LMREC III Note Holder, Inc. v. Hudson EFT LLC

Background

LMREC III Note Holder, Inc. sued Hudson EFT LLC and other defendants in a commercial mortgage foreclosure action involving property at 80 Main Street, Ossining, New York. In 2017, Hudson entered into loan agreements and signed two promissory notes secured by the property. The loan documents were later assigned to the plaintiff, which became their holder and owner.

The plaintiff alleged that Hudson stopped making payments due under the loan documents in March 2020. It sent a notice of default on April 3, 2020, accelerated the debt, and demanded payment. The plaintiff calculated that, as of July 31, 2021, Hudson owed $7,139,045.31, excluding attorneys’ fees and costs. The plaintiff sought summary judgment on Count I, which sought foreclosure, and default judgment against several defendants that had not appeared.

Default-Judgment Motion

The court denied the plaintiff’s motion for default judgment without prejudice. The court’s individual rules required a party seeking default judgment to proceed by an order to show cause, but the plaintiff had not done so. The court stated that the plaintiff could file the motion again in compliance with those rules.

Summary-Judgment Standard and Foreclosure Claim

Summary judgment is appropriate when there is no genuine dispute over any material fact and the moving party is entitled to judgment under the law. Applying New York law, the court explained that a mortgagee generally establishes a foreclosure claim by producing the note, the mortgage, and proof of default.

The plaintiff produced the notes, the security instrument, the assignment, and the notice of default. It also submitted evidence that the defendants had been in default since at least March 2020. The court found that the plaintiff had established its initial foreclosure case, shifting the burden to the defendants to establish an affirmative defense.

Defenses

The defendants argued that New York Executive Order No. 202.28 barred the action because of the COVID-19 pandemic. The court rejected that defense for several reasons. Hudson’s first missed payment occurred on March 1, 2020, before the pandemic-related lockdown in New York. The court also concluded that the executive order addressed commercial mortgage foreclosures for nonpayment, while the plaintiff alleged both monetary and nonmonetary defaults. In addition, the defendants had not provided evidence showing financial hardship caused by the pandemic.

The defendants also argued that the pandemic should be treated as a force majeure event excusing their performance. The court declined to imply a force majeure provision because the loan documents did not contain one. It further rejected the defendants’ impossibility and impracticability defenses. Under New York law, those defenses are narrowly applied and require performance to have become objectively impossible because of an unforeseeable event. The court found that the defendants’ first missed payment preceded the pandemic and that they had not shown that the pandemic made their business completely inoperable or performance impossible.

Gaccione and Clarke separately argued that the collapse of a retaining wall at the property in 2018 frustrated the purpose of the loan. The court found that Hudson continued making payments through March 2020 and that the defendants had not shown why the retaining wall could not be repaired. It therefore concluded that they had not established that defense.

Ruling and Relief

The court held that the defendants had not established any of their affirmative defenses and granted the plaintiff’s motion for summary judgment on Count I. The court directed the Clerk to enter judgment for the plaintiff on that count. Counts II and III remained in the action.

The court did not finally determine the total amount owed in this opinion. It directed the plaintiff to file a proposed foreclosure judgment providing for a sale of the property and requesting appointment of a referee. The proposed referee would calculate the total amount owed, carry out the sale, and distribute the sale proceeds. The court’s conclusion separately stated that the motion for default judgment was denied without prejudice and that the plaintiff could file a renewed motion complying with the court’s individual rules.