U.S. Bank Trust Company v. Jericho Plaza Portfolio LLC

Background

U.S. Bank Trust Company, National Association, acting as trustee for a mortgage-backed securities trust and through its special servicer, Midland Loan Services, sued Jericho Plaza Portfolio LLC, Menachem Meisner, and other entities. The main claims seek mortgage foreclosure, foreclosure of a security interest, possession, and breach of guaranty concerning a loan secured by two office buildings.

Jericho Plaza borrowed $149,180,000 from Natixis Real Estate Capital LLC in December 2021. The loan was secured by the property, leases, and rents. Natixis later transferred its interests in the loan documents to U.S. Bank Trust. The loan matured on January 9, 2024, but U.S. Bank Trust alleged that Jericho Plaza did not repay the remaining balance, accrued interest, and other amounts due.

U.S. Bank Trust also alleged that Jericho Plaza failed to pay operating expenses despite receiving more than $6.3 million intended for approved operating-budget expenses. The complaint alleged more than $3 million in unpaid vendor expenses, including expenses for sanitation, elevator maintenance, electricity, fire safety, security, cleaning, and heating and air-conditioning repairs. It also alleged that mechanic’s liens were filed against the property.

Meisner’s Motion to Dismiss

Meisner moved under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint plausibly states a claim for relief, to dismiss the breach-of-guaranty claim. He argued that the complaint did not adequately allege that either category of guaranteed obligations had been triggered.

The court held that the complaint adequately alleged that Jericho Plaza triggered “Borrower’s Recourse Liabilities” under three provisions of the loan agreement:

- Physical waste: The allegations that Jericho Plaza deliberately failed to pay for services necessary to maintain and protect the property, including electricity, sanitation, elevator maintenance, fire safety, and security, were sufficient at the pleading stage to allege intentional physical waste. - Misappropriation of funds: The complaint plausibly alleged that Jericho Plaza received funds intended for operating expenses but failed to use them to pay vital property expenses. - Unpaid charges and liens: The allegations that unpaid charges led to mechanic’s liens in specified amounts adequately pleaded the lender’s exposure under the loan agreement. The court stated that U.S. Bank Trust did not need to have already paid the lien amounts for this provision to apply.

The court also rejected Meisner’s argument that the complaint had to establish before foreclosure that the property was worth less than the loan balance. Because a foreclosure sale had not yet occurred, the court held that the complaint could plausibly allege that a deficiency might remain after the sale.

The court separately held that the complaint did not adequately allege a “Springing Recourse Event,” which would make Meisner responsible for the entire debt. The complaint did not identify one of the listed events or allege facts showing that one had occurred. The court therefore granted Meisner’s motion to dismiss to the extent the guaranty claim was based on such an event, while denying the motion as to the limited-recourse claim.

Jericho Plaza’s Motion to Dismiss

Jericho Plaza moved to dismiss the mortgage-foreclosure claim to the extent U.S. Bank Trust sought a deficiency judgment against it. The court denied that motion. Although the loan agreement generally limited the lender’s ability to seek a deficiency judgment against the borrower, the court held that the alleged physical waste, misappropriation of funds, and unpaid charges resulting in liens fell within stated exceptions to that limitation.

Request to Amend and Disposition

U.S. Bank Trust alternatively asked for permission to amend the complaint to explain how Jericho Plaza allegedly triggered a Springing Recourse Event. The court denied that request because U.S. Bank Trust had already received an opportunity to amend, chose instead to oppose the motions, and the court’s prior order warned that further opportunities ordinarily would not be granted.

Judge Paul A. Engelmayer concluded that the court granted in part and denied in part Meisner’s motion to dismiss, denied Jericho Plaza’s motion to dismiss, and denied U.S. Bank Trust’s request to amend the complaint. The order directed Meisner and Jericho Plaza to answer the complaint by October 11, 2024.