In re Olympia Office LLC, Case Nos.: 16–74892 (AST)

574 B.R. 38

IN RE: OLYMPIA OFFICE LLC, et. al., Debtors.

Case Nos.: 16–74892 (AST)

16–75515 (AST)

16–75516 (AST)

16–75517 (AST) (Jointly Administered)

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

Signed June 30, 2017

Joseph S. Maniscalco, Jordan Pilevsky, Jordan David Weiss, LaMonica Herbst Maniscalco LLP, Wantagh, NY, for Debtors.

ORDER CONCERNING DEBTORS' STANDING TO OBJECT TO NOTEHOLDER CLAIMS AND TRIAL EVIDENTIARY ISSUES

Alan S. Trust, United States Bankruptcy Judge

The Court enters this Order in accordance with Federal Rules of Civil Procedure 1, 16, 43, and 44, as incorporated by Rules 1001, 7016, 9014, and 9017 of the Federal Rules of Bankruptcy Procedure, as well as the Federal Rules of Evidence. This Order addresses the standing of Debtors to object to the proofs of claim filed by a secured creditor, as well as certain evidentiary issues raised at and after trial.

Pending before the Court are the following:

MLMT 2005–MCP1 Washington Office Properties, LLC's ("MLMT" or "Noteholder"), Motion for Relief from the Automatic Stay under Bankruptcy Code Sections 362(d)(1), 362(d)(2), and 362(d)(4). [dkt item 94]

MLMT's Motion for Dismissal or Conversion of the above-captioned Bankruptcy Cases under Bankruptcy Code Section 1112(b). [dkt item 95]

Olympia Office LLC's ("Debtors"), Opposition to the Relief from Stay Motion and Motion to Dismiss. [dkt item 107]

MLMT's Reply in Support of the Relief from Stay Motion and Motion to Dismiss. [dkt item 110]

Debtors' Motion to Object to Proof of Claim # 4–1, filed by MLMT. [dkt item 127]

MLMT's Memorandum of Law in Opposition to the POC # 4–1 Objection. [dkt item 152]

MLMT's Motion to Strike ("Motion to Strike") and Evidentiary Objection to Debtors' Reply. [dkt item 229]

MLMT and Debtors' Joint Letter Regarding Admission of Evidence. [dkt item 245]

Debtors' Request for admission of Accountant Report. [dkt item 246]

Debtors' Request to submit David Bornheimer Deposition Transcript and Designations. [dkt items 247, 248]

BACKGROUND AND PROCEDURAL HISTORY ¹

Pre–Petition History

In or about 2004, an entity known as CDC Properties I, LLC ("CDC") entered into two loan agreements (the "Loans") with Merrill Lynch Mortgage Lending, Inc. (the "Original Lender"), and secured those Loans with liens against eleven properties located in the State of Washington (the "Original Collateral") pursuant to duly recorded deeds of trust (the "Deeds of Trust"). On or about September 30, 2005, the Original Lender assigned the Loans to Wells Fargo Bank N.A., as Trustee for the Registered Holders of Merrill Lynch Mortgage Trust 2005–MCP1 Commercial Mortgage Pass–Through Certificates, Series 2005–MCP1 ("Wells Fargo") and U.S. Bank, N.A., as Successor–Trustee to LaSalle Bank N.A., as Trustee for the benefit of the Certificate Holders of Commercial Mortgage Pass–Through Certificates, Series MCCMT 2004–C2D ("U.S. Bank" and together with Wells Fargo, "Lenders").

CDC defaulted under the Loans, and on February 10, 2011, filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the Western District of Washington (the "CDC Bankruptcy Court"), and assigned Case No. 11–41010 (the "CDC Bankruptcy Case"). On November 22, 2011, the CDC Bankruptcy Court confirmed CDC's Plan of Reorganization (the "CDC Plan"), under which, inter alia , the Loans and Deeds of Trust remained in effect pursuant to their terms but with new monthly payment amounts and a new maturity date of October 17, 2017. The CDC Bankruptcy Case was closed on or about February 15, 2012.

Under the CDC Plan, Midland Loan Services, Inc., a division of PNC Bank, N.A. ("Midland"), acted as special servicer with respect to the Loans secured by the Original Collateral. While the CDC Plan placed various payment and reserve obligations on the reorganized debtor, the cash generated by operation of CDC's properties was actually collected through a lock box and disbursed through accounts controlled by Midland.

CDC defaulted under its Plan obligations. On March 11, 2016, Lenders commenced non-judicial foreclosure proceedings against the nine commercial properties that remained from the Original Collateral (the "Properties"). In May 2016, Lenders filed a Petition to Appoint Custodial Receiver in Washington state court to, among other things, obtain the appointment of a receiver over the Properties. On May 19, 2016, the state court entered its Order Appointing Custodial Receiver, pursuant to which JSH Properties, Inc. was appointed receiver over the Properties.

On or about July 1, 2016, Lenders served and subsequently recorded Notices of Trustee's Sales with respect to the Properties (the "Notices of Sale"), pursuant to which non-judicial foreclosure sales of the Properties were scheduled for October 21, 2016.

On or about September 23, 2016, CDC, without Lenders' consent, transferred all of the Properties by Quitclaim Deeds (the "Transfers") to four different, newly created entities located in four different states other than Washington (New York, Florida, Virginia, and Delaware), as tenants in common. These four entities are: Olympia Office LLC ("Olympia"); Seahawk Portfolio LLC; Mariners Portfolio LLC; and WA Portfolio LLC (collectively, the "Acquirers"). While each Acquirer, alone, received fractional interests in the Properties, collectively, they obtained 100% ownership of the Properties. At the time of the Transfers, the outstanding balance owed on the Loans allegedly exceeded $33 million.

On or about October 18, 2016, the Noteholder succeeded to Lenders' rights under the Loans and the Deeds of Trust.

These Debtors' Bankruptcies, Parties' Motions, Evidentiary Hearing, and Post–Hearing Submissions

On October 20, 2016, Olympia filed a voluntary petition under chapter 11 before the United States Bankruptcy Court for the Eastern District of New York (the "Court").

On November 16, 2016, Noteholder filed a motion with this Court pursuant to 11 U.S.C. § 362(d) seeking entry of an order determining that the automatic stay does not apply. [dkt item 19]

On November 28, 2016, the remaining Acquirers (Seahawk Portfolio, Mariners Portfolio, and WA Portfolio) each filed chapter 11 cases with this Court (collectively with Olympia, "Debtors"). These four related cases have been administratively consolidated.

On December 1, 2016, the Court entered an Order that determined, inter alia , the Properties were property of Debtors' estates and the automatic stay applied to the Properties. [dkt item 33]

On January 27, 2017, Noteholder filed a Motion for relief from the automatic stay pursuant to §§ 362(d)(1), 362(d)(2), and 362(d)(4) of the Bankruptcy Code (the "Relief from Stay Motion"). [dkt item 94]

On January 27, 2017, Noteholder filed a Motion for dismissal or conversion of the above-captioned Bankruptcy Cases pursuant to § 1112(b) (the "Motion to Dismiss"). [dkt item 95]

On January 31, 2017, Noteholder filed a proof of claim asserting that its claim is secured and it is owed at least $41,613,780.82, including interest, fees, and expenses, pursuant to the Loans (the "Noteholder POC"). [POC # 4–1]

On February 15, 2017, Debtors filed an Opposition to the Relief from Stay Motion and Motion to Dismiss (the "Opposition"). [dkt item 107]

On February 18, 2017, Noteholder filed a reply to the Opposition (the "Reply"). [dkt item 110]

On February 22, 2017, the Court held a preliminary hearing on the Relief from Stay Motion and Motion to Dismiss.

On March 1, 2017, the Court issued a contested matter scheduling Order (the "Scheduling Order"), scheduling an evidentiary hearing on the Relief from Stay Motion and Motion to Dismiss. [dkt item 121]

On March 8, 2017, Debtors filed an objection to the Noteholder POC (the "POC Objection"). [dkt item 127]

Given that the Relief from Stay Motion, the Motion to Dismiss, and the POC Objection (together, the "Parties' Motions") ultimately effected Debtors' ability to confirm a chapter 11 plan of reorganization and should be heard concurrently, on March 20, 2017, the Court issued an amended contested matter scheduling Order (the "First Amended Scheduling Order"), which provided, inter alia , that affidavits of party controlled witnesses including experts, as well as deposition excerpts, shall be filed with the Court no later than May 1, 2017, that any objection to any portion of a witness affidavit, including evidentiary objections, shall be filed no later than May 8, 2017 at 4:00 pm, that the parties shall exchange all exhibits by no later than May 1, 2017, and that an evidentiary hearing on the Parties' Motions would be held on May 11, 2017. [dkt item 141]

On April 11, 2017, Noteholder filed a memorandum of law in opposition to the POC Objection (the "Noteholder's POC Opposition"). [dkt item 152]

On April 26, 2017, Debtors filed a Motion to modify the First Amended Scheduling Order (the "Motion to Modify"). [dkt item 159] In support, Debtors assert, inter alia , that a deposition of David Bornheimer ("Bornheimer") was held on April 12, 2017 and needed to be continued, but could not be completed before the deadline of May 1, 2017 to submit affidavits and deposition excerpts to the Court. Additionally, Debtors assert Centrum Financial Services, Inc. ("Centrum"), an interested party in both the Debtors' bankruptcy case and the CDC Bankruptcy Case, had turned over documents to Debtors on April 20, 2017 that were purportedly related to the amount due under the Loans; thus Debtors needed extra time to investigate the documents in the context of the POC Objection and First Amended Scheduling Order.

On April 27, 2017, the Court entered an Order scheduling an emergency telephonic hearing on the Motion to Modify for May 1, 2017. [dkt item 161]

On April 28, 2017, the Noteholder filed an objection to the Motion to Modify (the "Objection to Modify"), asserting that Debtors do not have standing to challenge the Noteholder POC or modify the Noteholder's rights under the Loans because Debtors were not parties to the CDC Plan or the underlying loan documents incorporated therein,...