Federal Court Rules that Morrison Cohen Client’s Dispute Regarding Condo Default Will Proceed to Discovery

In a litigation leveled by CCO Condo Portfolio (AZ) Junior Mezzanine LLC against Morrison Cohen client HFZ Capital Group and owner Ziel Feldman, where it has alleged that the defendants (guarantors) failed to pay up on four Manhattan condo projects after the borrowers defaulted, U.S. District Judge Edgardo Ramos denied CCO Condo’s summary judgment on the issue of damages – which would have resulted in a judgment of more than $86 million – and ruled that the parties must proceed to discovery. The ruling was filed in the United States District Court, Southern District of New York on August 30, 2022.

CCO Condo filed suit against HFZ in March 2021, alleging it was owed for outstanding principal and interest loan payments on the condo projects, which CCO Condo had purchased through foreclosure. When CCO Condo then tried to sell the properties, Morrison Cohen successfully blocked the sale through proceedings in New York Supreme Court, alleging the sale was commercially unreasonable as defined by New York's Uniform Commercial Code.

The State Court later approved a second sale under different terms, and CCO submitted the only bid, buying the property for $65 million and leaving an outstanding $86 million balance allegedly owed by guarantors HFZ and Mr. Feldman.

In their opposition, Morrison Cohen argued, among other things, that it was not barred from challenging the second sale, which took place in January of 2022, and that there was a question of fact as to whether the second sale was commercially unreasonable “due to the timing and advertising of the sale during the winter holiday season and ongoing COVID-19 pandemic, as well as the language used in the ads and the high amounts of money required as deposits.”

Judge Ramos agreed, and in his August 30 ruling stated: “Defendants point to the explicit terms of the stipulation of dismissal in the state court action, which stated that it ‘shall not be read to impair any right or ability to bring any action or proceeding, or the raising any defense that challenges the commercial reasonableness of any future sale…’ Defendants should not now be barred from making their arguments regarding commercial reasonableness.” Judge Ramos continued, [w]ith these facts in mind, the Court must decide whether there is a triable issue of fact as to whether the [second] sale was commercially reasonable. The Court holds that there is.”

In an August 31 Law360 article that reported on the case, Morrison Cohen Partner David Ross commented on the ruling, "We're pleased with the federal court's ruling and believe, like the state court previously ruled, that this court will similarly rule that plaintiff's second sale was also a rushed, commercially unreasonable sale that suffered from the same infirmities as the first that was deemed to be commercially unreasonable.”

Morrison Cohen Chair and Co-Managing Partner Y. David Scharf and Partners David Ross and Jay Speyer are representing HFZ and owner Ziel Feldman in this matter.

Gary J. Mennitt and Pat Andriola of Dechert LLP are representing CCO.

Read the Law360 article here.