Federal National Mortgage Association v. 1488 Bushwick, LLC

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

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FEDERAL NATIONAL MORTGAGE

ASSOCIATION,

Plaintiff,

-against-

MEMORANDUM

1488 BUSHWICK, LLC, SOLOMON AND ORDER

STEINLAUF, the NEW YORK CITY 23-CV-4030 (RPK) (TAM)

DEPARTMENT OF HOUSING

PRESERVATION AND DEVELOPMENT,

the NEW YORK CITY

ENVIRONMENTAL CONTROL BOARD

and JOHN DOE #1 THROUGH JOHN

DOE #17,

Defendants.

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TARYN A. MERKL, United States Magistrate Judge:

Plaintiff Federal National Mortgage Association (“Fannie Mae”) initiated this

action on May 31, 2023, seeking foreclosure of a mortgage loan secured by a multi-unit

apartment property located at 1488 Bushwick Avenue, Brooklyn, New York 11207 (the

“Property”), against Defendants 1488 Bushwick, LLC, Solomon Steinlauf, the New York

City Department of Housing Preservation and Development, the New York City

Environmental Control Board, and John Does #1 through #17. (See Compl., ECF No. 1.)

Currently before the Court is Plaintiff’s motion for leave to file a supplemental

complaint pursuant to Federal Rule of Civil Procedure 15(d). (See Notice of Mot. to File

Suppl. Compl. (“Mot. to File”), ECF No. 59; Mem. of L. in Supp. of Mot. to File Suppl.

Compl. (“Pl.’s Mem.”), ECF No. 60.) Defendants 1488 Bushwick, LLC and Steinlauf

(“Defendants”) oppose the motion. (Affirmation in Opp’n to Mot. to File Suppl. Compl.

(“Defs.’ Affirmation”), ECF No. 61.) For the reasons set forth below, the Court grants

Plaintiff’s motion.1 The complaint filed at ECF No. 60-1 shall now serve as the operative

complaint.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

The Court assumes general familiarity with the substance and history of the case

and includes only the background relevant to the instant motion.

As noted, Plaintiff commenced this action on May 31, 2023, seeking foreclosure

on a mortgage loan held by Plaintiff and secured by the Property after Defendants

ceased making mortgage payments and defaulted under the terms of the Note, Loan

Agreement, and Mortgage Agreement (the “Loan Documents”). (See Compl., ECF No. 1,

¶¶ 1, 39–44; Pl.’s Mem., ECF No. 60, at 1.) The Loan Documents were executed on or

about January 29, 2021. (Compl., ECF No. 1, ¶¶ 17–20.) Plaintiff alleges that Defendants

have not made any mortgage payments since January 1, 2023. (Id. ¶ 44.)

Plaintiff moved for a default judgment on October 5, 2023, after Defendants

failed to appear. (Mot. for Default J., ECF No. 18.) On November 21, 2023, Plaintiff

moved, pursuant to Rule 66 of the Federal Rules of Civil Procedure, to appoint a

receiver for the Property. (Nov. 21, 2023 Mot. to Appoint Receiver, ECF No. 25.) After

Defendants appeared in the case, Defendants’ counsel requested a stay of proceedings

against Defendant 1488 Bushwick, LLC because it had filed for bankruptcy. (Defs.’

Letter, ECF No. 38.) The Court granted the stay while the bankruptcy case was pending

and administratively terminated Plaintiff’s motions for a default judgment and to

1 Like a motion to amend, the adjudication of a motion for leave to supplement is

generally considered a nondispositive pre-trial motion within a magistrate judge’s jurisdiction

under 28 U.S.C. § 636(b)(1)(A). See Kraiem v. JonesTrading Institutional Servs. LLC, 571 F. Supp. 3d

53, 59 n.5 (S.D.N.Y. 2021); see also Lubavitch of Old Westbury, Inc. v. Inc. Vill. of Old Westbury, New

York, No. 08-CV-5081 (DRH) (ARL), 2021 WL 4472852, at *8–9 (E.D.N.Y. Sept. 30, 2021).

appoint a receiver. (Feb. 16, 2024 and Feb. 29, 2024 ECF Min. Entries.) The bankruptcy

case was dismissed with prejudice on August 8, 2024. (Status Report, ECF No. 43.)

On August 22, 2024, Plaintiff filed a letter requesting a pre-motion conference in

anticipation of moving to file a supplemental complaint in order to plead full recourse

“liability against [1488 Bushwick, LLC and Steinlauf] based on [1488 Bushwick]’s

bankruptcy filing.” (Pre-Mot. Conf. Letter, ECF No. 44, at 1.) The Court directed

Defendants to respond and indicate whether they opposed amendment of the

complaint. (Aug. 30, 2024 ECF Order.) On September 6, 2024, Defendants filed a letter

response requesting that the Court deny Plaintiff’s motion to amend the complaint.

(Reply Letter, ECF No. 45.) On September 9, 2024, the Honorable Rachel P. Kovner

denied Plaintiff’s request for a pre-motion conference as unnecessary, directed the

parties to brief the motion, and referred the motion to the undersigned Magistrate

Judge. (Sept. 9, 2024 ECF Order.)

That same day, Plaintiff again moved to appoint a receiver. (Mot. to Appoint

Receiver, ECF No. 46; Sept. 13, 2024 ECF Order Referring Mot.) While the motion to

appoint a receiver was pending, Plaintiff filed a letter on the docket, addressed to the

counsel of Defendants Steinlauf and 1488 Bushwick, LLC, representing that Plaintiff

had served upon them a motion to file a supplemental complaint and supporting

papers. (Letter, ECF No. 50.) On October 21, 2024, Defendants requested a twenty-day

extension of their deadline to respond to Plaintiff’s notice of motion to file a

supplemental complaint, which was granted. (Letter, ECF No. 53; Oct. 22, 2024 ECF

Order.)

On November 8, 2024, the Court granted Plaintiff’s motion to appoint a receiver,

and appointed Orazio Crisalli as receiver of the Property. (Mem. & Order, ECF No. 56;

Order Appointing Receiver, ECF No. 56-1.)

The motion to file a supplemental complaint was fully briefed and filed on

November 18, 2024. (See Mot. to File, ECF No. 59; Pl.’s Mem., ECF No. 60; Defs.’

Affirmation, ECF No. 61; Pl.’s Reply in Supp. of Mot. to File Suppl. Compl. (“Pl.’s

Reply”), ECF No. 62.)

For the reasons contained herein, Plaintiff’s motion to file a supplemental

complaint is granted.

DISCUSSION

I. Legal Standards

Federal Rule of Civil Procedure 15(d) provides that “[o]n motion and reasonable

notice, the court may, on just terms, permit a party to serve a supplemental pleading

setting out any transaction, occurrence, or event that happened after the date of the

pleading to be supplemented.” Fed. R. Civ. P. 15(d); see also Kleeberg v. Eber, 331 F.R.D.

302, 315 (S.D.N.Y. 2019) (“Rule 15(d) allows a party to supplement its complaint in

order to present facts and claims that arose after the operative complaint was filed.”);

LaBarbera v. Audax Const. Corp., 971 F. Supp. 2d 273, 284 (E.D.N.Y. 2013) (same). “Where

the plaintiff seeks to add related claims against the same defendants, the analysis used

to determine whether supplementation is appropriate under Rule 15(d) is identical to

the analysis used to determine whether amendment is appropriate pursuant to Rule

15(a).” Kleeberg, 331 F.R.D. at 315 (citing Cummings-Fowler v. Suffolk County Cmty. Coll.,

282 F.R.D. 292, 296 (E.D.N.Y. 2012)). A party opposing amendment or supplementing

the complaint “has the burden of establishing that leave to amend would be prejudicial

or futile.” Blaskiewicz v. County of Suffolk, 29 F. Supp. 2d 134, 137 (E.D.N.Y. 1998).

“As with Rule 15(a), the decision to grant or deny a Rule 15(d) motion is within

the sound discretion of the district court.” LaBarbera, 971 F. Supp. 2d at 284. In addition,

the Second Circuit has held that, like the standard under Rule 15(a), “[a]bsent undue

delay, bad faith, dilatory tactics, undue prejudice to the party to be served with the

proposed pleading, or futility, [a Rule 15(d)] motion should be freely granted.” Nat’l

Credit Union Admin. Bd. v. U.S. Bank Nat’l Ass’n, 898 F.3d 243, 256 (2d Cir. 2018)

(alterations in original) (quoting Quaratino v. Tiffany & Co., 71 F.3d 58, 66 (2d Cir. 1995));

see also Kleeberg, 331 F.R.D. at 315 (“[C]ourts will grant leave to supplement a pleading

so long as the supplemental facts are connected to the original pleading and there is no

good reason to deny the request.”).

II. Analysis

With the supplemental complaint, Plaintiff seeks to add allegations related to

Defendant 1488 Bushwick, LLC’s bankruptcy case, including the details as to when it

was filed and what the loan documents provide for in the event that Defendant 1488

Bushwick, LLC (the “Borrower-Defendant”) declares bankruptcy. (See Proposed Suppl.

Compl., ECF No. 60-2 (redline version).) Specifically, Plaintiff seeks to add allegations

regarding the full recourse provisions of the underlying mortgage documents. (Id.

¶¶ 28–29.) Plaintiff contends that supplementing the complaint is warranted because

although the mortgage loan is generally non-recourse to Defendants, there are

exceptions and events set forth in Sections 3.02(a) and Section 3.02(b) of the Loan

Agreement that trigger full recourse liability. (Pl.’s Mem., ECF No. 60, at 4.) No such

exception or event had occurred when Plaintiff filed the initial complaint. (Id.)

Plaintiff claims that Borrower-Defendant’s filing for bankruptcy on February 13,

2024, constituted a “Bankruptcy Event” under Section 3.02(b), which changed the

nature of Defendants’ personal liability by “triggering the full recourse liability

provision of the Loan Agreement and corresponding liability of Steinlauf under the

Guaranty.” (Pl.’s Mem., ECF No. 60, at 4.) The proposed supplemental complaint,

accordingly, contains allegations detailing the full recourse provisions triggered by the

“Bankruptcy Event,” which permit Plaintiff to “seek a judgment personally against

Borrower-Defendant and [Defendant Steinlauf] for the full balance of the mortgage

loan.” (Proposed Suppl. Compl., ECF No. 60-1, ¶ 69; see generally id.) Plaintiff argues

that it should be allowed to supplement its pleading because these allegations are

connected to the original pleading and will supplement Plaintiff’s available relief,

without adding additional claims or parties. (Pl.’s Mem., ECF No. 60, at 6–7.) Plaintiff

further argues that it has acted in good faith and the proposed supplemental pleading is

not unfairly prejudicial to Defendants or futile. (Id. at 6.)

Defendants argue that the full recourse provision violates public policy, is an

unenforceable penalty, and violates the one action rule under Section 1301 of the New

York Real Property Actions and Proceedings Law (“RPAPL”). (Defs.’ Affirmation, ECF

No. 61, ¶¶ 2–9.) Defendants also largely rehash the same arguments considered and

rejected in their opposition to Plaintiff’s motion to appoint a receiver. (See generally

Defs.’ Affirmation in Opp’n to Mot. to Appoint Receiver, ECF No. 52; Defs.’ Aff. in

Opp’n to Mot. to Appoint Receiver, ECF No. 52-1.)

The clear connection between the supplemental allegations and the original

pleading strongly favors granting Plaintiff’s motion. See Witkowich v. Gonzales, 541 F.

Supp. 2d 572, 590 (S.D.N.Y. 2008) (“Rule 15(d) reflects a liberal policy favoring a merit-

based resolution of the entire controversy between the parties. To that end, leave to file

a supplemental pleading should be freely granted, provided that the supplemental facts

connect the supplemental pleading to the original.” (quotation marks, citations, and

alterations omitted)). Furthermore, as discussed above, parties should generally be

allowed to supplement their pleadings in the absence of “undue delay, bad faith,

dilatory tactics, undue prejudice to the party to be served with the proposed pleading,

or futility.” Nat’l Credit Union Admin. Bd., 898 F.3d at 256; see also Kleeberg, 331 F.R.D. at

314. Here, the Court finds no factors that weigh against granting Plaintiff’s motion for

leave to file. Specifically, the Court notes that Defendants will suffer no cognizable

undue prejudice if Plaintiff is permitted to file its supplemental complaint. As Plaintiff

points out, Plaintiff seeks to supplement its pleadings because of the actions Defendants

themselves have taken since the initiation of this litigation, i.e., filing for bankruptcy.

(See Pl.’s Mem., ECF No. 60, at 6.) Accordingly, the main source of delay in this case

thus far was caused by Defendants and the record does not demonstrate that Plaintiff’s

seeking to file the supplemental complaint is in bad faith, evidences dilatory tactics, or

will cause undue delay. See Nat’l Credit Union Admin. Bd., 898 F.3d at 256. The Court

also notes that neither party seeks discovery in this case, another reason that Plaintiff’s

filing will not unduly delay the litigation. (See Apr. 4, 2024 ECF Order (“Both parties

indicated that they are not seeking discovery at this time, and that the documentary

record in the case is clear.”).)

Defendants bear the burden of establishing that leave to amend would be unduly

prejudicial or futile, Cummings-Fowler, 282 F.R.D. at 298, and proffer several arguments

in opposition to Plaintiff’s motion. None are availing. Defendants first argue that the

full recourse provision violates public policy and is an unenforceable penalty, citing

ING Real Estate Fin. (USA) LLC v. Park Ave. Hotel Acquisition, LLC, 907 N.Y.2d 437, 2010

WL 653972 (N.Y. Sup. Ct. Feb. 24, 2010). (Defs.’ Affirmation, ECF No. 61, ¶¶ 2–4.)

However, the Court in ING declined to enforce the contested full recourse provision

because the provisions of the loan agreements were internally inconsistent, not because

the provision itself was an unenforceable penalty. ING, 2010 WL 653972, at *5–6.

Defendants do not advance any arguments suggesting that there are internal

contradictions within the full recourse provision and the Loan Agreements.2 Moreover,

Plaintiff points out that, by signing a pre-negotiation letter (“PNL”) in August 2023 in

connection with discussions to resolve this case, Defendants acknowledged and waived

their rights to these defenses. (Pre-Negotiation Letter, ECF No. 49-8, at ECF p. 4

(“Furthermore, [Defendants] further waive and release any and all defenses that they

may have to the rights and remedies of Fannie Mae, and as appropriate, the Servicer,

under the provisions of the Loan Documents and applicable law.”); see also Proposed

Suppl. Compl., ECF No. 60-1, ¶ 66; Pl.’s Reply, ECF No. 62, at 6.) The PNL, by its clear

terms, limits Defendants’ ability to argue against the rights and remedies that Plaintiff

seeks. (See Pre-Negotiation Letter, ECF No. 49-8, at ECF p. 4.) Furthermore, where the

standard for denying a motion to supplement the complaint requires a showing of

undue prejudice or futility, the question of whether Plaintiff will ultimately prevail is

not relevant. Defendants may continue to press their arguments and defenses as the

case proceeds, but these arguments do not provide a basis to deny the filing of an

otherwise appropriate supplemental pleading.

Defendants next argue that Plaintiff’s motion violates the one action rule. (Defs.’

Affirmation, ECF No. 61, ¶¶ 7–9.) See RPAPL § 1301. This rule “prevents a mortgagee of

real property from seeking to enforce rights upon default by pursuing a legal remedy

and an equitable remedy at the same time.” First Nationwide Bank v. Gelt Funding, Inc.,

No. 92-CV-790 (MBM), 1992 WL 358759, at *2 (S.D.N.Y. Nov. 30, 1992); United States v.

2 The factual basis for instituting the full recourse provision in ING also significantly

differs from the facts at issue here. In ING, the provision was triggered by the guarantors’

nineteen-day delay in paying property taxes. 2010 WL 653972, at *3. Here, Defendants have

repeatedly defaulted on the Loans, beginning on January 1, 2023, and continuing at least

through the filing of Plaintiff’s complaint. (See Compl., ECF No. 1, ¶ 44; see also Proposed Suppl.

Compl., ECF No. 60-1, ¶ 47 (alleging that the Borrower-Defendant has failed to pay any

monthly payments from January 1, 2023, through the filing of the proposed supplemental

complaint on November 18, 2024).)

Whitney, 602 F. Supp. 722, 730 (W.D.N.Y. 1985) (similar). Again, whether Plaintiff will

ultimately prevail on its requested relief is not at issue when determining whether to

grant a motion to supplement the complaint. Moreover, the requested relief does not

raise one action concerns: Plaintiff’s proposed supplemental complaint is not akin to the

commencement of another action. See RPAPL § 1301(3). Indeed, the proposed pleading

does not even add a new claim. Rather, it modifies the pleading’s factual allegations

and the prayer for relief to request that Defendants “may be adjudged to pay the entire

deficiency of any amounts remaining due and owing to Plaintiff following the sale of

the Property and distribution of the proceeds thereof.” (Proposed Suppl. Compl., ECF

No. 60-1, at 20; Pl.’s Reply, ECF No. 62, at 6.)

Defendants additionally argue that Plaintiff acted in bad faith by “refusing to

engage in reasonable alternatives to foreclosure, such as a workout plan, short sale,

assumption of debt, or deed in lieu, despite several attempts by the Defendants to offer

a deed in lieu of foreclosure.” (Defs.’ Affirmation, ECF No. 61, ¶ 10.) This is not a

defense against the filing of a supplemental complaint. Defendants’ argument that

Plaintiff is acting in bad faith by choosing to enforce the provisions of the Loan

Agreements and assert its rights according to those provisions is irrelevant and

unpersuasive because, as Plaintiff points out, “Plaintiff is under no obligation to

negotiate a resolution to this action.” (Pl.’s Reply, ECF No. 62, at 6.)

Here, there is “no good reason to deny [Plaintiff’s] request” to file the

supplemental complaint. Kleeberg, 331 F.R.D. at 315. Accordingly, Plaintiff should be

afforded the opportunity to test its claims on the merits. The Court thus grants

Plaintiff’s request for leave to file a supplemental complaint. See Witkowich, 541 F. Supp.

2d at 590 (granting leave to file supplemental pleadings where new allegations involve

the same subject matter, many of the same people, and took place shortly after the

events that were the subject of the litigation).

CONCLUSION

For the reasons discussed above, Plaintiff’s motion for leave to file a first

supplemental complaint (ECF No. 59) is granted. Plaintiff’s supplemental complaint,

filed at ECF No. 60-1, shall now serve as the operative complaint.

SO ORDERED.

Dated: Brooklyn, New York

March 7, 2025

A. aE

TARYN A? MERKL

UNITED STATES MAGISTRATE JUDGE

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