Wilmington Trust, N.A. v. 5400 Raleigh Crabtree, LLC

Background

Wilmington Trust, N.A., the mortgage lender, sued the defendant borrowers after they defaulted on a $204 million mortgage loan secured by liens on twenty-two properties. The defendants also defaulted on a separate mezzanine loan. Under that financing structure, certain entities that were the defendants’ sole members pledged their membership interests in the defendants to the mezzanine lender, and a guarantor guaranteed certain mezzanine-loan obligations.

The mortgage lender and mezzanine lender had entered an intercreditor agreement requiring fifteen business days’ written notice before the mortgage lender accepted a deed in lieu of foreclosure for a property. In August 2020, the court appointed Jeffrey Kolessar as receiver with authority, under the consent order, to sell or otherwise dispose of the properties free and clear of security interests, liens, claims, and other interests, with valid interests attaching to sale proceeds.

The receiver conducted marketing efforts, including two marketing campaigns, but did not locate a buyer. The receiver reported that third-party sales would yield only part of the outstanding debt and would cause additional expense and delay. As of November 30, 2023, the amount due on the mortgage loan was $262,989,455.80. The receiver therefore moved to liquidate the properties through a combination of deeds in lieu of foreclosure and receiver’s sales.

The Receiver’s Authority and Proposed Liquidation

The court held that the receiver had authority to liquidate the properties. The consent order expressly allowed the court to authorize a public sale, private sale, or other disposition of all or part of the properties. The defendants and mezzanine lender did not dispute that the receiver possessed this authority.

The court applied the principle that a receiver must seek the largest possible recovery for assets and protect their value. It found that the receiver had shown sound business reasons for using deeds in lieu of foreclosure. The receiver had spent several years marketing the properties and concluded that a third-party sale would produce substantially less than the debt owed, increase the defendants’ obligations, and delay liquidation. By contrast, deeds in lieu could provide the highest net present value for each property, avoid further marketing and court proceedings, reduce the mortgage lender’s losses, and eliminate the defendants’ outstanding mortgage obligations. The receiver could still use a nonjudicial foreclosure or receiver’s sale for an individual property if circumstances, such as a need for substantial repairs or renovations, warranted that approach.

The court also found that the receiver had provided the fifteen days’ written notice required by the intercreditor agreement. Neither the defendants nor the mezzanine lender disputed that the required period had elapsed.

Mezzanine Lender’s Jurisdiction and Rights

The mezzanine lender initially argued that the court lacked jurisdiction over it because it had not consented to jurisdiction in New York. The court rejected that argument, finding that the mezzanine lender had agreed in the intercreditor agreement to submit to the jurisdiction of the United States District Court for the Southern District of New York. The court also noted that the plaintiff had not sought to add the mezzanine lender as a party or obtain relief against it, and that the mezzanine lender had not sought to join the lawsuit.

The mezzanine lender argued that the proposed liquidation could affect its rights under the mezzanine loan agreement and guaranty, including alleged rights to bid on individual properties and retain equity above the mortgage debt. The court concluded that the receiver’s motion did not seek to eliminate those rights. The court noted that the mezzanine lender had already exercised its right to bid through Arden Property Trust, LLC, which submitted bids below the amount owed to the plaintiff, and that the mezzanine lender had not shown that it had a right to require a foreclosure sale.

The defendants requested additional findings concerning their objections, the receiver’s authority to direct the mezzanine borrowers, possible claims under the mezzanine documents, and the receiver’s role as attorney-in-fact. The court found that these requests went beyond the relief sought. It directed that the proposed order include language stating that the order does not eliminate or decide the rights of the defendants, the mezzanine lender, or the guarantor concerning the mezzanine loan documents.

Disposition

The court granted the receiver’s motion to liquidate the mortgaged properties through a combination of deeds in lieu of foreclosure and receiver’s sales. It directed the receiver to submit a proposed order within seven business days, allowed objections within five business days after that submission, and allowed replies within three business days thereafter.