In re 975 Walton Bronx LLC

• Decision Date: 23 September 2022
• Docket Number: 21-40487-jmm
• Citation: In re 975 Walton Bronx LLC, 21-40487-jmm (Bankr. E.D. N.Y. Sep 23, 2022)
• Parties: In re: 975 WALTON BRONX LLC, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

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In re: 975 WALTON BRONX LLC, Debtor.

No. 21-40487-jmm

United States Bankruptcy Court, E.D. New York

September 23, 2022

Kevin J. Nash, Esq., J. Ted Donovan, Esq.Goldberg Weprin Finkel Goldstein LLPCounsel for Debtor

Benjamin Mintz, Esq., Justin Imperato, Esq.Arnold &amp Porter Kaye Scholer LLPCounsel for Walton Improvement Group LLC

MEMORANDUM DECISION ON THE DEBTOR'S ABILITY TO CURE AND REINSTATE WALTON IMPROVEMENT GROUP LLC'S LOAN

JIL MAZER-MARINO.UNITED STATES BANKRUPTCY JUDGE

INTRODUCTION

This decision addresses whether the Debtor's plan of reorganization, which deaccelerates mortgage debt, is confirmable.As background, 975 Walton Bronx LLC(the "Debtor") owns an apartment building that is subject to a mortgage held by Walton Improvement Group (the "Lender").The mortgage secures a claim exceeding $20 million.Pre-petition, the Lender acquired the loan and mortgage from Investors Bank.At the time of the Lender's acquisition, the Debtor was in default by failing to make debt service payments.The Debtor also was in default of loan covenants restricting the transfer of interests in the Debtor.Specifically, the loan agreement required 15-21 Crooke LLC("Crooke") to be the sole owner of the Debtor and for Benzion Kohn to control Crooke.Prior to the Lender's acquisition of the loan and mortgage, Crooke sold 49.9% of its interests in the Debtor to The J Partners Group ("J Partners"), without notice to or consent from, Investors Bank.

The Debtor's Amended Plan of Reorganization proposed to cure the monetary default and reinstate the loan terms pursuant to section 1124 of title 11 of the United States Code(the "Bankruptcy Code").Lender objected to the plan claiming the Debtor could not reinstate the loan because the Debtor had not and did not propose to cure the control covenant default.The Debtor argued that Bankruptcy Code section 1124(2) did not require a cure of nonmonetary defaults.Additionally, the Debtor argued that the Lender was acting in bad faith because it acquired the loan knowing that J Partners owned an interest in the Debtor and for the purpose of calling a default based on the change of control.

On April 7, 2022, the Court rendered a decision that rejected the Debtor's argument that Bankruptcy Code section 1124(2) permitted the plan to cure and reinstate the mortgage without curing nonmonetary defaults.The Court rejected the Debtor's other arguments as well.However, the Court recognized that under New York law, even if a nonmonetary default could not be cured, a mortgagee could be precluded from accelerating a loan if the mortgagee could establish that the nonmonetary default was unintentional and did not damage the Lender, impair the Lender's collateral, or imperil the future payment of principal and interest.

As set forth below, the breach of the change of control covenant was intention, damaged the Lender and makes future payments of principal and interest less certain.Therefore, the Lender is entitled to accelerate the Loan under New York law and the Debtor cannot cure and reinstate the Lender's claim absent cure of the nonmonetary default and compliance with Bankruptcy Code section 1124(2).

JURISDICTION

The Court has jurisdiction under 28 U.S.C. §§ 157(a),157(b)(1)and1334(b), and the Eastern District of New York Standing Order of Reference dated August 28, 1986, as amended by Order dated December 5, 2012.This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Rule 7052 of the Federal Rules of Bankruptcy Procedure.

VENUE

Venue is proper pursuant to 28 U.S.C. §§ 1408and1409.This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (L).

BACKGROUND

The Property and the Loan Documents

The Debtor owns 975 Walton Avenue, Bronx, New York (the "Property"), a mixed-use building with 182 residential apartments and five stores.Debtor's Amended Disclosure Statementat 3, ECF No. 58.

The Debtor financed the Property's acquisition with a $22,500,000.00 loan (the "Loan") from Investors Bank.In connection with the financing, the Debtor executed and delivered to Investors Bank a Loan Agreement dated April 1, 2015, a Promissory Note in the principal amount of $22,500,000.00, and a Mortgage Consolidation, Extension and Modification Agreement.Decl. of Justin G. ImperatoEx. A, at 4, Ex. B, at 21, Ex. C, at 65, ECF No. 85.

Loan Agreementsections 2(a), 3(d) and 7(a)(ix)(collectively, the "Control Covenants") concern restrictions to changes of control of the Debtor.Section 2(a) states:

The Borrower hereby represents and warrants to the Bank (which representations and warranties shall survive until the Loan has been paid in full) that as of the date hereof . . . Benzion Kohn is the managing member of 15-21 Crooke LLC who is the sole member of Borrower.

Decl. of Justin G. ImperatoEx. C, at 67, ECF No. 85.

Section 3(d) states:

Notwithstanding the foregoing, the Bank may in its non-reviewable discretion and upon such terms and conditions as it determines prudent, consent to a transfer of the legal or equitable ownership of the Mortgaged Property and an assumption of the Loan in conjunction therewith upon the following terms and conditions (a "Transfer")

(i) No Event of Default or event or circumstance which, with the passage of time or the giving of notice or both would constitute an Event of Default under any of the Loan Documents shall have occurred and remain uncured at the time the Loan is to be assumed;

(ii) the proposed transferee (the "Transferee") shall have executed and delivered to the Bank an assumption agreement . . . evidencing the Transferee's agreement to abide and be bound by the terms of the Loan Documents and shall have provided the Bank with such legal opinions and title insurance endorsements as may be reasonably requested by the Bank;

(iii)The Bank shall have received payment of a transfer processing fee equal to one percent (1%) of the principal amount of the Loan then outstanding (the "Transfer Processing Fee") and all costs and expenses incurred by the Bank in connection with the Transfer (including reasonable attorneys' fees and expenses).The Bank may, as a condition to evaluating any requested consent to the Transfer, require that the Borrower or the Transferee post a cash deposit with the Bank in an amount equal to the Transfer Processing Fee and the anticipated costs and expenses in connection with the foregoing.

Decl. of Justin G. ImperatoEx. C, at 69-70, ECF No. 85.

Under section 3(i):

The Borrower covenant(s) and agree(s) that, until the Loan has been paid in full . . . [t]he Borrower . . . shall maintain 15-21 Crooke LLC as its sole member . . . [and][n]o equity ownership in the Borrower may be transferred, pledge[d] or encumbered, directly or indirectly, without the prior written consent of the Bank.^[1]

Decl. of Justin G. ImperatoEx. C, at 69, 71, ECF No. 85.

Section 7(a)(ix) provides, at the sole option of the Bank, an Event of Default shall occur if there is:

Except as may be otherwise specifically permitted herein, any change in the ownership of the Mortgaged Property or the equity ownership of the Borrower without the prior written consent of the Bank, which may be granted or withheld in the Bank's sole judgment[.]

Decl. of Justin G. ImperatoEx. C, at 74-75, ECF No. 85.

The Change of Ownership and Control of the Debtor

When the Debtor entered into the Loan Agreement, the Debtor's sole member was Crooke and Crooke's sole managing member was Benzion Kohn, an individual.Decl. of Justin G ImperatoEx. B at 63, ECF No. 85;see alsoMay23, 2022 Tr. 117:19 - 118:13, ECF No. 127.In January 2018, Crooke transferred 49.99% of its ownership interest in the Debtor to J Partners. May23, 2022 Tr. 13:19 - 14:15, ECF No. 127.

In April 2020, the Debtor defaulted on the loan by failing to make debt service payments.Amended Decl. of Daniel Wiener¶ 9, ECF No. 136("Wiener Decl.").The Debtor failed to make payments through the Petition Date.Id.In August 2020, Investors Bank gave notice of default and acceleration based on the Debtor's failure to make installment payments and failure to provide financial information.WienerDecl. ¶ 16.On or about October 2020, Investors Bank assigned the Loan to the Lender.WienerDecl. ¶ 11.In December 2020, the Lender sent the Debtor a second letter of default and acceleration again based on the Debtor's failure to make installment payments commencing with the payment due March 1, 2020.WienerDecl. ¶ 16.

In February 2021, the Lender commenced a foreclosure action in Supreme Court, Bronx County, IndexNo. 802465/2021E.Decl. of Larry JeremiasEx. G, at 70, ECF No. 96.The foreclosure complaint referenced the monetary defaults but did not reference the Control Covenant defaults.Seeid. at 73-85.

The Bankruptcy Case

The Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on February 25, 2021.Petition, ECF No. 1.The Debtor remains in possession of its property and continues to manage its assets.

The Lender timely filed a proof of claim asserting a claim of $23,984,121.65 as of the Petition Date, secured by substantially all of the Debtor's assets, including the Property, rents and proceeds from the Property, and proceeds of insurance policies covering the Property.Proof of ClaimNo. 7-1.

On November 22, 2021, the Debtor filed its amended chapter 11 plan of reorganization and related disclosure statement.Debtor's Amended Chapter 11 Plan of Reorganization, ECF No. 57(the "Plan");Debtor's Amended Disclosure Statement, ECF No. 58.Under the Plan, the Debtor intends to cure and reinstate the Loan.Planat 1.The Debtor calculated that the amount due to cure the pre-petition date arrears to be...