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  • Hello Living Developer Nostrand Llc, Hello Nostrand Llc v. 1580 Nostrand Mezz Llc, Madison Realty Capital LpCommercial - Business Entity document preview
  • Hello Living Developer Nostrand Llc, Hello Nostrand Llc v. 1580 Nostrand Mezz Llc, Madison Realty Capital LpCommercial - Business Entity document preview
  • Hello Living Developer Nostrand Llc, Hello Nostrand Llc v. 1580 Nostrand Mezz Llc, Madison Realty Capital LpCommercial - Business Entity document preview
  • Hello Living Developer Nostrand Llc, Hello Nostrand Llc v. 1580 Nostrand Mezz Llc, Madison Realty Capital LpCommercial - Business Entity document preview
  • Hello Living Developer Nostrand Llc, Hello Nostrand Llc v. 1580 Nostrand Mezz Llc, Madison Realty Capital LpCommercial - Business Entity document preview
  • Hello Living Developer Nostrand Llc, Hello Nostrand Llc v. 1580 Nostrand Mezz Llc, Madison Realty Capital LpCommercial - Business Entity document preview
  • Hello Living Developer Nostrand Llc, Hello Nostrand Llc v. 1580 Nostrand Mezz Llc, Madison Realty Capital LpCommercial - Business Entity document preview
  • Hello Living Developer Nostrand Llc, Hello Nostrand Llc v. 1580 Nostrand Mezz Llc, Madison Realty Capital LpCommercial - Business Entity document preview
						
                                

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FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF ROCKLAND HELLO LIVING DEVELOPER NOSTRAND LLC and HELLO NOSTRAND LLC, Index No: 034885/2021 Plaintiffs, MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFFS’ - against - MOTION FOR A TEMPORARY RESTRAINING 1580 NOSTRAND MEZZ LLC and MADISON ORDER AND PRELIMINARY REALTY CAPITAL LP, INJUNCTION Defendants. Plaintiffs Hello Living Developer Nostrand LLC (“Developer”) and Hello Nostrand LLC (“Hello”) submit this Memorandum of Law in Support of the Motion for a Temporary Restraining Order and Preliminary Injunction in this matter. PRELIMINARY STATEMENT Plaintiffs seek entry of an order (i) adding Nostrand Mezz Lender LLC (“Nostrand Mezz”), the current payee of the mezzanine loan at issue, as a party defendant, and (ii) pursuant to CPLR 6301, issuing a preliminary injunction directing (a) that the “Summary of Path for 421A” document be withdrawn from the data room and replaced with correct and accurate information concerning the property’s 421a tax abatement eligibility and (b) that Nostrand Mezz adjourn the UCC sale currently scheduled to take place on September 21, 2022, at 2:00 p.m., for at least thirty (30) days to allow sufficient time for accurate material information to be published to the market at large and disseminated to prospective bidders who have previously inquired with The Corbin Group at Rosewood Realty. This Court’s intervention is immediately required to temporarily delay the commercially unreasonable sale of Developer’s membership interests in Hello (the “Collateral”). Without the Court’s intervention, Nostrand Mezz intends to sell those interests by public sale on September 1 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 21, 2022, at 2:00 p.m. Allowing the sale to proceed, in light of the manifestly unreasonable sales process (which includes providing misleading and false information to artificially depress the likelihood of outside bidders and the value of any outside bids), will irreparably harm the plaintiffs. As demonstrated below, the plaintiffs are entitled to a temporary restraining order and preliminary injunction because (a) they are likely to succeed on their claim that because the bidding procedures are designed so that the defendants and their affiliates will be the only bidder, the process is commercially unreasonable, (b) the plaintiffs will be irreparably harmed if the UCC sale is allowed to go forward based upon materially misleading information, and (c) the equities heavily tip in favor of the plaintiffs. FACTUAL BACKGROUND AND PROCEDURAL HISTORY This action was stayed when Developer filed for relief under Chapter 11 of the United States Bankruptcy Code on December 21, 2021. Developer’s bankruptcy case was dismissed on July 25, 2022, on the motion of Nostrand Mezz. Nostrand Mezz, an affiliate of the Arch Companies (“Arch”), had purchased the mezzanine loan at issue in this action from defendant 1580 Nostrand Mezz LLC (“1580 Nostrand”) in or around March 2022. Another Arch affiliate, Nostrand Senior Lender LLC (“Lender”), acquired Hello’s mortgage loans for the underlying property at the same time. Lender recently commenced a foreclosure action in the Supreme Court State of New York, County of Kings, Index No. 524162/2022. It should be noted that the so-called mezzanine loan at issue was part of a workout with respect to the original loan, in which the then owner of the first mortgage created a mezzanine loan in 2020 during the pandemic shutdown when mortgage foreclosure cases in New York had been halted. In other words, the instrument that is at issue here is not from a separate and independent lender. Instead, it is an integral part of the underlying mortgage, intended to supplement the power 2 2 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 of the lender by effectively removing foreclosure from the judicial process, and is deliberately designed to prevent Hello from being able to exercise its rights to redeem the underlying mortgage. Counsel for the plaintiffs became aware several weeks ago of an advertisement by Rosewood Realty Group for a UCC sale of Developer’s membership interest in Hello. As noted above, the sale is scheduled for September 21, 2022 at 2 p.m., with a bid deadline of September 19, 2022, at 4 p.m. After repeated phone calls to various lawyers representing the defendants and their affiliates were unsuccessful in obtaining information about the sale, on August 25, 2022, Victor A. Worms, Esq. (co-counsel for plaintiffs) sent a letter to Jerold C Feuerstein, Esq., counsel for the defendants, requesting information about the sale. In addition to requesting information to confirm that the sale was properly noticed in accordance with the requirements of this Court’s order of October 25, 2021 (NYSCEF No. 58), the letter specifically requested “a copy of the complete bidding procedures and terms of sale as well as access to the due diligence data room for prospective bidders.” Aloe Aff. ¶ 4. The only response to Mr. Worms’ letter was an email dated August 26, 2022 from Mr. Feuerstein. That email states in its entirety: “Victor- As you are aware from the participating in the bankruptcy our client sold the loan to a third party.” Accordingly, on August 30, 2022, counsel for the plaintiffs sent a letter to Gayle Pollack, Esq., counsel to defendants’ affiliates in the newly- filed foreclosure action in Kings County (Nostrand Senior Lender LLC v. Hello Nostrand LLC et al., Index No. 524162/2022). This letter included a copy of Mr. Worms’ letter of August 25, 2022, and reiterated plaintiffs’ request for information concerning the sale. I received no response from Ms. Pollack. Aloe Aff. ¶ 6. On September 6, 2022, Greg Corbin of Rosewood Realty Group sent Mr. Worms a Word document which purported to be a notice of sale. This document did not include any of the 3 3 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 information required by the Court in its October 25, 2021 Order, nor did it include any due diligence or other information that would allow plaintiffs to assess whether the proposed sale would be commercially reasonable. Having received no meaningful information regarding the sale in response to these letters, on September 6, 2022 Mr. Worms submitted a letter to the Court (NYSCEF No. 117) to bring the Court’s attention to plaintiffs’ concerns with the conduct of defendants and their affiliates in scheduling the sale and request an emergency conference with the Court. The Court scheduled a Teams conference on September 12, 2022 and, among other things, directed that counsel for plaintiffs be provided with full information regarding the sale, including access to the due diligence data room maintained by Rosewood Realty Group. Counsel for the plaintiffs received access to the data room on September 13, 2022. Aloe Aff. ¶ 10. Included in the materials maintained in the data room is a one-page Word document titled “Summary of Path for 421A” a copy of which is attached as Exhibit A to the Aloe Aff. This document states the following: Summary of path for 421a No action was needed to take place before the June 15, 2022 421a expiration date To qualify for 421a for the expanded building: Amend plans/combine the tax lots Reopen the application to file a PAA with cellar level connecting the two buildings Amend the Building Permit To enlarge the permit to include the second lot Renew and expand existing TCO to the full enlarged building Existing CO originally issued June 24, 2021 Complete the expanded building by June 2026 Pay full taxes on the existing building until the new expanded building is complete Once TCO for the expanded building is received, follow the typical steps for 421a application and approval This document leads prospective bidders to believe that the undeveloped portion of the property located at 1580 Nostrand Avenue, Brooklyn, New York 11226, Block 5131, lot 106 (“Lot 106”) is ineligible for a 421a tax abatement as of right because the June 15, 2022 1 deadline to 1 Under RPTL § 421-a(16)(a)(xxviii), work had to “commence” by June 15, 2022 for the property to be eligible for an abatement under that program 4 4 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 commence work on the undeveloped portion of the property was not met. The assertion that the June 15, 2022 deadline was not met is false and misleading, and so counsel for plaintiffs sent a letter on September 15, 2022 to counsel for Nostrand Mezz to correct the record. Aloe Aff. ¶ 16. Attached to the letter was a copy of a Site Safety Log dated May 22, 2018 (Exhibit B) and a ZD 1 Zoning Diagram (Exhibit C), which conclusively demonstrates that required work commenced 2 in May of 2018, well before the deadline. Aloe Aff. ¶ 15. Counsel for the plaintiffs then stated in the letter that the “Summary of Path for 421A” document should be withdrawn from the data room and replaced with correct and accurate information concerning the property’s 421a tax abatement eligibility and demanded that Nostrand Mezz adjourn the UCC sale currently scheduled to take for at least thirty (30) days to allow sufficient time for this material information to be published to the market at large and disseminated to prospective bidders. The presence of this false and misleading information will, absent correction, result in a sales process that is not commercially reasonable. Eligibility for a 421a tax abatement is a significant component in determining the value of commercial real estate and development projects in New York City. For a property the size of the one at issue in this proceeding, the difference in value of the property based upon a 421a tax abatement could be in the tens of millions of dollars. This suppression of information regarding the valuation of the property appears to be intentional. As Nostrand Mezz and the current lenders on the property at issue are affiliates, they have an incentive to preclude other bidders from participating in the sale and in suppressing the value of any bids. Aloe Aff. ¶ 21. Instead of seeking to maximize the value of any bids in order to 2 As construction on the project was overseen and monitored by Hello’s lenders, presumably defendants and their affiliates had this information, but the information available to potential bidders in the data room suggests the opposite. 5 5 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 recover as much of their investment as possible, it appears that the strategy of Nostrand Mezz is to gain control of Developer so that it can, as the sole member of Hello, direct the capitulation of Hello on defaults, resulting in the seizure of ownership of the property and project. Absent restraint, the plaintiffs will suffer irreparable harm as a result of a commercially unreasonable sale of the Collateral. Plaintiffs are seeking modest relief; they simply are asking this Court to direct the removal of the false information from the data room, direct that the misrepresentations be corrected to those potential bidders who accessed the false information and scheduling the sale thirty (30) days out from the current sale date so that it can be conducted in a commercially reasonable manner. ARGUMENT Plaintiffs are entitled to a temporary restraining order and preliminary injunction to protect it from the irreparable harm that will result if Nostrand Mezz continues with the planned commercially unreasonable UCC sale. A preliminary injunction may be granted when plaintiff has shown: “(1) a likelihood of success on the merits; (2) the prospect of irreparable injury if the provisional relief is withheld; and (3) a balance of the equities tipping in the moving party’s favor.” Apple Air Conditioning & Appliance Service, Inc. v. Apple Home Heating Corp., 164 A.D.3d 460, 461 (2d Dep’t 2018) (internal quotations omitted). Similarly, a TRO may be granted “where it appears that immediate and irreparable injury, loss or damage will result unless the defendant is restrained before the hearing can be had.” CPLR § 6301. Moreover, New York U.C.C. § 9-625 explicitly authorizes injunctive relief to prevent a secured lender from foreclosing on property in a commercially unreasonable manner. See N.Y. U.C.C. § 9-625(a) (allowing the court to “order or restrain collection, enforcement, or disposition of collateral”). Because the proposed non-judicial 6 6 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 foreclosure sale is commercially unreasonable and the plaintiffs satisfy the requirements for injunctive relief, this court should enter a TRO and preliminary injunction barring the currently scheduled sale. I. Plaintiffs are Likely to Succeed on the Merits that the Proposed UCC Sale is not Commercially Reasonable. A. The New York U.C.C. requires that “all aspects” of the sale be conducted in a commercially reasonable manner. Under the UCC, every proposed sale must be a “good faith attempt to dispose of the collateral to the parties’ mutual best advantage.” Long Island Trust Co. v. Williams, 507 N.Y.S.2d 993, 997 (N.Y. Civ. Ct. 1986) (internal quotations omitted). It is not enough that the sale happens to benefit the creditor. See id. Under Article 9 of the UCC, “[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” N.Y. U.C.C. § 9-610(b). As relevant here, Section 9-627(b) provides that a “disposition of collateral is made in a commercially reasonable manner if the disposition is made. . . in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.” N.Y. U.C.C. § 9-627(b). In other words, the sale must follow commercially reasonable procedures. See Federal Deposit Ins. Corp. v. Herald Square Fabrics Corp., 81 A.D.2d 168, 184 (2d Dep’t 1981). Whether a sale is commercially reasonable is a fact-intensive inquiry. Coxall v. Clover Commercial Corp., 781 N.Y.S.2d 567, 574 (Civ. Ct. King County 2004). Courts consider “accepted business practices as a guide to what is most likely to protect both debtor and creditor.” Dougherty v. 425 Dev. Assocs., 93 A.D.2d 438, 446 (1983). Among the factors considered in assessing reasonableness is the timing between the notice and sale and “whether the seller permitted necessary inspections by prospective bidders.” In re Comprehensive Power, Inc., 578 7 7 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 B.R. 14, 40-41 (D. Mass. Bankr. 2017) (construing identical U.C.C. provisions and noting that a number of factors in addition to the price need to be considered to determine whether a transaction was commercially reasonable). “[C]loser scrutiny” is warranted where, as here, “the possibilities for self-dealing are substantial.” LBO Capital Corp. v. Home & City Sav. Bank, 1992 WL 209310, at *7 (N.D.N.Y. Aug. 18, 1992). B. A Sales Process Based Upon False and Misleading Information Is Not Reasonable Under New York law, the creditor bears the burden of establishing that it is conducting a UCC sale in a commercially reasonable manner. See, e.g., GE Credit Corp. v. Durante Bros. & Sons, Inc., 79 A.D.2d 509, 510 (1st Dep’t 1980); Security Tr. Co. v. Thomas, 59 A.D.2d 242, 247 (4th Dep’t 1977); Central Budget Corp. v. Garrett, 48 A.D.2d 825, 826 (2d Dep’t 1975). The UCC requires that “[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” N.Y. U.C.C. § 9-610(b). Pursuant to UCC § 9-627(b), the sale of collateral after a default is commercially reasonable if made “(1) in the usual manner on any recognized market; (2) at the price current in any recognized market at the time of the disposition; or (3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.” The purpose is to “insure that the debtor has an opportunity to redeem prior thereto, and that the property is not sacrificed at a price below its actual value.” See Sumner v. Extebank, 88 A.D.2d 887, 888 (1st Dep’t 1982) (citation omitted); see also Federal Deposit Ins. Corp. v. Herald Square Fabrics Corp., 81 A.D.2d 168, 184 (2d Dep’t 1981). Commercial reasonableness requires a secured lender to employ the methods and procedures that will fulfill the UCC’s prime objective of “optimizing resale price” the sale. See European Am. Bank v. Sackman Mortg. Corp. (In re Sackman Mortg. Corp.), 158 B.R. 926, 936 (Bankr. S.D.N.Y. 1993). 8 8 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 Given the importance of the availability of a 421-a tax benefit to the value of the property at issue in this case, it is clear that the presence of false and misleading information in the data room (which has the effect of deflating the value of the property) is not in conformity with “reasonable commercial practices” among buyers and sellers of commercial real estate in New York and will not result in “optimizing resale price.” As noted in the Korngold Affidavit at ¶ 14, “Eligibility for a 421-a tax abatement is a significant component in determining the value of commercial real estate and development projects in New York City.” Indeed, with respect to the specific parcel at issue, “the difference in value of the property based upon a 421-a tax exemption could be in the tens of millions of dollars.” Id. With the potential for saving over $1.5 million annually on taxes if the property received a 421-a benefit, the inclusion of false information about the eligibility and availability of this benefit destroys any claim that the sale would be commercially reasonable. C. Plaintiffs Will Suffer Irreparable Injury In The Absence Of Injunctive Relief Absent injunctive relief, the plaintiffs will suffer immediate and irreparable injury. Under New York law, irreparable harm is shown if money damages would be inadequate to compensate plaintiff for its loss. See McLaughlin, Piven, Vogel, Inc. v. W.J. Nolan & Co., 114 A.D.2d 165, 174 (2d Dep’t 1986). Where the potential injury would be the loss of real estate, courts repeatedly and consistently find that the harm to be irreparable. See, e.g., Brooklyn Heights Ass’n, Inc. v. Nat’l Park Serv., 777 F. Supp. 2d 424, 435 (E.D.N.Y. 2011) (“[I]t is well-settled that unauthorized interference with a real property interest constitutes irreparable harm as a matter of law, given that a piece of property is considered to be a unique commodity for which a monetary remedy for injury is an inherently inadequate substitute”) (citations omitted). Additionally, absent preliminary injunction, the plaintiffs will suffer irreparable harm because itwill lose its invaluable control 9 9 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 rights over Hello, which in turn owns the underlying property and controls the ongoing development. Loss of business control rights cannot be measured through money damages. See Int’l Equity Inv., Inc. v. Opportunity Equity Partners, Ltd., 407 F. Supp. 2d 483 (S.D.N.Y. 2005). Needless to say, if as a result of a commercially unreasonable sale that is artificially low based upon buyers and potential buyers relying upon the false information the defendants and their affiliates created and refuse to remove from the data room, the plaintiffs will be irreparably harmed by losing control of all aspects of Hello’s business, including, most importantly, its defense of the pending foreclosure action brought by Nostrand Mezz’s mortgage affiliate, as well as control of the plaintiffs’ inviolable equitable right of redemption, which will ultimately result in the plaintiff’s loss of ownership and control of the real property at issue. The defendants’ refusal to remove the false information in the data room underscores the fact that that information was placed there to deliberately ward off any bidders other than an affiliate of Nostrand Mezz. D. Balancing of the Equities Favors Injunctive Relief In deciding whether to grant a preliminary injunction, the Court must weigh the harm that the plaintiffs will suffer if the injunction is denied against the harm that the defendants are is likely to face if the requested relief is granted. See Gerald Modell Inc. v. Morgenthau, 196 Misc. 2d 354, 363 (Sup. Ct. N.Y. Cty. 2003). In doing so, the court should seek to maintain the status quo. See Gramercy Co. v. Benenson, 223 A.D.2d 497, 498 (1st Dep’t 1996). Here, the equities clearly weigh in favor of the plaintiffs and in favor of maintaining the status quo. Nostrand Mezz is threatening to proceed with a UCC sale of Developer’s ownership interests in Hello despite the fact that it has distributed false and misleading information that has the effect of reducing the interests of potential bidders and depresses any potential bids. 10 10 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 In contrast, plaintiffs are seeking only modest relief. All they are requesting from this Court is an Order directing that the defendants and affiliates ensure that corrected information regarding the potential 421-a benefit be uploaded to the data room and provided to potential bidders and that the sale be delayed thirty (30) days to allow the market to digest this important information. This correction of information and a brief pause surely cannot result in a legally recognizable harm. Perhaps defendants and affiliates are resisting this because they have a plan to obtain control of Hello (and then ultimately the property) at a below market price for their own use and benefit. This should not be permitted – if they ultimately obtain control through a commercially reasonable process, that is one thing. Obtaining control by improper means, like artificially understating the value of the collateral to deter prospective bidders, is quite another. Thus, plaintiffs’ motion should be granted in order to ensure that the requirements of commercial reasonableness under the UCC are followed. CONCLUSION Accordingly, for the foregoing reasons, the plaintiffs respectfully request that this Court enter an order (i) adding Nostrand Mezz, the current payee of the mezzanine loan at issue, as a party defendant, and (ii) pursuant to CPLR 6301, issuing a preliminary injunction directing (a) that the “Summary of Path for 421A” document be withdrawn from the data room and replaced with correct and accurate information concerning the property’s 421a tax abatement eligibility and (b) that Nostrand Mezz adjourn the UCC sale currently scheduled to take place on September 21, 2022, at 2:00 p.m., for at least thirty (30) days to allow sufficient time for accurate information to be published to the market at large and disseminated to prospective bidders who have previously inquired with The Corbin Group at Rosewood Realty. 11 11 of 12 FILED: ROCKLAND COUNTY CLERK 09/19/2022 11:55 AM INDEX NO. 034885/2021 NYSCEF DOC. NO. 140 RECEIVED NYSCEF: 09/19/2022 Dated: New York, New York September 19, 2022 By: _______________________ Paul H. Aloe David N. Saponara Francis M. Curran KUDMAN TRACHTEN ALOE POSNER LLP 800 Third Avenue, 11th Floor New York, New York 10022 Tel: (212) 868-1010 paloe@kudmanlaw.com dsaponara@kudmanlaw.com fcurran@kudmanlaw.com Victor A. Worms LAW OFFICES OF VICTOR A. WORMS 48 Wall Street, Suite 1100 New York, New York 10005 Tel: (212) 374-9590 vworms@victorawormspc.com Attorneys for Plaintiffs 12 12 of 12