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Builders Bank, An Illinois State Chartered Bank v. Rockaway Equities

September 23, 2011

BUILDERS BANK, AN ILLINOIS STATE CHARTERED BANK, PLAINTIFF,
v.
ROCKAWAY EQUITIES, LLC, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Marilyn D. GO United States Magistrate Judge

MEMORANDUM AND ORDER

Plaintiff Builders Bank brings this action against defendants Rockaway Equities, LLC ("Rockaway"), B and D Development, Inc., Beachway Properties, LLC, Fairway Equities, LLC, Yaron Hershco ("Hershco"), Able Equipment Rental, Inc., Feldman Lumber Industries, Inc., Miron Building Supply, LLC, Mastro Concrete, Inc. and S&J Sheet Metal, LLC (collectively "defendants")*fn1 to foreclose two mortgages upon several parcels of real property located at 1482 and 1496-1522 Prospect Place, Brooklyn, New York (the "Premises"). In December 2008, plaintiff moved for default judgment against defendants. See ct. doc. 22. In August 2009, plaintiff filed the instant motion for an interim order permitting it to take possession of the Premises, receive rents generated from the Premises and for an award of attorneys' fees. See ct. doc. 34. On September 28, 2009, the Honorable Kiyo A. Matsumoto denied without prejudice plaintiff's motion for default judgment for failure to serve the Amended Complaint on defendants Rockaway, B&D, Beachway, Fairway and Herscho. See ct. doc. 35. In October 2009, plaintiff re-filed the instant motion for default judgment against the defendants. See ct. doc. 37. On September 2, 2010, the parties consented to have the case reassigned to me for all purposes. See ct. doc. 50.

BACKGROUND

The facts described below are undisputed unless otherwise noted.

On April 9, 2007, plaintiff made a loan to defendant Rockaway in the amount of $2.5 million to acquire the Premises. Amended Complaint ("Am. Compl.") at ¶ 22. This loan was memorialized by a Standing Loan Note and secured by a Standing Loan First Mortgage Security Agreement and Fixture Filing which was recorded in the office of the City Register, Kings County on September 18, 2007 under document number CRFN 2007000478783. See id. at ¶ 23; ct. doc. 5-3 ("Standing Loan Note"); ct. doc. 32-1 ("Standing Loan First Mortgage Security Agreement and Fixture Filing"). In addition, plaintiff made a building loan to defendant Rockaway in the amount of $4 million to partially finance the acquisition, development and construction of twelve three-family homes located on the Premises. See Am. Compl. at ¶¶ 24-26. This loan was evidenced by a Building Loan Note and secured by a Consolidated Building Loan Mortgage, Security Agreement and Fixture Filing which was recorded in the Register's Office on September 18, 2007 under document number CRFN 20070004787787. Id. at ¶¶ 26-27; ct. doc. 5-4 ("Restated Building Loan Note").

The loan documents provide that interest is due and payable on the fifth day of each month starting on May 5, 2007 at the higher of 8% or one percent plus the Prime Rate. The total indebtedness becomes due and payable after an event of default at the election of the plaintiff. An event of default is defined as the failure to pay any installment of principal or interest payable pursuant to the note when due or any other amount payable under the Notes. The loan documents further provide that from the maturity date of April 5, 2008, or after an event of default, interest would accrue at the rate of 24% per year. Interest is calculated on an actual day/360 day basis. If the borrower fails to pay interest or principal due within 5 days after such payment is due, then the borrower is liable for a late charge of 5 cents on every dollar due, as well as all costs, including reasonable attorneys' fees and costs of collection.

Defendant Herscho personally guaranteed payment under the loan documents pursuant to the Guaranty Agreement dated April 4, 2007. See Am. Compl. at ¶ 53; ct. doc. 5-5 ("Guaranty Agreement").

The Standing Loan First Mortgage Security Agreement and Fixture Filing contains several provisions potentially relevant to the motion for interim relief as follows. Paragraph 9 provides:

Lease Assignment. Borrower acknowledges that, as additional security for the repayment of the Loan, Borrower has assigned to Lender interests in the leases of the Premises and the rents and income from the Premises. Upon the occurrence of a default under this Mortgage which has not been cured within any applicable grace or cure period, Lender shall be entitled to exercise any or all of the remedies provided in this Mortgage including without limitation, the appointment of a receiver, without notice to Borrower and without regard to the value of the Premises. This assignment shall continue in full force and effect during any period of foreclosure or redemption with respect to the Premises.

Paragraph 17 provides:

Foreclosure; Expense of Litigation.

a. When all or part of the Indebtedness shall become due, whether by acceleration or otherwise, Lender shall have the right to foreclose the lien hereof for such Indebtedness or part thereof and/or exercise any right, power or remedy provided in this Mortgage or any of the other Loan Documents in accordance with applicable law.

Paragraph 19 provides:

Appointment of Receiver. Upon or at any time after the filing of a complaint to foreclose this Mortgage, the court in which such complaint is filed shall, upon petition by Lender, appoint a receiver for the Premises, without notice to Borrower and without regard to the value of the Premises. Such appointment may be made either before or after sale, without notice, without regard to the solvency or insolvency of Borrower at the time of application for such receiver and without regard to the value of the Premises or whether the same shall be then occupied as a homestead or not and Lender hereunder or any other holder of the Note may be appointed as such receiver. Such receiver shall have power to collect the rents, issues and profits of the Premises (I) during the pendency of such foreclosure suit, (ii) in case of a sale and a deficiency, during the full statutory period of redemption, whether there be redemption or not, and (iii) during any further times when Borrower, but for the intervention of such receiver, would be entitled to collect such rents, issues and profits.

Paragraph 20 provides:

Lender's Right of Possession in Case of Default. At any time after an Event of Default has occurred, Borrower shall, upon demand of Lender, surrender to Lender possession of the Premises. Lender, in its discretion, may, with process of law, enter upon and take and maintain possession of all or part of the Premises, . . . . Lender shall have full power to use such measures, legal or equitable, as in its discretion may be deemed proper or necessary to enforce the payment or security of the avails, rents, issues, and profits of the Premises, including actions for the recovery of rent, actions in forcible detainer and actions in distress for rent. Without limiting the generality of the foregoing, Lender shall have full power to: . . .

f. receive all of such avails, rents, issues and profits.

Ct. doc. 31-2.

Defendants Rockaway and Yaron Hershco defaulted on the Notes by failing to pay them on their maturity date of April 5, 2008. Am. Comp. at ¶ 37. As a result, plaintiff declared the principal due under the loan documents which has not been paid. Plaintiff also discovered the defendants had obtained secondary financing on the Premises in violation of the mortgages held by plaintiff.

On September 3, 2008, Plaintiff commenced this action against the defendants and the secondary lenders to foreclose the two mortgages. Plaintiffs filed an Amended Complaint on September 30, 2008. In 2008, four of the residential building lots were sold with the proceeds of those sales applied to the building loan mortgage. Pursuant to a Stipulation of Settlement and Order dated October 27, 2008 which settled claims against the secondary lenders, the proceeds from the sale of a fifth lot were applied to the building loan mortgage in accordance with the terms set forth in the Stipulation.

The Clerk of the Court noted the default of the defendants in this action on April 10, 2009 and October 27, 2009. On May 12, 2009, the defendants appeared through counsel to contest the amount of damages claimed. See ct. doc. 26. In October 2009, plaintiff re-filed a motion for default judgment seeking to recover the outstanding amounts on the two mortgages, totaling $2,930,414.80, plus attorney's fees and costs. See ct. doc. 37. The defendants concede that there is no underlying defense to the foreclosure of the two mortgages.

During the pendency of this action, plaintiff learned that the defendants are renting three of the properties subject to the security agreements. Affidavit of Mark Luetkehans at ¶¶ 4, 11 (ct. doc. 40). Plaintiff changed the locks to these units, gave the tenants keys and directed the tenants to pay rent to plaintiff instead of defendants. Id. at ¶ 7. In response, the defendants changed the locks, gave new keys to the tenants and continues to collect the rent. Id. at ¶¶ 10, 13. Plaintiff alleges that it demanded that defendants tender all rents collected to date and inform the tenants to pay rent to plaintiff, but defendants have refused. Ct. doc. 34 at ¶ 12.

Defendants contend that there was no "formal written demand" as required by the mortgages. Affidavit of Yaron Hershco at ¶ 6 (ct. doc. 41). Moreover, the defendants deny that nine units have been rented. Id. at ¶ 6 (ct. doc. 41). Rather, the defendants claim that three tenants pay rent in the amount of $4,950 monthly. Id. The defendants use this rent to offset the ...


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