U.S. Bank Nat'l Ass'n v. Perlmutter (In re S. Side House, LLC)

• Decision Date: 16 March 2012
• Docket Number: Adversary No. 11–01455.,Bankruptcy No. 09–43576–ESS.
• Citation: 470 B.R. 659
• Parties: In re SOUTH SIDE HOUSE, LLC, Debtor. U.S. Bank National Association, 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, acting by and through its Special Servicer CW Capital Asset Management LLC, Plaintiff, v. Israel Perlmutter and Menachem Stark, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

470 B.R. 659

In re SOUTH SIDE HOUSE, LLC, Debtor.

U.S. Bank National Association, 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, acting by and through its Special Servicer CW Capital Asset Management LLC, Plaintiff,

v.Israel Perlmutter and Menachem Stark, Defendants.

Bankruptcy No. 09–43576–ESS.

Adversary No. 11–01455.

United States Bankruptcy Court,

E.D. New York.

March 16, 2012.

Melvin S. Hirshowitz, Esq., Melvin Hirshowitz Law Office, New York, NY, for the Defendants.

Joseph Lubertazzi, Jr., Esq., Peter Knob, Esq., McCarter & English, LLP, New York, NY, for the Plaintiff.

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW ON THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

ELIZABETH S. STONG, Bankruptcy Judge.

Before this Court is the Plaintiff's motion for summary judgment on the first count of its Complaint in an action referred to this Court by the United States District Court for the Eastern District of New York for the issuance of proposed findings of fact and conclusions of law pursuant to Bankruptcy Rule 9033.

The Defendants, Israel Perlmutter and Menachem Stark, are the principals of South Side House, LLC, the Debtor in a Chapter 11 case pending in this Court. The Plaintiff is the Debtor's largest creditor in the bankruptcy case as the holder of a commercial mortgage loan made to the Debtor in the principal amount of $29 million.In connection with that loan, the Debtor entered into a Note, Mortgage, and Other Security Documents (the “Loan Documents”), and the Defendants entered into an Indemnity Agreement.

In this action, the Plaintiff seeks to hold the Defendants liable as guarantors under the Indemnity Agreement. The Plaintiff argues that it is entitled to summary judgment on the first count of the Complaint, its cause of action to enforce the guaranty, if it establishes an absolute and unconditional guaranty, an obligation to pay the underlying debt, and nonperformance. And the Plaintiff contends that it has met this burden by demonstrating first, that the Defendants absolutely and unconditionally guaranteed payment of the amounts due under the Loan Documents if the Debtor files for bankruptcy; second, that the Debtor filed for bankruptcy; and third, that the Defendants did not make payment.

The Defendants argue that they are not liable as guarantors because the Indemnity Agreement is not a guaranty and because the action is barred by an exculpation clause and other terms in the Loan Documents. They also contend that there is a genuine dispute of material fact as to their intent to enter into a guaranty. And they argue that even if they are liable, the Plaintiff is not entitled to recover default interest, and the guaranty should not be enforced until this Court determines the Debtor's obligations to the Plaintiff in the bankruptcy case.

The Defendants also argue that this action is barred by the election of remedies rule in Section 1301(3) of New York State's Real Property Actions and Proceedings Law (“RPAPL”). And they ask this Court to stay this action pending the outcome of the confirmation hearings in the bankruptcy case.

Based on the entire record, and for the reasons stated below, this Court finds that the Plaintiff is entitled to summary judgment on the first count of the Complaint. There is no genuine dispute as to a material fact that the Defendants absolutely and unconditionally guaranteed payment of the debt due under the Loan Documents if the Debtor filed a petition for bankruptcy, that the Debtor filed a bankruptcy petition, and that the Defendants did not make payment. The Court also finds that this action is not barred by RPAPL Section 1301(3), and that the Defendants have not established grounds for a stay.

Jurisdiction

This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(c)(1). The following are the Court's proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c)(1) and Bankruptcy Rule 9033.

Background

The Debtor owns and operates a mixed-use building consisting of 74 residential units and two commercial units in Williamsburg, Brooklyn (the “Property”). Ch. 11 Pet., Bankr. Case No. 09–43576, ECF No. 1. The Defendants each own a 50 percent equity interest in the Debtor. Ch. 11 Pet. The Plaintiff is U.S. Bank National Association, 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, acting by and through its Special Servicer CWCapital Asset Management LLC.

The parties do not dispute that on April 19, 2007, the Debtor executed the Loan Documents in favor of UBS Real Estate Securities Inc., and on that same day, the Defendants executed the Indemnity Agreement in favor of UBS. Defs' Resp. Pl's Undisputed Material Facts ¶¶ 1–3, Bankr. Adv. Pro. No. 11–01455, ECF No. 13. They also do not dispute that as a result of certain assignments and mergers, the Plaintiff, as Trustee for the Trust, is the present holder of these interests. Defs' Resp. Pl's Undisputed Material Facts ¶¶ 4–7. And the parties do not dispute that the Indemnity Agreement and the Loan Documents are governed by New York law. Indem. Agreement § 22, Bankr. Adv. Pro. No. 11–01455, ECF No. 1–6; Note Art. 16, Bankr. Adv. Pro. No. 11–01455, ECF No. 1–2; Mortg. § 18.1, Bankr. Adv. Pro. No. 11–01455, ECF No. 1–14, 1–15.

The Foreclosure Proceeding

The Debtor defaulted under the Loan Documents by not making the full monthly payment due from September 10, 2008 through December 10, 2008, and in January 2009, the Plaintiff accelerated the debt and brought a foreclosure action in the District Court. Am. Compl. ¶ 14, Dist. Case No. 09–00411, ECF No. 7; Joint Statement ¶ 4, Bankr. Case No. 09–43576, ECF No. 260. The amended complaint in that action names the Debtor, the Defendants, Broadway Bank, and the City of New York as defendants. The Plaintiff alleges that the Debtor defaulted and that it is entitled to foreclose, and also alleges that the Defendants are parties to the Indemnity Agreement and that if the amounts due are not satisfied by the foreclosure proceeding, the Defendants are liable for any deficiency.

The District Court entered an order appointing a receiver on February 11, 2009, granted the Plaintiff's motion for summary judgment on April 24, 2009, and scheduled a conference to address the appointment of a referee. Dist. Case No. 09–00411, ECF Nos. 12, 20. On April 30, 2009, the Debtor filed for relief in this Court under Chapter 11 of the Bankruptcy Code. Ch. 11 Pet.; Defs' Resp. Pl's Undisputed Material Facts ¶ 8. As a result of the Debtor's bankruptcy case, the foreclosure proceeding was automatically stayed under Bankruptcy Code Section 362(a), and a referee was not appointed.

The Debtor's Bankruptcy Case

Some background as to the Debtor's Chapter 11 bankruptcy case is helpful to an understanding of the issues presented by this motion. The Debtor has operated its business and managed its property as a debtor in possession since the petition date. The Debtor lists two secured creditors, the Plaintiff and Broadway Bank, which holds a second mortgage on the Property, in its bankruptcy schedules. Schedule D, Bankr. Case No. 09–43576, ECF No. 24. The Debtor schedules the Plaintiff's claim as $29 million, and Broadway Bank's claim as $1.5 million. The Debtor also schedules two unsecured nonpriority claims totaling $24,200. Schedule F, Bankr. Case No. 09–43576, ECF No. 41.

Six creditors filed proofs of claim, including the Plaintiff, Broadway Bank, the receiver, and the receiver's counsel.¹ The unsecured creditors listed on the Debtor's schedules did not file proofs of claim, but voted in favor of the Debtor's Chapter 11 plan of reorganization (the “Plan”). Plan Ballots, Bankr. Case No. 09–43576, ECF No. 142. The claims of the receiver and his counsel were resolved by Order dated September 22, 2009. Bankr. Case No. 09–43576, ECF No. 80. And Broadway Bank's claim of some $1.5 million is treated without objection as unsecured under the Plan. Plan ¶¶ 3.8, 3.9, Bankr. Case No. 09–43576, ECF No. 297.

As such, the Debtor's principal creditor, and the only creditor to oppose confirmation of the Plan, is the Plaintiff. The Plaintiff objects to the Debtor's use of the Property's rental income as cash collateral, and moved for relief from the automatic stay and to dismiss the bankruptcy case. The Debtor objected to the Plaintiff's claim, and that objection is addressed in a Memorandum Decision of this Court. See In re South Side House, LLC, 451 B.R. 248 (Bankr.E.D.N.Y.2011), aff'd sub nom. U.S. Bank Nat'l Ass'n v. South Side House, LLC, 2012 WL 273119 (E.D.N.Y. Jan. 30, 2012).

The Debtor has been authorized to use the Property's rental income to make post-petition payments to the Plaintiff since the first week of the bankruptcy case, pursuant to orders entered from time to time on consent of the Plaintiff and Broadway Bank concerning the use of cash collateral. Bankr. Case No. 09–43576, ECF Nos. 9, 51, 93. While the Plaintiff initially objected to the Debtor's application to use cash collateral, the matter was resolved consensually and an order to that effect was entered without objection (the “Cash Collateral Order”). Cash Collateral Order, Bankr. Case No. 09–43576, ECF No. 51.

The Cash Collateral Order states that “[t]he Rents, together with any other income, receipts or revenues received by the Debtor, constitute cash collateral of the [Plaintiff] and Broadway Bank within the meaning of Section 363(a) of the Bankruptcy Code....” Cash Collateral Order ¶ H. It directs the Debtor to make monthly payments of $155,000 to be used by the Plaintiff for real estate taxes and insurance, and provides that the balance will “be applied to the indebtedness, as ultimately directed by the Court or as agreed by the parties.” Cash Collateral Order ¶ 8.

On April...