U.S. Bank Nat'l Ass'n v. Nesbitt Bellevue Prop. LLC

• Decision Date: 30 May 2012
• Docket Number: No. 12 Civ. 423 (JGK).,12 Civ. 423 (JGK).
• Citation: 866 F.Supp.2d 247
• Parties: U.S. BANK NATIONAL ASSOCIATION, Plaintiff, v. NESBITT BELLEVUE PROPERTY LLC, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

866 F.Supp.2d 247

U.S. BANK NATIONAL ASSOCIATION, Plaintiff,

v.NESBITT BELLEVUE PROPERTY LLC, et al., Defendants.

No. 12 Civ. 423 (JGK).

United States District Court,

S.D. New York.

May 30, 2012.

Keith Michael Brandofino, Eric J. Berardi, Tamara Anne Daniels, Kilpatrick Townsend & Stockton LLP, New York, NY, for Plaintiff.

John Kolsin Crossman, Frank Christian Welzer, Zukerman Gore, Brandeis & Crossman, LLP, New York, NY, for Defendants.

OPINION AND ORDER

JOHN G. KOELTL, District Judge:

This case involves the plaintiff's attempt to appoint a receiver for the defendants' properties because of the defendants' default on loans for which the properties are collateral. U.S. National Bank (“U.S. Bank,” the “plaintiff,” or the “Trustee”) is the Trustee, pursuant to a March 2006 Pooling and Servicing Agreement (the “PSA”) of various loans, including loans made to the defendants. The defendants are limited liability companies which own and operate, under the Embassy Suites franchise, hotels that are collateral for the defendants' loans. In an Opinion and Order dated May 7, 2012, the Court denied the defendants' motion to dismiss for lack of subject matter jurisdiction, determined that diversity jurisdiction pursuant to 28 U.S.C. § 1332 existed in this case, and ordered that an evidentiary hearing be held to determine whether the collateral is in jeopardy such that a receiver is justified. U.S. Bank Nat'l Ass'n v. Nesbitt Bellevue Prop. LLC, 859 F.Supp.2d 602, No. 12 Civ. 423, 2012 WL 1590518 (S.D.N.Y. May 7, 2012). At that evidentiary hearing, the defendants moved for judgment as a matter of law on the basis that the appointment of a receiver would be improper in this case because no other relief is sought. See generally Gordon v. Washington, 295 U.S. 30, 37, 55 S.Ct. 584, 79 L.Ed. 1282 (1935) (“[T]here is no occasion for a court of equity to appoint a receiver of property of which it is asked to make no further disposition.”).

The general background of this case is set forth in this Court's previous Opinion and Order, U.S. Bank, 859 F.Supp.2d at 605–06, 2012 WL 1590518, at *1, and will be repeated only as necessary to resolve the current disputes. For the reasons explained below, the defendants' motion is denied, and the plaintiff's motion to appoint a receiver is granted. The following constitutes the Court's findings of fact and conclusions of law.

I.

Whether a federal court should appoint a receiver in a diversity action is governed by federal law. Varsames v. Palazzolo, 96 F.Supp.2d 361, 365 (S.D.N.Y.2000). “The appointment of a receiver is considered to be an extraordinary remedy, and should be employed cautiously and granted only when clearly necessary to protect plaintiff's interests in the property.” Rosen v. Siegel, 106 F.3d 28, 34 (2d Cir.1997) (internal alterations and quotation marks omitted). “The following factors are relevant to establishing the need for a receivership:

‘Fraudulent conduct on the part of defendant; the imminent danger of the property being lost, concealed, injured, diminished in value, or squandered; the inadequacy of the available legal remedies; the probability that harm to plaintiffby denial of the appointment would be greater than the injury to the parties opposing appointment; and, in more general terms, plaintiff's probable success in the action and the possibility of irreparable injury to his interests in the property.’ ”

Varsames, 96 F.Supp.2d at 365 (quoting 12 Wright & Miller, Federal Practice & Procedure § 2983 (1999)) (internal alterations omitted).

As an initial matter, the parties dispute who bears the burden in this case. The plaintiff, citing D.B. Zwirn Special Opportunities Fund, L.P. v. Tama Broadcasting, Inc., 550 F.Supp.2d 481, 491 (S.D.N.Y.2008), argues that, where the loan agreement indicates that the parties have consented to the appointment of a receiver, “the party opposing the appointment bears the burden of demonstrating why a receiver should not be appointed.” Id. at 491. However, in D.B. Zwirn, the agreement at issue provided that in the event of a default “[t]he Agent may ... seek the appointment of a receiver” and that “the Transaction Parties further agree to consent to the appointment of a receiver (selected by the Agent and approved by the Required Lenders) by any court of competent jurisdiction.” Id. at 484 (alterations omitted). In this case, the security agreements on the properties provide only that, in the event of a default, U.S. Bank “may ... apply for the appointment of a ... receiver ... of the Trust property.” See Ginsberg Decl. Ex. 5 (the “Bellevue Hotel Deed of Trust”), at 7–8. Here, as in Citibank, N.A. v. Nyland (CF8) Ltd., 839 F.2d 93 (2d Cir.1988), the agreement provides that the bank “may apply for the appointment of a receiver,” but there is no explicit consent by the defendants to the appointment. Id. at 97. Here, as in Nyland, “the appointment of a receiver is not automatic under the mortgage agreement” and still requires an “adequate showing” by the plaintiff. Id. Thus, the burden remains on the plaintiff. However, the existence of a provision authorizing the application for a receiver in the event of a default, “strongly supports the appointment of a receiver” when there is a default. Id.

There are no allegations of fraud in this case, but courts have “appointed receivers even where there was no evidence of fraud.” D.B. Zwirn, 550 F.Supp.2d at 491 & n. 64 (citing United States v. Trusty Capital, Inc., No. 06 Civ. 8170, 2007 WL 44015, at *8 (S.D.N.Y. Jan. 5, 2007)). There is, moreover, no dispute that the defendants have defaulted on the loans at issue. The principal amount of the loans was $187,500,000, and the maturity date was February 6, 2011, at which time all of the loans became due and payable. (Ginsberg Decl. ¶¶ 3–5.) On February 6, 2011, the defendants defaulted on their obligations by failing to pay the amounts then due and owing, and there remains in excess of $175,000,000 due and owing to the plaintiff. (Ginsberg Decl. ¶¶ 15–17.) Thus, the plaintiff can foreclose on the properties, and is likely to succeed in ultimately obtaining possession of the properties. ( See, e.g., Bellevue Hotel Deed of Trust, at 7–8 (indicating remedies for default).)

However, the parties dispute the existence of any imminent danger of the diminution of the value of the properties. This is a critical factor in the analysis of whether to appoint a receiver. See, e.g., Melnick v. Press, No. 06 Civ. 6686, 2007 WL 2769490, at *1 (E.D.N.Y. Sept. 21, 2007) (“Plaintiffs are required to make a clear showing that the appointment is necessary to prevent irreparable injury.”). Relatedly, the parties dispute the balance of harms between the risk of such a diminution in value if a receiver is not appointed, and the injury that the defendants would suffer if one is appointed. On May 9, 2012, the Court held an evidentiary hearing to address these disputed issues. Based on the testimony and documents introduced at that hearing, the Court determines that the motion for a receiver should be granted.

A.

The eight collateral hotel properties (hereinafter, the “Hotels” or the “Collateral”) are all managed by Windsor Capital Group, Inc. (“Windsor”), ¹ and are licensed under the Embassy Suites Franchise. They are located in six different states.

There is no dispute that, if the Hotels were to lose their licenses to operate under the Embassy Suites brand, that would substantially diminish their value. In April, 2012, Windsor received letters from the licensor with regard to each of the Hotels, explaining that each of the Hotels was in default of the license agreement “as a result of its failure to comply with required Embassy Suites brand and product quality standards.” (May 9, 2012 Evid. Hr'g, Exs. C–1, C–2, C–3, C–4, C–5, C–6, C–7, & C–8.) The letters explain that the Hotels must cure the default by July 19, 2012, and that if they do not do so, then the franchise licenses may be terminated on September 1, 2012. ( Id.) The defaults relate to the Hotels' failure to obtain a satisfactory score on Quality Assurance Evaluations (“QAs”) that took place between December, 2011 and March, 2012. ( Id.)

At the evidentiary hearing, Patrick Nesbitt, the founder, CEO and Chairman of Windsor, explained that the QAs are given approximately every six months. (May 9, 2012 Evid. Hr'g Tr. at 55.) A hotel is awarded 4,000 points, which are spread evenly between 4 major categories, and between 10 and 50 weighted subcategories. ( Id.) These categories include so-called “brand standards,” which are the latest brand-wide requirements. ( Id.) An inspector then grades each subcategory and deducts points within each category. The total points are then added up. ( Id.) A score of 2400 or less is considered a failing score which will put the hotel in default. ( Id. at 59.)

After receiving the default notices, Nesbitt assembled a team of senior managers at Windsor to determine the most cost effective way to recover points on the QAs. ( Id. at 58.) Nesbitt testified at the hearing that, if the defendants are able to raise their scores in the next round of QAs, the default notices will be “eliminated.” ( Id. at 59–60.) The plan that Nesbitt and Windsor created comprises two stages of improvements that would cost a total of over $4.4 million. ( Id. at 60–65; see also May 9, 2012 Evid. Hr'g, Exs. B & D.) Nesbitt could not testify that the $4.4 million dollars would keep the Hotels in compliance with the franchise license for the duration of license agreement, but only that it would “get us past the next QA.” (May 9, 2012 Evid. Hr'g Tr. at 75, 78.) The total cost of bringing the Hotels into compliance with all brand standards would be much higher. ( Id. at 108–109.)

B.

Neither the defendants nor Windsor has the $4.4 million to pay for the improvements necessary to avoid the imminent loss of the Embassy Suites franchise. (May 9, 2012 Evid. Hr'g Tr. at 75, 106.) It is also undisputed...