1414 Utica Ave. Lender LLC v. Empire State Certified Dev. Corp. (In re Cort & Medas Assocs., LLC)

626 B.R. 372

IN RE: CORT & MEDAS ASSOCIATES, LLC, Debtor.

1414 Utica Avenue Lender LLC, Appellant,

v.Empire State Certified Development Corporation, Appellee.

Case No. 19-41313 (CEC)

20-cv-3971 (BMC)

United States District Court, E.D. New York.

Signed January 29, 2021

Joel M. Shafferman, Shafferman & Feldman LLP, New York, NY, for Debtor.

Paul A. Rubin, Hanh Huynh, Rubin, LLC, New York, NY, for Appellant 1414 Utica Avenue Lender LLC.

MEMORANDUM DECISION AND ORDER

COGAN, District Judge.

This appeal from the bankruptcy court reflects a contest over lien priority between two mortgagees of the debtor's real property. The issue arises because an intercreditor agreement between the mortgagees subordinated amounts due under one mortgage (the "CDC mortgage") to all amounts due under the other mortgage (the "PAB mortgage") – except for default charges. As to default charges owed on the PAB mortgage, the CDC mortgage had priority. Nevertheless, a state court foreclosure judgment obtained before the mortgagor's bankruptcy filing, in contravention of the intercreditor agreement, awarded a first priority to all amounts due under the PAB mortgage – including default charges.

The bankruptcy court declined to recognize the state court judgment. It rejected the argument of the current holder of the PAB mortgage, appellant 1414 Utica Avenue Lender LLC ("1414"), that the doctrines of res judicata and Rooker-Feldman prevented CDC from asserting a priority to the amount of the default charges.

As to res judicata , I disagree. CDC and its predecessor had full notice and an opportunity to be heard in state court when 1414 and its predecessor made it clear that they were seeking to include default charges in their priority, notwithstanding anything to the contrary in the intercreditor agreement. But CDC's predecessor, although named as a defendant and appearing in the foreclosure action, did not answer the plaintiff's foreclosure complaint to deny the plaintiff's claim of priority for all amounts due under the PAB mortgage. Nor did CDC or its predecessor object to the plaintiff's motion for summary judgment. In addition, CDC did not object to the form of judgment which the plaintiff submitted. It did not object to the referee's report which prioritized the default charges in favor of the plaintiff. And when the judgment was entered, CDC did not seek reargument or appeal.

Res judicata prevents CDC from asserting claims in the Debtor's bankruptcy case that it failed to assert in state court. The decision of the bankruptcy court is therefore REVERSED.¹

BACKGROUND

I. The Loan Documents

In 2009, the debtor Cort & Medias Associates, LLC (the "Debtor") issued two promissory notes and granted two mortgages to obtain financing for the development of a commercial parcel in Brooklyn. One loan was from appellee Empire State Certified Development Corporation ("CDC") for $1,132,000, secured by a mortgage, and guaranteed by the United States Small Business Administration ("SBA").² Upon closing, CDC assigned its rights under the loan and mortgage to the SBA.

At the same time, the Debtor received a $1,375,000 five-year term loan from the Park Avenue Bank ("PAB"), secured by a separate mortgage.

To establish priorities between the two mortgagees, CDC and PAB entered into an intercreditor agreement at the same time that the loans were extended, referred to as the "Third Party Lender Agreement." By its terms, the agreement was binding on any successors or assignees of CDC or PAB. The agreement recited that the CDC loan and mortgage would be subordinate to the PAB loan and mortgage. Specifically, the intercreditor agreement stated that "the interest held by CDC (CDC Lien) will be junior and subordinate to the lien or security interest" held by PAB.

There was, however, one relevant carve-out to that subordination provision. The intercreditor agreement further provided that as to any "Default Charges" owed on the PAB loan, PAB's loan and mortgage lien "is and will be subordinate to the [CDC loan] and the CDC Lien." "Default Charges" were defined to include "late fees, other default charges, and escalated interest after default" on the PAB loan. In other words, the PAB mortgage always had priority over the CDC mortgage, except for the payment of Default Charges, as to which the CDC mortgage had priority. There is no dispute in this case that the Default Charges under the PAB loan and mortgage that are at issue in this case – in the amount of $571,099.74 – fall within the definition of Default Charges.

II. The State Court Foreclosure Action

The PAB loan matured and went into default in 2015. By that time, PAB had fallen under FDIC receivership, and the FDIC had assigned the loan and mortgage to a subsidiary of Valley National Bank ("VNB"). VNB, as agent for its subsidiary, commenced a foreclosure action in New York State Supreme Court, Kings County, naming the SBA and other lienholders as defendants. The foreclosure complaint referenced and annexed the intercreditor agreement, alleging: "[T]he CDC Mortgage on the Mortgaged Premises and Chattel was subordinated to" the PAB mortgage. It specifically recited the existence of the intercreditor agreement and its interpretation of that agreement:

26. In conjunction with the Valley National Mortgage and the CDC Mortgage, as of December 29, 2009, The Park Avenue Bank and CDC entered into a Third Party Lender Agreement, whereby the CDC Mortgage on the Mortgaged Premises and Chattel was subordinated to the Valley National Mortgage . The Third Party Lender Agreement was recorded on January 13, 2010, in the City Register's Office, CRFN: 2010000013624. A true and correct copy of the Third Party Lender Agreement, together with the City Register's Office Recording and Endorsement Cover Page, is annexed hereto as Exhibit H and made a part hereof.

(Emphasis added). The "wherefore" clause of the complaint included a request that the SBA and all the other named interest holders "be barred and forever foreclosed of all right, title, interest, claim, lien and/or equity of redemption in and to the mortgaged premises." The SBA, by the U.S. Attorney for the Eastern District of New York, was served in 2015, and filed a notice of appearance in the foreclosure action, but did not answer or otherwise dispute VNB's right to foreclose the CDC mortgage on the terms requested.

The Debtor answered the complaint and hotly contested the foreclosure action. The SBA did not. VNB moved concurrently for summary judgment against those defendants who had answered or appeared and default judgment against those defendants who had not, and the state court granted the motion in September 2016. This motion is not in the record but two things that are clear by reference to other documents are: (1) VNB asserted that its mortgage had priority over the CDC mortgage, without qualification; and (2) the SBA did not file anything disputing that. The court appointed a referee to report on the priorities and distribution of proceeds from the contemplated sale, which the referee did in February 2017. Again, the referee's report is only referenced in the record, not included, but there is no dispute that it prioritized all amounts due under the PAB mortgage without qualification, and the SBA did not object to the report.

1414 acquired the interest in the loan, mortgage, and foreclosure action from VNB in April 2017. The following September (2017), on notice to all parties, including the SBA, the state court entered a Judgment of Foreclosure and Sale (the "Foreclosure Judgment"), substituting 1414 as plaintiff. The Foreclosure Judgment noted that the SBA had appeared (but not answered). The Foreclosure Judgment stated, among other things, that it was

ORDERED, ADJUDGED AND DECREED, that each and all of the defendants in this action, and all persons claiming under any of them after the filing of such Notice of Pendency of this action, be and they are hereby forever barred and foreclosed of all right, claim, lien, title, interest and equity of redemption in the said mortgaged premises and chattel and each and every part thereof[.]

The Foreclosure Judgment also computed the amounts due to 1414 under the mortgage, and that computation included the Default Charges:

that the report of [the] referee ... is modified in part to reflect that the amount due and owing to Plaintiff under the Note and Mortgage as of January 1, 2017, is $1,865,216.29 with interest continuing to accrue thereon through the date of entry of judgment at a per diem rate of $824.33, calculated as follows: (a) outstanding principal balance of $1,263,490.19; (b) Note Rate Interest of $13,021.04; (c) Default Rate Interest of $571,099.74 ; and (d) Negative Escrow of $17,605.32[.]

(Emphasis Added).³ Finally, the Foreclosure Judgment directed the referee, upon sale of the property, to give the PAB mortgage the highest priority after fees and taxes, specifically, directing her to pay 1414 "the sum of $1,865,216.29, the said amount so reported due" on the PAB mortgage, which, as reflected above, included the $571,099.74 in Default Charges. The SBA did not object to the proposed form of the Foreclosure Judgment prior to the state court entering it. After entry of the judgment, the SBA did not seek reargument nor did it appeal.

At some point thereafter which is not clear from the record, the SBA "put" the CDC loan and mortgage back to CDC, presumably pursuant to a contractual arrangement between them based on the foreclosure or the Debtor's bankruptcy. After lengthy but unsuccessful negotiations between 1414 and the Debtor,⁴ the property was scheduled for sale on March 7, 2019, about 18 months after entry of the Foreclosure Judgment.

III. The Bankruptcy Case

On March 6, 2019, the day before the foreclosure sale, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code, thus staying the foreclosure sale under 11 U.S.C. § 362(a). In the Chapter 11 case, 1414 timely field a secured claim for the full amount due on...