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U.S. Bank National Association v. LG-328 Huntsville, Al, LLC

United States District Court, N.D. Alabama, Northeastern Division

November 27, 2017

U.S. BANK NATIONAL ASSOCIATION, Plaintiff,
v.
LG-328 HUNTSVILLE, AL, LLC, et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          ABDUL K. KALLON, UNITED STATES DISTRICT JUDGE.

         This case arises out of the default of ten cross-collateralized commercial loans secured by, among other things, mortgages on income-producing properties leased to Logan's Roadhouse and serviced by U.S. Bank National Association, as Trustee, successor in interest to Bank of America, National Association, as successor by merger to LaSalle Bank, National Association, as Trustee for the registered holders of J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11, Commercial Mortgage Pass-Through Certificates, Series 2007-LDP11, acting by and through C-III Asset Management LLC, solely in its capacity as special servicer (U.S. Bank). Presently before the court is U.S. Bank's Motion for the Appointment of Receiver and Injunctive Relief, doc. 5, and an identical request made in the Complaint, doc. 2, which are now fully briefed, docs. 6; 31; and 32, and ripe for review. Upon consideration of the parties' briefs and evidentiary submissions, both requests are due to be denied.

         I. STANDARD OF REVIEW

         “A receiver is a neutral court officer appointed by the court, usually to ‘take control, custody, or management of property that is involved in or is likely to become involved in litigation for the purpose of . . . undertaking any [] appropriate action.'” Sterling v. Stewart, 158 F.3d 1199, 1201 n.2 (11th Cir. 1998) (quoting 12 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and Procedure § 2981, at 5 (1973)). In the Eleventh Circuit, it is settled that “federal law governs the appointment of a receiver by a federal court exercising diversity jurisdiction.” Nat'l P'ship Inv. Corp. v. Nat'l Hous. Dev. Corp., 153 F.3d 1289, 1292 (11th Cir. 1998). Accordingly, this court looks to Rule 66 of the Federal Rules of Civil Procedure which provides that “[t]hese rules govern an action in which the appointment of a receiver is sought . . . [b]ut the practice in administering an estate by a receiver . . . must accord with the historical practice in federal courts or with a local rule.” Fed.R.Civ.P. 66.

         Typically, the party seeking a receivership over certain property must “show that he or she has some legally recognized right in that property that amounts to more than a mere claim against [the] defendant.” 12 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and Procedure Civil § 2983 (2d ed. 1997); see also Piambino v. Bailey, 757 F.2d 1112, 1131 n.46 (11th Cir. 1985). The decision to appoint a receiver is an equitable one which rests “in the sound discretion of the court, ” Hutchinson v. Fidelity Investment Ass'n, 106 F.2d 431, 436 (4th Cir. 1939). While the inquiry is not governed by rote application of particular criteria, federal courts consider a number of factors regarding the propriety of establishing a receivership including: (1) “the probability that fraudulent conduct has occurred or will occur;” (2) the validity of the “claim by the party seeking the appointment;” (3) whether there is an “imminent danger that property will be concealed, lost, or diminished in value;” (4) the “inadequacy of [alternative] legal remedies;” (5) the “lack of a less drastic equitable remedy;” and (6) the “likelihood that appointing the receiver will do more good than harm.” Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316-17 (8th Cir. 1993); see also IP Co., LLC v. Cellnet Tech., Inc., No. 1:06-cv-3048, 2008 WL 11337779, at *1 (N.D.Ga. Dec. 18, 2008) (Carnes, J.) (applying similar factors); 12 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and Procedure Civil § 2983 (2d ed. 1997.) (listing “fraudulent conduct on the part of the defendant; the imminent danger of the property being lost . . . or squandered; the inadequacy of the available legal remedies; the probability that harm to [the] plaintiff . . . would be greater than the injury to the parties opposing appointment; and, in more general terms, plaintiff's probable success in the action and the possibility of irreparable injury to [her] interests in the property” as factors to consider in appointing a receiver).

         The creation of a receivership “is an extraordinary remedy that should be employed with the utmost caution, ” Netsphere, Inc. v. Baron, 703 F.3d 296, 305 (5th Cir. 2012) (citation omitted), but “there is no general requirement of a hearing in Rule 66, and the court may approve of the appointment of a receiver without a hearing where the record discloses sufficient facts to warrant it.” Citronelle-Mobile Gathering, Inc. v. Watkins, 934 F.2d 1180, 1189 (11th Cir. 1991).

         II. FACTS

         The Defendants, a collection of limited liability corporations based in Alabama, and seven other states, obtained ten individual loans from Natixis Real Estate Capital, Inc. (Natixis) in April 2007. Doc. 6 at 2-3. The loans were secured by, among other things, mortgages on ten income-producing properties leased by the Defendants to Logan's Roadhouse, a restaurant chain. Id. at 2. The properties were also subject to Deposit Account Agreements, which require the direct submission of rental payments “to a lockbox under the exclusive control of Plaintiff.” Doc. 31 at 9; see also Docs. 6 at 5, 18; 1-20 at 2-5.[1]

         Roughly three months after executing the original loan agreements, the Defendants entered into a Note Splitter and Modification Agreement with Natixis. Doc. 1 at 14. This agreement split the principal amount of each of the original notes in half and divided that amount evenly between two new notes, the “A-1 Note” and the “A-2 Note.” Id. at 14-15. The split notes remained secured by the previously executed loan documents, but the note tiers were combined and transferred into two separate trusts for securitization pursuant to an intercreditor agreement between Natixis and two other entities. Id. at 15-17; Doc. 6 at 6-8. The intercreditor agreement provides that the A-1 noteholder maintains “exclusive custody of and record title under the Mortgages” and generally makes all the decisions necessary to administer and service the loans, but that the split notes are of equal priority and received payments and recoveries are distributed evenly between the A-1 and the A-2 noteholders. Doc. 1 at 16, 18-19. The split notes are cross-defaulted and cross-collateralized effectively functioning as a single lien placed across all the properties as security for both the A-1 and A-2 notes. Id. at 19; Doc. 6 at 9. In other words, a default under any of the split notes or mortgages constitutes a default under all of the split notes and mortgages. Docs. 6 at 9; 1 at 19-20. A failure to satisfy the full amount due under the loan documents on the maturity date constitutes a default. Doc. 1 at 20; see also Doc. 1-1 at 68.

         The day after the loans matured, U.S. Bank sent a letter to each Defendant notifying them that they were in default and demanding immediate payment of all amounts due and owing. Doc. 1 at 20; see also Doc. 1-29 at 2-5. To date, those amounts remain unpaid. Doc. 1 at 21. The loan documents provide that, in the event of a default, U.S. Bank may seek the appointment of a receiver to administer the properties. Id. at 21-22; see also Doc. 1-12 at 9. In light of this provision, U.S. Bank has filed a motion requesting the appointment of a receiver and additional injunctive relief to enable the receiver to function effectively. Docs. 6 at 10-11; 1 at 24-30.

         III. DISCUSSION

         Based on its contention that the loan documents provide an express right to the appointment of a receiver in the event of a default, U.S. Bank argues that it is contractually entitled to a court-appointed receiver. Setting aside whether such an agreement is even enforceable, [2] the court notes that the loan documents do not indicate that the Defendants ever consented to the automatic appointment of a receiver. Rather, the loan documents provide only that U.S. Bank may “apply for the appointment of a receiver . . . without notice and without regard for the adequacy of the security for the Debt.” Doc. 6 at 14; see also Doc. 1-12 at 9. In other words, contrary to U.S. Bank's initial contention in this matter, the relevant contractual language does not reflect the existence of an affirmative right to a receiver as a remedy for default. Thus, the court turns to the equitable principles traditionally governing the receivership remedy.

         “[T]he appointment of a receiver is not automatic . . . [and is a] remedy [that] should be . . . granted only when clearly necessary to protect plaintiff's interests in the property.” Citibank, N.A. v. Nyland (CF8) Ltd., 839 F.2d 93, 97 (2d Cir. 1988). To obtain this relief, U.S. Bank has the burden of demonstrating the necessity of a receiver to preserve its rights in the subject property. See, e.g., Sterling Sav. Bank v. Citadel Dev. Co., 656 F.Supp.2d 1248, 1262 (D. Or.2009). In that respect, the court notes that many of the factors traditionally governing the appointment of a receiver are not in dispute. For example, the Defendants do not contest that they are in default, or that U.S. Bank is virtually certain to prevail on the merits of its breach of contract claim. Doc. 31 at 3, 12. Similarly, there is no question that, as a creditor with a security interest in real property, U.S. Bank “[has] an interest in the property . . . that may provide a basis for convincing the court to appoint a receiver.” Baron, 703 F.3d at 306 (citation omitted).

         On the other hand, U.S. Bank does not allege that fraud has occurred or that it is likely to occur. This factor weighs strongly against the appointment of a receiver as it has a direct bearing on the touchstone of the receivership inquiry- whether the appointment is “clearly necessary to protect plaintiff's interests in the property.” Nyland, 839 F.2d at 97; Gordon v. Washington, 295 U.S. 30, 37 (1935) (noting that the ...


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