LLC v. LLC (2010)

MEMORANDUM OF DECISION RE MOTION FOR ORDER (# 135) OBJECTIONS TO MOTION FOR ORDER (# 136 AND # 139) AND MOTION TO VACATE RECEIVER (# 140)

The plaintiff (hereinafter referred to as “Tentech”) commenced a foreclosure action to foreclose a mortgage on a commercial/industrial building located in Norwich, Connecticut.   By way of background, in August 2001, Tolland Savings Bank, now known as New Alliance Bank entered into a financial accommodation with Win Holdings International, Inc. (hereinafter referred to as “Win Holdings”) and received a mortgage to secure repayment of the obligation due to it.   The mortgage granted by Win Holdings was on real property known as 9 Wisconsin Avenue, Norwich, Connecticut.   New Alliance Bank entered into at least two modifications of the financial accommodation with Win Holdings on August 1, 2001 and April 4, 2005.   Prior to the second modification, Win Holdings with the knowledge of New Alliance, transferred by quit claim deed its rights, title and interest in 9 Wisconsin Avenue, Norwich, Connecticut to Nine Wisconsin Avenue, LLC (hereinafter referred to as “Nine Wisconsin”), however, neither at the time of or subsequent to the transfer by Win Holdings did New Alliance Bank request or insist that Nine Wisconsin become obligated to it for any monetary sum or as a guarantor.

New Alliance Bank commenced, in 2007, a foreclosure of the mortgage securing its obligation (See New London Superior Court Docket # KNL-CV-07-5002721S) but in a written decision filed on February 27, 2008, Judge Trial Referee Robert C. Leuba found in favor of Win Holdings and ruled that no default had existed to support the commencement of the proceeding.   Judgment was entered in favor of Win Holdings.   The present plaintiff, Tentech, purchased the mortgage note and obligation from New Alliance Bank during the pendency of the prior foreclosure proceeding and was the plaintiff at the time of the decision in February of 2008.   Tentech is now, in this action, claiming another cause for commencements of a foreclosure which is contested.

Subsequent to the commencement of the current judicial proceeding in August of 2008, Nine Wisconsin, the owner of the real property located at 9 Wisconsin Avenue, Norwich, Connecticut, but not the mortgagor or party obligated for monetary sums to plaintiff, filed a Chapter 11 bankruptcy proceeding (Case No. 09-20246) which remains currently pending.   Tentech obtained relief from bankruptcy stay on August 19, 2009 to continue the prosecution of this case.

On June 28, 2010, Tentech represented that the mortgagor (assumed to be Win Holdings which is the only party having granted a mortgage by the prior mortgagee) was collecting rents from 9 Wisconsin Avenue, Norwich, Connecticut and moved for the appointment of a receiver of rents received from tenants occupying the 9 Wisconsin Avenue, Norwich, Connecticut property.   This court granted an order on September 7, 2010, at the request of Tentech at oral argument despite a written objection and request for argument by Win Holdings and Nine Wisconsin and without testimony as to the existence or nonexistence of rent paying tenants.   The court appointed Block & Kahan Properties, LLC as the receiver, with a bond in the amount of $25,000.00.¹

On October 8, 2010, Block & Kahan Properties, LLC filed a motion for order seeking to require Win Holdings and Nine Wisconsin to provide keys, access information, alarm/security necessary to gain access to property and to change the locks.   At a hearing on November 8, 2010, testimony of Eddy Block of Block & Kahan Properties, LLC and Mike Chesbro, formerly an employee of Win Holdings was heard.   Win Holdings and Nine Wisconsin claim that the testimony elicited showed that in spite of claims of abandonment, 9 Wisconsin Avenue, Norwich, Connecticut continues to be occupied by United Machinery and Textile, as the auction purchaser of the equipment on the premises and by property of customers of the former tenant, Decorative Screen Printing.   Further, Mr. Chesbro testified that the building is presently to be heated with sufficient fuel oil to last the current winter season, is secured and cared for and has no maintenance issues, requirements or impediments not addressed.   The property, at the time of the hearing, however, was uninsured for liability and casualty insurance.

Tentech claims, as a result of the evidence presented at the November 8, 2010 hearing, that the building in question was not only uninsured, but that Mr. Chesbro, the maintenance man, could not testify how long he would remain at the property.   There was no evidence submitted at the hearing for the court to conclude that the third party (not a party to the present proceeding) would continue to pay for maintenance and/or security throughout the upcoming winter months.

The defendants, Nine Wisconsin, Win Holdings and Polivy & Tascher, LLC contended that the court should not only deny the motion for order (# 135), but should vacate the order granting a receiver based upon the following claims:  (1) Block and Kahan, LLC are not independent due to its business relationship with Tentech;  (2) no rents are being collected, therefore, there are no rent payments to receive;  (3) there is no statutory or common-law authority to appoint a receiver as a “caretaker” of commercial/industrial property;  and (4) the appointment of a receiver violates the scope of the bankruptcy relief from stay order and the bankruptcy procedure for filing and payment of administrative claims.

As to its initial claim of lack of independence, the court appointed Block and Kahan, LLC, as receivers of rents based upon the request of plaintiff's counsel who was the only one to appear at the short calendar hearing.   Counsel advised the court the proposed receiver shared office space with TenTech and was experienced in the management of properties.   At the hearing on November 8, 2010, evidence presented showed that the plaintiff's corporate structure had members and owners that were also members and owners of the receiver.   The defendants requested that the court vacate the order due to lack of independence of the receiver.

A research of the Connecticut law results in a finding that there is no authority in Connecticut indicating that a receiver must be an independent party to the present litigation.   Pursuant to 65 Am.Jur.2d Receivers § 75, the appointment of a receiver is under the court's discretion, and there is generally “no legal obstacle” to the appointment of an interested party with one exception when a Texas statute specified that interested parties could not function as receivers.²

There is no such statutory limitation under the relevant Connecticut statutes.   See General Statutes §§ 52-504 through 52-514.   The court hereby denies the request to vacate the appointment of the present receiver on the basis of this ground.

As to the second claim and third claim that with the lack of rent and lack of authority to appoint a “caretaker” receiver, the court must further review the facts of the present controversy with the statutory and/or common law of our jurisdiction.   It is undisputed that there are no rents presently in collection because the business operating on the premises has been shut down and the equipment sold by an auctioneer.   The property sits with the equipment belonging to the successful bidder and personal property owned by third parties used in the manufacturing process in the former business tenant.   While there is evidence of property insurance coverage, recently procured by Nine Wisconsin,³ said insurance certificate excludes theft coverage and vandalism in addition to water exclusion and sprinkler leaking exclusion.   The court further finds that based upon the testimony and exhibits presently, there is sufficient evidence to conclude that the present maintenance man (Mr. Chesbro) will remain on the property to regulate the heat, lights, security, sprinkler system, etc.

As to the ability of the court to continue the appointment of a receiver when no rents are collected to serve a “caretaker” function, our Appellate Court has recently articulated that “a number of factors [to consider] when deciding whether to appoint a receiver of rents including (1) whether waste or loss is occurring;  Hartford Federal Savings & Loan Assn. v. Tucker, 196 Conn. 172, 175, 491 A.2d 1084, cert. denied, 474 U.S. 920, 106 S.Ct. 250, 88 L.Ed 258 (1985);  (2) the risk to the foreclosing party that he will recover less than the full amount of his debt, that is, whether the deficiency is certain or only threatened;  e.g., Prudential Ins. Co. Of America v. Calabrese, Superior Court, judicial district of Waterbury, Docket No. CV 95 0127550 (August 11, 1995), (15 Conn. L. Rptr. 13);  and (3) whether there are provisions in lending documents that allow or require the appointment of a receiver in the event of the mortgagor's default;  Jewett City Savings Bank v. Weiss, Superior Court, judicial district of Windham, Docket No. CV 96 0053937 (November 21, 1996) (holding that when mortgage deed permits appointment of receiver and there is likely deficiency after foreclosure, court may grant motion to appoint receiver).”  Antonio v. Johnson, 113 Conn.App. 72, 77-78, 967 A.2d 261 (2009);  see also Connecticut Natural Gas Corp. v. Hartford, LLC, Superior Court, judicial district of Hartford, Docket No. CV 07 4032082 (March 1, 2010, Graham, J.) (49 Conn. L. Rptr. 421, 422) (noting “usual purpose of a receivership is to preserve and protect property pending the outcome of litigation”).

The Antonio court further noted that “[t]he application for a receiver is addressed to the sound legal discretion of the court, to be exercised with due regard to the relevant statutes and rules, and such exercise is not to be disturbed lightly nor unless abuse of discretion material error appears,” Antonio v. Johnson, supra, 113 Conn.App. 77.

In the present case, the mortgage documents reviewed by the court gives the plaintiff, holder of the note and mortgage, permission to enter into the property to take reasonable measures to safeguard the same against loss and damages.   The plaintiff has the right to do so under the loan documents but has chosen to seek orders from the court for that very purpose.   Caron, Connecticut Foreclosures, § 10.01. The court concludes that under the facts and circumstances of the case, it has authority to permit and order a receiver to secure the property from potential loss and/or waste from potential vandalism and damages excluded in the insurance policy procured by Nine Wisconsin.   The receiver acts as an arm of the court and not possessor of the subject property.  Desiderio v. Iadonisi, 115 Conn. 652, 163 A.254 (1933).

As to the bankruptcy defenses interposed by the defendants, the defendants contend that the bankruptcy relief from stay order does not authorize a receiver of rents to be appointed by the state court and, further, the actions of the receiver would require the approval of the bankruptcy court for administrative expenses.   As to the former argument, the court must look at the specific language used by the bankruptcy court ⁴ when it granted the relief from stay.   Nine Wisconsin, in analyzing the extent of the relief from stay order, relies on the Appellate Court in the case of Citi Mortgage, Inc. v. Mehta, 39 Conn.App. 822, 668 A.2d 729 (1995).   In that case, the bankruptcy court modified the stay to allow the plaintiff to “proceed with [its] state court foreclosure action against [the defendant's] real property.”   In the present case, the bankruptcy court's order permits the plaintiff to try the present foreclosure action in state court and “exercise its rights under applicable non-bankruptcy law” against the property.   As noted by TenTech, in its argument and briefs, if the order was only intended to limit the stay modification to the trial of the foreclosure action, then the first paragraph of the stay order would be surplusage.   The appointment of receiver of rents involve the rights of a plaintiff mortgagee to seek self-help redress when the loan documents so provide and/or an order from the court to appoint a receiver.

“An action of foreclosure is peculiarly equitable and the court may entertain all questions which are necessary to be determined in order that complete justice may be done between the parties ․ The object of appointing receivers is to secure the property in dispute from waste or loss ․ It is not the office of a court of equity to appoint receivers as a mode of granting ultimate relief.   They are appointed as a measure ancillary to the enforcement of some recognized equitable right.”  (Citations omitted.)  Hartford Federal Savings & Loan Assn. v. Tucker, 196 Conn. 172, 175, 491 A.2d 1084, cert. denied, 474 U.S. 920, 106 S.Ct. 250, 88 L.Ed 258 (1985).   The appointment of a receiver constitutes an exercise of the plaintiff's rights under applicable non-bankruptcy law against the property, and such an appointment is therefore proper under the terms of the bankruptcy court's order.

As to the issue of administrative expenses, Nine Wisconsin claims that they are subject to the jurisdiction and approval of the bankruptcy court pursuant to § 503 of the Bankruptcy Code. An administrative expense is defined as “the actual necessary costs and expense of preserving the estate including ․ wages, salaries and commissions for services rendered after the commencement of the case ․” 11 U.S.C. § 503(b)(1)(A) (2006).   The defendants have provided no case law indicating that, because of this statute, the court must deny the motion to compel and/or vacate the appointment of the receiver.   As stated above, the receiver performs its services as an arm of the court and not a possessor of property.   The relief from stay has granted the plaintiff TenTech the right to proceed in state court to continue the foreclosure action and to exercise its rights under the applicable non-bankruptcy law which, in this case, is the law of the State of Connecticut.   Whether the receiver is entitled to any fees for services rendered and/or materials supplied when no rents are collected is a matter for another day.

ORDER

Tentech's motion for order # 135 is granted to the extent set forth below and the objections of the defendant's # 136 and # 139 are hereby denied.   Nine Wisconsin's motion to vacate the appointment of a receiver # 140 is hereby denied.

The court hereby orders the defendant Nine Wisconsin to provide keys, access information and alarm/security codes necessary for the receiver Block & Kahan Properties, LLC to gain access to the subject property located at 9 Wisconsin Avenue, Norwich, Connecticut for the purposes of securing the subject property from waste and/or loss from vandalism, etc.   The receiver shall keep the subject property protected from damage from broken heating and water pipes and shall maintain the utilities in sufficient working condition, as needed to protect said structure and improvements from damage and/or loss from the elements and/or third parties pending further order of the court.

The receiver shall make said real property and/or improvements thereon available to the defendants Nine Wisconsin and/or Win Holdings during normal business hours (i.e. Monday-Friday 9:00 a.m. to 5:00 p.m.) upon 24 hours advance notice for the purpose of (1) removal of the sold auction items;  (2) removal of personal property of the parties used by Decorative Screen Printing in its manufacturing process (former tenant);  (3) any real estate agents showing the subject property for sale;  and/or (4) any local or state officials performing routine duties in their governmental capacity.

Said orders remain in effect until the need for protection from vandalism, and protection from damage and/or loss no longer exists after motion and further order of this court.

Devine, J.

FOOTNOTES

FN1. Win Holdings and Nine Wisconsin did not appear through counsel on September 7, 2010 for oral argument.   No mention as made in the written objection to the appointment of receiver (# 133) that rents were not in the process of collection all that time..  FN1. Win Holdings and Nine Wisconsin did not appear through counsel on September 7, 2010 for oral argument.   No mention as made in the written objection to the appointment of receiver (# 133) that rents were not in the process of collection all that time.

FN2. See V.T.C.A., Civil Practice and Remedies Code § 64.021..  FN2. See V.T.C.A., Civil Practice and Remedies Code § 64.021.

FN3. Counsel for Polivy & Tascher, LLC provided the court with a copy of a declaration page representing the procurement of property insurance by Nine Wisconsin with exclusions noted above, effective date 11/17/2010..  FN3. Counsel for Polivy & Tascher, LLC provided the court with a copy of a declaration page representing the procurement of property insurance by Nine Wisconsin with exclusions noted above, effective date 11/17/2010.

FN4. In Re Nine Wisconsin Ave., LLC, Debtor Case No. 09-20246(ASD), Re Doc. I.D. No. 47, Order Granting Relief From the Automatic Stay, p. 2..  FN4. In Re Nine Wisconsin Ave., LLC, Debtor Case No. 09-20246(ASD), Re Doc. I.D. No. 47, Order Granting Relief From the Automatic Stay, p. 2.

Devine, James J., J.