MB Fin. Bank, N.A. v. World Fresh Mkt., LLC, Civil No. 2012-92
| Decision Date | 06 March 2013 |
| Docket Number | Civil No. 2012-92 |
| Parties | MB FINANCIAL BANK, N.A., Plaintiff, v. WORLD FRESH MARKET, LLC, a United States Virgin Islands Limited Liability Company, Defendant. |
| Court | U.S. District Court — Virgin Islands |
Before the Court is MB Financial Bank, N.A.'s Motion for the Appointment of a Receiver [DE 8], which World Fresh Market, LLC opposes [DE 17].
This diversity suit is a commercial foreclosure action. MB Financial Bank, N.A. ("MB Financial") is the assignee of the loan and mortgage at issue. Collateral securing the loan includes World Fresh Market, LLC's ("WFM") leasehold interest in four grocery stores located in the Virgin Islands ("the VI Properties"), in addition to real property located in Chicago, Illinois.1 Pl.'s Mem., Ex. H at 2 [DE 9-8] (identifying the collateral securing the loan). On December 3, 2012, MB Financial initiated this action, alleging WFM is in default under the terms and conditions of the loan documents and requesting, inter alia, judgment foreclosing the mortgage.
MB Financial seeks the appointment of a receiver2 to collect the rents and profits of the VI Properties pending the outcome of the foreclosure action.3 Virgin Islands courts have recognized two standards governing receivership appointments: (1) the standard set forth in Section 4.3 of the Restatement (Third) of Property: Mortgages ("Restatement"); and (2) the multi-factor equitable test enunciated in the unpublished opinion of National Investors Pension Insurance v. Bayside Resort Inc., 1984 U.S. Dist. LEXIS 24701 (D.V.I. 1984).4 See e.g., First Am. Dev. Group/Carib, LLC v. WestLB AG, 53 V.I. 107 (V.I. Super. Ct. 2010) (discussing both standards); Mortg. Elec. Registration Sys., Inc. v. Patock, 51 V.I. 917, 928 (D.V.I. 2009) (discussing National Investors standard only). While urging the Court to adopt the Restatement standard, MB Financial contends it is nevertheless entitled to the appointment of a receiver regardless of the standard applied.5
Section 4.3 of the Restatement addresses a mortgagee's entitlement to the appointment of a receiver and states in relevant part:
(b) A mortgagee is entitled to the appointment of a receiver to take possession of the real estate if the mortgagor is in default under the mortgage and the mortgage or other agreement contains either a mortgage on the rents or a provision authorizing appointment of a receiver to take possession and collect rents upon mortgagor default.
Restatement (Third) of Property: Mortgages § 4.3(b); accord First Am. Dev. Group/Carib, LLC, 53 V.I. at 121. As Comment b of the Reporters' Notes to the Restatement explains, section 4.3(b) is directed towards mortgages on rental real estate. Thus, under the Restatement, if the mortgage is on rental real estate and contains a provision for the appointment of a receiver, and the borrower is in default, the lender is entitled to a receiver. 6
Given the Virgin Islands courts have not taken the position that the Restatement standard controls, this Court follows the guidance set forth in National Investors, discussed below. See Patock, 51 V.I. at 928 (applying National Investors standard). Nevertheless, even if the Restatement standard controls, its applicability to the instant matter is unclear. Unlike the Chicago properties, some of which are apparently owned by WFM and serve as rental property, filings by the parties suggest that the VI Properties are merely leased by WFM and are used asretail grocery stores. Accordingly, it does not appear that WFM is a mortgagor of rental real estate with respect to the VI Properties - a requirement under the Restatement standard.
Under the standard enunciated in National Investors, the appointment of a receiver is considered "an equitable remedy of rather drastic nature available at the discretion of the Court." Patock, 51 V.I. at 928 (quoting Nat'l Investors Pension Ins. Co., 1984 U.S. Dist. LEXIS 24701, at *5). Accordingly, a court is not bound by mortgage stipulations providing for an appointment of a receivership upon default of the mortgagor. Nat'l Investors Pension Ins. Co., 1984 U.S. Dist. LEXIS 24701, at *4. The following factors guide the Court in its exercise of discretion: "1) whether the security is adequate to cover the debt, 2) whether the mortgagor is insolvent, 3) whether there exists in the mortgage instrument a pledge of rent and profits to the mortgagee, 4) whether waste has been committed, 5) or whether the security is endangered by nonpayment of taxes." Id. at *6.
The security in this case includes the VI Properties, as well as "all inventory, furniture, equipment, accounts, chattel, papers, receivables, proceeds, accessories, cash collateral and other personal property" of WFM. Pl.'s Mem. at 3; Ex. E [DE 9-5]. While not acknowledged by MB Financial in its memorandum, the security also includes real property located in Chicago, Illinois. See Pl.'s Mem., Ex. H at 2 [DE 9-8]. As of November 28, 2012, the debt payoff totaled $4,589,714.94. Pl.'s Mem., Ex. G, Kosminskas Aff. ¶ 8 [DE 9-7].
MB Financial contends the VI Properties are inadequate to cover the debt because MB Financial's "security interests in the propert[ies] predominantly consist of grocery store inventory, and [WFM's] stock is almost entirely perishable product." Pl.'s Mem. at 7. MBFinancial offers no evidentiary support, however, such as an appraisal report, establishing the inadequacy of the security to cover the debt. Moreover, affidavit testimony of Ahmad M. Alkhatib ("Mr. Alkhatib"), the sole shareholder and managing member of WFM, indicates the inventory value of each grocery store exceeds one million dollars. Alkhatib Aff. ¶ 2 [DE 17-1]. Mr. Alkhatib avers further that appraisal reports for the properties located in Chicago, Illinois indicate values exceeding MB Financial's claim. Id. ¶ 3; see also Ex. B, Summary Appraisal Reports [DE 18-1]. Accordingly, MB Financial has not submitted sufficient evidence of the inadequacy of the security to cover WFM's debt to MB Financial.
MB Financial relies on WFM's alleged status as a "single purpose entity" having no other source of income, coupled with its past-due balance of $4,589,714.94, in support of its position that WFM is insolvent. Pl.'s Mem. at 8.
"'Insolvent' is defined as a debtor 'having liabilities that exceed the value of assets' or the inability to pay debts as they fall due or in the usual course of business." Thabault v. Chait, 541 F.3d 512, 517 (3d Cir. 2008) (quoting Black's Law Dictionary 812 (8th ed. 2004)); see 11A V.I.C. § 201(22) (). MB Financial has submitted evidence of WFM's failure to pay its mortgage obligations as they fall due; however, a failure to pay does not equate to an inability to pay. As the Court does not have a complete accounting profile of WFM, it cannot definitively conclude that WFM is insolvent.
WFM concedes MB Financial has established the existence of the third factor. See Def.'sMem. at 3; see also Pl.'s Mem., Ex. E, Security Agreement, Schedule "A" ¶ (iii) [DE 9-5 at 13](listing as collateral all rents and profits).
The Restatement describes the factors a court should consider when determining what constitutes waste. Restatement (Third) of Property: Mortgages § 4.6.7 Here, MB Financial merely speculates that WFM "likely has been committing waste on the propert[ies] pursuant to Restatement § 4.6(a)(2) by failing to properly maintain the propert[ies]." MB Financial offers no evidence in support of its position. Accordingly, MB Financial has not established that WFM has committed waste on the VI Properties.
MB Financial states that the last factor is a non-issue as WFM only holds a leasehold interest in the VI Properties. See Pl.'s Mem. at 8.
In sum, MB Financial has not established to the Court's satisfaction that (1) the security is insufficient to cover the debt, (2) WFM is insolvent or (3) WFM has committed waste. Given the drastic nature of the appointment of a receiver, the Court finds that such an appointment is not warranted at this time.
For the foregoing reasons, MB Financial's motion for the appointment of a receiver [DE 8] is DENIED WITHOUT PREJUDICE.
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1. As described in the appraisal reports accompanying defendant's response, the Chicago properties are comprised of commercial real estate in which WFM has either a leasehold or fee simple interest. See Def.'s Resp., Ex. B [DE 18-1].
2. "[T]he intended purpose of the receiver . . . is to preserve and maintain the [property] site during the pendency of [] litigation, to preserve the value of the security, and to ensure that the laws and regulations of the U.S. Virgin Islands are fully complied with." First Am. Dev. Group/Carib, LLC v. WestLB AG, 53 V.I. 107, 130 (V.I. Super. Ct. 2010).
3. WFM expressly consented to the appointment of a receiver under these circumstances in the loan agreement. See Pl.'s Mem., Ex. A, Loan Agreement, Art. III ¶ 4(b) [DE 9-1] (providing for the appointment of a receiver of the Virgin Islands and Chicago properties "or any part thereof, and of all the earnings, revenues, rents, issues, profits and income thereof" in the event of default and a subsequent foreclosure action).
4. "Although unpublished opinions are not binding precedent, citation to such opinions is not prohibited and unpublished opinions may...
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