Manufacturers Hanover Trust Co. v. 400 Garden City Associates

• Decision Date: 07 January 1991
• Citation: 568 N.Y.S.2d 505,150 Misc.2d 247
• Parties: MANUFACTURERS HANOVER TRUST COMPANY, Plaintiff, v. 400 GARDEN CITY ASSOCIATES, a New York limited partnership; VMS Realty Partners; the State of New York; and "John Doe 1-100" and "Jane Doe 1-100", fictitious names intended to be tenants in possession of the premises under foreclosure, or other persons having or claiming an interest in the premises under foreclosure, Defendants.
• Court: New York Supreme Court

Page 505

568 N.Y.S.2d 505

150 Misc.2d 247

MANUFACTURERS HANOVER TRUST COMPANY, Plaintiff, v. 400 GARDEN CITY ASSOCIATES, a New York limited partnership;

VMS Realty Partners; the State of New York; and "John Doe

1-100" and "Jane Doe 1-100", fictitious names intended to be

tenants in possession of the premises under foreclosure, or

other persons having or claiming an interest in the premises

under foreclosure, Defendants.

Supreme Court, Nassau County,

IAS Part IX.

Jan. 7, 1991.

Hofheimer Gartlir & Gross, New York City, for plaintiff.

Bachner, Tally, Polevoy & Misher, New York City, for defendant VMS Realty Partners.

ELI WAGER, Justice.

This motion by the plaintiff brought by order to show cause for an order severing the action of plaintiff against defendant VMS Realty Partners from the foreclosure action against defendants 400 Garden City Associates and the State of New York, and granting plaintiff leave pursuant to Real Property Actions and Proceedings Law section 1301(3) to pursue its action to recover under the guarantee from defendant VMS is determined as follows:

Plaintiff, Manufacturers Hanover Trust Company (MHT), is the holder of two mortgages made and executed by defendant 400 Garden City Associates to secure payment for loans in excess of $25,000,000.00. The mortgage loans are secured by office building premises located at 400 Garden City Plaza, Garden City, New York. Simultaneously with the execution of the mortgages and notes, the defendant VMS Realty Partners (VMS) executed and delivered to plaintiff a guarantee pursuant to which VMS bound itself to pay MHT all accrued and unpaid interest on the notes, all real estate taxes and general or special assessments. In addition, pursuant to the guarantee, VMS also agreed to reimburse MHT for all expenses incurred by MHT in enforcing its rights under the guarantee and in collecting the amounts subject to the guarantee.

In May of 1990, MHT commenced this action to foreclose upon the above described mortgages, which have a principal balance in excess of $21,000,000.00. A receiver was appointed to collect the rent and operate the building during the pendency of this action.

On August 17, 1990, defendant 400 Garden City Associates, filed a voluntary petition under Chapter 11 of the Bankruptcy Code (11 U.S.C. § 1101 et seq.), thereby staying the foreclosure.

In September 1990, upon a motion by 400 Garden City Associates, United States Bankruptcy Court entered an order ousting the foreclosure receiver and returning control to 400 Garden City Associates as debtor in possession.

Plaintiff seeks to sever the action and to be granted leave to proceed against VMS on the note. For the reasons set forth, plaintiff's motion is denied.

The filing of a bankruptcy petition under Chapter 11 of the Bankruptcy Code automatically stays any foreclosure action pending against the debtor and the property of the debtor (11 U.S.C. § 362[a].

Defendant, 400 Garden City Associates has filed for bankruptcy, thereby staying the foreclosure action commenced by plaintiff. The court agrees with plaintiff that ordinarily, the automatic stay provisions of the Bankruptcy Code do not operate to protect third-party nonbankrupt guarantors (see e.g., In re Larmar Estates, Inc., 5 B.R. 328 [Bkrtcy., E.D.N.Y., 1980]. However, while VMS is not protected by the automatic stay, the property is. "[T]he automatic stay provisions of § 362(a) stay actions only against the debtor and property of the estate" (id. at 330).

Therefore, while plaintiff is stayed from proceeding with its foreclosure action, which by operation of section 362 includes its foreclosure action against VMS, it is not prohibited by the United States Bankruptcy Code from proceeding at law against VMS to recover on the note. Since plaintiff is not stayed by the Bankruptcy Code from proceeding at law against the guarantor VMS, this motion is properly before this court. Plaintiff need not, as argued by VMS, seek approval by Bankruptcy Court to lift the automatic stay because VMS is not subject to the stay on the note.

In New York, where a mortgagor defaults, a mortgagee must elect between pursuing a legal remedy or foreclosing on the property, but may not prosecute both actions without leave of court (RPAPL § 1301; TBS Enterprises, Inc. v. Grobe, 114 A.D.2d 445, 494 N.Y.S.2d 716 [2d Dept.1985]; see U.S. v....