In re 1141 Realty Owner LLC
| Decision Date | 18 March 2019 |
| Docket Number | Case No. 18-12341 (SMB) (Jointly Administered) |
| Citation | 598 B.R. 534 |
| Parties | IN RE: 1141 REALTY OWNER LLC, et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
KLESTADT WINTERS JURELLER, SOUTHARD & STEVENS, LLP, 200 West 41st Street, 17th Floor, New York, New York 10036, Tracy L. Klestadt, Esq., Joseph C. Corneau, Esq., Christopher Reilly, Esq., Of Counsel, Attorneys for Debtor and Debtor-in-Possession
SIDLEY AUSTIN LLP, 787 Seventh Avenue, New York, New York 10019, Michael G. Burke, Esq., Dennis Kao, Esq., Of Counsel, Attorneys for Wilmington Trust, N.A., solely in its capacity as Trustee
1141 Realty Owner LLC ("Debtor") owns the Flatiron Hotel, a 62-room hotel located at 9 West 26th Street a/k/a 1141 Broadway, New York, New York ("Property"). The Property is encumbered by a mortgage currently held by Wilmington Trust, N.A. ("Wilmington") solely in its capacity as Trustee for the benefit of the Registered Holders of Wells Fargo Commercial Mortgage Trust 2015-C28, Commercial Mortgage Pass Through Certificates, Series 2015-C28. Wilmington filed a proof of claim ("Claim ") (ECF Doc. # 129) in the approximate sum of $ 32 million. The Claim includes a "make-whole" or yield maintenance premium, defined below, in the approximate sum of $ 3.1 million. The Debtor objected, inter alia , to the enforceability of the make-whole premium1 and Wilmington filed a response2 that the parties agreed the Court could treat as a motion for summary judgment on that issue.
For the reasons that follow, the Motion is granted to the extent of concluding that the make-whole premium at issue is enforceable under New York law, and the Debtor's corresponding objection is overruled.
The material facts are not in dispute. On April 16, 2015, the Debtor entered into a loan agreement ("Loan Agreement ") with Wilmington's predecessor in interest, Rialto Mortgage Finance, LLC ("Rialto"). (Motion at ¶ 6.)3 Contemporaneously, the Debtor executed two promissory notes (Note A and Note B, and collectively, the "Notes") for a combined amount of $ 25 million, secured by a mortgage on the Property. (Id. )4 The "Maturity Date" of the loan was "the Stated Maturity Date [May 6, 2025] or such other date on which the final payment of the principal of the Note becomes due and payable as therein or herein provided, whether at such stated maturity date, by declaration or acceleration , or otherwise." (Loan Agreement at p. 7, § 1.1.2 (emphasis added).) Rialto subsequently assigned the mortgage, along with the Loan Agreement and Notes (collectively, the "Loan Documents"), to Wilmington. (Claim at Exhibit E; see also id. at Exhibit F (assigning leases and rents to Wilmington).) The Loan Agreement is governed by New York law. (Loan Agreement at § 9.3.)
On September 15, 2017, Wilmington's counsel sent a Notice of Default and Acceleration ("September Default Notice"), informing the Debtor "that it is in default of its obligations under the Loan Documents in that, among other things, [the Debtor] has failed to maintain valid and effective liquor licenses issued by the New York Liquor Authority permitting [the Debtor] to serve alcoholic beverages at the Property." (See Motion at ¶ 11.) The Loan Agreement provided a host of available remedies following an Event of Default, including the acceleration of the debt, (see Loan Agreement at § 7.2), and Wilmington's remedies were cumulative and not exclusive of any other right under the Loan Documents. (Id. at §§ 7.2, 7.3.) Wilmington opted to "accelerate[ ] and demand[ ] immediate repayment in full of the entire outstanding indebtedness due under the Note, Mortgage, and the Loan Documents in the principal sum of $ 24,209,357.00 together with all accrued interest thereon ... and all other sums due under the Loan Documents."5 (September Default Notice.) On October 11, 2017, Wilmington's servicer sent the Debtor a Notice of Additional Defaults ("October Default Notice").6 The Claim Objection and Debtor's Reply in Further Support of Objection to Claim No. 14 , dated January 22, 2019 ("Reply ") (ECF Doc. # 105) do not contest the Debtor's defaults under the Loan Documents although the Debtor insists that its default was not intentional.
The present dispute centers on Wilmington's entitlement to the "Yield Maintenance Default Premium" defined in the Loan Agreement as the:
amount equal to the greater of: (i) three percent (3%) of the principal amount of the Loan being repaid and (ii) the excess, if any, of (a) the present value (determined using a discount rate equal to the Treasury Rate at such time) of all scheduled payments of principal and interest payable in respect of the principal amount of the Loan being repaid provided that the Note shall be deemed, for purposes of this definition, to be due and payable on the Free Window Date, over (b) the principal amount of the Loan being repaid.
(Loan Agreement at p. 13, § 1.1.2.)7 With certain exceptions that do not apply, the Debtor could not prepay the loan prior to the Maturity Date except in accordance with the Loan Agreement . (Id. at § 2.3.1.) Furthermore, any payment following an Event of Default was deemed a "voluntary prepayment" requiring the payment of the Yield Maintenance Default Premium:
If, following an Event of Default which occurs prior to Free Window Date, payment of all or any part of the Debt is tendered by Borrower or otherwise recovered by Lender, such tender or recovery shall be deemed a voluntary prepayment by Borrower in violation of the prohibition against prepayment set forth in Section 2.3.1 and Borrower shall pay, in addition to the Debt, (i) an amount equal to the Yield Maintenance Default Premium ....
The Debtor and an affiliate filed voluntary petitions for chapter 11 relief in this Court on July 31, 2018 and Wilmington filed the Claim three months later asserting an amount "not less than" $ 32,048,285.29. This sum included $ 3,108,096.78 allocated to the Yield Maintenance Default Premium. (Schedule to Proof of Claim of Wilmington Trust, N.A. at p. 6, ¶ 17.)9 The Debtor objected arguing that the Yield Maintenance Default Premium is unenforceable as a matter of New York law because Wilmington had accelerated the debt, and hence, the Maturity Date, and the acceleration requires disallowance of the prepayment premium. (Claim Objection at ¶¶ 10, 11.) Wilmington responded that the Yield Maintenance Default Premium is allowable under the unambiguous terms of section 2.3.3. In essence, the latter section governs any post-default payment, not just prepayments, and merely "deems" the post-default payment to be a "prepayment" for the purpose of the Yield Maintenance Default Premium.
In response, the Debtor contended that courts will only uphold prepayment premiums after acceleration where the applicable loan agreement expressly provides that the premium is due following an acceleration and uses the word "acceleration," or some other variant. (Reply at ¶ 12.) Because the word "acceleration" is "conspicuously absent" from the relevant provision of the Loan Agreement , (id. at ¶ 16), Wilmington's acceleration of the debt precludes entitlement to a Yield Maintenance Default Premium. The Reply also claimed there is no evidence that the Debtor subjectively intended to default. (Id. at ¶¶ 19, 20.)
When asked to interpret contractual language, the question under New York law is "whether the contract is unambiguous with respect to the question disputed by the parties." Law Debenture Tr. Co. of N.Y. v. Maverick Tube Corp. , 595 F.3d 458, 465 (2d Cir. 2010) (quoting Int'l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002) ). Ambiguity presents a question of law. Id. A contract is ambiguous if it "could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Int'l Multifoods , 309 F.3d at 83 (internal quotation marks and citation omitted); accord Cont'l Ins. Co. v. Atl. Cas. Ins. Co. , 603 F.3d 169, 180 (2d Cir. 2010) ; Maverick Tube , 595 F.3d at 466. An agreement is not ambiguous if it has a definite and precise meaning, and unambiguous language does not become ambiguous because a party urges a different interpretation that strains the language beyond its ordinary meaning. Maverick Tube , 595 F.3d at 467 ; Seiden Assocs., Inc. v. ANC Holdings, Inc. , 959 F.2d 425, 428 (2d Cir. 1992). Where the dispute concerns a provision of the contract, the Court must consider the contract "as a whole to ensure that undue emphasis is not placed upon particular words and phrases," Bailey v. Fish & Neave , 8 N.Y.3d 523, 837 N.Y.S.2d 600, 868 N.E.2d 956, 959 (2007) ; accord Maverick Tube , 595 F.3d at 468, and "seek to give ‘[e]ffect and meaning ... to every term of [a] contract.’ " XL Specialty Ins. Co. v. Level Glob. Inv'rs, L.P. , 874 F.Supp.2d 263, 284 (S.D.N.Y. 2012) (quoting Reda v. Eastman Kodak Co. , 233 A.D.2d 914, 649 N.Y.S.2d 555, 557 (N.Y. App. Div. 1996) ).
If the contract is ambiguous, " ‘the court may accept any available extrinsic evidence to ascertain the meaning intended by the parties during the formation of the contract.’ " Morgan Stanley Grp. Inc. v. New England Ins. Co. , 225 F.3d 270, 275-76 (2d Cir. 2000) (quoting Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, London, 136 F.3d 82, 86 (2d Cir. 1998) ). If...
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Neelkanth Hotels, LLC v. U.S. Bank (In re Neelkanth Hotels, LLC)
...for calculating the premium in a default payment scenario versus a nondefault prepayment scenario. See In re 1141 Realty Owner LLC, 598 B.R. 534 (Bankr. S.D.N.Y. 2019) (enforcing "Yield Maintenance Default Premium" under New York law where loan documents clearly contemplated any payment fol......