New York Community Bank v. LLC (2011)

MEMORANDUM OF DECISION RE PLAINTIFF'S APPLICATION FOR APPOINTMENT OF RECEIVER OF RENTS (NO. 114)

Pursuant to Practice Book § 21–20, New York Community Bank (N.Y.CB) hereby applies to this court for the appointment of a receiver of rents for the property located at 135 Gold Star Highway, Groton, Connecticut, as more particularly described as the “mortgaged premises.”   The mortgaged premises is a hotel with 59 units operated as the Days Inn and Suites Groton.

FACTS

The owner of the mortgaged premises, Gurukrupa, LLC (Gurukrupa), expressly agreed in the mortgage that, in the event of a default, NYCB shall be entitled to the appointment of a receiver as a matter of right.   As security for a loan evidenced by a promissory note dated February 9, 2007 (the note) in the original principal sum of Two Million Four Hundred Thousand Dollars and No Cents ($2,400,000), Gurukrupa conveyed to NYCB all of its interest in the mortgaged premises pursuant to a mortgage and security agreement (the mortgage) and collectively with the promissory note and other loan documents (the loan documents).

As further security for the note, Gurukrupa executed an assignment of leases and rents dated February 9, 2007 (the assignment of rents), wherein Gurukrupa absolutely and unconditionally conveyed, transferred, assigned and set over to NYCB all of Gurukrupa's rights, title, interest and privileges on all leases and subleases now or hereinafter in existence with respect to the mortgaged premises or any part thereof, including all rents, income, royalties, profit and other sums due or to become due under the leases, security deposits, and any payment made by a tenant in lieu of rent.¹  The loan documents and assignment of rents have been reviewed by the court.

Consistent with the assignment of rents, Gurukrupa agreed in the mortgage to convey to NYCB all of its right in and to all leases, licenses, occupancy agreements or agreements to lease all or any part of the mortgaged premises, and all rents, income, receipts, revenues, security deposits, escrow accounts, reserves, issues, profits and payments of any kind payable under the leases or otherwise arising from the mortgaged premises.   Gurukrupa also agreed in the mortgage that NYCB may, at any time without notice, either in person, by agent or by a receiver appointed by a court, and without regard to the adequacy of any security for the indebtedness, enter upon the mortgaged premises and, with or without taking possession of the mortgaged premises, and with or without legal action, collect all income (which term shall include amounts determined by NYCB as fair rental value for use and occupation of the mortgaged premises by any person, including Gurukrupa) and, after deducting all costs of collection and administration expense, including attorneys fees and reasonable reserves, NYCB may apply the net income to any of the indebtedness in such order and amounts as NYCB in its sole discretion may determine.   Finally, Gurukrupa agreed that NYCB, without notice, shall have the right to obtain the appointment of a receiver, which appointment is consented to by Gurukrupa.   Gurukrupa is in arrears in excess of $215,000, not including default interest, and this amount continues to increase as Gurukrupa fails to pay the $25,218.04 monthly payment obligation under the loan documents.

In a letter dated December 7, 2010, NYCB, through counsel, advised Gurukrupa that, due to the default, it was declaring the entire principal balance immediately due and payable, together with all other obligations due under the loan documents, including collection costs, and that, if Gurukrupa did not pay all amounts, it may exercise all rights and remedies available under the loan documents or otherwise available at law or in equity.   The parties entered into negotiations for reinstatement of the mortgage loan during the winter months of 2010 and 2011.   Said negotiations did not result in any agreement.   NYCB now seeks the appointment of a receiver.   The parties in dispute presented witnesses and documentary evidence to the court at a hearing on August 8, 2011, with briefs filed by September 15, 2011.

LAW RE RECEIVER OF RENTS

Connecticut courts have considered various factors in determining whether to appoint a receiver, including (a) whether there is a provision in the mortgage providing for the appointment of a receiver in the event of default;  (b) the risk that the foreclosing party will recover less than the full amount of the debt;  and (c) whether waste or loss is occurring.  Antonio v. Johnson, 113 Conn.App. 72, 78 (2009);  People's Bank v. 418 Meadow St. Ass'n., No. CV–07–5007172, 2007 WL 4637178, at *3 (Conn.Super., Dec. 7, 2007).  “The 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 ․” (Citation omitted.)  Masterton v. Lenox Realty Co., 127 Conn. 25, 33, 15 A.2d 11 (1940).  “The object of appointing receivers is to secure the property in dispute from waste or loss.”   2 Swift, Digest, p. 159.  “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.”  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.2d 258 (1985).

It is undisputed in the present controversy that the mortgage in question is in default and that NYCB has chosen to accelerate the debt and foreclose on the property.   Gurukrupa contends, in spite of the specific language in the bank documents and assignment of rents and lease, that the court should deny the application for receiver.

ANALYSIS

At the hearing of August 8, 2011, NYCB presented testimonial evidence from its bank officer Lisa Delfoe, that the loan is in default with arrears of $274,950.68 with principal balance of $2,509,197.96 plus default interest 5 percent above the note rate of 8 1/2 percent in addition to a negative escrow balance of $24,104.83.   She further stated that Gurukrupa encumbered the mortgaged premises by a second mortgage in the amount of $200,000 in violation of the loan documents.   In addition the 2010 profit and loss statement exhibits a short fall in net income of $100,000.   All of said testimony was unrefuted by Gurukrupa.   She further testified that although mortgage modifications were discussed, NYCB never agreed to any change or modification of the loan in question.

NYCB also called on Eric Lewis, an MAI certified appraiser, to testify as to the value of the mortgaged premises.   He opined that the value at the time of his appraisal (April 14, 2011) was $1,700,000, or $28,814 per room based upon his categorization of the subject property as a “limited service property” comparable to others in the area using the income capitalization approach and sale comparison methods of appraisal.   Gurukrupa, through counsel, stipulated to the value of the mortgaged premises, limited to this hearing.

Gurukrupa claimed, through the testimony of its accountant, Paul Lupo, that improvements were made to the property during negotiations to modify the mortgage short of foreclosure.   He confirmed on cross examination that his client did not have the ability to pay the mortgage according to its terms.   Gary Avigne, a hotel consultant hired by Gurukrupa, testified as to the improvements performed and those needed to increase revenues for the subject property.

This court concludes, based upon the witnesses' testimony and exhibits submitted that the facts favor the appointment of receiver of rents.   It is undisputed that the mortgage is in default, with the property worth substantially less than the stipulated value.   The court further finds that there was not a meeting of the minds for a mortgage modification.   The repairs and upgrades made by Gurukrupa were necessary because the property was run down.   They were also necessary to meet the demands of the franchiser in its 2010 inspection report.

The court further finds, as argued by NYCB, that the testimony of the hotel consultant was a conclusory statement without the benefit of audited financial statements.   The court also finds that Gurukrupa's marketing practices are deficient as evidenced by a decrease in marketing expenses.   The lack of ordinary maintenance and delaying improvements have further lessened the cash flow necessary to operate the facility.

Gurukrupa claims that the NYCB (1) has an adequate remedy at law;  (2) the financial consequences of a receiver;  and (3) the attempts to work out a forbearance and/or a modification of the mortgage prior to the foreclosure action.   For reasons set out in NYCB's reply brief, pages 4–6, this court concludes that none justify the denial of a receiver appointment.

The court is left with the factors set out in Antonio v. Johnson, supra.   The court finds that there is a provision in the mortgage providing for a receiver in the event of default.   The foreclosing party (N.Y.CB) will recover less than the full amount of the debt based upon the evidence presented.   The court further finds that waste and/or loss is occurring based upon the inadequate and/or untimely maintenance, repair and upkeep of the mortgaged premises by Gurukrupa.   A receiver of rents is appointed pursuant to the terms of an order, hereinafter more fully set forth.

ORDER

The foregoing Application for Appointment of Receiver of Rents (the “Application”) having been presented to and heard by this court, it is hereby ordered that:

1. GOCT Associates LLC (the “Receiver”) is hereby appointed to act as Receiver in this action to take possession, custody and control of, and manage, operate and preserve the property located at 135 Goldstar Highway, Groton, Connecticut, including all real and personal property of Gurukrupa, LLC (“Gurukrupa”) in which property New York Community Bank (“NYCB”) has an interest (the “Mortgaged Premises”, as more fully described in the Application).

2. The appointment of the Receiver shall continue until further ordered by the court.

3. Defendant, Gurukrupa, LLC and its partners, stockholders, officers, directors, representatives, servants, contractors (including any management companies), agents and employers and any one acting on its behalf or in concert with it, with actual notice of the order (collectively referred to herein as “Gurukrupa”) shall deliver to the Receiver all of the Mortgaged Premises, including without limitation, all monies and bank accounts related in any way thereto, all goods, equipment, fixtures, furnishings, books records, accounts, inventory, all assets, all goods, rents, receivables, accounts, deposits, equities and profits.   Gurukrupa is directed to perform all reasonable acts to delivery the Mortgaged Premises to the Receiver.

4. The Receiver shall operate, manage and maintain the Mortgaged Premises in the ordinary course including, but not limited to, the power to:  (a) employ and compensate servants, agents, employees, clerks, attorneys, accountants and/or property managers;  (b) purchase, merchandise, materials, supplies, and services for paying for them at ordinary and usual rates and prices out of funds that will come into possession of Receiver as receiver;  (c) pay NYCB amounts due to it pursuant to the loan documents relating to the Mortgaged Premises from funds that will come into Receiver's possession as receiver after Receiver pays Receiver's fees and expenses;  (d);  (e) conduct the property management and rental operations;  and (f) do all other things and take all other actions necessarily or beneficially related to the operation of the Mortgaged Premises and to protect NYCB's security interest in the Mortgaged Premises.

5. The Receiver may not incur any expenses for capital improvements to the Mortgaged Premises or enter into any agreements for an amount in excess of $5,000 without first obtaining the written consent of NYCB, except Receiver may pay those expenses which are approved by NYCB in an Operating Budget.

6. The Receiver is directed to provide the parties with an accounting of income and expenses on a monthly basis, including an accounting of its fees, which shall be commercially reasonable and at market rates.

7. The Receiver shall take possession of and receive from the defendants any money on deposit in financial institutions to the credit of such defendants with respect to the Mortgaged Premises, and the receipt by the Receiver for such funds will discharge the bank holding the deposit from further responsibility for such account to said defendants for funds for which the Receiver has given such receipt.

8. Gurukrupa shall deliver and turn over to the Receiver all information and date necessarily or beneficially related to the operation of the Mortgaged Premises including, without limitation, all books, records, electronic data (regardless of how same may be stored), or other document relating to the operation and ownership of the Mortgaged Premises.

9. Gurukrupa shall immediately turn over to the Receiver any and all rents, royalties, issues, profits, revenue, income and other benefits (the “Funds”) arising from or related to the Mortgaged Premises, regardless of whether such Funds are already received and currently available or are hereafter received, and regardless of whether such Funds are nor or hereafter in the personal possession, custody or control of the defendants or deposited or held by a banking institution or any other third party.   Gurukrupa shall also immediately turn over to the Receiver other personal property or fixtures related to the Mortgaged Premises.

10. Gurukrupa shall surrender and deliver immediately to the Receiver all policies of insurance covering the Mortgaged Premises, including without limitation policies that provide hazard and/or liability coverage, and shall not perform any act that will limit or decrease existing coverage.   The Receiver shall determine upon taking possession of the property whether in the Receiver's judgment, there is adequate insurance coverage.   If there is adequate insurance, the Receiver shall be named as an uninsured or an additional insured on the policies for the period that the Receiver shall be in possession of the Mortgaged Premises.   If adequate insurance does not exist, the Receiver shall procure sufficient insurance.   At the Receiver's option, Receiver shall have the right and authority to notify all insurers to name the Receiver (as the court-appointed receiver for Gurukrupa) as a loss payee and to collect payments on any losses covered by the insurance policies, and to restore and repair the property in response to any loss.

11. Gurukrupa is hereby ordered to deliver, or cause to be delivered, immediately to the Receiver all approvals, licenses (including but not limited to liquor licenses, if any), permits, operation, construction, maintenance, and rentals, including without limitation all governmental approvals, surveys, plans, drawings, specifications, engineering reports, environmental reports, construction contracts and documents, work reports, advertising materials, deposits, deposit account records, operating account records, other banking or financial records, contracts, documents and instruments relating in any way to the Mortgaged Premises, and further is restrained until further order of its court from taking any action to interfere with the Receiver in discharging its duties hereby, or with any of the property to be delivered to the Receiver pursuant to this order.

12. Receiver is authorized to operate all business on the Mortgaged Premises under the authority of any existing contracts, permits, leases, and licenses, including but not limited to any existing liquor licenses, currently held by Gurukrupa or any defendant.

13. The Receiver is authorized to pay any fees associated with and due pursuant to any franchise agreement to maintain continued operation of the Mortgaged Premises under the same entitle name.   The Receiver is authorized to communicate, negotiate, or otherwise deal with the Mortgaged Premises' franchiser regarding compliance with or cure of any possible defaults relating to license renewals or license agreements.

14. The Receiver shall open and maintain deposit accounts at a federally insured bank or financial institution for the purpose of depositing therein all proceeds and income collected from the Mortgaged Premises and to withdraw such funds as are necessary to pay for the costs incurred in the operation and maintenance of the Mortgaged Premises in accordance with this Order and, so long as any indebtedness shall be due to NYCB by Gurukrupa, shall turn over to NYCB any funds remaining in such account at the end of each month in excess of the amount necessary to pay the aforesaid Receiver's fees and expenses, costs of operation and maintenance, working capital and capital improvements, and reserve for future operating expenses.   NYCB shall apply such funds to reduce the indebtedness owed to it by Gurukrupa.

15. Money coming into possession of the Receiver and not expended for any of the purposes authorized herein must be held by the Receiver subject to such orders as this court may hereafter issue.

16. The Receiver shall be entitled to compensation for its services to include:  (a) a management fee of $4,000 per month;  (b) an accounting fee equal to $750 per month;  (c) reimbursement of out of pocket expenses;  and (d) final wind down fee equal to $4,000 upon conclusion of the receivership to wind down all books and records.   In the event there is a shortfall in operating revenue, NYCB shall advance funds to cover Receiver's fees.

17. No lien, claim or other security interest in any property affected by this receivership will in any manner be affected by this order.   Any party's failure to oppose the appointment of the Receiver, any party's consent to the appointment, or any party's procurement of the appointment will not constitute waiver of any lien, claim or right.

18. The Receiver is directed to file in this action, within thirty (30) days of taking exclusive possession, custody and control of the Mortgaged Premises, an inventory of all property of which the Receiver has taken possession.   If the Receiver subsequently comes into possession of additional property, it must file a supplemental inventory as soon as practicable.

19. It is specifically acknowledged that NYCB may take steps necessary to prepare for the foreclosure of the Mortgage, either by strict foreclosure or foreclosure by sale, and the Receiver shall provide NYCB reasonable access to the Mortgaged Premises for the purpose of conducting appraisals, environmental inspections, mechanical inspection, structural inspections or other purposes related to the foreclosure of their mortgage on the Mortgaged Premises.

20. Receiver shall not be liable for any obligation of Gurukrupa relating to the Mortgaged Premises that arose prior to the entry of this Order.   The Receiver shall have no liability to any party for any claims, actions or causes of action arising out of or relating to events or circumstances occurring prior to the appointment of the Receiver.   This protection of the Receiver from liability shall include, but not be limited to, any liability from the performance of services rendered by third parties on behalf of Gurukrupa, and any liability to which Gurukrupa is currently or may ultimately be exposed under any applicable laws pertaining to the ownership and use of the Mortgaged Premises and operation of Gurukrupa's businesses.

21. Receiver shall not be obligated to advance any funds.

22. Receiver's liability shall be limited to the Receivership Estate.

23. The Receiver shall make available to NYCB any and all financial, operational, or other information required to be provided to NYCB under the Mortgage, a certain Promissory Note dated February 9, 2007, and other loan documents as defined in the Application, or any other document securing Gurukrupa's obligations to NYCB relating to the Mortgaged Premises.

24. Receiver shall post a bond with surety in the amount of 100,000.00.

Devine, J.

FOOTNOTES

FN1. NYCB is the successor by merger to Synergy Bank, the original holder of the loan documents..  FN1. NYCB is the successor by merger to Synergy Bank, the original holder of the loan documents.

Devine, James J., J.