In re South Side House Llc

• Decision Date: 27 June 2011
• Docket Number: No. 09–43576.,09–43576.
• Citation: 55 Bankr.Ct.Dec. 26,451 B.R. 248
• Parties: In re SOUTH SIDE HOUSE, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

451 B.R. 248

55 Bankr.Ct.Dec. 26

In re SOUTH SIDE HOUSE, LLC, Debtor.

No. 09–43576.

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

June 27, 2011.

Leo Fox, Esq., Stephanie Park, Esq., New York, NY, for South Side House, LLC.Joseph Lubertazzi, Jr., Esq., Peter Knob, Esq., McCarter & English, LLP, Newark, NJ, for U.S. Bank National Association, as Trustee.

MEMORANDUM DECISION ON OBJECTION TO CLAIM

ELIZABETH S. STONG, Bankruptcy Judge.

South Side House, LLC, the Debtor in this Chapter 11 bankruptcy case, seeks the entry of an order modifying the claim of its principal creditor, U.S. Bank National Association, as successor-in-interest to Bank of America, N.A., as Trustee for the registered holders of J.P. Morgan Chase Commercial Mortgage Securities Trust 2007–LDP11 Commercial Mortgage Pass–Through Certificates, Series 2007–LDP11 (the “Lender”). The issues to be decided are whether the Lender is entitled to prepetition default interest, and if so, from what date; whether the Lender is entitled to prepayment consideration; and how much the Lender may claim in special servicer fees and expenses.¹ These issues require careful attention to the precise terms of the parties' agreements within the framework established by the Bankruptcy Code and the applicable principles of New York law, including New York's rule of “perfect tender in time.” For the reasons stated herein, the Debtor's motion is granted in part and denied in part.

Jurisdiction

This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(1). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (B). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Federal Rule of Civil Procedure 52, as made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7052.

Background

This single asset real estate case has been pending since April 30, 2009, when the Debtor sought relief under Chapter 11 of the Bankruptcy Code. The Debtor owns and operates a mixed-use building consisting of over 70 residential units and two commercial units located at 98–116 South Fourth Street in Brooklyn (the “Property”). The Debtor's assets include the Property and the rental income that it generates. The Debtor continues to operate its business pursuant to Bankruptcy Code Sections 1107 and 1108.

In April 2007, the Debtor executed a note, mortgage, and assignment of leases and rents (the “Loan Documents”) which were later assigned to the Lender. The Debtor defaulted under the Loan Documents by not making the monthly payment due in November 2008, or any monthly payments thereafter and, according to the Lender, by granting a second mortgage to Broadway Bank without the Lender's consent.

In December 2008, CWCapital Asset Management, LLC (“CWCapital”) was retained by the Lender as a special servicer. In January 2009, the Lender accelerated the debt and brought a foreclosure action in the U.S. District Court for the Eastern District of New York. In February 2009, the District Court appointed a receiver to manage the Property, and in April 2009, the court granted the Lender's motion for summary judgment. But before a master was appointed to compute damages, the Debtor commenced this bankruptcy case, staying those proceedings.

The Lender filed a claim in the amount of $36,833,639.68. That claim consists of $29 million in principal, $911,677.36 in non-default interest from October 10, 2008 to the petition date, $688,750 in default interest from November 11, 2008 to the petition date, $5,954,395.26 ² in prepayment consideration, $290,000 representing the fees and expenses anticipated to be paid to the special servicer, and other charges, less certain credits. Broadway Bank also filed a secured claim in excess of $1.5 million, arising from the second mortgage on the Property, and that claim is treated as unsecured in the Debtor's proposed plan of reorganization (the “Plan”).

The Loan Documents

In April 2007, the Debtor executed a Consolidated, Amended and Restated Promissory Note in favor of UBS Real Estate Securities Inc. (“UBS”), in the amount of $29 million (the “Note”). At the same time, the Debtor executed a Consolidated, Amended and Restated Mortgage, Assignment of Leases and Rents and Security Agreement in favor of UBS (the “Mortg.”). The Loan Documents are governed by New York law.

Default and Default Interest

The Note provides that payments are due on the tenth day of each month and are to be paid from June 2007 to April 2017. Under the Note, the annual interest rate is 5.575 percent and the default interest rate is an additional five percent.

The Mortgage defines an “Event of Default” to include nonpayment of “any portion of the Debt ... on or before the date the same is due....” Mortg. § 10.1(a). And the Mortgage provides that default interest is payable “from the date of an Event of Default through the earlier of the date upon which the Event of Default is cured or the date upon which the Debt is paid in full....” Mortg. § 10.3.

In addition, Article 4 of the Note entitled “DEFAULT INTEREST” provides:

Borrower does hereby agree that upon the occurrence of an Event of Default, Lender shall be entitled to receive ... [interest at the “Default Rate”]. The Default Rate shall be computed from the occurrence of the Event of Default until the earlier of the date upon which the Event of Default is cured or the date upon which the Debt is paid in full.

Note Art. 4.

Default and Acceleration

The “Default and Acceleration” provision of the Note states:

[The Debt shall] without notice become immediately due and payable at the option of Lender if any payment required in this Note is not paid on or before the date the same is due or on the Maturity Date or on the happening of any other default, after the expiration of any applicable notice and grace periods, herein or under the terms of the Security Instrument or any of the Other Security Documents (collectively, an “Event of Default”).

Note Art. 3. The “Debt” includes:

(a) The whole of the principal sum of this Note, (b) interest, default interest, late charges and other sums, as provided in this Note, the Security Instrument or Other Security Documents ..., (c) all other monies agreed or provided to be paid by Borrower in this Note, the Security Instrument or the Other Security Documents, (d) all sums advanced pursuant to the Security Instrument to protect and preserve the Property ... and the lien and the security interest created thereby, and (e) all sums advanced and costs and expenses incurred by Lender in connection with the Debt ... or any part thereof, any renewal, extension, or change of or substitution for the Debt or any part thereof, or the acquisition or perfection of the security therefor, whether made or incurred at the request of the Borrower or Lender....

Id.Prepayment, the Prepayment Premium, and Evasion

Under the Note, the borrower has the right to “prepay the unpaid principal balance of [the] Note” two years after the first date on which monthly payments are due, provided that the borrower provides adequate notice, pays the entire unpaid principal balance of the Note, interest accrued and unpaid on the principal balance, an amount equal to the interest that would have accrued on the amount being prepaid, other sums due under the Note, and a “prepayment consideration ... equal to the greater of (i) one percent ... of the principal balance of this Note being prepaid and (ii) the Yield Maintenance Premium....” Note Art. 5, § 5.2(a).

The “Yield Maintenance Premium” is:

[A]n amount equal to the excess of (i) the sum of the present values of a series of payments payable at the times and in the amounts equal to the payments of principal and interest (including, but not limited to the principal and interest payable on the Maturity Date) which would have been scheduled to be payable after the date of such tender under this Note had this Note not been prepaid, with each such payment discounted to its present value at the date of such tender at the rate which when compounded monthly is equivalent to the Prepayment Rate ... over (ii) the then principal amount of this Note.

Note Art. 5, § 5.2(d). And the “Prepayment Rate” is:

[T]he bond equivalent yield (in the secondary market) on the United States Treasury Security that as of the [date that is five business days prior to the prepayment date] has a remaining term to maturity closest to, but not exceeding, the remaining term to the Maturity Date, as most recently published in the “Treasury Bonds, Notes and Bills” section in The Wall Street Journal as of the date of the related tender of payment.

Id.

Mortgage Section 9.1 concerns prepayment before default and provides that the loan must be repaid in accordance with the terms of the Note, including payment of the prepayment consideration or premium. Section 9.2 provides that the Debtor is not required to pay the prepayment consideration or premium if the prepayment results from casualty or condemnation, unless there is an event of default. And Section 9.3 governs payment after default and acceleration:

Following an Event of Default and acceleration of the Debt, if Borrower or anyone on Borrower's behalf makes a tender of payment of the amount necessary to satisfy the Debt at any time prior to foreclosure sale (including, but not limited to, sale under power of sale under this Security Instrument), or during any redemption period after foreclosure, (i) the tender of payment shall constitute an evasion of Borrower's obligation to pay any prepayment consideration or premium due under the Note and such payment shall, therefore, to the maximum extent permitted by law, include a premium equal to the prepayment consideration or premium that would have been payable on the date of such tender had the Debt not been so accelerated, or (ii) if at the time of such tender a prepayment would have been prohibited under the Note had the...