Wilmington Trust v. 36th Street Property Inc.
Wilmington Trust, National Association, As Trustee For The Benefit of the Registered Holders of UBS Commercial Mortgage Trust 2019-C17, Commercial Mortgage Pass-Through Certificates Series 2019-C17 v. 36th Street Property Inc.
- Lorna Schofield
- 1:22-cv-00302
- U.S. District Court · Southern District of New York
- 4
In Wilmington Trust v. 36th Street Property, Judge Schofield stayed proceedings against guarantors and denied amendment without prejudice during the debtors’ bankruptcy.
The guarantor defendants, whose proceedings are stayed; Wilmington Trust, whose motion to amend was denied without prejudice; and the other parties, who must address the case’s future after the bankruptcy stay expires as to the debtor defendants.
What happened
Wilmington Trust, National Association v. 36th Street Property Inc. is a foreclosure case involving debtor defendants, guarantor defendants, and other defendants who had not appeared. The debtor defendants filed for bankruptcy, which automatically paused claims against them.
Wilmington Trust argued that the bankruptcy filing triggered the guarantors’ liability and asked to amend its complaint. The guarantors asked the court to extend the bankruptcy-related pause to the proceedings against them because they were closely involved in the debtors’ reorganization, including efforts to return the property to operation.
Judge Lorna G. Schofield granted the guarantors’ request to pause the proceedings and stayed the action until further court order. She denied Wilmington Trust’s request to amend the complaint without prejudice to renewing it after the pause is lifted. The parties must file a joint letter within one week after the bankruptcy stay ends for the debtor defendants.
The detailed version
- Wilmington Trust v. 36th Street Property Inc. · No. 1:22-cv-00302
- Lorna Schofield
- June 8, 2022
Background
Wilmington Trust filed a foreclosure action against 36th Street Property Inc. and HR 442 Corp., identified as the debtor defendants; Ae Sook Choi and Jin Sup An, identified as the guarantor defendants; and the New York City Department of Finance, New York City Environmental Control Board, and Newbank, identified as defaulting defendants because they had not appeared or answered. The court had appointed Janus Hotel Management Services, LLC as receiver of the property.
The debtor defendants later filed for bankruptcy in the Eastern District of New York. That filing triggered the automatic stay under 11 U.S.C. § 362, which generally pauses litigation against the entities that filed for bankruptcy but ordinarily does not protect co-defendants or related non-debtors.
Motions and Analysis
Wilmington Trust argued that the bankruptcy filing triggered full recourse against the guarantor defendants under the mortgage. It asked for permission to amend the portion of its complaint concerning only the guarantor defendants to reflect that alleged change in liability. The guarantor defendants asked the court to extend the stay to the proceedings against them.
The court explained that a bankruptcy stay may sometimes be extended to non-debtors when litigation against them would immediately harm the bankruptcy estate. The court cited circumstances including the need for the debtor to divert significant resources to the litigation or a threat to the debtor’s reorganization. Although the stay is not ordinarily extended to guarantors, sureties, or co-obligors, courts may extend protection when necessary to protect a successful reorganization.
The court noted that Ae Sook Choi was president of the debtor defendants and that the guarantor defendants were closely involved in the bankruptcy proceedings and any restructuring plan. The stated goal of that plan was to return the property to operation as a going concern. Based on that involvement and the need to protect the reorganization, the court extended the stay to the guarantor defendants.
Ruling
Judge Lorna G. Schofield ordered that the guarantor defendants’ motion to stay the proceedings against them was GRANTED. The action was STAYED until further order of the court. The plaintiff’s motion for leave to amend the complaint was DENIED without prejudice to renewal following the lifting of the stay.
The court also ordered that, within one week after the bankruptcy stay expires as to the debtor defendants, the parties must file a joint letter explaining how the bankruptcy proceeding affects the claims in this case and stating each party’s position on how the case should proceed. Each side’s portion of the letter may not exceed three pages.
Read the full 4-page opinion on CourtListener, the free public archive maintained by the Free Law Project.