Ne. Indus. Dev. Corp. v. Parkstone Capital Partners, LLC (In re Ne. Indus. Dev. Corp.)

• Decision Date: 29 July 2014
• Docket Number: Case No. 13–37619 (CGM),Adversary No. 14–09005
• Citation: 513 B.R. 825
• Parties: In re: Northeast Industrial Development Corporation, Debtor Northeast Industrial Development Corporation, Plaintiff v. ParkStone Capital Partners, LLC, et al., Defendants
• Court: U.S. Bankruptcy Court — Southern District of New York

513 B.R. 825

In re: Northeast Industrial Development Corporation, DebtorNortheast Industrial Development Corporation, Plaintiff

v.ParkStone Capital Partners, LLC, et al., Defendants

Case No. 13–37619 (CGM)

Adversary No. 14–09005

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

Signed July 29, 2014

Genova & Malin, Attorneys for Plaintiff Northeast Industrial Development Corporation, 1136 Route 9, Wappingers Falls, New York 12590, By: Thomas Genova, Esq., Andrea B. Malin, Esq.

Deily & Glastetter, LLP, Attorneys for Defendants ParkStone Capital Partners, LLC, ParkStone Capital Partners II, LLC, and Jonathan Childs, 8 Thurlow Terrace, Albany, New York 12203, By: Jason A. Little, Esq., Joann Sternheimer, Esq.

Oxman Tulis Kirkpatrick Whyatt & Geiger, LLP, Attorneys for Defendant Vincent Rippa, 120 Bloomingdale Road, Suite 100 White Plains, New York 10605, By: Stuart E. Kahan, Esq.

Chapter 11

MEMORANDUM DECISION AND PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW GRANTING THE PARKSTONE DEFENDANTS' MOTION TO DISMISS THE COMPLAINT

CECELIA G. MORRIS, CHIEF U.S. BANKRUPTCY JUDGE

Before the Court is the motion of defendants ParkStone Capital Partners, LLC (“ParkStone”), ParkStone Capital Partners II, LLC (“ParkStone II”), and Jonathan Childs (together, the “ParkStone Defendants”) for: (i) dismissal of this adversary proceeding for lack of subject-matter jurisdiction; (ii) abstention; (iii) dismissal for failure to state a claim; and, in the alternative, (iv) judgment on the pleadings. For the reasons set forth below, the Court grants the motion in part and recommends that the United States District Court for the Southern District of New York (the “District Court”) adopt the following proposed findings of fact and conclusions of law resolving the remaining issues.

BACKGROUND

A. The Note and the Debtor's Default

Northeast Industrial Development Corporation (the “Debtor”) is the owner of commercial real property located in Newburgh, New York (the “Property”). Compl. ¶ 4, No. 14–09005, ECF No. 1. The Property is subdivided into four lots: three partially-developed lots containing parking, curbing, water and sewer hookups,and high-technology communications upgrades (the “Partially–Developed Lots”) and one fully-developed lot containing an 18,600 square foot office building (the “Building”). Id.

On February 12, 2008, the Debtor and Hudson Valley Bank (“HVB”) entered into a Construction Loan Mortgage Note (the “Note”) in the original principal amount of $2.8 million. Id. ¶ 5. To secure the Debtor's obligations under the Note, the Debtor executed a Construction Loan Mortgage and Security Agreement (the “Mortgage”) granting HVB a security interest in the Property. Id. Copies of the Note and Mortgage are attached to the Complaint as Exhibit A. See id. Ex. A.

Among other things, the Note provides that interest will accrue on the outstanding principal balance at a rate equal to the “Prime Rate” (defined in the Note) plus 1.0%. Note ¶ 1 (Compl. Ex. A). In the event of default, the Mortgage provides that the interest rate will increase to the Prime Rate plus 6.0%. Mortg. ¶ 1.8 (Compl. Ex. A). For each month that the default is not cured, the interest rate will increase by an additional 1.0% until it reaches the maximum rate permitted by law. Id. Both the Note and Mortgage require modification of the terms of those instruments to be in writing and signed. See Note ¶ 27 (“[A]ny writings not signed by [the] [l]ender or oral statements or conversations ... inconsistent with the provisions of this Note ... shall be null and void.”); Mortg. ¶ 9.1 (“No ... modification ... hereof[ ] shall be valid unless in writing, dated and signed by the party against whom such ... modification ... is sought to be enforced.”).

In 2010, due to the Debtor's default under the Note, HVB commenced a foreclosure action in the Supreme Court of Orange County, New York. Compl. ¶ 6.

B. ParkStone's Acquisition of the Note

At the time the foreclosure proceeding was commenced, the Debtor had listed the Property for sale through a broker, Sculpture Realty, Inc. (“SRI”). Id. ¶ 7. According to the Complaint, defendants Jonathan Childs and Vincent Rippa contacted SRI to inquire about purchasing the Property from the Debtor. Id. ¶ 8. Those two defendants then attempted to use SRI to “gain access to the premises” and “obtain confidential information” about the Property “for the purpose of determining the financial status of the [Debtor].” Id. At the time, the Debtor was unaware that Mr. Childs was the principal of ParkStone or that Mr. Rippa was Mr. Childs' father-in-law. Id.

According to the Debtor, rather than pursue the acquisition of the Property through SRI, Mr. Childs and Mr. Rippa instead caused ParkStone to purchase the Note and Mortgage from HVB. Id. ¶ 9. After several months of little or no activity in the foreclosure proceeding, ParkStone requested that the state court appoint a receiver over the Property. Id. ¶¶ 10–11. At ParkStone's request, the state court appointed Mr. Rippa as receiver (the “Receiver”), despite the fact that he was both the father-in-law of Mr. Childs and had been involved in the acquisition of the Note and Mortgage from HVB. Id. ¶ 11. According to the Debtor, ParkStone did not disclose these facts to the state court. Id.

In March 2012, with the Receiver in place, the Debtor's principal, ParkStone, and the Receiver agreed to a forbearance of the foreclosure action and the terms of a loan workout agreement (the “Loan Workout Agreement”). Id. ¶ 12. The parties agreed that ParkStone would provide additional funding for the purpose of completing construction of the then-unfinished Building. Id. The Debtor would be responsiblefor completing the construction and finding a suitable tenant. Id. For its part, ParkStone agreed to accept payment of $1.5 million in full satisfaction of the Note, provided that such amount was to be paid by May 4, 2012. Id. The Debtor thereafter secured a tenant for the Building, and the parties agreed to a further forbearance of the loan for a total of 24 months from the date the Building was certified for occupancy. Id. ¶ 13. During that time, the parties agreed that the Debtor would be permitted to pay off the Note for a total of $2.2 million. Id.

According to the Debtor, ParkStone delayed finalizing the paperwork for the Loan Workout Agreement until after construction was completed and a certificate of occupancy was issued in March 2013. Id. ¶¶ 14–17. At that time, ParkStone produced paperwork that allegedly bore no resemblance to the original terms of the Loan Workout Agreement. Id. Specifically, the “new” terms would have required the Debtor to pay $2.5 million if paid before June 30, 2013; $2.6 million if paid before September 30, 2013; $2.7 million if paid before January 31, 2014; and $2.9 million if paid after January 31, 2014 but before September 30, 2014. Id. ¶ 17. The terms would also have required the Debtor to waive any defenses to the foreclosure. Id. ¶ 17 n.2. The Debtor considered these terms unacceptable. Id.

The Debtor also contends that the Receiver mismanaged the Property during its negotiations with ParkStone. The Receiver collected more than $200,000 in rent from the new tenant, but did not pay the $116,000 commission that was due to SRI for finding the tenant or the nearly $129,000 that was owed to subcontractors and materialmen that the Debtor engaged to complete the construction of the Building. Id. ¶¶ 18–22. The Receiver also failed to apply for a property tax reduction from the City of Newburgh, which the Debtor contends would have saved it “hundreds of thousands of dollars” over a five-year period. Id. ¶ 22.

C. Proceedings in the Bankruptcy Case

On December 2, 2013, the Debtor filed this chapter 11 case. See Pet., No. 13–37619, ECF No. 1. Along with its petition, the Debtor filed a motion to authorize the use of cash collateral and to compel turnover by the Receiver pursuant to § 543(b) of the Bankruptcy Code. See Mot., No. 13–37619, ECF No. 2. After a hearing on January 28, 2014, the Court entered an order removing the Receiver and directing him to turn over the Property to the Debtor. See Order, No. 13–37619, ECF No. 52.

ParkStone filed a proof of claim for $4,454,867. See Proof of Cl. 1, No. 13–37619, Cl. No. 9. According to the proof of claim, the amount owed to ParkStone consists of: $2,420,624 in unpaid principal; $611,879.96 in unpaid interest at the contractual, non-default rate; $836,460.07 in unpaid interest at the default rate; $562,043.41 in loan advances; and $23,859.56 in “other costs.” Id. at 3. According to the Debtor's schedules, the Property is worth only $3.575 million. Am. Scheds. 1 (Sched. A), No. 13–37619, ECF No. 39.

On February 28, 2014, the Debtor filed a disclosure statement (the “Disclosure Statement”) pursuant to § 1125 of the Bankruptcy Code. See Discl. Stmt., No. 13–37619, ECF No. 67. A copy of the Debtor's proposed chapter 11 plan (the “Plan”) is attached as an exhibit to the Disclosure Statement. See id. Ex. B. The Plan proposes to create six classes of claims, of which three are impaired. Plan 9–12 (Discl. Stmt. Ex. B). ParkStone's impaired Class 2 claim will be capped at $2 million and paid in full no later than December 31, 2015. Id. at 10–11. Prior tothat date, ParkStone will receive monthly interest-only payments at a rate of 5.25% per annum plus additional principal payments upon the sale of any of the Partially–Developed Lots. Id. According to the Disclosure Statement, “[t]he success of [this adversary proceeding] in reducing [ParkStone's claim] ... is vital to the successful resolution of this case and directly imparts the feasibility of the Debtor's plan of reorganization.” Discl. Stmt. 19.

D. The Adversary Proceedingi. The Complaint

On January 31, 2014, the Debtor filed a complaint (the “Complaint”) against ParkStone, ParkStone II, Mr. Childs, and the Receiver (together, the “Defendants”), initiating this adversary proceeding. The...