Bankruptcy of a Co-Lender Or Subordinate Lender - Massey Knakal

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Bankruptcy of a Co-Lender Or Subordinate Lender - Massey Knakal Powered By Docstoc     |                                                                                                                                                                                                  Wednesday, september 16, 2009 |                                     5

realty law digest                                           Financing

                  scott e.
                                                            Bankruptcy of a Co-Lender
                                                            Or Subordinate Lender                                                                                                                                 By
                                                                                                                                                                                                                  Jeffrey B.
City’s Revocation of Retirement Home’s Real
Property Tax Exemption Held Improper

                                                                           ver the past year, in this       grounds enumerated in Bankrupt-             has long been an issue for lenders                   of the bankruptcy court, the junior

T    he petitioner, a not-for-profit corporation,
     operates a retirement home for the aged.
The subject properties consist of two parcels: a
                                                                           column, we have exam-
                                                                           ined several different
                                                                           issues related to troubled
                                                                                                            cy Code §362(d). The two grounds
                                                                                                            that may apply to a senior lender
                                                                                                            seeking relief in order to foreclose
                                                                                                                                                        structuring complex transactions,
                                                                                                                                                        but such concerns have typically
                                                                                                                                                        been focused on the borrower, not
                                                                                                                                                                                                             mortgagee was a “lender” in respect
                                                                                                                                                                                                             to the collateral property, not a
                                                                                                                                                                                                             “debtor” (and the senior lender was
warehouse parcel and a retirement home parcel.                             real estate loans, primar-       a bankrupt junior lender’s lien are:        another lender in the stack.                         not its “creditor”), and, therefore, its
The warehouse parcel involved an improved area                 ily in connection with borrower              (1) “for cause”5 or (2) if the debtor          In In re Three Strokes Limited                    second mortgage interest was not
of over 20,000 square feet, of which about 4,000               defaults and lender remedies. The            has no equity in the subject prop-          Partnership10 a senior lender was                    subject to the automatic stay.
square feet was leased to a state university, with             credit crisis, however, has affected         erty and the subject property is not        prevented from completing a non-                         In another situation, where a
the remainder, according to the petitioner, used               mortgagees as well as mortgagors.            necessary for the bankrupt junior           judicial foreclosure that was com-                   senior lender commenced fore-
for storage to support the retirement home. The                If, in the context of a participated,        lender’s effective reorganization.6         menced before the junior lender                      closure against its borrower, but
retirement home parcel contained about 84,000                  syndicated, tranched or senior/              Aside from “lack of adequate protec-        voluntarily filed its Chapter 11 case.               did not name or serve a necessary
square feet of improved space, of which, 3,738                 junior loan structure, one of the            tion,”7 the phrase “for cause” is not       The court held that the bankrupt                     bankrupt party, thereby leaving its
square feet was leased by an associated not-for-               lenders were to file a petition for          defined in the Bankruptcy Code.8            junior lender’s second lien was                      security interest undisturbed, the
profit corporation, for the operation of an adult              relief under the Bankruptcy Code,1              There is a split in authority as         a “cognizable property interest”                     court found that as the debtor
day care facility. Additionally, 520 square feet was           the automatic stay afforded such             to whether the automatic stay is            protected by the automatic stay                      would remain in the same posi-
leased to a hairdressing salon, and the 1,827-square-          lender could have material conse-            applicable in a circumstance where          and that an intercreditor and sub-                   tion, no interest of the bankrupt
feet main dining hall was periodically leased to               quences to the other lenders, espe-          a senior lender is attempting to            ordination agreement entered into                    estate was affected and therefore
several not-for-profit institutions for luncheon and           cially in a circumstance where the                                                                                                            the automatic stay did not apply.12
dinner meetings.                                               loan or underlying collateral was                                                                                                             However, the case law is not well
    The petitioner had received tax exemptions from            itself troubled. As banks and other                                                                                                           developed on whether such a fore-
the city for many years pursuant to RPTL 420-a.                financial institutions fail, the issue                                                                                                        closure would constitute a violation
The city had revoked the previously-held charitable            of lender bankruptcy has become                                                                                                               of the automatic stay and a cautious
exemption for the warehouse parcel, deeming the                more prevalent in the finance indus-                                                                                                          lender may want to seek relief from
university rental at market rate and the storage               try.                                                                                                                                          the stay.
area not a charitable use. The city also partially                 One of the most fundamental                                                                                                                   Given the potential negative con-
revoked the exemption for the retirement home                  protections afforded entities that                                                                                                            sequences of failing to seek relief
parcel, ruling that the adult day care, hairdresser,           file for bankruptcy is the imposition                                                                                                         from the automatic stay, a prudent
and dining uses were also “at market rate and, in              of the automatic stay, which pro-                                                                                                             first mortgagee is well advised to
any event, not charitable.” The petitioners had                hibits creditors from commencing                                                                                                              seek relief from the stay “out of
unsuccessfully appealed to the board of assess-                or continuing nearly all efforts to                                                                                                           an abundance of caution” rather
ment review, and thereafter commenced the instant              enforce debts or perfect security                                                                                                             than risk wasting time and effort
action seeking a determination that the assessment             interests in property of the debtor.2                                                                                                         on a foreclosure that may be over-
was unlawful and the revocation improper.                      The automatic stay is designed to                                                                                                             turned. Additionally, a first mort-
    The court held that the petitioner was entitled            give a debtor “breathing room” in                                                                                                             gagee may choose to petition the
to the exemption pursuant to RPTL §420-a(2) for                order to focus on either reorganiz-                                                                                                           court for relief from the stay rather
the portion of the warehouse leased to the state               ing its business or conducting an                                                                                                             than risk punitive damages for will-
university, since the city failed to demonstrate               orderly liquidation of its assets in                                                                                                          fully continuing with a foreclosure

that such use was “not exclusively for educational             bankruptcy. In situations where                                                                                                               of a bankrupt junior lender’s lien.
purposes, and that the corporation or institution              the automatic stay applies, a credi-                                                                                                          If, however, the market value of the
leasing that portion of the property…is not a New              tor must move for relief from the                                                                                                             underlying property has declined
York State Agency operated for educational pur-                automatic stay prior to engaging                                                                                                              below the outstanding balance of
poses.” The court found that the record established            in activities designed to enforce                                                                                                             the first mortgage, the second mort-
both facts.                                                    its debt.
    The court further held that the city failed to                 Failure to seek relief from the          foreclose on a property subject to
demonstrate that the income from the university                stay may result in a bankruptcy              a junior mortgage after the junior
lease “[exceeded] the carrying, maintenance and                court awarding a debtor actual dam-          lender has filed for bankruptcy.             Given the increased complexity of financing arrangements in recent
depreciation charges of the property as set forth              ages, including costs and attorney’s         Inasmuch as the subject junior               years, lenders who participate in multiparty lending agreements are
under RPTL §420-a (2).” The court explained that               fees, as well as punitive damages,           mortgage still has value (in the most        well advised to carefully consider the potential impact of a bankruptcy
“an economic benefit to a charitable organization              in appropriate circumstances. 3              basic sense, if the market value of
does not by itself extinguish a tax exemption. The             Actions taken in violation of the            the underlying property exceeds              of a co-lender.
question is how the property is used, not whether              automatic stay are generally void;           the outstanding principal balance
it is profitable.”                                             however, courts may grant retroac-           of the first mortgage loan) and is          by the lenders did not extinguish                    gage loan is essentially unsecured
    The court further found that the storage of                tive relief from the stay in limited         an asset of the bankruptcy estate,          said property interest. As such, the                 and may not be considered an asset
equipment used in the operation of its retirement              circumstances.4                              the automatic stay could prevent            senior lender was required to seek                   of the bankrupt estate.
home across the street, was not a basis to cancel                  If the automatic stay is appli-          the first mortgagee from exercis-           relief from the stay before continu-                     Generally, bankruptcy courts will
the exemption. The city argued that on two visits              cable, a creditor must seek relief           ing its remedies and completing a           ing with its foreclosure.                            lift the stay if the bankrupt junior
to the premises, it had not observed the premises              from the stay based on certain               foreclosure against the underlying             Certain courts, however, have                     lender has no equity in its lien. It
being used for storage and that keeping the space                                                           borrower. The majority of relevant          found that the automatic stay does                   will be difficult, if not impossible, for
vacant was not “exclusively in furtherance of peti-                                                         decisions appear to hold that the           not apply to a senior lender fore-                   a bankrupt junior lender to prove
tioner’s not-for-profit purposes.”                             Jeffrey b. steiner is a member of DLA        automatic stay does indeed apply9           closing a bankrupt junior lender’s                   to the court that its unsecured lien
    The court noted that this case did not involve             Piper LLP (US), and Zachary samton           and that a senior lender must peti-         lien. In Farmers Bank v. March11 the                 is “necessary for an effective reor-
a situation where land was being left fallow indefi-           is counsel. christopher J. baum, an          tion the court for relief from the stay     court found that the automatic stay                  ganization.” However, a bankrupt
nitely. Rather, the issue was “what specific use,              associate with the firm, assisted in the     before it can foreclose out the junior      was intended to protect “debtors”                    junior lender may argue that rather
consistent with non-profit status, developed land              preparation of this article.                 lender’s mortgage. Bankruptcy               and although under the protection                    than conducting a hasty         » Page 7
may be put to.” The court found that the city’s argu-
ment that the property “cannot be, at times, vacant,
or that portions of a developed premises may not
be used for storage, is simply erroneous.”
    The court found that the subject uses were
“incidental to the normal tax exempt use to which           marketplace                                   15,000-square-foot expansion, and                                                                                               es” like copy rooms.
petitioner put the premises” and that the city did                                                        Norris’ managing partner John J.                                                                                                   “It was suited for a law firm—
not demonstrate “either or both of such inciden-                                                          Eagan said the firm plans to add                                                                                                we need the space where you can
tal uses were not taking place at the warehouse                                                           more lawyers and new practice                                                                                                   integrate all the different facets that
premises.” Thus, the exemption for the warehouse            By Justin smulison                            areas like corporate litigation and                                                                                             Thelen had on many floors, into
parcel should not have been revoked.                                                                      real estate.                                                                                                                    one floor. They have an understat-
    The city also failed to demonstrate that the adult
daycare facility use was not associated with the
retirement home. Thus, the exemption should
                                                            N    oRRIs, McLaughlin & Marcus
                                                                 has signed a direct lease at 875
                                                            Third Ave. for nearly 30,000 square
                                                                                                             “We currently have 20 attorneys
                                                                                                          and 15 staff members, and we’ll have
                                                                                                          the capacity for 40 [attorneys] in the
                                                                                                                                                                                                                                          ed design theme and they paid a lot
                                                                                                                                                                                                                                          of attention to openness. We didn’t
                                                                                                                                                                                                                                          need to change size of attorneys’
not have been revoked for the adult center space            feet on the entire eighth floor.              new space,” Mr. Eagan said. “We’ll                                                                                              offices,” Mr. Eagan said.
and dining hall premises which were occasionally               The commercial law firm had                grow on a planned basis that would
leased to various dining hall operators.                    been subletting half of the 18th floor        allow us to get up to that level.”
    The court also held that although the hairdresser
lease was for a profit making concern, such services
were consistent with the petitioner’s exempt use
                                                            from Hogan & Hartson for the last
                                                            five years. Norris will vacate that
                                                            space by the end of October as its
                                                                                                             Jones Lang LaSalle managing
                                                                                                          director Martin Horner and the
                                                                                                          Garibaldi Group’s Jeff Toia served
                                                                                                                                                                                                                                          T   HE FIvE-story building at 901
                                                                                                                                                                                                                                              Broadway has been sold to a
                                                                                                                                                                                                                                          Spanish investor for $24.6 million,
and therefore, the exemption relating to such space         new 10-year lease begins in space             for Norris.                                                                                                                     or $1,716 per square foot.
should also not have been revoked.                          formerly occupied by Thelen.                     Cushman & Wakefield broker Paul                                                                                                 The landmarked, 14,336-square-
    The court said the city failed to show that the            Norris was represented internally          Glickman served for the landlord.                                                                                               foot building, was the original home
                                                                                                                                                                                                                     NYLJ/RICK KOPSTEIN

rent received by the petitioner for the daycare             by partner Kevin T. o’Brien.                     Before its dissolution last year,                                                                                            of the Lord & Taylor Dry Goods
center portion exceeded the carrying charges for               Loeb & Loeb partner Raymond                Thelen occupied six-and-a-half floors                                                                                           Store, and has stood in the Flatiron
that portion of the retirement home           » Page 7      sanseverino and associate Nichole             in the 29-story building.                                                                                                       District for 142 years.
                                                            Cortese represented the landlord,                Mr. Eagan said the space is ideal                                                                                               Guy Arad, a partner       » Page 7
                                                            875 Third Avenue LLC, an entity of            for his firm, and that plans have been
scott e. mollen is a partner at Herrick, Feinstein and an   Eastgate Realty.                              drawn to “expand the reception area                                                                                             @| To report a real estate transaction,
adjunct professor at St. John’s University School of Law.      The transaction marks a                    and create some more interior offic-        875 third ave.                                                                      contact
« Continued from page 5
at Adam Leitman Bailey, repre-
sented the buyer, an entity owned
by a private Spanish investor.
   Wachtel & Masyr partner Mor-
ris Missry represented the seller,
Thor Equities.
   Serving as the brokers for Thor
was a Massey Knakal Realty Servic-
es team comprised of chairman and
founding partner Robert Knakal,                                                                901 Broadway
vice chairman John Ciraulo and
director of sales Craig Waggner.
   “This sale, at a very high price

                                                                                              PHOTO COURTESY MASSEY KNAKAL
per square foot, is a good sign for
the market which is sorely in need
of good signs,” Mr. Knakal said.
   In October 2006, Thor purchased
the property for more than $17 mil-
   The 7,000-square-foot ground
floor is occupied by a high-end
fashion retailer, Miss Sixty, which
signed its lease early in 2007 for
$313 per square foot.
   A gallery tenant occupies floors    floors according to a release issued      Robin Brinkman from Dia
two through four and pays $62 and      by Massey Knakal. The fifth floor      Soleado Invest acted as the broker
$70 per square foot across the three   penthouse is currently vacant.         for the buyer.

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