of this Note or any document evidencing or securing this Note, then the interest payable thereon from and after the Extended Maturity Date or the date of default, where before or after judgment, shall be at an annual rate of seven (7) percentage points above the rate of this Note at the Extended Maturity date or date of default ("Default Rate"), but in no event greater than the maximum allowed by law.

ECF No. 130, Exh. C at 9.

The Mortgage similarly provides for payment of interest at a Default Rate of 7% above the Non-Default Rate in the event of default, and that such interest "shall be deemed a part of the Indebtedness and shall be secured by this Agreement ...." Id. at 26 (Section 5). Section 13 of the Mortgage contains a list of twenty-six events that constitute default, including:

(o) if by order of the court of competent jurisdiction, a trustee, receiver or liquidator of the Premises, or any part thereof, shall be appointed, or if at any time the Mortgagor , or any shareholder, partner or member of Mortgagor (if a corporation, partnership or limited liability company) or any maker, guarantor or surety of the Note, this Agreement or any other Loan Document, shall be insolvent, shall grant a general assignment for the benefit of creditors, shall be placed in receivership, shall file or have filed against it a petition for relief under the United States Bankruptcy Code , or shall be dissolved, or if the filing of any petition by or against the Mortgagor or maker, guarantor or surety of the Note, this Agreement or any other Loan Document with respect to any of the foregoing shall occur;

* * *

(v) if Mortgagor shall fail to eliminate or secure any mechanics or other liens, easements, restrictions, encroachments, notices (including any lis pendens) or clouds upon title asserted against the Premises , by bonding or otherwise, within thirty (30) days of the date it becomes aware of same ;

Id. at 32-33 (the "Events of Default Provision") (emphasis added). Section 13 continues:

[I]n the event (i) a specific cure period for an event of default is not otherwise identified in this Paragraph 13 and (ii) such default is a non-monetary default, Mortgagor shall be entitled to written notice of default and shall be given thirty (30) days from the date of such notice within which to cure the default (the "Initial Grace Period"). If, however, (a) such default cannot be cured within the Initial Grace Period; (b) Mortgagor has, during the Initial Grace Period, commenced and has diligently and continuously prosecuted its efforts to cure; and (c) prior to the expiry of the Initial Grace Period, Mortgagor has notified Mortgagee in writing of the results of its efforts to cure as well as the reason(s) and basis for such inability to cure within the Initial Grace Period, Mortgagor shall have an additional thirty (30) days from the last day of the Initial Grace Period within which Mortgagor shall continue to diligently and continuously prosecute cure to completions....

Id. at 34 (the "Grace Period Provision").

Section 14 of the Mortgage addresses remedies upon occurrence of default:

Remedies of Mortgage . Upon the occurrence or happening of one or more Events of Default, Mortgagee may, in its sole discretion, in addition to all other rights and remedies available hereunder or availed at law or in equity:

(a) Declare the entire principal of the Note then outstanding (if not then due and payable), and all accrued and unpaid interest thereon, to be due and payable immediately, and upon any such declaration, (i) all accrued and unpaid interest due under the Note, (ii) the outstanding principal of the Note, (iii) any prepayment premium due under the Note and (iv) any and all other charges required to be paid by Mortgagor pursuant to any provision of this Agreement, the Note, or any other documents executed in connection herewith or any other document securing the Note shall become and be immediately due and payable, anything in the Note or in this Agreement to the contrary notwithstanding....

Id. at 35.

Bankruptcy and Post-Petition Actions

Less than one year after executing the Loan Documents, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. ECF No. 1. Thereafter, the Debtor continued in possession of the Property and the management of its business as a debtor-in-possession under Section 1107 of the Bankruptcy Code. Pursuant to Section 13(o) of the Mortgage, the Debtor's voluntary petition constituted an event of default. At no point did the Lender issue a written notice of default.

After this case was filed, the Debtor and the Lender negotiated a stipulation with respect to the use of cash collateral, which was subsequently approved by the Court and entered as an Order (A) Authorizing Debtor's Use of Cash Collateral, (B) Providing Adequate Protection, (C) Scheduling Final Hearing, and (D) Granting Related Relief (the "Cash Collateral Stipulation") [ECF No. 17]. Pursuant to the So-Ordered Stipulation, the Debtor agreed to, inter alia , pay Lender's reasonable attorneys' fees and expenses as provided for in the Loan Documents, id. at 9, and to remit monthly mortgage payments to the Lender at the non-default rate of interest, while preserving the Lender's right to seek payment of default interest later. Id. at 10. The parties stipulated that...