53 Stanhope LLC

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
Case No.: 19-23013-rdd
53 STANHOPE LLC, et al.,
Chapter 11
(Jointly Administered)
Debtors.
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MODIFIED BENCH RULING ON CONFIRMATION OF THE DEBTOR'S AMENDED
JOINT CHAPTER 11 PLAN OF REORGANIZATION
APPEARANCES:
BACKENROTH FRANKEL & KRINSKY, LLP, by Mark Frankel, Esq., for
the debtors and debtors in possession
ABRAMS, FENSTERMAN, FENSTERMAN,
EISMAN, FORMATO, FERRARA, WOLF & CARONE, LLP, by Andrea Caruso,
Esq., for the debtors and debtors in possession
KASOWITZ BENSON TORRES LLP, by Jennifer Recine, Esq. and Andrew
Glenn, Esq., for Brooklyn Lender, LLC
NORRIS MCLAUGHLIN, P.A., by Melissa Pena, Esq., for the Israeli
Investors
HON. ROBERT D. DRAIN, United States Bankruptcy Judge
The Court gave a lengthy oral ruling on December 17,
2020 regarding the request of each of the 18 debtors and debtors
in possession herein (the “Debtors”) for confirmation of their
amended joint chapter 11 plan of reorganization [Dkt. 93] (the
“Plan”) and their related objection to a substantial portion of
the proofs of claim filed in each of these cases by their
primary 	secured 	creditor, Brooklyn Lender, LLC (“Brooklyn
Lender”). In requesting 	confirmation of the 	Plan, the Debtors
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also sought a determination that the claims of the “Israeli
Investors” -- which comprise claims filed 	against the Debtors
by (a) what the parties have referred to as the “Israeli
Investor LLCs” and (b) 	individual investors in the Investor
LLCs (the “Individual Israeli Investors”) -- should be
subordinated under section 510(b) of the 	Bankruptcy Code, 11
U.S.C. § 510(b), to the claims of the Debtors’ other creditors
(except to the extent that certain of 	the Debtors’ other
creditors have agreed to 	different treatment under the Plan).
Class 6 of the Plan provides for such treatment. 	My bench
ruling also addressed 	that issue, as well 	as other confirmation
issues raised by the Israeli Investors. 	The 	Israeli
Investors 	and 	the 	Debtors 	previously 	agreed, 	however, 	not
to 	litigate 	at 	this 	time 	the 	merits 	of 	the 	Debtors’
objections 	to 	the 	Israeli 	Investors’ 	claims 	with 	the
exception 	of 	the 	Plan’s 	right 	to 	treat 	those 	claims 	as
subject 	to 	mandatory 	subordination 	under 	section 	510(b)
of 	the 	Bankruptcy 	Code. 	My 	ruling 	therefore 	only
addressed 	the 	merits 	of 	those 	claims 	to 	the 	extent 	they
were 	relevant 	to 	the 	feasibility 	of 	the 	Plan 	under
section 	1129(a)(11) 	of 	the 	Bankruptcy 	Code, 	11 	U.S.C. 	§
1129(a)(11).
It was important for the parties to receive a ruling
promptly, as the Debtors had obtained exit financing for the
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Plan that was time sensitive. 	I informed the parties, though,
that I might review the transcript and file a modified bench
ruling, which of course would not at that point be a transcript,
if the transcript warranted improvement in grammar or clarity
for the benefit of the parties and any appellate court. 	I do so
here; my underlying rulings on the Plan and confirmation-related
issues, including the Debtors’ objections to Brooklyn Lender’s
claims, have not changed, however.
The foregoing issues 	were the subject of an
evidentiary hearing held in July and August 2020, and this
Modified Bench Ruling reflects the Court’s 	assessment of the
witnesses’ testimony and exhibits admitted into 	evidence, as
well as the parties’ post-trial 	briefing.
The Debtors propose to finance their exit from
Chapter 11 with a loan from an entity 	known 	as 	Lightstone
Capital. 	The exit loan proceeds would suffice to pay in full
the claims of Brooklyn 	Lender in the amount 	that the Debtors
contend those claims 	should be allowed, 	roughly 	$35.3 million.
Indeed, after paying allowed administrative expenses and
general unsecured claims that the Plan also provides 	will be
paid in full on 	the Plan’s effective date -- but not the
payment of any cash 	on account of the 	Israeli Investors’
claims, which the Plan 	contemplates 	satisfying, to the extent
allowed, with equity interests in the applicable reorganized
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Debtors -- the exit loan would leave the reorganized Debtors
with approximately a $2 	million 	cushion 	before consideration of
Brooklyn Lender’s claim for attorneys fees and 	expenses 	under
section 506(b) of the Bankruptcy Code, 11 U.S.C. § 506(b).
Section 506(b)’s allowance of claims for attorneys fees and
costs, as well as 	for allowance of postpetition 	interest
notwithstanding the general rule, codified in section 502(b)(2)
of the Bankruptcy Code, 11 U.S.C. § 	502(b), against the
allowance of claims for 	postpetition interest, comes into play
because the Debtors acknowledge that in each of their estates
Brooklyn Lender is oversecured -- that is, 	the value of its
collateral exceeds the 	amount of its claim 	against each Debtor
for unpaid principal 	and prepetition interest. 	Under section
506(b), Brooklyn Lender would have an entitlement, up to the
value of its collateral, not only to the allowance of any
unpaid postpetition interest, but also to reasonable attorneys’
fees and expenses as provided in 	the various loan agreements
that the Debtors entered into with Brooklyn Lender’s assignor
and the Debtors’ original lender, 	Signature 	Bank. 	Even 	with
the 	payment 	of 	reasonable 	attorneys 	fees 	and 	expenses,
however, 	the 	Debtors 	contend 	that 	they 	would 	have 	a 	small
surplus 	left 	over, 	including 	for 	interest 	payments 	under
the 	Lightstone 	Capital 	loan 	after 	a 	lengthy 	interest
payment 	holiday 	thereunder, 	and 	could 	service 	that 	loan
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or 	reduce 	it 	by 	refinancing 	or 	selling 	various 	of 	their
properties 	at 	agreed-to 	release 	prices.
Brooklyn 	Lender 	opposes 	the 	Debtors’ 	objections
to 	its 	claims 	and 	confirmation 	of 	the 	Plan, 	as 	have 	the
Israeli 	Investors.
The 	Plan 	is 	an 	unimpairment 	plan 	under 	section
1124(1) 	of 	the 	Bankruptcy 	Code 	because 	it 	provides 	for
cash 	payment 	in 	full 	of 	the 	allowed 	claims 	against 	each
Debtor’s 	estate 	(except 	where 	a 	claimant 	has 	agreed 	to 	a
lesser 	treatment). 	Section 	1124(1) 	provides 	that 	a 	claim
is 	impaired 	unless 	the 	plan 	“leaves 	unaltered 	the 	legal,
equitable, 	and 	contractual 	rights 	to 	which 	such 	claim 	or
interest 	entitles 	the 	holder 	of 	such 	claim 	or 	interest.”
Section 	1126(f) 	of 	the 	Bankruptcy 	Code, 	11 	U.S.C. 	§
1126(f), 	provides 	that 	classes 	that 	are 	not 	impaired 	by 	a
chapter 	11 	plan 	are 	deemed 	to 	have 	accepted 	it.
If, 	however, 	any 	Debtor 	lacks 	sufficient 	cash 	to
pay 	Brooklyn 	Lender’s 	ultimately 	allowed 	claims 	against
it, 	the 	Plan 	cannot 	be 	confirmed 	with 	respect 	to 	such
Debtor 	because 	Brooklyn 	Lender 	would 	be 	impaired 	and 	its
votes 	in 	that 	Debtor’s 	case 	would 	have 	to 	be 	counted,
and, 	therefore, 	the 	Debtor 	would 	have 	to 	“cram 	down” 	the
Plan 	over 	Brooklyn 	Lender’s 	negative 	vote 	under 	section
1129(b) 	of 	the 	Bankruptcy 	Code, 	11 	U.S.C. 	§ 	1129(b) 	--
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something 	that 	the 	Debtors 	have 	not 	tried 	to 	do 	-- 	or 	the
Plan 	would 	not 	be 	feasible 	as 	to 	such 	Debtor 	under
section 	1129(a)(11) 	of 	the 	Bankruptcy 	Code, 	which 	the
Debtors 	appear 	to 	concede.
Even 	if 	Brooklyn 	Lender’s 	allowed 	claims 	exceed
the 	amount 	of 	cash 	available 	only 	at 	certain 	of 	the
Debtors, 	moreover, 	the 	Plan 	cannot 	be 	confirmed, 	because
the 	Plan 	is 	a 	joint 	plan 	for 	all 	of 	the 	Debtors 	and 	does
not 	provide 	for 	the 	Debtors’ 	substantive 	consolidation.
It 	also 	is 	the 	case 	that 	Lightstone 	Capital’s 	exit
financing 	cannot 	be 	disaggregated 	from 	all 	or
substantially 	all 	of 	the 	Debtors.
If 	the 	Israeli 	Investors’ 	allowed 	claims 	cannot
be 	subordinated 	under 	section 	510(b) 	of 	the 	Bankruptcy
Code 	and 	more 	cash 	is 	required 	to 	pay 	them 	than 	is
provided 	for 	in 	the 	exit 	facility 	combined 	with 	the
Debtors’ 	other 	sources 	of 	cash, 	the 	Plan 	also 	cannot 	be
confirmed 	unless 	amended 	to 	provide 	for 	such 	claims’
impairment 	and 	cram 	down, 	again 	something 	that 	the
Debtors 	have 	not 	sought.
I 	will 	first 	address 	the 	issues 	raised 	with
respect 	to 	Brooklyn 	Lender’s 	claims 	and 	then 	turn 	to 	the
Israeli 	Investors.
Although 	Signature 	Bank 	made 	separate 	mortgage
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loans 	to 	each 	Debtor, 	the 	underlying 	loan 	documents 	are
basically 	in 	the 	same 	form. 	Each 	Debtor 	has 	a
substantially 	similar 	note 	and 	mortgage, 	which 	Signature
Bank 	previously 	assigned 	to 	Brooklyn 	Lender. 	Thus
references 	to 	a 	provision 	in 	a 	loan 	document 	can 	apply 	to
the 	same 	provision 	in 	each 	loan 	document 	unless 	otherwise
noted.
The 	fundamental 	dispute 	between 	the 	Debtors 	and
Brooklyn 	Lender 	is 	over 	the 	amount 	of 	the 	interest
component 	of 	Brooklyn 	Lender’s 	claims, 	both 	with 	respect
to 	claims 	for 	pre-bankruptcy, 	or 	prepetition 	interest 	and
claims 	for 	postpetition, 	or 	pendency 	interest, 	i.e.
interest 	accruing 	after 	the 	bankruptcy 	petition 	date 	and
before 	confirmation 	and 	the 	effective 	date 	of 	the 	Plan.
The 	Debtors 	contend 	that 	both 	pre- 	and 	postpetition
interest 	should 	be 	allowed 	on 	Brooklyn 	Lender’s 	claims 	at
the 	non-default 	contract 	rate, 	which, 	because 	they 	have
consistently 	paid 	that 	interest, 	would 	mean 	that 	any
further 	claims 	by 	Brooklyn 	Lender 	for 	unpaid 	interest
would 	be 	disallowed. 	Brooklyn 	Lender, 	to 	the 	contrary,
contends 	that 	it 	has 	an 	allowed 	claim 	for 	a 	substantial
amount 	of 	unpaid 	default 	rate 	interest, 	accrued 	both 	pre-
and 	postpetition. 	Brooklyn 	Lender’s 	non-default 	rate
varies 	among 	the 	Debtors, 	between 	3.625 	percent 	and 	4.35
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percent, 	whereas 	the 	default 	rate 	under 	the 	loan
documents 	is 	24 	percent. 	Moreover, 	Brooklyn 	Lender 	has
asserted 	certain 	defaults 	against 	each 	Debtor 	that 	the
parties 	agree 	–- 	if 	default 	interest 	is 	enforceable 	--
would 	start 	the 	accrual 	of 	such 	interest 	from 	the 	making
of 	each 	loan. 	The 	monetary 	spread 	between 	the 	parties’
positions 	therefore 	is 	huge; 	indeed, 	Brooklyn 	Lender’s
claims 	including 	its 	claims 	to 	default 	interest 	are 	more
than 	double 	the 	amount 	that 	the 	Debtors 	assert.
The 	Bankruptcy 	Code 	and 	case 	law 	address 	claims
to 	pre- 	and 	postpetition 	interest 	differently. 	One 	looks
to 	applicable 	state 	law 	to 	determine 	the 	allowance 	of 	a
creditor’s 	claim 	for 	prepetition 	interest. 	Key 	Bank
National 	Association 	v. 	Milham 	(In 	re 	Milham), 	141 	F.3d
420, 	423 	(2d 	Cir. 	1998); 	In 	re 	Residential 	Capital 	LLC,
508 	B.R. 	851, 	858 	(Bankr. 	S.D.N.Y. 	2014). 	Under 	New 	York
law, 	which 	governs 	here, 	given 	the 	location 	of 	the
mortgaged 	properties 	and 	the 	parties, 	will 	generally
enforce 	unambiguous 	contract 	provisions 	for 	default
interest 	at 	a 	higher 	rate 	than 	pre-default 	interest, 	even
if 	the 	default 	interest 	is 	at 	a 	high 	rate 	and 	reflects 	a
large 	spread 	against 	non-default 	interest. 	Pereira 	v.
Prompt 	Mortg. 	Providers 	of 	N. 	Am., 	LLC 	(In 	re 	Heavey),
608 	B.R. 	341, 	348-49 	(Bankr. 	E.D.N.Y. 	2019), 	and 	the
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cases 	cited 	therein. 	In 	Heavey, 	as 	here, 	the 	lender’s
default 	rate 	was 	24 	percent, 	but 	the 	court 	nevertheless
allowed 	the 	lender’s 	claim 	for 	it. 	See 	also 	In 	re
Campbell, 	513 	B.R. 	846, 	850 	(Bankr. 	S.D.N.Y. 	2014), 	aff’d
2015 	U.S. 	Dist. 	LEXIS 	129992 	(S.D.N.Y. 	Sept. 	28, 	2015),
also 	allowing 	a 	prepetition 	claim 	for 	24 	percent 	default
interest.
A 	default 	under 	the 	parties’ 	contract 	must 	of
course 	have 	occurred 	for 	the 	default 	rate 	to 	be 	owed. 	In
re 	Northwest 	Airlines 	Corp., 	2007 	Bankr. 	LEXIS 	3919 	at 	*5
(Bankr. 	S.D.N.Y. 	Nov. 	9, 	2007). 	Moreover, 	as 	noted 	in 	In
re 	Heavey, 	608 	B.R. 	at 	349-50, 	and 	the 	cases 	cited
therein, 	New 	York 	law 	recognizes 	certain 	limited
circumstances 	in 	which 	a 	court 	may 	refrain 	from 	enforcing
a 	loan 	contract 	when 	it 	comes 	to 	acceleration 	and 	the
accrual 	of 	default 	rate 	interest. 	The 	Debtors 	have
raised 	such 	a 	defense 	to 	Brooklyn 	Lender’s 	claim 	to
prepetition 	default 	interest, 	as 	well 	as 	contended 	that
at 	least 	some 	of 	the 	defaults 	relied 	on 	by 	Brooklyn
Lender 	were 	not, 	in 	fact, 	defaults 	at 	all.
Postpetition 	interest 	is 	governed 	by 	the
Bankruptcy 	Code 	in 	addition 	to 	applicable 	non-bankruptcy
law. 	First, 	section 	502(b)(2) 	of 	the 	Bankruptcy 	Code
disallows 	claims 	for 	“unmatured 	interest,” 	i.e.
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postpetition 	interest, 	although 	courts 	have 	recognized
exceptions 	to 	that 	rule 	as 	applied 	to 	unsecured 	claims
against 	chapter 	11 	debtors 	based 	on 	various 	theories,
namely 	under 	(x) 	the 	“best 	interests” 	test 	in 	section
1129(a)(7) 	of 	the 	Bankruptcy 	Code, 	because 	under 	the
distribution 	scheme 	in 	a 	case 	under 	chapter 	7 	of 	the
Bankruptcy 	Code 	-- 	which 	Bankruptcy 	Code 	section
1129(a)(7) 	requires 	a 	creditor’s 	treatment 	under 	a
chapter 	11 	plan 	must 	at 	least 	equal 	-- 	creditors 	are
entitled 	to 	payment 	of 	postpetition 	interest 	at 	the
“legal 	rate” 	before 	distributions 	to 	the 	debtor’s
interest 	holders 	(see 	11 	U.S.C. 	§ 	726(a)(5)), 	or 	(y) 	the
“fair 	and 	equitable” 	test 	of 	section 	1129(b) 	of 	the
Bankruptcy 	Code 	in 	a 	cram 	down, 	or 	(z) 	longstanding 	case
law 	(see, 	e.g., 	Vanston 	Protective 	Bondholders 	Committee
v. 	Green, 	329 	U.S. 	156, 	162-65 	(1946); 	Ruskin 	v.
Griffiths, 	269 	F.2d 	827, 	831 	(2d 	Cir. 	1959)), 	holding
that 	before 	any 	return 	to 	interest 	holders, 	creditors
should 	receive 	postpetition 	interest 	at 	a 	rate 	to 	be
determined 	by 	the 	Court 	applying 	equitable 	principles.
In 	addition, 	section 	506(b) 	of 	the 	Bankruptcy
Code 	provides 	that 	“to 	the 	extent 	that 	an 	allowed 	secured
claim 	is 	secured 	by 	property, 	the 	value 	of 	which 	after
any 	recovery 	under 	subsection 	(c) 	of 	this 	section 	[which
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is 	irrelevant 	here] 	is 	greater 	than 	the 	amount 	of 	such
claim, 	there 	shall 	be 	allowed 	to 	the 	holder 	of 	such 	claim
interest 	on 	such 	claim 	and 	any 	reasonable 	fees, 	costs 	or
charges 	provided 	for 	in 	the 	agreement 	or 	state 	statute
under 	which 	such 	claim 	arose.”
It 	is 	well 	established 	that 	section 	506(b) 	does
not 	require 	an 	oversecured 	creditor’s 	postpetition
interest 	to 	be 	paid 	at 	any 	particular 	rate, 	the 	issue
here. 	Under 	section 	506(b)’s 	plain 	meaning, 	the 	rate 	of
postpetition 	interest 	is 	instead 	within 	the 	limited
discretion 	of 	the 	court, 	In 	re 	Milham, 	141 	F.3d 	at 	423,
or, 	as 	stated 	in 	In 	re 	139-41 	Owners 	Corp., 	313 	B.R. 	364,
368 	(S.D.N.Y. 	2004), 	at 	the 	“sole” 	discretion 	of 	the
court, 	which 	thus 	returns 	one 	to 	pre-Bankruptcy 	Code
caselaw 	holding 	that 	“[i]t 	is 	manifest 	that 	the
touchstone 	of 	each 	decision 	on 	allowance 	of 	interest 	in
bankruptcy, 	receivership 	and 	reorganization 	has 	been 	a
balance 	of 	the 	equities 	between 	creditor 	and 	creditor 	or
between 	creditors 	and 	the 	debtor.” 	Vanston 	Bondholders
Protective 	Committee 	v. 	Green, 	329 	U.S. 	at 	162.
There 	is 	a 	presumption, 	however 	-- 	and 	most
cases 	describe 	it 	as 	a 	strong 	presumption 	-- 	that 	the
“contract 	rate” 	will 	apply 	under 	section 	506(b), 	subject
to 	limited 	equitable 	considerations. 	Whether 	that
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presumption 	in 	favor 	of 	the 	contract 	rate 	is 	for 	default
interest 	of 	just 	pre-default 	contract 	interest 	is 	less
clear. 	See 	generally 	In 	re 	Heavey, 	608 	B.R. 	at 	353; 	In
re 	1111 	Myrtle 	Ave. 	Grp., 	LLC, 	598 	B.R. 	729, 	736 	(Bankr.
S.D.N.Y. 	2019); 	In 	re 	General 	Growth 	Props., 	Inc., 	451
B.R. 	323, 	326 	(Bankr. 	S.D.N.Y. 	2011).
As 	noted, 	the 	Plan 	provides 	for 	unimpairment 	of
Brooklyn 	Lender’s 	claims 	under 	section 	1124(1) 	of 	the
Bankruptcy 	Code. 	That 	section 	has 	been 	interpreted,
including 	specifically 	by 	the 	Fifth 	Circuit 	on 	the 	issue
of 	the 	allowance 	of 	a 	claim 	for 	postpetition 	interest, 	to
be 	subject 	to 	the 	requirements 	of 	the 	Bankruptcy 	Code 	as
they 	pertain 	to 	claim 	allowance. 	Namely, 	although
section 	1124(1) 	states 	that 	a 	claim 	is 	impaired 	unless
the 	plan 	leaves 	unaltered 	the 	legal, 	equitable, 	and
contractual 	rights 	to 	which 	such 	claim 	or 	interest
entitles 	the 	holder 	of 	such 	claim 	or 	interest, 	Congress
contemplated 	that 	those 	rights 	include 	the 	Bankruptcy
Code’s 	own 	limitations 	on 	claim 	allowance, 	including
limitations 	on 	the 	allowance 	of 	postpetition 	interest.
See 	Keystone 	Gas 	Gathering 	L.L.C. 	v. 	Ad 	Hoc 	Comm. 	(In 	re
Ultra 	Petroleum 	Corp.), 	943 	F.3d 	758, 	763-65 	(5th 	Cir.
2019), 	and 	the 	cases 	cited 	therein, 	including 	Solow 	v.
PPI 	Ents. 	(US) 	(In 	re 	PPI 	Enters.(US)), 	324 	F.3d 	197,
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201-02 	(3d 	Cir. 	2003).
Having 	written 	legislative 	history 	to 	the
amendment 	to 	section 	1124, 	H.R. 	Rep. 	103-835 	at 	47-48
(1994), 	that 	was 	intended 	to 	supersede 	a 	case 	that 	had
provided 	for 	unimpairment 	of 	the 	claim 	of 	an 	unsecured
creditor 	of 	a 	solvent 	debtor 	without 	paying 	postpetition
interest 	to 	that 	claimant 	(In 	re 	New 	Valley 	Corp., 	168
B.R. 	73 	(Bankr. 	D. 	N.J. 	1994), 	I 	was 	at 	first 	surprised
by 	Ultra 	Petroleum’s 	holding, 	but, 	having 	considered 	its
discussion 	of 	the 	legislative 	history 	generally 	and 	the
operation 	of 	the 	statute, 	I 	agree 	with 	it. 	I 	therefore
conclude 	that 	unimpairment 	under 	section 	1124(1) 	does 	not
eliminate 	the 	factors 	that 	courts 	consider 	when 	they
decide 	whether 	to 	apply 	a 	contract 	interest 	rate 	under
section 	506(b) 	and, 	more 	specifically, 	the 	consideration
of 	those 	factors 	when 	deciding 	whether 	to 	employ 	a
default 	rate 	as 	opposed 	to 	a 	non-default 	contract 	rate.
Those 	factors 	are 	now 	fairly 	well 	established,
and 	it 	also 	is 	generally 	recognized 	that, 	given 	the
importance 	of 	predictability 	with 	respect 	to 	the
treatment 	of 	secured 	loans 	in 	bankruptcy, 	they 	should 	be
applied 	“sparingly” 	to 	diverge 	from 	the 	contract 	rate.
See 	In 	re 	Residential 	Capital, 	508 	B.R. 	at 	857. 	In
addition 	to 	the 	state 	law 	factors 	limiting 	acceleration
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and 	the 	enforcement 	of 	pre-bankruptcy 	default 	interest,
which 	apply 	to 	postpetition 	interest, 	as 	well, 	courts
consider 	the 	following 	under 	section 	506(b): 	the
solvency 	of 	the 	debtor’s 	estate; 	whether 	the 	contract
rate 	is 	considered 	a 	penalty; 	if 	there 	has 	been
misconduct 	by 	the 	creditor; 	if 	allowing 	the 	creditor’s
claim 	to 	postpetition 	interest 	at 	the 	contract 	rate 	would
harm 	other 	creditors; 	and, 	lastly, 	the 	adverse 	effect
that 	allowing 	such 	interest 	would 	have 	on 	the 	debtor’s
fresh 	start. 	In 	re 	Heavey, 	608 	B.R. 	at 	352; 	In 	re 	1111
Myrtle 	Ave. 	Grp., 	598 	B.R. 	at 	736, 	and 	the 	cases 	cited
therein.
None 	of 	these 	factors 	is 	dispositive; 	allowance
is 	decided 	on 	a 	case-by-case 	basis. 	It 	is 	fair 	to 	say,
however, 	that 	if 	the 	debtor 	is 	solvent 	and 	unsecured
creditors 	will 	be 	paid 	in 	full 	even 	if 	the 	higher
contract 	rate 	is 	allowed, 	courts 	will 	allow 	the 	claim 	at
the 	default 	rate 	under 	section 	506(b). 	See, 	e.g., 	In 	re
1111 	Myrtle 	Ave. 	Grp., 	598 	B.R. 	at 	738, 	741 	(confirmed
plan, 	solvent 	debtor, 	unsecured 	creditors 	paid 	in 	full);
In 	re 	General 	Growth 	Props., 	451 	B.R. 	at 	330, 	331 	(plan
confirmed 	and 	effective, 	unsecured 	creditors 	paid 	in
full, 	debtor 	was 	highly 	solvent). 	In 	such 	cases, 	the
debtor’s 	“fresh 	start” 	also 	was 	not 	jeopardized 	by
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allowance 	at 	the 	higher 	default 	rate. 	See 	also 	Urban
Communicators 	PCS 	Ltd. 	P’ship 	v. 	Gabriel 	Capital, 	L.P.,
394 	B.R. 	325, 	338 	(S.D.N.Y. 	2008) 	(solvent 	debtor;
debtor’s 	“fresh 	start” 	not 	implicated 	because 	debtor 	was
liquidating). 	Thus, 	the 	only 	issue 	was 	the 	allocation 	of
value 	between 	the 	secured 	creditor 	on 	the 	one 	hand 	and
the 	debtor’s 	interest 	holders 	on 	the 	other, 	which 	Ruskin
v. 	Griffiths 	long 	ago 	determined 	requires 	payment 	of 	the
secured 	creditor 	at 	the 	higher 	default 	rate 	on 	equitable
grounds. 	229 	F.2d 	at 	831-32. 	See 	also 	Official 	Comm. 	of
Unsecured 	Creditors 	v. 	Dow 	Chem. 	Corp. 	(In 	re 	Dow 	Corning
Corp.), 	456 	F.3d 	668, 	680 	(6th 	Cir. 	2006), 	cert. 	denied,
127 	S. 	Ct. 	1874 	(2007).
As 	for 	whether 	the 	default 	rate 	would 	be
considered 	a 	“penalty,” 	a 	significant 	spread 	between 	non-
default 	and 	default 	interest 	has 	not 	been 	construed 	by
several 	courts 	as 	a 	penalty 	justifying 	disallowance 	under
section 	506(b), 	just 	as 	it 	generally 	has 	not 	under
applicable 	New 	York 	law. 	See 	In 	re 	Heavey, 	608 	B.R. 	at
354, 	and 	the 	cases 	cited 	therein, 	where 	a 	spread 	of, 	in
those 	cases, 	18.625 	percent, 	12 	percent, 	and 	8.8 	percent
between 	default 	and 	non-default 	rates 	was 	not 	viewed 	as 	a
penalty 	for 	purposes 	of 	section 	506(b). 	See 	also 	In 	re
Urban 	Communicators 	PCS 	Ltd. 	P’ship. 	v. 	Gabriel 	Capital,
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394 	B.R. 	at 	341-42, 	in 	which 	the 	court 	noted 	that 	a 	24
percent 	default 	rate 	was 	enforceable 	under 	New 	York 	law
and 	thus 	also 	should 	have 	been 	allowed 	against 	a 	solvent
liquidating 	debtor 	for 	purposes 	of 	section 	506(b).
On 	the 	other 	hand, 	other 	decisions 	have 	been
less 	tolerant 	of 	a 	significant 	spread 	between 	non-default
and 	default 	interest. 	See 	Southland 	Corp 	v. 	Toronto-
Dominion 	(In 	re 	Southland 	Corp.), 	160 	F.3d 	1054, 	1060
(5th 	Cir. 	1998) 	(affirming 	allowance 	of 	default 	interest
under 	section 	506(b) 	based 	on 	trial 	court’s 	findings 	that
other, 	junior 	creditors 	would 	remain 	“unscathed” 	by 	the
bankruptcy 	and 	“[t]he 	2% 	spread 	between 	default 	and 	pre-
default 	interest 	rates 	is 	relatively 	small”); 	see 	also 	In
re 	La 	Guardia 	Assocs., 	L.P., 	2006 	Bankr. 	LEXIS 	4735, 	at
*113-15 	(Bankr. 	E.D. 	Pa. 	Sept. 	13, 	2006) 	(default
interest 	that 	was 	33 	percent 	higher 	than 	non-default 	rate
supports 	allowance 	at 	non-default 	rate); 	In 	re 	Manuel
Mediavilla, 	Inc., 	2016 	Bankr. 	LEXIS 	3469, 	at 	*6-9 	(Bankr.
D. 	P.R. 	Sept. 	23, 	20160 	(postpetition 	interest 	allowed 	at
5% 	non-default 	rate 	instead 	of 	8% 	default 	rate, 	which 	was
viewed 	as 	“a 	coercive 	penalty 	that 	affects 	Debtors’
possibilities 	of 	reorganization”), 	rev’d 	on 	other
grounds, 	PRLP 	2011 	Hldgs., 	LLC 	v. 	Manuel 	Mediavilla,
Inc., 	568 	B.R. 	551 	(B.A.P. 	1st 	Cir. 	2017). 	La 	Guardia
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and 	Manuel 	Mediavilla 	each 	reasoned 	that 	because 	the
creditor 	bought 	the 	loan 	knowing 	it 	was 	in 	default 	and
would 	have 	priced 	the 	default 	risk 	in 	the 	loan 	purchase
agreement, 	allowing 	default 	interest 	would 	be
inequitable. 	2006 	Bankr. 	LEXIS 	3469, 	at 	*113-15; 	2016
Bankr. 	LEXIS 	4735, 	at 	*8. 	See 	also 	In 	re 	Family 	Pharm.,
Inc., 	605 	B.R. 	900, 	912 	(Bankr. 	W.D. 	Mo. 	2019); 	In 	re
Vest 	Assocs., 	217 	B.R. 	696, 	703-04 	(Bankr. 	S.D.N.Y.
1998); 	Fischer 	Enters. 	v. 	Geremia 	(In 	re 	Kalian), 	178
B.R. 	308, 	314-17 	(Bankr. 	D. 	R.I. 	1995).
Although 	the 	spread 	here 	between 	non-default 	and
default 	interest 	is 	significant, 	I 	would 	not 	view 	the
parties’ 	default 	rate, 	standing 	on 	its 	own, 	as 	an
unenforceable 	penalty 	for 	purposes 	of 	section 	506(b),
largely 	for 	the 	reasons 	articulated 	in 	In 	re 	Route 	One
West 	Windsor 	Ltd. 	P’Ship., 	225 	B.R. 	76, 	87-90 	(Bankr. 	D.
N.J. 	1998). 	I 	do 	not 	accept 	some 	courts’ 	logic 	of
finding 	a 	penalty 	based 	on 	an 	analysis 	of 	what 	would 	be 	a
“reasonable 	profit” 	for 	a 	defaulted 	loan. 	To 	do 	so 	would
unduly 	curtail 	the 	ability 	to 	sell 	defaulted 	loans, 	which
might 	cause 	lenders 	to 	overprice 	pre-default 	interest 	and
lead 	courts 	to 	reduce 	claims 	based 	on 	what 	the 	claimant
paid 	for 	the 	loan, 	a 	proposition 	disavowed 	as 	early 	as
Hamilton’s 	First 	Report 	on 	the 	Public 	Credit.
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Here, 	each 	of 	the 	Debtors 	is 	solvent, 	at 	least
based 	on 	the 	Debtors’ 	claims 	calculations. 	On 	the 	other
hand, 	if 	Brooklyn 	Lender’s 	claims 	are 	allowed 	in 	full,
most, 	if 	not 	all, 	of 	the 	Debtors 	will 	become 	insolvent,
the 	Debtors 	will 	be 	unable 	to 	confirm 	the 	Plan 	and, 	more
importantly, 	unless 	they 	find 	additional, 	materially
greater 	financing, 	which 	appears 	unlikely, 	most, 	if 	not
all, 	of 	the 	Debtors 	would 	either 	have 	the 	automatic 	stay
lifted 	as 	to 	their 	underlying 	properties 	or 	liquidate
either 	in 	Chapter 	11 	or 	in 	converted 	cases 	under 	Chapter
7 	of 	the 	Bankruptcy 	Code. 	If 	Brooklyn 	Lender’s 	claimed
default 	interest 	were 	allowed 	in 	full, 	therefore, 	it
appears 	that 	some, 	if 	not 	all, 	of 	the 	Debtors 	would 	not
receive 	a 	fresh 	start. 	In 	addition, 	based 	on 	the 	evidence
before 	me 	in 	connection 	with 	the 	best 	interest 	analysis
of 	the 	Plan 	under 	section 	1129(a)(7) 	of 	the 	Bankruptcy
Code, 	unsecured 	creditors 	of 	most, 	if 	not 	all, 	of 	the
Debtors 	would 	not 	be 	paid 	in 	full. 	Such 	considerations
applied 	in 	both 	La 	Guardia 	and 	Manuel 	Mediavilla, 	and
indeed 	had 	a 	greater 	influence 	on 	those 	courts’ 	decisions
to 	allow 	postpetition 	interest 	at 	the 	non-default 	rate
than 	their 	analyses 	of 	the 	default 	rate 	as 	a 	“penalty.”
2006 	Bankr. 	LEXIS 	4735, 	at 	*115; 	2016 	Bankr. 	LEXIS 	3469,
at 	*8-9. 	See 	also 	In 	re 	Family 	Pharm., 	Inc. 	605 	B.R. 	at
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913, 	and 	In 	re 	Vest 	Assocs., 	217 	B.R. 	at 	703-04 	(each
considering 	effect 	of 	default 	interest 	on 	other
creditors). 	Few, 	if 	any, 	reported 	decisions 	have
confronted 	such 	a 	mix 	of 	factors 	arguing 	both 	in 	favor 	of
and 	against 	the 	allowance 	of 	default 	interest 	as 	exist
here.
The 	final 	factor 	when 	deciding 	whether 	to 	allow
postpetition 	interest 	under 	section 	506(b) 	of 	the
Bankruptcy 	Code 	at 	less 	than 	the 	default 	rate 	is 	creditor
misconduct, 	over 	which 	the 	Debtors 	and 	Brooklyn 	Lender
are 	in 	major 	disagreement.
It 	is 	worth 	noting 	at 	the 	outset 	that 	“lender
misconduct” 	has 	been 	held 	not 	to 	include 	merely 	acquiring
a 	loan 	with 	the 	intention 	of 	enforcing 	a 	default
thereunder, 	which 	clearly 	was 	Brooklyn 	Lender’s 	strategy
here. 	See 	Downtown 	Ath. 	Club 	of 	N.Y. 	City 	v. 	Caspi 	Dev.
Corp. 	(In 	re 	Downtown 	Ath. 	Club 	of 	N.Y. 	City), 	1998
Bankr. 	LEXIS 	1642, 	at 	*25-26, 	31-33, 	34-35 	(Bankr.
S.D.N.Y. 	Dec. 	21, 	1998). 	See 	also 	In 	re 	139-141 	Owners
Corp., 	313 	B.R. 	at 	369. 	It 	is 	also 	worth 	noting 	that 	the
Debtors 	have 	not 	asserted 	the 	affirmative 	defense 	of
champerty 	under 	N.Y. 	Judiciary 	Law 	§ 	489 	(McKinney 	2020),
perhaps 	because 	of 	the 	safe 	harbor 	contained 	in 	N.Y.
Judiciary 	Law 	§ 	489(2). 	Justinian 	Capital 	SPC 	v. 	WestLB
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AG, 	N.Y. 	Branch, 	28 	N.Y.3d 	160, 	167-70 	(2016); 	Phoenix
Light 	SF 	Ltd. 	v. 	United 	States 	Bank 	NA, 	2020 	U.S. 	Dist.
LEXIS 	46950, 	at 	*31-33 	(S.D.N.Y. 	March 	8, 	2020).
Instead, 	the 	Debtors 	contend 	that 	Brooklyn
Lender 	asserted 	several 	types 	of 	default 	that 	either 	were
not 	in 	fact 	defaults 	or 	would 	not 	justify 	acceleration 	or
be 	enforceable 	under 	applicable 	non-bankruptcy 	law. 	The
Debtors 	further 	allege 	that 	because 	of 	these 	wrongfully
asserted 	defaults, 	and 	Brooklyn 	Lender’s 	continued
pursuit 	of 	default 	interest 	tied 	to 	them, 	Brooklyn 	Lender
unduly 	delayed 	the 	Debtors’ 	exit 	from 	Chapter 	11, 	which
is 	recognized 	as 	“lender 	misconduct” 	for 	purposes 	of
section 	506(b). 	See, 	e.g., 	In 	re 	Nixon, 	404 	Fed. 	App’x
575, 	579 	(3d 	Cir. 	2010).
The 	allegedly 	wrongfully 	asserted 	defaults 	are
as 	follows. 	First, 	in 	May 	2017, 	Brooklyn 	Lender 	called 	a
default 	based 	on 	section 	18(g) 	of 	the 	loan 	agreements
against 	several 	of 	the 	Debtors 	on 	the 	ground 	that 	either
the 	borrower 	or 	its 	principal, 	Mr. 	Strulovitch 	provided 	a
misleading 	certificate 	or 	other 	written 	misinformation
regarding 	the 	borrower’s 	ownership 	as 	part 	of 	the 	loan
application 	or 	the 	making 	of 	the 	loans. 	In 	addition,
Brooklyn 	Lender 	contends 	that 	several 	of 	the 	Debtors 	have
violated 	the 	same 	section 	based 	on 	Mr. 	Strulovitch’s
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submission 	in 	connection 	with 	loan 	applications 	of 	a
personal 	financial 	statement 	that 	grossly 	overstated 	his
net 	worth. 	As 	noted, 	the 	parties 	agree 	that 	if 	Brooklyn
Lender 	is 	correct, 	default 	interest 	would 	run 	from 	the
commencement 	of 	each 	loan 	because 	such 	misrepresentations
would 	give 	rise 	to 	a 	default 	at 	that 	time. 	The 	Debtors
contend, 	however, 	that 	none 	of 	these 	defaults 	would 	be
enforceable 	under 	New 	York 	law.
In 	addition, 	Brooklyn 	Lender 	has 	alleged 	that
two 	of 	the 	Debtors, 	618 	Lafayette 	LLC 	and 	Eighteen 	Homes
LLC, 	breached 	sections 	9 	and 	18(q) 	of 	their 	loan
agreements 	by 	permitting 	encumbrances 	on 	their 	respective
property 	securing 	the 	loans, 	the 	encumbrance 	on 	618
Lafayette 	LLC’s 	property 	being 	a 	mortgage 	to 	a 	Mr.
Schwimmer 	and 	the 	encumbrance 	on 	18 	Homes 	LLC’s 	property
being 	a 	restriction 	in 	favor 	of 	a 	Mr. 	Greenfeld 	on 	its
sale 	or 	other 	transfer, 	each 	of 	which 	was 	publicly 	filed
with 	the 	county 	clerk. 	The 	Debtors 	contend 	that 	because
Messrs. 	Schwimmer 	and 	Greenfeld 	have 	disavowed 	the
encumbrances 	as 	“mistakes” 	and 	have 	removed 	them 	from 	the
land 	records, 	the 	defaults 	are 	not 	enforceable.
The 	Debtors 	also 	contend 	that 	although 	Brooklyn
Lender 	has 	accurately 	alleged 	defaults 	under 	section
18(o) 	of 	the 	loan 	agreements 	based 	upon 	uncured 	New 	York
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City 	Building 	Code 	violations 	on 	many, 	if 	not 	all, 	of 	the
Debtors’ 	properties, 	such 	defaults 	would 	not 	support
acceleration 	and 	the 	enforcement 	of 	default 	interest
under 	New 	York 	law.
Each 	loan 	agreement 	has 	a 	stated 	maturity 	date
and 	provides 	in 	section 	36 	that 	until 	paid 	following
maturity, 	default 	interest 	will 	accrue 	on 	the 	unpaid
balance. 	Certain 	of 	the 	loans 	-- 	to 	D&W 	Real 	Estate
Spring 	LLC, 	1125-1133 	Greene 	Ave. 	LLC, 	325 	Franklin 	LLC,
1213 	Jefferson 	LLC, 	APC 	Holding 	1 	LLC, 	and 	92 	South 	4 t h
St. 	LLC 	-- 	have 	in 	fact 	matured, 	in 	each 	case
postpetition. 	The 	Debtors 	contend, 	however, 	that
Brooklyn 	Lender 	delayed 	payment 	of 	the 	loans 	on 	maturity
by 	its 	misconduct 	in 	wrongfully 	asserting 	and 	prosecuting
the 	other 	defaults, 	and, 	therefore, 	that 	the 	roughly
$3.66 	million 	of 	post-default 	interest 	accruing 	on 	the
matured 	balances 	should 	not 	be 	allowed 	under 	section
506(b).
Finally, 	the 	Debtors 	contend 	that 	without 	other
valid 	defaults 	it 	would 	be 	inequitable 	under 	section
506(b) 	to 	allow 	Brooklyn 	Lenders’ 	claim 	for 	postpetition
default 	interest 	merely 	because 	the 	Debtors 	filed 	their
bankruptcy 	cases, 	which 	is 	listed 	as 	a 	default 	under
section 	18(i) 	of 	the 	loan 	agreements.
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I 	will 	address 	each 	of 	these 	asserted 	defaults
as 	to 	whether 	they 	actually 	exist, 	where 	that 	has 	been
challenged 	by 	the 	Debtors, 	and 	then 	as 	to 	whether 	they
are 	enforceable 	under 	New 	York 	law 	and, 	as 	to
postpetition 	interest, 	whether 	Brooklyn 	Lender 	is 	not
entitled 	to 	postpetition 	interest 	under 	section 	506(b) 	of
the 	Bankruptcy 	Code 	even 	if 	it 	is 	entitled 	to 	it 	under
New 	York 	law
Let 	me 	begin 	with 	the 	defaults 	alleged 	to 	have
occurred 	based 	on 	the 	mere 	commencement 	of 	the 	Debtors’
bankruptcy 	cases.
Each 	Debtor 	has 	indisputably 	remained 	current 	on
regularly 	scheduled 	non-default 	interest 	payments 	on 	the
outstanding 	principal 	amount 	of 	each 	loan, 	before 	any
acceleration 	or 	the 	loan’s 	maturity. 	When 	the 	only
default 	was 	the 	bankruptcy 	filing 	itself, 	courts 	have
properly 	held, 	that 	post-default 	interests 	should 	not 	be
allowed 	under 	section 	506(b). 	In 	re 	Residential 	Capital,
508 	B.R. 	at 	862; 	see 	also 	In 	re 	Bownetree, 	LLC, 	2009
Bankr. 	LEXIS 	2295, 	at 	*11-14 	(Bankr. 	E.D.N.Y. 	July 	24,
2009); 	In 	re 	Northwest 	Airlines 	Corp., 	2007 	Bankr. 	LEXIS
3919 	at 	*16-18.
I 	disagree 	with 	Bownetree’s 	rationale 	that
allowance 	at 	the 	default 	rate 	under 	such 	circumstances
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would 	be 	tantamount 	to 	enforcing 	an 	ipso 	facto 	provision
prohibited 	by 	section 	365(e)(1) 	of 	the 	Bankruptcy 	Code,
2009 	Bankr. 	LEXIS, 	at 	*8-9; 	section 	365(e)(2)(B) 	excepts
loan 	contracts 	from 	that 	provision. 	11 	U.S.C. 	§ 	365(e).
Rather, 	as 	Judge 	Glenn 	found 	in 	Residential 	Capital,
there 	is 	no 	basis 	to 	allow 	a 	claim 	for 	postpetition
default 	interest 	if 	there 	is 	no 	doubt 	that 	the 	lender
will 	be 	paid 	in 	full 	and, 	in 	fact, 	the 	lender 	has 	been
paid 	currently 	under 	its 	agreement. 	In 	Northwest
Airlines, 	Judge 	Gropper 	concluded 	that 	to 	the 	extent
there 	was 	a 	default 	other 	than 	the 	bankruptcy 	filing, 	it
was 	not 	a 	meaningful 	default 	and 	therefore 	allowance 	of
default 	interest 	was 	not 	required, 	2007 	Bankr. 	LEXIS
3919, 	at 	*16-18; 	thus, 	the 	case’s 	fundamental 	principle
is 	similar 	to 	the 	holding 	in 	Residential 	Capital, 	namely
that 	a 	mere 	bankruptcy 	default 	should 	not 	trigger 	default
interest 	if 	it 	is 	clear 	that 	the 	debtor 	will 	be 	paying
the 	non-default 	rate 	currently 	and 	ultimately 	will
satisfy 	the 	claim 	under 	its 	chapter 	11 	plan. 	See 	also 	In
re 	Vest 	Assocs., 	217 	B.R. 	at 	704. 	Analysis 	to 	the
contrary 	in 	In 	re 	1111 	Myrtle 	Ave. 	Grp., 	598 	B.R. 	at 	738-
39, 	is 	concededly 	dicta 	given 	the 	court’s 	finding 	that
the 	debtor 	had 	defaulted 	under 	a 	separate 	provision 	of
the 	loan 	agreement 	in 	addition 	to 	the 	bankruptcy 	default.
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Id. 	at 	740. 	Thus, 	if 	the 	only 	default 	here 	was 	a
Debtor’s 	filing 	for 	relief 	under 	the 	Bankruptcy 	Code,
Brooklyn 	Lender’s 	claim 	for 	postpetition 	default 	interest
would 	be 	disallowed.
Turning 	to 	the 	other 	asserted 	defaults 	New 	York
law, 	as 	noted, 	places 	certain 	limitations 	on 	the 	ability
of 	a 	creditor 	with 	a 	mortgage 	on 	real 	property 	to
enforce, 	including 	by 	acceleration, 	certain 	types 	of
defaults. 	New 	York 	law 	generally 	categorizes 	loan
defaults 	either 	as 	(a) 	payment, 	or 	monetary 	defaults,
i.e. 	the 	failure 	to 	pay 	principal 	or 	interest 	when 	due,
or 	(b) 	non-monetary 	defaults, 	basically 	every 	other 	type
of 	default. 	Absent 	truly 	extraordinary 	circumstances
such 	as 	lender 	misconduct 	or 	a 	de 	minimis 	delay 	in 	making
a 	payment, 	New 	York 	law 	will 	not 	limit 	a 	lender’s 	right
to 	accelerate 	and 	enforce 	a 	loan 	based 	on 	its 	borrower’s
monetary 	default. 	See, 	e.g., 	CIT 	Small 	Bus. 	Lending
Corp. 	v. 	Crossways 	Holding, 	LLC, 	2014 	N.Y. 	Misc. 	LEXIS
4175, 	at 	*6-7 	(Sup. 	Ct. 	N.Y. 	Cty. 	Aug. 	29, 	2014); 	1
Bergman 	on 	New 	York 	Mortgage 	Foreclosures, 	§ 	5.06 	(2020).
New 	York 	has 	long 	recognized 	broader 	equitable
exceptions 	to 	enforcing 	the 	parties’ 	contract 	with
respect 	to 	acceleration 	and 	non-monetary 	defaults,
however. 	Generally, 	courts 	look 	to 	three 	factors: 	has
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the 	lender 	suffered 	actual 	damages 	as 	a 	result 	of 	the
default; 	has 	the 	default 	impaired 	the 	lender’s 	security,
that 	is, 	the 	collateral 	securing 	the 	debt; 	and 	does 	the
default 	make 	the 	future 	payment 	of 	principal 	and 	interest
less 	likely? 	Courts 	also 	consider 	whether 	the 	default
was 	inadvertent 	or 	insignificant, 	although 	in 	analyzing
whether 	the 	default 	was 	insignificant 	or, 	to 	the
contrary, 	material, 	they 	usually 	apply 	the 	foregoing
three 	factors. 	See 	the 	leading 	case 	of 	Karas 	v.
Wasserman, 	91 	A.D.2d 	812, 	812-13 	(3d 	Dep’t. 	1982), 	as
well 	as 	such 	decisions 	as 	Empire 	State 	Bldg. 	Assocs. 	v.
Trump 	Empire 	State 	Partners, 	245 	A.D.2d 	225, 	226-28 	(1st
Dep’t. 	1997); 	Tunnell 	Pub. 	Co. 	v. 	Strauss 	Commun., 	Inc.,
169 	A.D.2d 	1031, 	1032 	(3d 	Dep’t. 	1991); 	Blomgren 	v.
Tinton 	763 	Corp., 	18 	A.D.2d 	979, 	979-80 	(1st 	Dep’t.
1963); 	100 	Eighth 	Avenue 	Corp. 	v. 	Morgenstern, 	4 	A.D.2d
754 	(2d 	Dep’t. 	1957); 	and 	Rockaway 	Park 	Series 	Corp. 	v.
Hollis 	Automotive 	Corp., 	206 	Misc. 	955, 	957-58 	(Sup. 	Ct.
N.Y. 	Cty. 	1954). 	See 	also 	Michael 	Giusto, 	“Note: 	Mortgage
Foreclosure 	for 	Secondary 	Breaches: 	A 	Practitioner’s
Guide 	to 	Defining 	‘Security 	Impairment,’” 	26 	Cardozo 	L.
Rev. 	2563 	(May 	2005), 	which 	discusses 	not 	only 	this
general 	rule, 	but 	also 	how 	courts 	determine 	whether 	a
default 	actually 	impairs 	a 	lender’s 	security 	or 	makes
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future 	payment 	less 	likely 	or 	causes 	the 	lender 	actual
harm.
Having 	evaluated 	each 	of 	the 	remaining 	defaults
alleged 	by 	Brooklyn 	Lender 	in 	the 	light 	of 	that 	case 	law
and 	the 	testimony 	and 	other 	evidence 	before 	me, 	it 	is
clear 	that 	certain 	defaults 	called 	by 	Brooklyn 	Lender
should 	not 	be 	enforced 	while 	others 	should 	be.
That 	testimony 	was 	by 	the 	following 	people: 	the
Debtors’ 	principal, 	Mr. 	Chaskiel 	Strulovitch; 	the
Debtors’ 	manager, 	Mr. 	Goldwasser, 	primarily 	as 	to 	the
Plan’s 	feasibility; 	Mr. 	Kohn, 	with 	respect 	to 	how 	the
Debtors 	have 	addressed 	New 	York 	City 	Building 	Code
violations; 	Mr. 	Moses 	Strulovitch, 	Mr. 	Wagschal, 	and 	Mr.
Hutman, 	whose 	testimony 	in 	addition 	to 	that 	of 	Mr.
Chaskiel 	Strulovitch, 	was 	relevant 	to 	the 	alleged 	failure
to 	accurately 	disclose 	the 	ownership 	interests 	in 	certain
Debtors 	in 	connection 	with 	the 	loan 	applications; 	Mr.
Halpern 	and 	Mr. 	Schonberg, 	with 	regard 	to 	the 	nature 	of
the 	ownership 	interests 	and 	claims 	asserted 	by 	the
Israeli 	Investors; 	Mr. 	Aviram, 	the 	representative 	of
Brooklyn 	Lender, 	with 	regard 	to 	the 	actions 	it 	took 	with
respect 	to 	the 	alleged 	defaults; 	Brooklyn 	Lender’s 	two
experts, 	Ms. 	Stewart 	and 	Mr. 	Madison, 	who 	opined 	on 	the
context 	of 	lenders’ 	evaluation 	of 	defaults, 	including
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non-monetary 	defaults, 	and 	the 	importance 	of 	enforcing
defaults; 	and, 	finally, 	Mr. 	Stagnari, 	the 	loan 	officer 	at
Signature 	Bank 	responsible 	for 	administering 	the 	Debtors’
loans 	before 	Brooklyn 	Lender 	purchased 	them 	at 	face,
although 	he 	was 	not 	the 	loan 	officer 	when 	the 	loans 	were
originated.
The 	foregoing 	New 	York 	law 	applies 	most 	clearly
to 	block 	the 	acceleration 	and 	enforcement 	of 	default
interest 	based 	on 	various 	New 	York 	City 	Building 	Code
violation 	defaults. 	Mr. 	Stagnari’s 	testimony 	on 	this
issue 	was 	most 	telling. 	At 	all 	times, 	not 	just 	on 	this
issue, 	Mr. 	Stagnari 	was 	not 	only 	unbiased, 	but 	also 	a
very 	knowledgeable 	witness, 	his 	testimony 	reflecting
considerable 	experience 	with 	loans 	of 	this 	type. 	He
testified 	that 	he 	is 	in 	charge 	a 	large 	portfolio 	of
commercial 	real 	estate 	loans 	at 	Signature 	Bank 	-- 	both 	in
terms 	of 	the 	number 	of 	loans 	under 	his 	supervision 	and
their 	dollar 	amount 	-- 	having 	worked 	his 	way 	up 	the 	chain
of 	loan 	officer 	responsibility. 	He 	consistently 	appeared
well 	informed 	and 	experienced 	regarding 	lending 	practices
from 	the 	creditor’s 	perspective 	with 	respect 	to
commercial 	real 	estate 	loans 	like 	these 	in 	the 	New 	York
area.
Brooklyn 	Lender’s 	two 	expert 	witnesses, 	on 	the
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other 	hand, 	provided 	little 	to 	no 	meaningful 	testimony 	on
any 	of 	the 	default-related 	issues. 	Ms. 	Stewart 	proffered
almost 	literally 	no 	testimony 	that 	was 	relevant 	to
commercial 	real 	estate 	loans 	secured 	by 	rental 	properties
in 	New 	York 	City. 	Her 	experience, 	albeit 	lengthy 	and 	of
a 	responsible 	nature 	over 	a 	long 	career, 	has 	been 	with
consumer 	loans 	on 	the 	consumer’s 	own 	residential
property, 	although 	sometimes 	property 	that 	had 	more 	than
one 	or 	two 	units 	within 	it. 	It 	is 	clear 	from 	her 	own
testimony 	that 	considerations 	about 	non-monetary 	defaults
and 	a 	borrower’s 	moral 	character 	in 	that 	context 	are
materially 	if 	not 	entirely 	different 	than 	when 	addressing
the 	commercial 	real 	estate 	loans 	at 	issue 	here. 	I
therefore 	gave 	far 	more 	weight 	to 	Mr. 	Stagnari’s
testimony 	than 	Ms. 	Stewart’s 	as 	to 	what 	a 	reasonable
lender 	would 	do 	with 	respect 	to 	the 	non-monetary 	defaults
asserted 	here.
For 	his 	part, 	Mr. 	Madison’s 	testimony 	did 	not
contradict 	the 	conclusions 	that 	I 	reach 	here. 	He 	simply
noted 	the 	importance 	of 	a 	default 	rate 	for 	monetary
defaults 	and 	testified 	in 	general 	terms 	that 	non-monetary
defaults 	are 	important 	although 	courts 	have 	come 	up 	with
exceptions 	to 	their 	enforcement.
Mr. 	Stagnari 	testified 	that 	to 	his 	knowledge
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Signature 	Bank 	has 	never 	called 	a 	non-monetary 	default,
and, 	accordingly, 	has 	never 	called 	a 	non-monetary 	default
based 	on 	New 	York 	City 	Building 	Code 	violations. 	He 	was
also 	clear 	that 	almost 	every, 	and 	perhaps 	every, 	building
in 	his 	extensive 	New 	York 	City 	loan 	portfolio 	has
Building 	Code 	violations 	on 	it.
Mr. 	Kohn 	was 	also 	clear 	that 	the 	Debtors 	have
successfully 	addressed 	the 	violations 	and 	either 	cured
and 	removed 	them 	of 	record, 	or 	reasonably 	believe 	because
of 	that 	cure 	that 	they 	will 	remove 	them 	of 	record 	(albeit
that 	the 	process 	of 	removing 	violations 	of 	record,
consistent 	with 	such 	process 	generally 	in 	New 	York 	City,
has 	taken 	considerable 	time). 	In 	the 	light 	of 	this 	and
Mr. 	Stagnari’s 	testimony, 	I 	find 	that 	such 	alleged
defaults 	placed 	Brooklyn 	Lender 	at 	no 	risk 	with 	respect
to 	payment 	or 	impairment 	of 	its 	collateral. 	Such
violations 	therefore 	would 	not 	warrant 	Brooklyn 	Lender’s
acceleration 	of 	the 	loans 	or 	the 	enforcement 	of 	24
percent 	default 	interest.
On 	the 	other 	hand, 	the 	encumbrances 	placed 	of
record 	on 	the 	buildings 	owned 	by 	618 	Lafayette 	LLC 	and
Eighteen 	Homes 	LLC 	not 	only 	violated 	sections 	9 	and 	18(q)
of 	those 	Debtors’ 	loan 	agreements, 	but 	also 	serve 	as 	a
valid 	basis 	for 	acceleration 	and 	the 	enforcement 	of
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default 	interest 	under 	New 	York 	law. 	Such 	encumbrances
impaired 	Brooklyn 	Lender’s 	interest 	in 	the 	collateral,
and 	I 	do 	not 	believe, 	contrary 	Mr. 	Cheskiel 	Stulovitch’s
testimony 	and 	the 	submissions 	by 	the 	non-Debtor 	parties
to 	those 	encumbrances, 	Messrs. 	Schwimmer 	and 	Greenfeld,
that 	those 	encumbrances 	were 	accidental 	or 	inadvertent.
The 	actual 	encumbrances 	are 	memorialized 	in 	simple
written 	agreements 	in 	each 	case 	signed 	by 	Mr. 	Strulovitch
on 	behalf 	of 	the 	applicable 	Debtor. 	It 	is 	hard 	to
imagine, 	therefore, 	that 	they 	were 	mere 	mistakes. 	They
are 	not 	lengthy 	documents, 	they 	specifically 	refer 	to 	the
properties 	at 	issue, 	and 	they 	clearly 	provide 	for 	the
respective 	encumbrances.
It 	is 	true 	that 	Messrs. 	Schwimmer 	and 	Greenfeld
have 	since 	waived 	their 	rights 	under 	their 	respective
agreements 	and 	that 	the 	encumbrances 	are 	no 	longer 	of
record. 	Thus, 	today 	Brooklyn 	Lender’s 	security 	is 	not
impaired 	by 	them. 	However, 	it 	was 	impaired 	from 	the 	date
they 	were 	recorded 	until 	the 	date 	the 	waivers 	were 	filed
on 	the 	county 	records, 	and 	therefore 	the 	defaults 	support
acceleration 	and 	the 	accrual 	of 	default 	interest 	under
New 	York 	law 	as 	against 	those 	two 	Debtors 	from 	the 	date
of 	the 	defaults 	to 	the 	date 	of 	cure.
The 	Debtors 	contend 	that 	the 	next 	type 	of
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default 	alleged 	by 	Brooklyn 	Lender 	-- 	that 	certain 	of 	the
Debtors 	or 	Mr. 	Cheskiel 	Stulovitch 	misrepresented 	those
Debtor’s 	ownership 	in 	or 	in 	connection 	with 	a 	loan
application 	-- 	not 	only 	should 	not 	serve 	as 	a 	basis 	for
acceleration 	and 	the 	enforcement 	of 	default 	interest, 	but
also 	never 	occurred. 	Brooklyn 	Lender 	asserts, 	to 	the
contrary, 	that 	Mr. 	Strulovitch 	was 	listed 	in 	connection
with 	the 	loan 	applications 	as 	owning 	100 	percent 	of 	the
following 	Debtors’ 	ownership 	interests 	when, 	in 	fact, 	45
percent 	of 	those 	interests 	were 	owned 	by 	one 	or 	more 	of
the 	Israeli 	Investors: 	325 	Franklin 	LLC, 	1213 	Jefferson
LLC, 	106 	Kingston 	LLC, 	and 	618 	Lafayette 	LLC. 	In
addition, 	Brooklyn 	Lender 	alleges 	that 	two 	other 	Debtors,
Meserole 	and 	Lorimer 	LLC 	and 	D&W 	Real 	Estate 	Spring 	LLC,
were 	not 	owned 	99 	percent 	by 	Mr. 	Strulovitch 	and 	1
percent 	by 	Mr. 	Wagschal 	as 	represented, 	but, 	rather,
entirely 	or 	almost 	entirely 	by 	Mr. 	Wagschal. 	Finally,
Brooklyn 	Lender 	contends 	that 	the 	following 	Debtors 	were
not 	100 	percent 	owned 	by 	Mr. 	Strulovich 	but, 	instead,
only 	50 	percent 	by 	him 	-- 	APC 	Holding 	1 	LLC, 	Eighteen
Homes 	LLC, 	167 	Hart 	LLC, 	53 	Stanhope 	LLC, 	1125-1133
Greene 	Ave. 	LLC, 	92 	South 	4 t h 	Street 	LLC, 	834
Metropolitan 	Ave. 	LLC, 	and 	55 	Stanhope 	LLC 	-- 	and 	that
the 	following 	Debtors 	were 	not 	owned 	99 	percent 	by 	Mr.
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Strulovitch 	but, 	rather, 	85 	percent 	by 	him: 	119 	Rogers
LLC 	and 	127 	Rogers 	LLC. 	For 	these 	latter 	two 	categories
of 	asserted 	defaults, 	Brooklyn 	Lender 	alleges 	that 	a 	Mr.
Gutman 	owns 	50 	percent 	of 	the 	following 	Debtors 	-- 	834
Metropolitan 	Ave. 	LLC, 	92 	South 	4 t h 	Street 	LLC, 	and 	1125-
1133 	Greene 	Ave. 	LLC 	-- 	Mr. 	Greenfeld 	owns 	50 	percent 	of
Eighteen 	Homes 	LLC, 	and 	limited 	liability 	companies 	at
least 	affiliated 	with 	and 	perhaps 	100 	percent 	owned 	by
Mr. 	Strulovitch 	or 	his 	family 	own 	the 	interests 	in 	the
other 	Debtors 	that 	are 	not 	directly 	owned 	by 	Mr.
Stuolovitch.
Perhaps 	because 	Brooklyn 	Lender’s 	identification
of 	these 	alleged 	defaults 	-- 	especially 	the 	first 	set
based 	on 	its 	review 	of 	pre-bankruptcy 	litigation 	between
the 	Israeli 	Investors 	and 	Mr. 	Stulovitch 	-- 	apparently
inspired 	Brooklyn 	Lender 	to 	buy 	the 	loans 	in 	the 	first
place 	in 	order 	to 	call 	the 	defaults, 	they 	have 	attracted
most 	of 	the 	parties’ 	attention.
The 	applicable 	Debtors 	contend 	that 	each 	of 	the
disputed 	third-party 	ownership 	interests 	were 	not, 	in
fact, 	ownership 	interests 	but, 	rather, 	“profit 	sharing
interests.” 	Each 	of 	the 	Debtors 	at 	issue 	is 	a 	limited
liability 	company. 	Limited 	liability 	companies 	under 	the
tax 	laws 	record 	income 	with 	respect 	to 	any 	such 	interest,
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i.e. 	profit 	sharing 	interests, 	as 	an 	ownership 	interest
or 	a 	partner 	interest 	on 	their 	tax 	returns 	because 	they
report 	income 	and 	losses 	as 	a 	partnership 	and 	such 	an
interest 	is 	a 	form 	of 	interest 	in 	the 	LLC, 	although 	the
two 	interests 	are 	different 	as 	to 	the 	entitlement 	to
capital 	in 	a 	liquidation. 	See 	Rev. 	Proc. 	93-27, 	1993-2
C.BB. 	343 	(1993); 	Bradley 	T. 	Borden, 	“Profits-Only
Partnership 	Interests,” 	74 	Brooklyn 	L.R. 	1283, 	1296-97
(2009). 	Accordingly, 	these 	Debtors 	issued 	K-1s 	that 	the
record 	reflects 	identify 	the 	claimed 	ownership 	interests
as 	alleged 	by 	Brooklyn 	Lender, 	with 	the 	exception 	of 	the
four 	Debtors 	with 	regard 	to 	the 	45 	percent 	Israeli
Investor 	interests, 	which 	do 	not 	appear 	on 	the 	K-1s
associated 	with 	those 	Debtors.
As 	to 	those 	four 	Debtors, 	however, 	Brooklyn
Lender 	introduced 	evidence 	that 	each 	had 	an 	operating
agreement 	that 	did 	recognize 	or 	provided 	for 	45 	percent
ownership 	interests 	to 	be 	held 	by 	Israeli 	Investors. 	Mr.
Strulovitch 	testified 	that 	the 	parties 	nevertheless
thereafter 	changed 	the 	nature 	of 	those 	interests 	to
“profit 	sharing 	interests” 	because 	the 	Signature 	Bank
loans 	would 	not 	have 	been 	made 	without 	such 	change. 	That
is 	conceivable, 	but 	there 	is 	no 	separate 	record 	of 	it,
and, 	more 	importantly, 	I 	do 	not 	accept 	Mr.Strulovitch’s
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testimony 	that 	Signature 	Bank 	knew 	about 	this 	change 	as
reflected 	in 	a 	hearsay 	conversation 	he 	testified 	he 	had
with 	the 	original 	loan 	officer, 	Mr. 	Dietz.
As 	a 	fallback, 	the 	Debtors 	contend 	that 	the
Israeli 	Investors’ 	interests 	in 	the 	four 	Debtors 	were 	at
best 	profits 	sharing 	interests, 	too, 	and, 	in 	any 	event,
are 	no 	more 	than 	a 	claim 	subject 	to 	subordination 	under
section 	510(b) 	of 	the 	Bankruptcy 	Code 	for 	the 	right 	to 	be
issued 	ownership 	interests 	in 	the 	four 	Debtors, 	and, 	as
to 	the 	Individual 	Israeli 	Investors, 	only 	an 	ownership
interest 	in 	the 	four 	Israeli 	Investor 	LLCs 	that 	were 	to
invest 	in 	them. 	Thus, 	the 	Debtors 	contend, 	there 	was 	no
failure 	of 	disclosure 	in 	or 	in 	connection 	with 	the 	loan
applications.
The 	only 	testimony 	of 	any 	Israeli 	Investors 	was
vague 	as 	to 	the 	intended 	nature 	of 	their 	ownership
interest 	in 	any 	Debtor, 	with 	the 	exception 	of 	their
assertion 	that 	they 	or 	their 	family 	members 	were
persuaded 	by 	a 	Mr. 	Oberlander 	to 	invest 	in 	certain
unidentified 	single 	purpose 	limited 	liability 	companies 	-
- 	the 	Israeli 	Investor 	LLCs 	– 	which 	in 	turn 	were 	to 	be
managed 	by 	Mr. 	Oberlander 	and 	Mr. 	Strulovitch 	and 	would
invest 	in 	single 	asset 	real 	estate 	companies 	controlled
by 	Mr. 	Strulovitch. 	The 	Israeli 	Investor 	witnesses 	could
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not 	identify, 	however, 	which 	companies 	were 	to 	be 	owned
45 	percent 	by 	the 	Israeli 	Investor 	LLCs.
Both 	Mr. 	Strulovitch 	and 	Mr. 	Wagschal
acknowledged 	that 	Mr. 	Wagschal 	had 	a 	greater 	interest 	in
certain 	of 	the 	Debtors 	than 	was 	disclosed 	in 	or 	in
connection 	with 	the 	loan 	applications 	for 	those 	Debtors.
One 	can 	reasonably 	infer 	from 	Mr. 	Wagschal’s 	testimony
that 	titular 	ownership 	of 	these 	Debtors 	was 	transferred
in 	large 	measure 	by 	Mr. 	Wagschal 	to 	Mr. 	Strulovitch 	to
shield 	them 	from 	Mr. 	Wagschal’s 	creditors, 	with 	the 	two
men 	recognizing 	that 	Mr. 	Wagschal 	nevertheless 	would 	in
effect 	be 	entitled 	to 	most 	or 	all 	of 	these 	Debtors’ 	value
and 	would 	have 	the 	major 	say 	in 	their 	management.
Mr. 	Strulovitch, 	Mr. 	Wagschal, 	and 	Mr. 	Gutman
had 	only 	the 	most 	rudimentary 	understanding 	of 	an
ownership 	interest 	in 	an 	LLC 	or, 	for 	that 	matter, 	of 	what
they 	viewed 	to 	be 	a 	lesser, 	profit 	sharing 	interest. 	Such
testimony 	is 	hard 	to 	credit 	given 	the 	commercial
experience 	of 	these 	men, 	but, 	taking 	into 	account 	the
Jewish 	orthodox 	community 	in 	which 	they 	live 	and 	do
business 	-- 	which 	they 	credibly 	testified 	relies 	more 	on
trust 	among 	its 	members 	than 	legal 	documentation 	or
characterization 	of 	ownership 	interests 	for 	tax 	purposes
-- 	it 	is 	possible 	that 	their 	naivite 	is 	not 	feigned.
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However, 	I 	conclude 	that 	the 	better 	view 	is 	that 	third
parties 	-- 	namely 	Mr. 	Wagschal 	and 	Mr. 	Gutman 	and 	at
least 	the 	Israeli 	Investor 	LLCs, 	if 	not 	the 	Individual
Israeli 	Investors 	-- 	had 	ownership 	interests, 	broadly
defined, 	in 	certain 	Debtors 	that 	were 	not 	disclosed 	when
those 	Debtors 	or 	Mr. 	Strulovitch 	represented 	their
ownership 	structure 	in 	or 	in 	connection 	with 	their 	loan
applications. 	Brooklyn 	Lender 	also 	established 	that 	the
ownership 	interests 	of 	Mr. 	Strulovich’s 	affiliates 	and
relatives 	also 	were 	not 	fully 	disclosed 	at 	that 	time.
On 	the 	other 	hand, 	in 	applying 	New 	York 	law 	that
I 	previously 	summarized, 	I 	do 	not 	believe 	that 	this 	is
the 	type 	of 	default 	that 	would 	serve 	as 	a 	basis 	for
acceleration 	or 	enforcement 	of 	default 	interest. 	First,
it 	is 	not 	clear 	that 	the 	loan 	applications 	sufficiently
solicited 	disclosure 	of 	ownership 	interests 	as 	I 	have
broadly 	defined 	the 	term 	above. 	More 	importantly, 	I 	do
not 	see 	how 	Signature 	Bank’s 	collateral 	or 	ability 	to 	be
repaid 	was 	in 	any 	way 	affected 	by 	such 	failure 	to
disclose, 	to 	the 	extent 	that 	it 	constituted 	a 	default.
Each 	of 	the 	loans 	was 	non-recourse 	to 	the
Debtors’ 	owners, 	including 	Mr. 	Strulovitch. 	Mr.
Strulovitch 	only 	gave 	what 	Mr. 	Stagnari 	described 	as 	a
“bad 	boy 	guarantee” 	to 	Signature 	Bank, 	not 	a 	monetary
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guarantee, 	that 	would 	be 	triggered 	if 	Mr. 	Stolovitch
caused 	the 	borrower 	to 	take 	certain 	prescribed 	actions.
It 	also 	is 	clear 	from 	Mr. 	Stagnari’s 	testimony, 	as 	well
as 	his 	and 	other 	Signature 	Bank 	officers’ 	analysis 	of 	the
loans 	as 	reflected 	in 	the 	bank’s 	Credit 	Offering
Memoranda, 	that 	Signature 	Bank 	relied 	upon 	the 	Debtors’
properties’ 	income 	stream, 	i.e. 	rental 	payments, 	and/or
the 	value 	of 	the 	properties, 	themselves, 	to 	support 	a
refinancing 	or 	a 	sale 	in 	order 	to 	repay 	the 	loans.
Neither 	Signature 	Bank 	nor 	Brooklyn 	Lender 	undertook 	a
meaningful 	credit 	analysis 	of 	Mr. 	Strulovitch 	or 	any
other 	disclosed 	owner. 	It 	did 	not 	even 	request 	a 	balance
sheet 	or 	other 	financial 	disclosure 	by 	the 	other 	actually
identified 	owners 	besides 	Mr. 	Strulovitch 	that 	were
disclosed 	to 	it. 	And 	even 	as 	to 	Mr. 	Strulovitch,
Signature 	Bank 	did 	not, 	according 	to 	Mr. 	Stagnari’s
testimony, 	pay 	attention 	to 	his 	credit 	reports.
Signature 	Bank 	did 	require 	a 	relatively 	brief 	financial
statement 	from 	him, 	but 	Brooklyn 	Lender’s 	representative,
Mr. 	Aviram, 	found 	the 	dramatic 	increase 	in 	value 	of 	Mr.
Strulovitch’s 	net 	worth 	on 	that 	financial 	statement 	to 	be
incredible 	on 	its 	face 	and 	I 	conclude 	that 	Signature 	Bank
also 	would 	have 	done 	so 	and 	would 	not 	have 	relied 	on 	it
and 	in 	fact 	did 	not 	rely 	on 	it.
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The 	only 	possible 	adverse 	effect 	that 	might 	have
stemmed 	from 	the 	apparent 	failure 	to 	accurately 	disclose
the 	owners, 	broadly 	speaking, 	of 	certain 	of 	the 	Debtors
would 	be 	to 	subject 	the 	lender 	to 	a 	potential 	violation
of 	money 	laundering 	and 	Patriot 	Act 	rules 	and 	regulations
or 	“know 	your 	customer” 	rules. 	In 	post-argument
briefing, 	the 	parties 	have 	addressed 	that 	issue.
Although 	the 	regulatory 	regime 	is 	complex, 	and 	I 	believe
clearly 	beyond 	the 	knowledge 	of 	Mr. 	Strulovitch, 	I
conclude 	that 	such 	nondisclosure, 	even 	the 	failure 	to
disclose 	a 	profits 	interest 	or 	other 	similar 	less 	than
full 	ownership 	interest 	in 	a 	borrower, 	might 	put 	a 	lender
at 	risk 	of 	such 	a 	violation. 	See 	31 	C.F.R. 	§§ 	542.315,
1010; 	https://www.treasury.gov/resource-
center/sanctions/Documents/licensing_guidance.pdf. 	(each
focusing 	on 	the 	need 	for 	analysis 	of 	direct 	and 	indirect
ownership 	interests 	or 	control).
On 	the 	other 	hand, 	there 	is 	no 	evidence 	that
Signature 	Bank 	conducted 	any 	such 	analysis 	as 	to 	the
Debtors’ 	disclosed 	owners. 	Moreover, 	such 	a 	risk 	had 	no
bearing 	on 	it 	or 	Brooklyn 	Lender 	being 	paid 	in 	full 	or
risk 	of 	impairment 	of 	the 	collateral. 	There 	is 	no
evidence, 	either, 	that 	upon 	learning 	of 	potential
undisclosed 	owners 	of 	certain 	of 	the 	Debtors, 	Brooklyn
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Lender 	undertook 	any 	analysis 	or 	reporting 	to 	the
applicable 	authorities. 	Indeed, 	Brooklyn 	Lender’s
constant 	refrain 	that 	the 	challenged 	interests 	were 	full
ownership 	interests 	and 	not 	just 	more 	limited 	“profits
interests” 	strongly 	suggests 	that 	the 	regulatory 	risk 	did
not 	carry 	any 	weight 	with 	it, 	since 	mere 	profits
interests 	would 	likely 	trigger 	a 	review 	and 	reporting
requirement, 	too. 	Finally, 	there 	is 	no 	suggestion 	that
any 	of 	the 	third-party 	owners 	would 	in 	fact 	be 	the 	types
of 	investor 	targeted 	by 	the 	applicable 	rules 	and
regulations.
I 	therefore 	conclude 	that 	under 	New 	York 	law 	the
alleged 	defaults 	arising 	from 	the 	failure 	to 	accurately
disclose 	certain 	of 	the 	Debtors’ 	owners, 	broadly
speaking, 	would 	not 	support 	acceleration 	or 	enforcement
of 	a 	default 	rate. 	I 	also 	conclude 	that 	the 	obvious
inaccuracies 	in 	Mr. 	Strulovitch’s 	financial 	statements
also 	would 	not 	justify 	acceleration 	or 	enforcement 	of
default 	interest.
That 	leaves 	one 	other 	set 	of 	defaults. 	None 	of
the 	loans 	matured 	by 	its 	terms 	before 	the 	bankruptcy
filing 	date, 	but, 	as 	noted, 	several 	of 	them 	have 	since
matured. 	There 	is 	no 	question 	that 	under 	New 	York 	law
post-maturity 	default 	interest 	would 	be 	enforced 	upon 	the
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applicable 	Debtor’s 	failure 	to 	pay 	the 	matured 	loan
except 	in 	extremely 	limited 	circumstances 	such 	as 	the
lender’s 	failure 	to 	honor 	a 	payment 	or 	other 	lender
misconduct 	preventing 	payment. 	Courts 	considering 	the
allowance 	of 	postpetition 	interest 	under 	section 	506(b)
also 	have 	held 	that 	default 	interest 	should 	be 	allowed
after 	the 	loan’s 	maturity 	date 	passed, 	barring 	some
overriding 	equitable 	factor 	to 	the 	contrary. 	In 	re
Residential 	Capital, 	508 	B.R. 	at 	862; 	see 	also 	In 	re
Route 	One 	West 	Windsor 	Ltd. 	P’Ship., 	225 	B.R. 	at 	78, 	91.
The 	Debtors 	have 	argued 	that 	Brooklyn 	Lender’s
own 	misconduct 	prevented 	them 	from 	paying 	the 	loans 	at
maturity, 	an 	argument 	deserving 	careful 	consideration
given 	that 	I 	have 	held 	that 	many 	of 	the 	defaults 	called
by 	Brooklyn 	Lender 	did 	not 	warrant 	acceleration 	and 	the
imposition 	of 	default 	interest 	under 	longstanding 	New
York 	law. 	(And 	such 	law 	goes 	back 	at 	least 	to 	the 	1920s;
there 	are 	not 	many 	recent 	cases, 	but 	one 	can 	reasonably
attribute 	this 	to 	the 	law 	being 	well 	established 	as 	of 	at
least 	the 	1980s.)
The 	problem 	with 	the 	Debtors’ 	argument 	is 	that
the 	Debtors 	have 	not 	established 	that 	they 	had 	the
ability 	to 	pay 	the 	matured 	loans 	until 	they 	obtained 	the
Lightstone 	Capital 	exit 	facility 	commitment, 	and 	they
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have 	not 	shown 	that 	Brooklyn 	Lender’s 	conduct 	proximately
caused 	such 	inability. 	It 	is 	clear, 	moreover, 	that 	even
with 	the 	Lightstone 	Capital 	exit 	facility, 	the 	Debtors
will 	not 	be 	able 	to 	confirm 	their 	Plan, 	because 	too 	many
of 	the 	Debtors 	are 	in 	fact 	liable 	for 	post-default
interest 	for 	the 	Plan 	to 	proceed 	under 	section 	1124(1).
Brooklyn 	Lender 	also 	established 	that 	the
Debtors 	did 	not 	even 	exercise 	their 	right 	to 	force 	an
extension 	of 	the 	applicable 	loan’ 	maturity 	dates, 	which
under 	certain 	circumstances 	they 	have 	under 	the 	loan
documents, 	until 	the 	Plan 	was 	filed, 	well 	after 	many 	of
the 	loans 	had 	matured. 	There 	also 	was 	ample 	evidence 	that
there 	were 	late 	payments 	on 	most 	of 	the 	matured 	loans,
even 	if 	those 	payments 	did 	not 	rise 	to 	the 	level 	of 	a
payment 	default, 	and, 	therefore, 	as 	to 	those 	loans 	it 	is
clear 	that 	Brooklyn 	Lender 	could 	not 	be 	forced 	to 	grant 	a
maturity 	extension 	under 	the 	loan 	agreements’ 	extension
provision.
At 	oral 	argument, 	counsel 	for 	Brooklyn 	Lender
confirmed 	that 	the 	roughly 	$3.6 	million 	of 	default
interest 	tied 	to 	maturity 	defaults 	ran 	only 	from 	the
maturity 	date 	to 	the 	confirmation 	hearing 	date. 	And
while 	the 	Debtors’ 	counsel 	said 	that 	she 	was 	not 	sure
whether 	that 	analysis 	properly 	took 	into 	account 	any
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payments 	that 	should 	have 	been 	applied 	to 	principal 	and
were 	not, 	it 	appears 	that 	Brooklyn 	Lender 	is 	properly
calculating 	the 	default 	interest 	from 	the 	maturity 	date
of 	each 	loan 	as 	opposed 	to 	some 	earlier 	time.
This 	returns 	us 	to 	consideration 	of 	whether 	the
equitable 	factors 	limiting 	the 	allowance 	of 	postpetition
interest 	at 	the 	default 	rate 	under 	section 	506(b) 	of 	the
Bankruptcy 	Code 	should 	apply 	to 	Brooklyn 	Lender’s 	claims
to 	such 	interest 	based 	on 	the 	maturity 	defaults 	and 	“no
encumbrance” 	defaults 	under 	certain 	Debtors’ 	loans. 	As
suggested 	above, 	this 	is 	a 	close 	question 	because 	while
the 	applicable 	Debtors 	are 	solvent, 	allowance 	of 	such
default 	interest 	will 	lead 	to 	denial 	of 	confirmation 	of
the 	Plan, 	which 	may 	harm 	not 	only 	those 	Debtors’ 	owners,
but 	also 	other 	creditors 	besides 	Brooklyn 	Lender. 	For 	the
same 	reason, 	those 	Debtors’ 	fresh 	start 	would 	jeopardized
by 	denial 	of 	the 	Plan’s 	confirmation.
Because 	the 	Debtors 	are 	single 	asset 	real 	estate
entities, 	however, 	their 	“fresh 	start” 	under 	the 	Plan
would 	not 	entail 	the 	preservation 	of 	going 	concern 	value,
a 	significant 	number 	of 	jobs, 	or 	supplier 	relationships.
It 	would 	instead 	primarily 	preserve 	ownership 	of 	the
properties 	in 	the 	current 	owners. 	In 	addition, 	a
debtor’s 	insolvency 	has 	never 	been 	a 	per 	se 	basis 	for
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denying 	an 	oversecured 	creditor’s 	claim 	to 	postpetition
interest 	at 	the 	default 	rate. 	In 	re 	Residential 	Capital,
508 	B.R. 	at 	857-58. 	Lastly, 	the 	Israeli 	Investors 	have
asserted 	the 	largest 	claims 	against 	the 	Debtors; 	most
other 	creditors, 	besides 	Brooklyn 	Lender, 	appear 	to 	be
insiders. 	And, 	albeit 	inexplicably 	to 	the 	Court 	(because
it 	would 	appear 	that 	confirmation 	of 	the 	Plan 	is 	the
Israeli 	Investors’ 	best 	and 	perhaps 	only 	chance 	recover
from 	the 	Debtors), 	the 	Israeli 	Investors 	oppose
confirmation 	and 	have 	not 	sought 	to 	reduce 	Brooklyn
Lender’s 	claims.
Weighing 	all 	of 	these 	facts 	and 	equitable
considerations, 	I 	conclude 	that 	the 	record 	does 	not
support 	further 	reduction 	of 	Brooklyn 	Lender’s 	claims 	to
default 	interest 	accruing 	during 	the 	“encumbrance 	period”
against 	618 	Lafayette 	LLC 	and 	Eighteen 	Homes 	LLC, 	nor 	its
claims 	for 	post-maturity 	default 	interest 	against 	Debtors
whose 	loans 	matured 	or 	will 	mature 	prior 	to 	the 	filing 	of
a 	viable 	chapter 	11 	plan.
Turning 	to 	the 	Plan’s 	treatment 	of 	the 	Israeli
Investors, 	it 	important 	to 	note 	again 	that 	there 	are 	two
sets 	of 	them: 	the 	Israeli 	Investor 	LLCs 	and 	the
Individual 	Israeli 	Investors. 	Moreover, 	the 	Israeli
Investor 	LLCs 	have 	asserted 	two 	different 	types 	of 	claims
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against 	the 	Debtors. 	First, 	the 	Israeli 	Investor 	LLCs
claim 	that 	they 	were 	thwarted 	by 	3225 	Franklin, 	618
Jefferson, 	106 	Kingston 	and 	1213 	Lafayette 	and/or 	Mr.
Strulovitch 	from 	investing 	in 	those 	Debtors’ 	equity. 	It
is 	easy 	to 	conclude 	that 	such 	claims 	are 	subordinated 	to
the 	level 	of 	those 	ownership 	interests 	under 	the 	plain
terms 	of 	section 	510(b) 	of 	the 	Bankruptcy 	Code, 	as 	they
are 	for 	damages 	arising 	from 	the 	attempted 	purchase 	of 	a
security 	of 	one 	of 	such 	Debtors.
In 	addition, 	however, 	those 	same 	Israeli
Investor 	LLCs, 	as 	well 	as 	other 	Israeli 	Investor 	LLCs 	and
the 	Individual 	Israeli 	Investors, 	have 	filed 	proofs 	of
claim 	against 	the 	other 	Debtors 	alleging 	that 	the 	other
Debtors 	participated 	in 	a 	fraudulent 	scheme 	by 	Mr.
Oberlander 	and 	Mr. 	Strulovitch 	to 	take 	the 	Israeli
Investor 	LLCs’ 	money 	intended 	to 	be 	invested 	in 	specific,
though 	unidentified 	(with 	the 	exception 	of 	the 	four
Debtors 	just 	mentioned), 	real 	estate 	projects, 	and
instead 	divert 	that 	money 	for 	other 	uses. 	Unless,
however, 	those 	claimed 	funds 	were 	intended 	to 	be 	invested
in 	an 	affiliate 	of 	a 	Debtor 	(defined 	in 	section 	101(2)(B)
of 	the 	Bankruptcy 	Code 	as 	“a 	corporation 	[applied 	by 	the
caselaw 	to 	include 	limited 	liability 	companies], 	20
percent 	or 	more 	of 	whose 	outstanding 	voting 	securities
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are 	directly 	or 	indirectly 	controlled, 	or 	held 	with 	power
to 	vote, 	by 	. 	. 	. 	an 	entity 	that 	directly 	or 	indirectly
owns, 	controls, 	or 	holds 	with 	power 	to 	vote, 	20 	percent
or 	more 	of 	the 	outstanding 	voting 	securities 	of 	the
debtor” 	other 	than 	in 	capacities 	that 	would 	not 	here
apply, 	11 	U.S.C. 	§ 	101(2)(B)), 	such 	a 	claim 	would 	not 	be
covered 	by 	section 	510(b) 	of 	the 	Bankruptcy 	Code. 	See,
for 	example, 	In 	re 	Wash. 	Mut. 	Inc., 	462 	B.R. 	137, 	145-47
(Bankr. 	D. 	Del. 	2011), 	and 	In 	re 	Semcrude, 	L.P., 	436 	B.R.
317, 	321 	(Bankr. 	D. 	Del. 	2010), 	each 	of 	which 	holds 	that
section 	510(b) 	applies 	only 	to 	claims 	based 	on 	the
purchase 	or 	sale 	of 	securities 	of 	the 	debtor 	or 	the
debtor’s 	affiliate, 	not 	fraud 	by 	the 	debtor 	or 	an
affiliate 	with 	respect 	to 	the 	purchase 	or 	sale 	of
securities 	of 	a 	different, 	non-affiliate 	entity.
It 	is 	quite 	possible 	that 	the 	allegedly
fraudulently 	transferred 	funds 	were 	diverted 	from 	being
invested 	in 	an 	affiliate 	of 	a 	Debtor, 	as 	defined 	by
section 	101(2)(B), 	especially 	under 	the 	logic 	of
Templeton 	v. 	O’Cheskey 	(In 	re 	Am. 	House 	Found.), 	785 	F.3d
143, 	155-57 	(5th 	Cir. 	2015), 	which 	reads 	“affiliate” 	more
broadly 	than 	the 	two 	Delaware 	cases 	previously 	cited 	to
include 	entities 	under 	the 	control 	of 	an 	affiliate.
However, 	the 	Debtors 	have 	not 	made 	such 	a 	showing. 	There
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is 	really 	no 	proof 	that 	the 	allegedly 	transferred 	funds
or 	improperly 	transferred 	funds 	were 	intended 	to 	go 	to
any 	specific 	“affiliates,” 	including 	as 	defined 	in
Templeton, 	with 	the 	exception 	of 	the 	four 	specific
Debtors 	already 	identified. 	Thus, 	the 	Debtors 	have 	not
made 	their 	case 	as 	to 	these 	claims’ 	treatment 	under 	the
Plan 	under 	section 	510(b).
This 	is 	not 	the 	end 	of 	the 	inquiry 	regarding 	the
other 	Israeli 	Investor 	claims, 	however. 	The 	main 	reason
the 	Debtors 	were 	not 	able 	to 	make 	the 	foregoing 	showing
is 	that 	there 	is 	nothing 	in 	the 	record 	other 	than 	wholly
conclusory 	allegations 	to 	show 	that 	any 	such 	funds
actually 	were 	meant 	to 	go 	to 	any 	specific 	entities 	or
that 	Debtors 	participated 	in 	or 	received 	any 	wrongful
diversion 	of 	funds. 	The 	testimony 	of 	the 	Israeli
Investors 	specifically 	omitted 	any 	contention 	to 	the
contrary. 	The 	proofs 	of 	claim, 	which 	attach 	the
complaints 	in 	pre-bankruptcy 	litigation 	on 	this 	point,
are 	extremely 	vague 	on 	the 	facts, 	and 	clearly 	do 	not
satisfy 	Fed. 	R. 	Bankr. 	P. 	7009, 	incorporating 	Fed. 	R.
Civ. 	P. 	9(b), 	as 	to 	the 	elements 	of 	fraud, 	including 	when
these 	allegedly 	fraudulent 	diversions 	occurred, 	who 	the
recipients 	were 	intended 	to 	be 	and 	in 	fact 	were, 	and 	the
like. 	Thus, 	the 	Debtors’ 	inability 	to 	subordinate 	most
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of 	the 	Israeli 	Investors’ 	claims 	does 	not 	on 	this 	record
require 	denial 	of 	the 	Plan’s 	confirmation; 	the 	Plan 	is
feasible 	notwithstanding 	the 	Debtors’ 	inability 	to 	pay
the 	Israeli 	Investors’ 	claims 	because 	those 	claims 	lack
support.
The 	second 	group 	of 	Israeli 	Investors 	-- 	the
Individual 	Israeli 	Investors 	-- 	have 	a 	second 	impediment
to 	the 	allowance 	of 	their 	claims 	against 	all 	of 	the
Debtors, 	as 	well. 	As 	conceded 	by 	the 	two 	Individual
Israeli 	Investors 	who 	testified 	at 	the 	trial, 	these
claimants 	did 	not 	invest 	in 	the 	Debtors, 	but, 	rather, 	in
the 	Israeli 	Investor 	LLCs. 	They 	are 	at 	best, 	therefore,
either 	creditors 	of 	or 	shareholders 	in 	the 	Israeli
Investor 	LLCs 	and 	assert 	claims 	against 	the 	Debtors 	only
derivatively 	through 	the 	Israeli 	Investor 	LLCs 	and 	are
not 	even 	parties 	in 	interest. 	See 	In 	re 	Terrestar
Networks, 	Inc., 	2013 	Bankr. 	LEXIS, 	at 	*6 	(Bankr. 	S.D.N.Y.
Feb. 	28, 	2013). 	See 	also 	In 	re 	Refco 	Inc., 	505 	F.3d 	109,
118-19 	(2d 	Cir. 	2007), 	and 	In 	re 	Comcoach 	Corp., 	698 	F.3d
571, 	574 	(2d 	Cir. 	1993).
The 	Israeli 	Investors 	raised 	certain 	other
objections 	to 	confirmation 	of 	the 	Plan: 	that 	the 	Plan
provides 	for 	the 	substantive 	consolidation 	of 	the
Debtors’ 	estates, 	that 	the 	Plan 	violates 	the 	best
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interests 	test 	of 	11 	U.S.C. 	§ 	1129(a)(7), 	and 	that 	the
Israeli 	Investors’ 	claims, 	to 	the 	extent 	not 	subordinated
under 	11 	U.S.C. 	§ 	510(b), 	were 	in 	fact 	impaired 	and
therefore 	entitled 	to 	vote 	to 	reject 	the 	Plan 	under
section 	1126 	of 	the 	Bankruptcy 	Code, 	forcing 	a 	cram 	down.
I 	believe 	that 	each 	of 	these 	objections 	was 	addressed 	in
detail 	during 	oral 	argument, 	and 	I 	will 	incorporate 	those
rulings 	into 	this 	Modified 	Decision.
In 	short, 	by 	its 	plain 	terms 	the 	Plan 	does 	not
provide 	for 	substantive 	consolidation 	of 	the 	Debtors’
estates. 	The 	only 	basis 	for 	the 	Israeli 	Investors’
contention 	to 	the 	contrary 	was 	that 	the 	proposed 	exit
loans 	were 	cross 	collateralized, 	but 	that 	does 	not 	equate
with 	substantive 	consolidation, 	just 	as 	cross-
collateralization 	of 	DIP 	loans 	under 	section 	364 	of 	the
Bankruptcy 	Code, 	11 	U.S.C. 	364, 	does 	not 	result 	in
substantive 	consolidation. 	For 	the 	reasons 	detailed 	on
the 	record 	of 	oral 	argument 	at 	Tr. 	pages, 	35, 	37, 	38 	and
41-42, 	the 	Plan 	in 	fact 	satisfies 	section 	1129(a)(7) 	of
the 	Bankruptcy 	Code 	with 	the 	exception 	of 	one 	Debtor, 	106
Kingston, 	which 	the 	Debtors’ 	counsel 	conceded 	would 	be
separately 	carved 	out 	from 	the 	Lightstone 	Capital 	exit
facility, 	at 	which 	point 	that 	Debtor 	also 	would 	satisfy
section 	1129(a)(7). 	Finally, 	the 	Debtors 	have 	a 	pending
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objection 	to 	the 	Israeli 	Investors’ 	claims, 	which 	the
Israeli 	Investors 	have 	not 	sought 	to 	be 	temporarily
allowed 	for 	voting 	purposes. 	Assuming, 	consistent 	with
my 	ruling, 	that 	the 	Debtors 	are 	not 	able 	to 	subordinate
all 	of 	the 	Israeli 	Investors’ 	claims 	on 	this 	record 	under
section 	510(b) 	of 	the 	Bankruptcy 	Code, 	the 	Israeli
Investors 	therefore 	nevertheless 	are 	not 	allowed 	to 	vote
on 	the 	Plan 	as 	Class 	4 	(General 	Unsecured) 	Claims.
At 	oral 	argument 	I 	also 	denied 	the 	Israeli
Investors’ 	request 	for 	the 	appointment 	of 	a 	Chapter 	11
trustee 	pursuant 	to 	section 	1104 	of 	the 	Bankruptcy 	Code,
11 	U.S.C. 	§ 	1104. 	As 	noted 	then, 	there 	is 	no 	support 	for
the 	appointment 	of 	a 	trustee 	on 	this 	record 	and, 	indeed,
the 	Israeli 	Investors 	did 	not 	offer 	any 	evidence 	for 	such
relief 	thus 	clearly 	did 	not 	carry 	their 	burden 	of 	proof.
I 	therefore 	direct 	the 	Debtors 	to 	prepare 	an
order 	consistent 	with 	my 	rulings 	denying 	confirmation 	of
the 	Plan 	for 	the 	reasons 	stated, 	namely 	that 	Brooklyn
Lender’s 	claims 	against 	certain 	of 	the 	Debtors 	for
default 	interest 	based 	on 	the 	maturity 	of 	the 	loans 	to
those 	Debtors 	as 	well 	as 	against 	two 	Debtors 	based 	on 	the
encumbrances 	permitted 	by 	those 	Debtors 	would 	give 	rise
to 	claims 	that 	could 	not 	be 	rendered 	unimpaired 	by 	full
cash 	payment 	under 	the 	Plan.
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I 	have 	not 	addressed 	Brooklyn 	Lender’s 	claims
for 	payment 	of 	its 	legal 	fees 	and 	expenses, 	for 	three
reasons. 	First, 	I 	am 	sure 	that 	it 	has 	incurred 	more 	fees
after 	those 	covered 	by 	the 	submitted 	time 	and 	expense
records. 	Secondly, 	the 	Debtors 	should 	have 	the
opportunity 	to 	review 	those 	time 	and 	expense 	records 	in
the 	light 	of 	my 	ruling 	which, 	again, 	reflected 	that
certain 	of 	the 	defaults 	called 	by 	Brooklyn 	Lender 	really
would 	not 	be 	enforceable 	and, 	therefore, 	might 	reflect 	on
the 	reasonableness 	of 	fees 	and 	expenses 	related 	to
attempts 	to 	enforce 	those 	defaults. 	Finally, 	such 	review
is 	best 	taken 	in 	a 	clear 	context 	where 	there 	is 	a
practical 	prospect 	of 	recovering 	such 	fees 	and 	expenses,
whereas 	at 	this 	time 	it 	is 	unclear 	whether 	that 	context
will 	ever 	come 	to 	pass.
It 	is 	conceivable 	that 	some 	or 	even 	all 	of 	the
Debtors 	(albeit 	most 	likely 	only 	on 	a 	consensual 	basis)
may 	still 	be 	able 	to 	confirm 	a 	plan 	or 	plans 	in 	the
future. 	In 	any 	event, 	I 	direct 	counsel 	for 	the 	Debtors 	to
schedule 	a 	case 	conference 	for 	within 	the 	next 	30 	to 	45
days 	to 	address 	the 	next 	steps 	in 	these 	cases, 	which 	also
could 	serve 	as 	a 	hearing 	date 	if 	a 	party 	in 	interest
wants 	to 	seek 	relief, 	for 	example 	in 	the 	form 	of 	a 	motion
for 	relief 	from 	the 	automatic 	stay 	under 	section 	362 	of
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the 	Bankruptcy 	Code, 	conversion 	of 	one 	or 	more 	of 	these
cases 	to 	a 	case 	under 	Chapter 	7 	of 	the 	Bankruptcy 	Code,
or 	the 	filing 	of 	its 	own 	Chapter 	11 	plan.
Dated: 	White 	Plains, 	New 	York
February 	18, 	2021
/s/Robert D. Drain
United 	States 	Bankruptcy 	Judge
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