KATHERINE B. FORREST, District Judge.
Somewhere well past the eleventh hour and indeed quite close to midnight, when a state foreclosure proceeding had been completed and an auction scheduled of property owned by the First Union Baptist Church ("First Union"), located at 2064 Grand Concourse, Bronx, New York 10457 (the "Property"), First Union obtained a judicially sanctioned reprieve. The reprieve was in the form of a vigorously negotiated settlement agreement (the "Agreement") entered into between the lender, TD Capital Group ("TD"), and First Union. The terms of the Agreement reflected a complex set of negotiated terms—none more important than one: in the event of any ultimate default, and even then after the expiration of yet another waiting period, TD would be able to record a deed in lieu. The Agreement provided for a series of events that had to occur before any recordation—but it also provided that if and when they did occur, it would signal that the arrangement was at an end. According to the carefully-negotiated structure of the Agreement, TD was providing First Union with time to solve difficult financial issues associated with the Property, and First Union was in turn committing that if it failed in its efforts, TD would then have peace.
This appeal arises from First Union's attempt to avoid the clear and enforceable terms of the Agreement. The facts in the record demonstrate that First Union was unable to comply with its obligations under the Agreement; the record suggests various reasons why that may have been so, but none ultimately matter. Consistent with its core right that held together the web of interrelated terms in the Agreement, TD then recorded the deed in lieu. More than six months passed before First Union sought to reopen the bankruptcy proceeding in which the Agreement had played such a significant role, and sought an order voiding the recordation. By this time, the judge who had presided over the Agreement had retired. The newly assigned judge ultimately held a hearing, and found in First Union's favor.
Now before the Court is an appeal of that decision and order. For the reasons set forth below, this Court finds that the Bankruptcy Court erred. Fundamentally, the Agreement that provided for the deed in lieu is not a mortgage, or akin to a mortgage, that under New York law would require a right of redemption, thereby voiding recordation as it occurred here. The terms of the Agreement providing for recordation are enforceable and do not constitute an inappropriate penalty. Instead, on its face, and without resort to extrinsic evidence (rendering the factual hearing that occurred unnecessary), the deed in lieu was one of a number of interdependent terms in an Agreement that first and foremost provided relief to a debtor whose rights to the Property were plainly and unambiguously at an end. The Agreement was an arrangement between a creditor and debtor that provided give and take on a number of items, and the deed in lieu was a bargained-for term, as part of a negotiated exchange.
The Court therefore REVERSES the Bankruptcy Court's Judgment dated August 4, 2017, and grants appellants' requested relief.
On April 25, 2003, First Union obtained a mortgage on the Property from Carver Federal Savings Bank ("Carver") in the principal amount of $1,120,000. (Appendix to Brief for Appellant ("App."), A0419 ¶ 4.) On May 1, 2010, it defaulted. (
On October 1, 2012, First Union filed for bankruptcy under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Proceeding"). (
On or about December 2013, TD acquired Carver's interest in the Foreclosure Judgment and underlying loan.
It is uncontested that when it acquired Carver's interest in the Property, TD had several options—including pursuing the Carver plan, or staying relief and conducting a foreclosure sale—all of which would have resulted in First Union's immediate loss of the Property. But TD did something else: it voluntarily chose to enter into discussions with First Union and sought an arrangement that would provide First Union with continued occupancy and a real opportunity to find a long term solution, while also protecting its legitimate interests. In this regard, it is uncontested that the parties spent a period of almost five months negotiating such an arrangement. First Union itself described these negotiations as "near constant," "arduous," "extremely intense," and "among the most challenging the professionals have encountered." (App. A0342 ¶ 1.)
At the end of this process, the parties reached agreement on a series of interdependent terms. Most importantly to First Union, the Agreement guaranteed it a clear opportunity to avoid "an outright loss of the Property through a state court foreclosure sale." (App. A0342-43 ¶ 2.) First Union moved under Bankruptcy Rule 9019 for Court Approval of the Agreement. In its accompanying Memorandum of Law, First Union conceded that it "would be unlikely to prevail in state court as it is unaware of any defenses to foreclosure and there has already been a judgment issued and a previous auction sale scheduled and stayed." (
The Agreement's interrelated terms provided for First Union to execute a deed in lieu of foreclosure to be held in escrow by TD and returned only if there was no default and if and when a compromise amount of $1,500,000 was received. Over the course of the year that followed, First Union would retain possession of the Property, and pay monthly "use and occupancy" payments—$9000 a month in —, and $9360 a month in 2015.
Payments were due on the first of the month, but TD allowed a grace period until the tenth of the month. In the event of non-payment after the grace period, First Union would be in default, but could then still cure the default with a payment and a late fee by 3:00 p.m. on the last day of the month. The consequences of a default that was not cured varied—for the first 180 days, TD was entitled to notice a foreclosure sale in state court in accordance with the Judgment. First Union's financial advisor, Robert C. Smith, described this provision—in effect buying First Union 180 extra days—as providing "further protection for the debtor" that would give First Union "a
After 180 days, however, a default and lack of redemption entitled TD to "record the deed in full satisfaction of its claim against the debtor." (App. A0346-47 ¶ 19.) Smith noted that:
(App. A0366-67 ¶ 10) (emphasis added).
For its part, when discussing the Deed Transaction, First Union specifically stated that the "agreement
First Union further identified a critical benefit that TD would receive as part of the Agreement—avoiding the "costs and delay of conducting a foreclosure sale"— noting that were TD to have filed a motion to stay relief that it "would likely be granted and a foreclosure sale would occur." (
(
Moreover, the parties agreed to mutual general releases upon carrying out the terms of the Agreement. First Union noted that these releases were "mutually beneficial" and that "[b]oth sides benefit from the disputes among them to be resolved on a
When finalized, the Agreement was presented to Judge Gropper for review. On June 27, 2014, Judge Gropper held a hearing at which he stated that he had read the entire Agreement and noted that that matter had always been "a very, very difficult case and [that he thought the Settlement] benefited from all the parties involved." (App. A0395.) Additionally, he struck a portion of the Agreement involving Attorneys' Fees.
In his Order approving the Agreement, he stated that the "Bankruptcy Court shall retain jurisdiction over the terms and provisions of the Stipulation" and also that "nothing in the Agreement shall impair the Debtor's state court right of redemption if the Property goes to a foreclosure sale." (App. A0361) (emphasis added). The possibility of a foreclosure sale was clearly, by the terms of the Agreement, limited to a default that occurred within the first 180 days.
Judge Gropper entered his Order approving the Agreement on June 27, 2014. No party appealed.
The first 180 days passed without First Union successfully securing refinancing or selling the building. In May 2015, one month before the compromise payment deadline, however, First Union defaulted on its May "use & occupancy" payment and did not cure it before the end of the month. (App. A0422 ¶ 22.)
A representative from TD called Pastor Wilson, First Union's representative, to inform him that he was in default. (App. A0421 ¶ 19.) At Wilson's request, TD extended First Union's deadline to cure the default until June 2, 2015. (App. A1126 ¶ 17.) When the payment did not arrive that day, TD began the process of recording the deed. (App. A0422 ¶ 24.) The deed was finally recorded on June 8, 2015. (
First Union has proffered a Development Agreement dated May 31, 2015 with the Thorobird Company ("Thorobird") as evidence of what may be characterized as potential, contingent, forthcoming financial wherewithal. While many facts relating to the Development Agreement were developed at trial, none are material to this decision.
In February 2016, approximately eight months after the default, and seven months following recordation of the deed, First Union returned to Bankruptcy Court seeking to reopen the matter—specifically, it sought to extend the stipulated payment delivery date. As Judge Gropper had retired from the bench in the interval between the approval of the Agreement and that time, the case was heard by Judge Wiles.
Judge Wiles held a hearing on March 9, 2016. (App. A0459.) At that hearing, though First Union had not challenged the ability of TD to record the deed, Judge Wiles stated sua sponte that it was "not entirely clear . . . that that's effective under New York law to eliminate the Church's right of redemption." (App. A0473.) He admitted that the background of the Agreement and facts were "not entirely clear" to him, but in any case directed the parties to research and "brief the issue of whether this arrangement really has extinguished the church's right to redeem the property." (App. A0473-74.) He scheduled a further hearing for April 14, 2016.
After the April hearing, First Union commenced an adversary proceeding seeking,
The district court acts as the first level appellate review for orders from a bankruptcy court.
Bankruptcy Rule 9019 allows a court to approve a compromise or settlement if it is fair, equitable, and in the best interests of the estate. Fed. R. Bankr. 9019(a);
Furthermore, the bankruptcy judge has an obligation to make an informed and independent judgment as to whether a proposed compromise is fair and equitable after apprising itself of "all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated."
New York Real Property Law § 320 states that: "A deed conveying real property, which, by any other written instrument, appears to be intended
Under New York law, in order to determine whether a deed was given as a security or as an absolute conveyance, a court must look at the intentions of the parties.
Once a court determines that a deed is given as a mortgage, "[t]he holder of a deed given as a security must proceed in the same manner as any other mortgagee— by foreclosure and sale—to extinguish the mortgagor's interest."
However, in
In
Under New York law, a contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.
Appellants raise three issues on appeal. First, they contend that the bankruptcy court erred by not enforcing the 2014 Stipulation and Order as written. Second, they contend that the bankruptcy court erred in concluding that the Settlement Agreement violated RPL § 320. And third, they argue that the bankruptcy court erred when it determined that the Deed Transaction constituted an impermissible penalty under New York law.
The Court reviews the Bankruptcy Court's conclusions of law, and mixed conclusions of law and findings of fact
The Bankruptcy Court found that the Deed Transaction was no more than a mortgage. The center of its analysis lay in the fact that "the parties did not intend to accomplish an absolute conveyance of the Property
This Court disagrees with these determinations. It is clear from the face of the Agreement that it constituted a complex, multi-faceted agreement on a number of terms and was the product of extensive arms-length negotiations. It offered far more than a mortgage or lien on property. Rather, it laid out a comprehensive plan for extending the time in which First Union might be able to retain the property, despite the fact that a judgment of foreclosure had already been obtained. The challenged aspect of the Settlement Agreement—in which TD could record the deed in the event of a default after 180 days—was part of the overall fabric of consideration, and the other terms in the Agreement were interdependent upon this pivotal provision.
As such, the conveyance of the deed represented far more than a mortgage. It was part of an extensively negotiated, judicially-ordered settlement. Moreover, the 180-day mark represented a "heavily negotiated" term that gave finality to TD but also extended First Union's opportunities to refinance or sell the Property. This was highlighted in the briefing and declarations as a lynchpin of the Settlement Agreement.
The
The Second Circuit affirmed, finding that "[i]t was the clear intention of the parties, approved and ordered by the district court, that the transaction was not to be treated as a mortgage governed by the foregoing provision of New York law."
The Court finds that here, as in
Moreover, the terms of the Agreement themselves are not clearly mortgage related. The payments were termed "use and occupancy payments," not mortgage payments, they were not related to the interest rates, and their payment did not affect the total $1,500,000 owed to TD.
The Bankruptcy Court further erred by relying on trial evidence to establish the intent behind the Agreement. The record itself, consisting of the Settlement Agreement, the Hearing Transcript, the Memorandum in Support of the Agreement, the Declaration in Support of the Agreement, and the Order, all clearly evince an intent to look at the Deed Transfer as something more than a mortgage. It was therefore unnecessary to look further. Even if that were not the case, the trial testimony does not clearly establish that the Deed Transfer was intended only as a mortgage.
For all of these reasons, the Court finds that the Bankruptcy Court erred by finding that the Settlement Agreement violated RPL § 320.
Furthermore, this Court does not find the Deed Transfer to be an unenforceable penalty. The amount fixed (the property value) was certainly not "grossly disproportionate" to the probable loss, especially "as of the date of its making."
The Bankruptcy Court's inquiry into the potential developed value of the property, as presented at trial by Thorobird's representative, Campbell, is a distraction from the question at hand—whether at the time the Agreement was reached, the Property value was grossly disproportionate to TD's possible damages.
In addition, given the lack of certainty about the value of the Property at the time of the Agreement, such damages could certainly be considered difficult to ascertain. Indeed, all the facts and circumstances at the time of the Agreement support the Deed Transaction as proportionate to TD's potential damages.
Moreover, as discussed above, the Deed Transaction was an essential part of the Agreement—the product of compromise on both sides, and consideration rendered by each party.
In sum, the Bankruptcy Court erred when it found that the Deed Transaction was a penalty and therefore unenforceable.
Appellants also devote a considerable amount of their brief to the argument that Judge Gropper's Order is a
The Court not need reach this argument, as it has already resolved that the Deed Transaction neither violates RPL § 320 nor is it an unenforceable penalty. However, the Court tends to agree with appellants. The Bankruptcy Court's conclusion that Judge Gropper would, had he read the provision of the Agreement including the Deed Transaction, "undoubtedly . . . refused to approve the result," is not based on any evidence in the record. The Deed Transaction was not hidden in the Settlement Agreement, but prominently featured in the Agreement itself, as well as the accompanying memorandum and declaration. Judge Gropper stated that he had read all of the above, that he was familiar with the long struggle and the extensive negotiations, that the Agreement represented "hard choices," and that he was willing to approve it. There is no indication that he did not review the Agreement as Rule 9019 required him to do.
Moreover, the Court agrees that, having relied upon the Agreement, principles of estoppel should bar First Union from challenging the Agreement now. All the facts in evidence suggest that TD would have foreclosed on the property long ago, or followed the Carver Plan, had it not been relying upon the Agreement and Order.
In sum, the Court finds that the Bankruptcy Court erred in its Memorandum Decision and Opinion of August 4, 2017 and that the decision should be REVERSED to the extent it invalidated the Deed Transaction as violative of RPL § 320 or as an impermissible penalty, and the Judgment that followed VACATED to the extent that it set aside the transfer of the deed to 2064 Grand Concourse LLC and to the extent it invalidated the Deed Transaction as violative of RPL § 320 or as an impermissible penalty.
For the reasons set forth above, the decision of the Bankruptcy Court is REVERSED to the extent it invalidated the Deed Transaction as violative of RPL § 320 or as an impermissible penalty, the Judgment that followed VACATED to the extent that it set aside the transfer of the deed to 2064 Grand Concourse LLC and to the extent it invalidated the Deed Transaction as violative of RPL § 320 or as an impermissible penalty, the adversary complaint DISMISSED, and summary judgment GRANTED to the appellants.
The Clerk of Court is instructed to terminate this action.
SO ORDERED.