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awarding average hourly rate of $606.81 for partner work in foreclosure action
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20-CV-2048 (VSB) (KHP)
05-04-2023
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS TRUSTEE, FOR THE BENEFIT OF THE HOLDERS OF COMM 2015-LC19 MORTGAGE TRUST COMMERCIAL MORTGAGE PASSTHROUGH CERTIFICATES, acting by and through Midland Loan Services, a Division of PNC Bank, National Association, as Special Servicer under the Pooling and Servicing Agreement dated as of February 1, 2015, Plaintiff, v. 5615 NORTHERN LLC and SPYRO E. AVDOULOS, Defendants.
HONORABLE VERNON S. BRODERICK, UNITED STATES DISTRICT JUDGE
REPORT AND RECOMMENDATION ON REQUEST FOR JUDGMENT OF FORECLOSURE AND SALE AND REQUEST FOR RECEIVER
KATHARINE H. PARKER UNITED STATES MAGISTRATE JUDGE
This matter was referred to the undersigned for a Report and Recommendation as to whether a judgment of foreclosure and sale should be issued and the amount of the judgment, as well as whether a receiver should be appointed.
This factual background is primarily drawn from the Court's findings in its opinion and order granting summary judgment to Plaintiff (ECF No. 68).
Plaintiff Wells Fargo Bank, N.A. is Trustee for the Benefit of the Holders of COMM 2015-LC19 Mortgage Trust Commercial Mortgage Pass-Through Certificates (the “Trust”). The Trust is the beneficial owner and successor-in-interest to an entity that loaned Defendant $9 million in December 2014. The loan was documented in a Consolidated, Amended and Restated Promissory Note (“Note”) and Loan Agreement (“Loan Agreement”) dated December 17, 2014.
The borrower, Defendant 5615 Northern LLC (“Defendant”), owns a commercial building at 56-15 Northern Boulevard in Queens, New York (the “Property”), which is pledged as collateral for the loan. This is documented in a Consolidated, Amended and Restated Mortgage, Assignment of Leases and Rents and Security Agreement, also dated December 17, 2014 (the “Mortgage”). The Mortgage includes a security interest in favor of the holder of the Mortgage in, among other things, all machinery, equipment, fixtures, and other property owned by the borrower located upon the property. The Mortgage was recorded with the Office of City Register of the City of New York (“Register”). As additional collateral security for the loan, Defendant entered into an Assignment of Leases and Rents dated December 17, 2014 (the “ALR”), pursuant to which it gave the lender a security interest in all leases and rents generated by the property. The ALR was also recorded with the Register.
Defendant Spyro E. Avdoulos (the “Guarantor”), a member of the Defendant corporation, signed a Guaranty of Recourse Obligations (the “Guaranty”) for the loan, making him responsible for payment and performance of certain obligations with respect to the loan.
Midland Loan Services, a Division of PNC Bank, N.A., is the special servicer for the loan (“Special Servicer”) and acts in this capacity under a Pooling and Servicing Agreement (the “PSA”) dated February 1, 2015. The Special Servicer charges certain Special Servicing Fees under the PSA to perform its duties and is entitled to a Liquidation Fee, which is a percentage of certain amounts received in connection with the liquidation of the Property through foreclosure sale.
There were three events of default on the loan. Defendant was obligated to notify the original lender of the termination of the lease of any significant tenant in the Property. Mayors Auto Group LLC was a significant tenant whose lease terminated on May 31, 2019, but Defendant failed to provide notice of this, resulting in a “Lease Default” (as defined in the Loan Documents). Under the Loan Documents, if a Lease Default occurred, Defendant was required to allow Plaintiff access to a portion of the rents generated from the Property. Defendant failed to do this, resulting in a “Cash Management Default” (as defined in the loan documents). Finally, the loan maturity date was January 6, 2020, at which time Defendant was required to pay the outstanding principal balance on the loan, all accrued and unpaid interest, and all other amounts due under the Note, Loan Agreement, Mortgage, ALR and Guaranty (collectively, the “Loan Documents”). Defendant defaulted and did not pay the amounts due, resulting in a “Maturity Default” (as defined in the Loan Documents).
On February 7, 2020, Plaintiff issued a notice of default on the loan to Defendant. Defendant failed to cure the default. However, Plaintiff recovered monies from the Property to cover interest through March 6, 2020 through a monthly payment from Defendant in February 2020 and by drawing on Escrow funds in March 2020.
On March 6, 2020, Plaintiff commenced this action. On May 22, 2020, Plaintiff moved for the appointment of a temporary receiver (ECF No. 18), and on March 30, 2021, Plaintiff moved for summary judgment (ECF Nos. 31-35.) On August 23, 2022, Defendants moved to dismiss for lack of subject matter jurisdiction. (ECF No. 64.) On October 27, 2022, the Honorable Vernon S. Broderick denied Defendants' motion to dismiss for lack of subject matter jurisdiction and granted Plaintiff's motion for summary judgment. (ECF No. 68.) Judge Broderick found that Plaintiff is the holder and owner of the Mortgage and the accompanying Note, ALR and Guaranty; that a Maturity Default occurred on January 6, 2020, and that a Lease Default and Cash Management Default also occurred. He rejected Defendants' affirmative defenses of unclean hands and bad faith and held that Plaintiff was entitled to a judgment of foreclosure. Judge Broderick severed Plaintiff's claim against the Guarantor pending completion of the foreclosure sale, receipt of proceeds therefrom, and conveyance of title to the Property to Plaintiff.
Judge Broderick denied Plaintiff's request to appoint a receiver over Defendant's assets in light of his decision to grant summary judgment to Plaintiff. However, Judge Broderick did so without prejudice to Plaintiff reopening the issue. Plaintiff subsequently reopened the issue of appointment of receiver because Defendant continued to fail to turn over rents generated from the Property, including from a new tenant, and failed to comply with other obligations under the loan documents, including by failing to pay taxes due on the Property. (ECF Nos. 71, 82-84)
Judge Broderick referred this matter to me for a Report and Recommendation on the amount of the judgment of foreclosure and sale and on Plaintiff's application for the appointment of a receiver. On November 3, 2022, the undersigned set a briefing schedule and hearing date on the issues referred. I granted two extensions of time for this briefing to allow the parties to engage in settlement discussions, but no settlement was reached. (ECF Nos. 75, 77.) On January 20, 2023, Plaintiff filed its proposed findings of fact and conclusions of law with supporting declarations. (ECF Nos. 80-82.) On February 15, 2023, Plaintiff filed additional declarations in support of the request for appointment of a receiver. (ECF Nos. 83-84.) Defendant did not file a response. On April 17, 2023, at the Court's direction, Plaintiff filed additional exhibits substantiating its damages calculations. (ECF No. 103.) The Court held an evidentiary hearing on April 18, 2023. Anne L. Heslop (“Heslop”), the Special Servicer's Asset Resolution Specialist, testified at the hearing regarding the damages calculations. Defendant's counsel appeared and cross-examined the witness.
DISCUSSION
1. Judgment of Foreclosure and Sale
Under New York law, a plaintiff establishes a prima facie entitlement to foreclosure and sale by producing evidence of the mortgage, the note, and the defendant's default. Gustavia Home, LLC v. Rutty, 785 Fed.Appx. 11, 14 (2d Cir. 2019); see also OneWest Bank N.A. v. Cole, 2015 WL 4429014, at *1 (E.D.N.Y. July 17, 2015) (authorizing foreclosure and sale of property upon entry of default judgment). Judge Broderick already determined that Plaintiff established its right to foreclose upon the Property in his decision granting Plaintiff summary judgment. He determined that Plaintiff demonstrated it was the holder and owner of the Mortgage and the accompanying Note, ALR and Guaranty, and that Plaintiff had demonstrated there was a Maturity Default, a Lease Default, and a Cash Management Default (all as defined in the Loan Documents). (ECF No. 68.)
Where, as here, the Court has granted summary judgment in favor of the Plaintiff based on an undisputed showing of default on the mortgage, it is appropriate for the court to appoint a referee to oversee the sale of the property and ensure the proceeds from the sale are distributed in accordance with the Court's computation. U.S. Bank Tr., N.A. v. Dingman, 2016 WL 6902480, at *4 (S.D.N.Y. Nov. 22, 2016). “[C]ourts regularly appoint referees in cases of mortgage foreclosures and sales.” Windward Bora, LLC v. Brown, 2022 WL 875100, at *5 (E.D.N.Y. Mar. 24, 2022) (collecting cases and appointing Plaintiff's requested referee to oversee the foreclosure sale).
Plaintiff proposes that the Court appoint Mr. Ian V. Lagowitz of Trigild IVL Group as referee for the purpose of accomplishing a sale of the Property. (ECF Nos. 100, 101.) Mr. Lagowitz's resume indicates that he is an experienced Court Appointed referee, and that he has decades of experience in receivership and real estate management. (ECF No. 19-7.) Defendant did not object to the appointment of Mr. Lagowitz as referee. Accordingly, I recommend that Mr. Lagowitz be appointed as Referee for the purpose of accomplishing a sale of the property.
I further recommend that the proceeds of the sale be applied to the total amount owed pursuant to the loan documents, as set forth below. See OneWest Bank, N.A. v. Denham, 2015 WL 5562980, at *14 (E.D.N.Y. Aug. 31, 2015) (recommending that the property be foreclosed upon and sold with the proceeds being applied to the outstanding amount owed on the note), report and recommendation adopted, 2015 WL 5562981 (E.D.N.Y. Sept. 21, 2015).
2. Damages
Pursuant to Section 1321 of the RAPL, “the trial court has the authority to compute the amount owed or appoint a referee to do the same.” Dingman, 2016 WL 6902480, at *4. Thus, the undersigned has been properly assigned to make a recommendation of the amount of damages owed.
It is Plaintiff's burden to prove damages. Lupia v. N.J. Transit Rail Operations, Inc., 2023 WL 2387100, at *6 (S.D.N.Y. Mar. 7, 2023). Damages must be determined with reasonable certainty. Hosking v. New World Mortg., Inc., 570 Fed.Appx. 28, 31 (2d Cir. 2014). “Any determination of damages in an action for foreclosure and sale should be determined under the terms of the Notes and Mortgages.” E. Sav. Bank, FSB v. Rabito, 2014 WL 4804872, at *1 (E.D.N.Y. Sept. 10, 2014) (quotation marks and citation omitted), report and recommendation adopted, 2014 WL 4804901 (E.D.N.Y. Sept. 26, 2014). A court may consider “both documentary and oral evidence in computing the amount due on the mortgage.” Isaacson v. Karpe, 445 N.Y.S.2d 37, 38 (App. Div. 1981).
Plaintiff has provided affidavits of persons with personal knowledge setting forth when the defaults occurred and the dollar amount of damages due under the Loan Documents, along with computations of damages in accordance with the terms of the Loan Documents. (See Declaration of Anne L. Heslop dated January 6, 2023 (“Heslop Decl. #1”); Declaration of Legal Services Rendered of Keith M. Brandofino, Esq., dated January 20, 2023 (“Brandofino Decl.”)). Plaintiff also submitted exhibits to support its calculations, including the Loan Transaction History and various relevant bills and invoices. (ECF No. 103.) Heslop also testified under oath at the Evidentiary Hearing as to the computation of damages. These submissions are sufficient to allow the court to determine the amounts due and owing. Capstone Cap. Grp., LLC v. Hahn, 2022 WL 2532449, at *5 (S.D.N.Y. Mar. 15, 2022) (documents detailing the agreements as well as an invoice of the amounts owed that showed calculations were sufficient to establish the damages amount); E. Sav. Bank, FSB v. Beach, 2014 WL 923151, at *9 (E.D.N.Y. Mar. 10, 2014) (affidavit of senior asset manager, compiled after examination of records kept in the regular course of business, was acceptable proof of amounts due on note and mortgage).
Plaintiff seeks the following categories of damages: (a) the unpaid principal balance on the loan; (b) the accumulated interest on the unpaid principal amount since the date of the last payment, as well as an accumulated default interest pursuant to Section 2.2.2 and Schedule I of the Loan Agreement from the date of the first default; (c) a Maturity Late Charge pursuant to Section 2.3.3 of the Loan Agreement; (d) Property Protective Advances pursuant to Section 11.13(a)(vii) of the Loan Agreement and Section 7.3 of the Mortgage, including taxes and insurance payments that Plaintiff advanced for the Property, attorneys' fees, and miscellaneous expenses to ensure protection and preservation of its interest in the Property; (e) Special Servicing Fees pursuant to Sections 9.1(a)(iii) and 11.24(a) of the Loan Agreement and Sections 1.01 and 3.12(b) of the PSA as well as fees incurred for the generation of Payoff Quotes; and (f) a Liquidation Fee pursuant to Section 11.24(a) of the Loan Agreement and Article I and Section 3.12(c) of the PSA. I discuss each category of requested damages below.
For many of these items, Plaintiff requested a higher dollar amount at the April 18, 2023 evidentiary hearing than it did in its prior briefing and declarations. A summary of these higher amounts requested by Plaintiff is available at ECF No. 103-5. The undersigned utilizes these more recent calculations in this Report.
a. Unpaid Principal Balance
There is no dispute that the principal amount of the loan was $9 million. The interest rate on the loan is 4.99%. Loan Agreement, Schedule 1; 2.2. The loan contemplated monthly payments in the amount of $48,258.96 applied first to accrued and unpaid interest and then to the principal. Loan Agreement 2.2.3; 2.3.1(b). At the evidentiary hearing, Heslop testified that the monthly payments were applied to the principal and interest according to a thirty-year amortization schedule. (Hearing Tr. 38:20-23.)
Defendant failed to pay back the outstanding principal balance of the loan by the January 6, 2020 Maturity Date. At that point, the unpaid balance was $8,298,637.59. (Heslop Decl. #1 ¶ 15.) However, Defendant continued to make monthly payments in January and February 2020, and a payment for March 2020 was received by drawing on available escrow funds. (Hearing Tr. 24:6-23.) After March 6, 2020, Defendant made no payments on the loan. (Id.) As of March 6, 2020, accounting for the payments made after the Maturity Date, the unpaid principal amount that Defendant owes is $8,271,086.02. (Heslop Decl. #1 ¶ 9; Hearing Tr. 20:9-18.) Plaintiff's balance sheets filed at ECF No. 103-7 substantiate this amount.
Accordingly, I respectfully recommend that Defendant be ordered to pay $8,271,086.02 as the unpaid principal balance on the loan.
b. Accrued Interest
Section 2.2 of the Loan Agreement provides that the outstanding principal balance shall bear interest at the “Interest Rate” defined in Schedule I of the contract as a rate of 4.99%.The Loan Agreement further provides that in the event of default, the lender may elect to accrue interest at the “Default Rate,” defined in Schedule I of the contract as “a rate per annum equal to the lesser of (i) the Maximum Legal Rate or (ii) five percent (5%) above the Interest Rate.” In New York, the maximum legal rate is 16%. N.Y. Gen. Oblig. Law § 5-501. Five percent above the Interest Rate is 9.99%. Accordingly, the appropriate Default Rate is 9.99%.
Although a rate of prejudgment interest of nine percent is prescribed by statute, “it is well-established that when a contract provides for interest to be paid at a specified rate until the principal is paid, the contract rate of interest, rather than the legal rate set forth in CPLR 5004, governs until payment of the principal or until the contract is merged in a judgment.” NML Capital v. Republic of Argentina, 621 F.3d 230, 240 (2d Cir. 2010) (quotation marks and citation omitted). Accordingly, the rate of interest specified in the contract should apply.
Section 2.2.3 of the Loan Agreement provides the method for calculating interest on the principal balance. It states that interest "shall be calculated by multiplying (a) the actual number of days elapsed in the period for which the calculation is being made by (b) a daily rate based on a three hundred and sixty (360) day year (that is, the Interest Rate or Default Rate, as then applicable, expressed as an annual rate divided by 360) by (c) the Outstanding Principal Balance.” Loan Agreement § 2.2.3.
If Plaintiff elected to seek interest at the Default Rate, the relevant period would be from the date of the earliest default until the present. Plaintiff asserts that the Lease Default and Cash Management Default occurred on February 21, 2019, which is one month after Mayors Auto Group LLC provided notice of its intention to terminate its lease. (Heslop Decl. #1 ¶ 14.) The “present” for purposes of the inquest is the date that a final order on the inquest is issued. As that is an uncertain future date, for purposes of this Report, I consider the present to be the last date of Plaintiff's calculations as presented at the Inquest hearing-April 6, 2023. The actual number of days in this period is 1,505 days. The applicable daily rate is the Default Rate of 9.99% divided by 360, which is 0.0002775. The Outstanding Principal Balance is the balance as of the date of default, which is $8,298,637.59. The product of those numbers is $3,465,822.25649. Accordingly, Plaintiff could have elected to request close to $3.5 million in accumulated interest had it pursued the “Default Rate” as contemplated in the contract.
However, Plaintiff is only requesting a total of $2,953,365.50 in interest. Their interest calculation is a bit convoluted but is summarized in the first Heslop Declaration at ¶¶ 10-14. In sum, Plaintiff conducted two interest calculations. First, it calculated an accumulated interest using the Interest Rate of 4.99% from the date of the last payment received, i.e., March 6, 2020 until April 6, 2023. Rather than following the method for calculating interest as provided in Section 2.2.3 of the loan agreement, Plaintiff calculated interest on a monthly basis based on the actual number of days in each month at the rate of 4.99%. (Heslop Decl. #1, Schedule I; Hearing Tr. 36:12-38:4.) Plaintiff's calculations yielded an amount of $1,245,017.34 in accrued interest. Had Plaintiff followed the calculation method provided in the contract by calculating the product of the number of days elapsed from March 6, 2020 until April 6, 2020 (1,187), the applicable daily rate of 4.99% divided by 360 (0.00013861111) and the outstanding principal balance as of March 6, 2020 ($8,271,086.02), this would have yielded a slightly higher interest amount of $1,360,853.26.
This amount is lower than the principal unpaid balance as of the date of the first default, because this amount accounts for the payments received between the date of default and March 6, 2020.
Second, Plaintiff calculated a separate “Default Interest” amount from the date of the default until January 6, 2023, but using the Interest Rate of 4.99% rather than the optional Default Rate of 9.99% contemplated in the contract. (Hearing Tr. 46:8-21.) Plaintiff calculated this Default Interest based on the actual number of days in each month and the amortization of the loan over the relevant period. This calculation, as evidenced in the first Heslop Declaration at Schedule II and Plaintiff's exhibits submitted in advance of the Evidentiary Hearing, totaled $1,708,348.16.
Plaintiff requests a total in accrued interest of the sum of the two amounts it calculated, which equals a total of $2,953,365.50 in accumulated interest as of April 6, 2023. Plaintiff confirmed at the evidentiary hearing that it was only seeking this amount of interest even though it could have calculated a higher amount pursuant to the Loan Agreement. Defendant agreed at the evidentiary hearing that it was “fine” with this lower calculation.
Due to a technology issue, a portion of the hearing, including this discussion as to the appropriate interest rate, was not recorded and is not reflected in the hearing transcript.
Accordingly, I respectfully recommend that Defendant be directed to pay $2,953,365.50 in accumulated interest on the unpaid principal amount. This accounts for accumulated interest on the unpaid balance up until April 6, 2023. The Court should also account for additional interest that Plaintiff is owed from April 6, 2023 until such time as a final judgment is entered on the inquest. On the date that final judgment is entered, the Clerk of the Court should calculate the amount of this additional interest and include it in the final judgment. See Bank of Am., N.A. v. NMR Realty Abstract Servs., Ltd., 2013 WL 12358272, at *7 (E.D.N.Y. Mar. 14, 2013) (directing clerk of court to calculate additional interest from date of report and recommendation until date of final judgment and include it in the final judgment). For the sake of simplicity, the Clerk of the Court may do so using the calculation method provided in Section 2.2.3 of the Loan Agreement, i.e. by finding the product of: (a) the number of days elapsed between April 6, 2023 and the date of judgment, (b) 0.00013861111 (the “daily rate” assuming the Default Rate applies), and (c) 8,271,086.02 (the Outstanding Principal Balance).
c. Maturity Late Charge
Section 2.3.3 of the Loan Agreement provides for a Late Payment Charge if the borrower fails to pay principal, interest and any other sum due under the loan documents on the Maturity Date. The charge is the lesser of five percent of the unpaid sum or the maximum amount allowed by law. The charge is supposed to “defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of use of such delinquent payment.” Loan Agreement § 2.3.3. Here, the parties agree that five percent is the correct rate to apply.
The Maturity Date of the loan is January 6, 2020. As of that date, the unpaid principal amount was $8,298,637.59. (Heslop Decl. #1 at ¶ 15, see also ECF No. 103-7.) Five percent of this unpaid principal amount is $414,931.88. Therefore, I respectfully recommend that Defendant be directed to pay $414,931.88 as a Maturity Late Charge.
d. Property Protective Advances and Remaining Attorneys' Fees and Costs
Article 7 of the Mortgage sets out the lender's rights and remedies upon default by the borrower. Among other things, the lender is authorized to take actions it deems advisable to protect and enforce its rights against the borrower and in and to the property. Mortgage § 7.1. These actions include initiating a foreclosure action, selling the Property, applying any sums then deposited or held in escrow or otherwise by or on behalf of the lender to the payment of taxes and other charges, and to pay insurance premiums and interest on the unpaid principal balance on the note. Mortgage § 7.1(j). Section 7.3 of the Mortgage provides that after a default, the lender may do what it deems necessary to protect the security of the Mortgage and is authorized to bring any action to protect its interest in the Property and the cost and expense thereof, including reasonable attorneys' fees. Mortgage § 7.3.
Further, Section 11.13(a)(vii) of the Loan Agreement discusses Defendant's obligation to indemnify the lender. Among other things, it states that the borrower must pay for or reimburse the lender for “all reasonable costs and expenses incurred by Lender” in connection with “enforcing any Obligations of or collecting any payments due from Borrower or Guarantor under the Loan Documents.” Loan Agreement § 11.13(a).
Under Section 10.3 of the Loan Agreement, if the borrower fails to perform any obligation under the loan documents, the lender may perform or cause the performance of such obligation and all costs, expenses, liabilities, penalties and fines of lender incurred or paid in connection therewith shall be payable by the borrower to the lender on demand and if not paid shall be added to the Obligations and bear interest at the Default Rate. Loan Agreement § 10.3. Obligations of the borrower include payment of all taxes that become due and payable, as well as payment of any lien or charge against the Property. Loan Agreement § 4.1.3.
Plaintiff asserts that, as of April 6, 2023, it paid $896,269.22 in protective advances and is entitled to reimbursement of this amount. In particular, Plaintiff asserts that it advanced (i) $747,607.94 in property taxes; (ii) $1,222.27 in property insurance payments, (iii) $1,092.35 in miscellaneous expenses, (iv) $14,250.00 in third-party expenses, and (v) $132,123.31 in attorneys' fees and costs, all of which were made to ensure the protection and preservation of its interest in the Property. (Heslop Decl. #1 ¶ 18; Brandofino Decl. ¶¶ 3, 7.) In addition to the attorneys' fees and costs that Plaintiff seeks as protective advances, Plaintiff has incurred an additional $36,607.30 in attorneys' fees and costs that Plaintiff has not yet paid to its counsel, bringing the total requested attorneys' fees to $168,730.61.
Plaintiff also requests interest on the protective advances in the amount of $190,608.60, which it calculated using the prime rate, which up to now has been lower than the Default Rate. (Hearing Tr. 58:10-12.)
Courts in this Circuit allow plaintiffs in foreclosure actions to recover such protective advances where the plaintiff submits sufficient documentation to prove the accuracy of its claims. E. Sav. Bank, FSB v. Johnson, 2022 WL 18858919, at *5 (E.D.N.Y. Dec. 27, 2022) (collecting cases), report and recommendation adopted, 2023 WL 1778788 (E.D.N.Y. Feb. 6, 2023); see also CIT Bank, N.A. v. Neris, 605 F.Supp.3d 521, 529 (S.D.N.Y. 2022) (ordering payment of unpaid escrow advances based on testimony as to the amount owed).
Taxes, Insurance, and Third Party Expenses: Plaintiff asserts that it was required to pay $747,607.94 in property taxes and $1,222.27 in property insurance because Defendant failed to make these necessary payments. (Hearing Tr. 54:18-23.) Plaintiff submitted substantial documentation demonstrating the accuracy of these amounts, including insurance-related invoices at ECF No. 103-6. Heslop also testified to these amounts at the evidentiary hearing and walked the Court through documentation demonstrating the payment of these amounts from Plaintiff's escrow account. Plaintiff also requests $14,250 in third party expenses to cover the cost of annual appraisals of the Property, which were required by the PSA. (Hearing Tr. 34:16-19, 54:8-16.) It has submitted invoices for these expenses. (ECF No. 103-7.)
Because Plaintiff has submitted sufficient documentation to prove the accuracy of its claims as to taxes, insurance, and third-party expenses, I recommend that Defendant be directed to reimburse Plaintiff for these payments.
Miscellaneous Expenses: Plaintiff requested $1,092.35 in miscellaneous expenses, but it is unclear from Plaintiff's submissions what expenses this amount refers to. When asked at the evidentiary hearing, Heslop was not able to explain what this amount referred to, but she suggested that this may reference payments that were required to pay fees that had accrued on a cash management account that the Special Servicer managed for the property. (Hearing Tr. 70:16-19.) Heslop stated that she could not attest to those fees. (Id. 72:14-19.) Heslop testified that she was not authorized to waive this cost, but Plaintiff's counsel conceded that this amount could not be awarded without appropriate documentation. (Id. 71:16-21.)
Insofar as Plaintiff has not sufficiently supported its request for $1,092.35 in miscellaneous expenses, I recommend that Plaintiff be denied recovery of this amount.
Attorney's Fees: As to attorney's fees and costs, Plaintiff submitted its attorney bills and invoices (ECF No. 103-8), and Plaintiff's counsel submitted an attorney declaration testifying to the hours worked on this matter and the fees charged and received to date (Brandofino Decl.).
The Court may award attorneys' fees and costs where there is “sufficiently clear” contractual language providing for such an award, provided those fees are “reasonable.” NetJets Aviation, Inc. v. LHC Commc'ns, LLC, 537 F.3d 168, 175 (2d Cir. 2008). A reasonable fee is generally described as the product of a reasonable hourly rate and a reasonable number of hours expended by attorneys and their staff on the matter. Millea v. Metro-North R.R. Co., 658 F.3d 154, 166 (2d Cir. 2011). In considering the reasonableness of the hourly rate, the Court's analysis is guided by the prevailing market rate for similar services. Blum v. Stenson, 465 U.S. 886, 895 n.11 (1984). The relevant community is this District. Arbor Hill Concerned Citizens Neighborhood Ass'n v. Cty. Of Albany, 522 F.3d 182, 183-84 (2d Cir. 2008). The Court also considers factors including the attorneys' experience, reputation, and ability; the time, labor, and skill required; the novelty and complexity of the legal issues posed, awards in similar cases; and degree of success. Agudath Israel of America, et al. v. Hochul, 2023 WL 2637344 (2d Cir. Mar. 27, 2023). As to the reasonableness of the number of hours expended, the Court “does not play the role of an uninformed arbiter but may look to its own familiarity with the case and its experience generally as well as to the evidentiary submissions and arguments of the parties.” Gierlinger v. Gleason, 160 F.3d 858, 876 (2d Cir. 1998) (quotation marks and citation omitted). Additionally, “[f]ee awards normally include those reasonable out-of-pocket expenses incurred by the attorney,” Tr. of N.Y.C. Dist. Council of Carpenters Pension Fund,Welfare Fund, Annuity Fund v. B&L Moving & Installation, Inc., 2017 WL 4277175, at *8 (S.D.N.Y. Sept. 26, 2017), including for items such as “shipping, filing fees, process servers, and litigation support,” HSBC Bank USA, N.A. v. PAKS Holdings, LLC, 2021 WL 667661, at *8 (S.D.N.Y. Feb. 22, 2021).
Here, various provisions within the Loan Documents are clear that Plaintiff is entitled to reasonable attorneys' fees and costs expended in enforcing its rights under the Loan Documents. Mortgage Sections 1.3, 7.1(h), 7.3, 8.1, Article 13, Loan Agreement Section 10.2, 10.4, 11.13(a). These provisions are sufficiently clear to justify an award of fees to Plaintiff, provided the fees are reasonable. See Gaia House Mezz LLC v. State St. Bank & Tr. Co., 720 F.3d 84, 95 (2d Cir. 2013) (upholding a fee provision in a loan contract).
Plaintiff seeks $168,730.61 for legal fees and costs incurred for the period starting January 2020 through April 6, 2023. (Brandofino Decl. ¶¶ 3, 7; ECF 103-5.) The total accrued legal fees amount to $167,033.35 and the costs amount to $1,697.26. Six attorneys, two paralegals and one law clerk worked on the matter during the relevant period. Partners/Senior Counsel spent 191.6 hours on the matter; associates spent 96.7 hours on the matter; paralegals spent 53 hours; and the law clerk spent 1 hour. The average partner/senior counsel rate was $606.81 per hour. The average associate rate was $454.48 per hour. The average paralegal rate was $225.09 per hour. The law clerk rate was $259 per hour. According to their biographies, the lead attorneys on the matter have experience handling foreclosure actions. (ECF No. 103-9.)
The Brandofino declaration inaccurately conflates these amounts in paragraph 7.
In light of counsel's experience and accounting for inflation, the effective hourly attorney rates are within rates found reasonable in this District and are reasonable. See, e.g., UMB Bank, Nat'l Ass'n v. Bluestone Coke, LLC, 2021 WL 3292519, at *6 (S.D.N.Y. Aug. 2, 2021) (approving rates of up to $1,030 per hour for services rendered in connection with a complex bankruptcy and commercial litigation among sophisticated commercial actors); HSBC Bank USA, N.A., 2021 WL 667661, at *7 (approving hourly rates of $571.50 and $423.00 in breach of contract case), report and recommendation adopted, 2021 WL 5042710 (S.D.N.Y. Oct. 28, 2021); Tabatznik v. Turner, 2016 WL 1267792, at *11-12 (S.D.N.Y. Mar. 30, 2016) (applying a per hour partner rate of $650 and associate rate of $425 in action to enforce a promissory note).
However, hourly rates for paralegals of $100 to $150 are typical for awards in this District. Glob. Perez Garcia v. Hirakegoma Inc., 2020 WL 1130765, at *12 (S.D.N.Y. Mar. 9, 2020) (collecting cases); VFS Fin., Inc. v. Pioneer Aviation, LLC, 2009 WL 2447751, at *4 (S.D.N.Y. Aug. 11, 2009) (finding an hourly rate of $125 reasonable for paralegals in an action for failure to pay on a promissory note). Plaintiff's requested rate for paralegals and law clerks of $225.09 per hour is unduly high, and I recommend that this rate be reduced to $150 per hour, in keeping with what is typically found reasonable in this district.
As to the number of hours expended, having reviewed the records I find the time spent to be reasonable. The time entries are clear and substantive, and they show that Plaintiff's counsel spent an appropriate amount of time litigating this action, including by responding to Defendant's motion to dismiss (which was denied), briefing the motion for summary judgment (which was granted), and attempting to settle the action, all of which were reasonable undertakings.
Accordingly, I recommend that the requested attorneys' fees be granted, except that the paralegal and law clerk hourly rate be reduced to $150, resulting in attorneys' fees in the amount of $162,012.90.
Plaintiff also requests $1,697.26 in costs. Of this amount, $400 is for the fee charged by the Court for filing the action, $544.38 is for the foreclosure search, and the remaining $752.88 is attributable to miscellaneous fees such as for hosting teleconferences and conducting research on Westlaw. Plaintiff's counsel documented its accrued costs in contemporaneously maintained billing records and submitted a sworn attorney declaration attesting to these costs. This record is sufficient to support the request for reimbursement of costs.
Accordingly, I respectfully recommend that Plaintiff be awarded $163,710.16 in attorneys' fees and costs, $132,123.31 of which was already paid by Plaintiff as a protective payment and $31,586.85 of which was not paid.
In sum, I recommend that Defendant be required to reimburse Plaintiff for the following Protective Advances: (i) $747,607.94 in taxes; (ii) $1,222.27 in insurance; (iii) $14,250 in third party expenses; and (vii) $132,123.31 in legal expenses already paid, totaling $895,203.52 in protective payments. The Clerk of the Court should be directed to calculate the interest owed on this amount as of the date of a final order on the inquest by using the prime rate or the Default rate of 9.99%, whichever is lower. I further recommend that Plaintiff be awarded $31,586.85 of outstanding attorneys' fees and costs not yet paid as a protective advancement. Because Plaintiff has not advanced this amount, interest should not be calculated as to this amount. Moreover, if Plaintiff makes additional Protective Advances between April 6, 2023 and the issuance of a final judgment, Defendant should reimburse Plaintiff for those amounts to the extent Plaintiff substantiates the accuracy of the amounts.
e. Special Servicing Fees and Payoff Quote/Verification Fee
Section 11.24(a) of the Loan Agreement provides that “[a]t the option of Lender, the Loan may be serviced by a . . . special servicer . . . selected by Lender and Lender may delegate all or any portion of its responsibilities under the Loan Documents to the Servicer.” Loan Agreement § 11.24(a). The Loan Agreement further provides that “Borrower shall pay (i) any fees and expenses of Servicer . . . in connection with . . . any special servicing or workout of the Loan or enforcement of the Loan Documents, including, without limitation, any advances made by Servicer and interest on such advances, any liquidation fees in connection with the exercise of any or all remedies permitted under this Agreement.” Id.
The PSA provides methods for calculating the fee to be paid to the special servicer.
Specifically, Section 1.01 of the PSA provides:
[F]or each calendar month (or portion thereof), the fraction of the Special Servicing Fee Rate applicable to such month, or portion thereof (determined using the same interest accrual methodology that is applied with respect to the Mortgage Rate for such Mortgage Loan for such month) multiplied by the Stated Principal Balance of such Specially Serviced Loan as of the Due Date (without giving effect to all payments of principal on such Specially Serviced Loan or Serviced REO Loan on such Due Date) in the Collection Period prior to such Distribution Date ....PSA § 1.01. The PSA further provides that the “Special Servicing Fee Rate” is 0.25% per annum.
In February 2020, Plaintiff engaged Midland Loan Services as Special Servicer and has accrued Special Servicing Fees since that date in accordance with the PSA. (Heslop Decl. #1 ¶ 21.) The Special Servicer has calculated its fee in accordance with the PSA at a rate of 0.25% of the principal unpaid balance, assessed monthly, and based on an amortization schedule that assumes the borrower is making monthly payments on the principal. This method gives Defendant the benefit of the doubt as to the principal balance, which Defendant is in fact not paying off. (Hearing Tr. 66:19-67:5.) Based on this calculation, Plaintiff incurred a special servicing fee of $66,105.97. Ms. Heslop testified to the accuracy of this amount at the evidentiary hearing. (Id. at 65:5-9; see also Heslop Decl. #1, Schedule VIII.)
In addition to this Special Servicing Fee, Plaintiff requests a Payoff Quote fee of $4,100. This fee represents the cost charged by the Special Servicer to Plaintiff for generating formal “Payoff Quotes” showing the total amount due on the loan. These quotes were generated by the Special Servicer on February 26, 2021, December 2, 2021, March 4, 2022, and January 3, 2023, each time either at the request of Defendant or at the request of Plaintiff's or Defendants' counsel in connection with settlement discussions. (ECF No. 103-5; Hearing Tr. 73:4-8; 73:14-21.) Generation of the letters incurred a cost of $100 for the February 2021 letter, $1,000 for the December 2021 letter, and $1,500 each for the March 2022 and January 2023 letters. The Loan Transaction History filed at ECF No. 103-5 shows that these amounts were incurred. Heslop testified that the cost involved in generating these letters is due to “all the work that is necessary to compile the information.” (Hearing Tr. 74:8-9.)
I find that the amounts requested for Special Servicing Fees and for generation of Payoff Quotes is well substantiated. Accordingly, I respectfully recommend that Defendant be directed to pay Plaintiff $66,105.97 to cover the Special Servicing Fee from February 2020 until April 6, 2023, as well as $4,100 to cover the costs incurred for generating Payoff Quotes. To the extent Plaintiff substantiates that it incurred additional Special Servicing Fees or reasonable Payoff Quote costs between April 6, 2023 and the issuance of a final judgment, those amounts should be included in the damages award.
f. Liquidation Fee
Section 11.24(a) of the Loan Agreement provides that the borrower is obliged to reimburse the lender for all reasonable out-of-pocket costs and expenses incurred by the lender or special servicer in connection with “any special servicing or workout of the Loan or enforcement of the Loan Documents, including, without limitation, . . . any liquidation fees in connection with the exercise of any or all remedies permitted under this Agreement.” Loan Agreement § 11.24(a).
Section 3.12(c)(iii) of the PSA provides that “[a] Liquidation Fee will be payable to the Special Servicer . . . with respect to . . . any Specially Serviced Loan or Serviced REO Property as to which the Special Servicer recovered any Liquidation Proceeds. . .” Article I of the PSA defines “Liquidation Proceeds” as “[c]ash amounts . . . received by or paid to the Master Servicer or the Special Servicer in connection with: (i) the liquidation of a Mortgaged Property or other collateral constituting security for a Defaulted Mortgage Loan, through trustee's sale, foreclosure sale, disposition of REO Property or otherwise.” Article I of the PSA further provides that the Liquidation Fee will be equal to the lesser of: (i) the product of 1.0% and the proceeds of such full, partial or discounted payoff or the Net Liquidation Proceeds related to such liquidated or repurchased Mortgage Loan or Specially Serviced Loan, as the case may be, in each case exclusive of any portion of such payoff or Net Liquidation Proceeds that represents Penalty Charges; (ii) $1,000,000; and (iii) any applicable cap set by the PSA.
Accordingly, in the event the Property is sold at a foreclosure sale, the Special Servicer will be entitled to the payment of Liquidation Proceeds from Plaintiff calculated as 1% of the sum of the balance due, provided that amount is less than $1,000,000. (Hearing Tr. 67:20.) The Loan Documents provide that Defendant should reimburse Plaintiff for the Liquidation Fee it incurs.
Plaintiff estimates the Liquidation Fee as $127,694.94, which it calculates at 1% of the sum of the estimated Liquidation Proceeds. (Hearing Tr. 68:17-24.) It estimated the Liquidation Proceeds as the sum of the unpaid principal balance, accumulated interest on the unpaid balance as of April 6, 2023, accumulated interest on the protective advances as of April 6, 2023, Special Servicing Fees as of April 6, 2023, and accumulated fees for Payoff Quotes. However, this amount will necessarily change in light of additional interest accruing between April 6, 2023 and the foreclosure sale. Accordingly, the exact dollar amount of the Liquidation Fee should be calculated after the foreclosure sale occurs and after Plaintiff receives a bill from the Special Servicer for the Liquidation Fee. At such time, Plaintiff should submit evidence that it paid the Special Servicer the requested Liquidation Fee, at which point the Court should direct Defendant to reimburse Plaintiff for that amount. In accordance with the Loan Documents, this amount may not exceed $1 million.
3. Post-Judgment Interest
Post-judgment interest is mandatory in civil federal actions. Lewis v. Whelan, 99 F.3d 542, 545 (2d Cir. 1996) (citing 28 U.S.C. § 1961(a)). “[I]nterest shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding.” 28 U.S.C. § 1961(a)).
Thus, I also recommend awarding post-judgment interest, to be calculated based on the weekly average one-year constant maturity Treasury yield for the week preceding the date on which judgment is entered. See Schipani v. McLeod, 541 F.3d 158, 165 (2d Cir. 2008) (holding that post-judgment interest is mandatory and calculated pursuant to federal statute); Builders Bank v. N. Funding, LLC, 2012 WL 4928854, at *1 (E.D.N.Y. Oct. 16, 2012) (awarding postjudgment interest at the federal rate in action for judgment of foreclosure and sale).
4. Appointment of Receiver
Plaintiff proposes that Mr. Lagowitz serve as receiver of Defendant's assets pursuant to Rule 66 of the Federal Rules of Civil Procedure. (ECF Nos. 83-84.) Appointment of a receiver is an extraordinary remedy that should be granted only when clearly necessary to protect a party's interest in a property. U.S. Bank Nat'l Ass'n v. Nesbitt Bellevue Prop. LLC, 866 F.Supp.2d 247, 249 (S.D.N.Y. 2012). Courts consider various factors when evaluating whether to appoint a receiver, including whether the defendant engaged in fraudulent conduct; whether there is imminent danger of the property being lost, concealed, injured, diminished in value, or squandered; whether legal remedies are adequate; the probability that harm to the plaintiff from denying the appointment would be greater than injury to the defendant opposing appointment; and the plaintiff's probable success in the action. Id. at 249-50. Contract provisions or operative loan documents authorizing appointment of a receiver or application for same are factors that strongly support appointment of a receiver in situations involving default on a loan. Id.
Here, the factors weigh in favor of appointing a receiver. First, Plaintiff demonstrated imminent danger of the property being diminished in value. In particular, Plaintiff submitted affidavits from Heslop dated February 10, 2023 (“Heslop Decl. #2), David V. Mignardi dated February 15, 2023 (“Mignardi Decl.”) and Derek Stephens dated May 19, 2020 (“Stephens Decl.”) that indicate that Defendant has failed to pay bills and taxes on the Property, resulting in a Water Lien and expiration of an insurance policy on the Property. Additionally, Defendant failed to provide Plaintiff with financial statements for the period July 1, 2021 through December 31, 2022 and an annual report for the year 2021. (Heslop Decl. #2 ¶ 5.) Defendant also failed to pay property taxes due in June 2020, December 2020, June 2021, December 2021, June 2022, and December 2022, which in the aggregate exceed $700,000. (Id. ¶ 8.)
A tax lien on the property could diminish the value of the property or even result in seizure of the property by government authorities. Wilmington Tr., Nat'l Ass'n as Tr. for Benefit of Registered Holders of Wells Fargo Com. Mortg. Tr. 2018-C44, Com. Mortg. Pass-Through Cerificates, Series 20 v. 31 Prince St., LLC, 2023 WL 414249, at *3 (S.D.N.Y. Jan. 25, 2023) (granting plaintiff's motion to appoint of a receiver because borrower's failure to pay necessary taxes posed a “significant danger” of the properties being diminished in value).
Moreover, given the evidence that Defendant has failed to pay taxes over an extended period of time and failed to provide information about the water lien or any information about its finances, Plaintiff is now in the position of having to advance significant funds to avoid further liens being placed on the property. Defendant's conduct poses a danger that the Property may be diminished in value by liens. United States v. Nissen, 2021 WL 191399, at *2-3 (S.D.N.Y. Jan. 19, 2021) (evidence of borrower's failure to pay taxes, mortgage payments, and insurance payments was sufficient to show a significant danger that the value of the property would be diminished). This type of harm and potential harm has been found sufficient to meet the standard for appointment of a receiver. See, e.g., 31 Prince St., LLC, 2023 WL 414249, at *3.
Second, Plaintiff has shown that the likely harm it will suffer absent appointment of a receiver would be greater than injury to Defendant if a receiver is appointed. As a result of Defendant's behavior, Plaintiff has already suffered harm in that it has advanced hundreds of thousands of dollars in protective payments. Meanwhile, Plaintiff believes that Defendant obtained a new tenant for the Property but has not turned over any rents as required under the loan documents. (Heslop Decl. #2 ¶ 7.) While Plaintiff is losing money on the Property, Defendant continues to gain money. Defendant also has advanced no argument as to why the appointment of a receiver would cause it any injury.
Third, Plaintiff has shown a high likelihood of success on the merits of its underlying foreclosure action-indeed, Judge Broderick already determined that Plaintiff established its right to foreclose upon the Property.
Finally, the loan documents clearly provide that the lender may “apply for the appointment of a receiver,” and that the borrower “authorize[s] and consent[s]” to the appointment of a receiver. Article & Section 7.1(g). The PPA also provides that the borrower “consents to the appointment of” a receiver in any “marshaling of assets and liabilities or similar proceedings of or relating to such Borrower of or relating to all or substantially all of its property.” PSA p. 93, subsection (e).
Together, these factors weigh strongly in favor of the appointment of a receiver. Accordingly, I respectfully recommend that Mr. Lagowitz be appointed as a receiver.
CONCLUSION
For the reasons set forth above, I respectfully recommend as follows:
• That judgment be entered in favor of Plaintiff in the amount of $12,636,379.74 for damages accrued up to April 6, 2023. This amount accounts for:
o The unpaid principal balance of $8,271,086.02;
o $1,245,017.34 of regular interest and $1,708,348.16 of default interest accrued on the unpaid balance until April 6, 2023;
o The maturity late charge of $414,931.88;
o Protective advances totaling $895,203.52 and an additional $31,586.85 for outstanding attorneys' fees and costs;
o $66,105.97 in Special Servicing Fees and $4,100.00 for Payoff Quote fees.
• That judgment be entered in favor of Plaintiff for an amount to be determined at the time of judgment for:
o Interest that will have accrued on the unpaid principal balance from April 6, 2023 until the time of judgment;
o Interest accrued on the protective advances, calculated at prime rate or the Default Rate of 9.99%, whichever is less;
o Additional payments Plaintiff makes in protective advances, attorney's fees, Special Servicing Fees, and Payoff Quote fees, and any interest accrued thereon in accordance with this Report.
o A Liquidation Fee in an amount to be determined following the foreclosure sale.
• That post-judgment interest be awarded to Plaintiff.
• That Mr. Lagowitz be appointed as a referee of the sale and as a receiver on the Property, and the proceeds from the sale of the Property be applied to the amount of damages owed.
NOTICE
The parties shall have fourteen days from the service of this Report and Recommendation to file written objections to the Report and Recommendation, pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure. See also Fed.R.Civ.P. 6(a), (d) (adding three additional days only when service is made under Fed.R.Civ.P. 5(b)(2)(C) (mail), (D) (leaving with the clerk), or (F) (other means consented to by the parties)).
A party may respond to another party's objections after being served with a copy. Fed.R.Civ.P. 72(b)(2). If any party files written objections to this Report and Recommendation, the other party shall have fourteen days to serve and file a response. Such objections shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Vernon S. Broderick at the United States Courthouse, 40 Foley Square, New York, New York 10007, and to any opposing parties. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(d), 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Broderick. The failure to file these timely objections will result in a waiver of those objections for purposes of appeal. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(d), 72(b); Thomas v. Arn , 474 U.S. 140 (1985).