By Emma Cueto

Law360 (May 20, 2020, 7:33 PM EDT) -- A New York state judge has declined to block an auction for the ownership interest in a Manhattan development project, saying the proposed sale, originally scheduled to take place at the New York office of Paul Hastings LLP, did not violate the state's emergency measures in response to COVID-19.

Judge Frank P. Nervo said in Monday's ruling that although New York state has placed a moratorium on evictions, the sale of a fee interest in the property did not qualify as an eviction, and added that the pandemic actually worked against plaintiff 1248 Associates Mezz II, a developer that is partly owned by Hidrock Properties, in showing that it is not likely to succeed in its bid to block the sale.

"Plaintiff's anticipation of economic damage resulting from the noticing, the manner or timing of the sale, particularly in light of the current economic shutdown and restrictions on travel as a result of the COVID-19 pandemic, is merely speculative," Judge Nervo wrote in the order.

The judge, therefore, declined to grant a preliminary injunction against the sale and vacated the initial temporary restraining order granted after the complaint was filed.

1248 Associates Mezz II LLC is connected both to Hidrock Properties and real estate firm Wachtel Missry LLP and filed the complaint to block the sale on April 30, just before the May 1 sale was scheduled to take place. 

According to the complaint, 1248 Associates holds the rights to develop a property at 12 E. 48th St. in Manhattan, where it plans to construct a 31-story building that will house a high-end Hilton hotel as well as retail space. In addition to supplying $33 million of its own money, the company partly financed the project with several loans — including $7 million from 12E48 Mezz LLC, which is controlled by private equity investor Henry R. Silverman — in 2017, the complaint says.

The project was close to hitting the targets required under the loan agreement with 12E48 Mezz in March, according to the complaint, when the pandemic hit and the New York governor issued emergency orders that shut down nonessential construction in the state. The project was not deemed essential, the complaint says.

Before the shutdown, 1248 Associates was already looking for a way to refinance with a third party in order to repay the loan, according to the complaint, but negotiations fell through when the pandemic struck. The developer says that once the emergency orders are lifted and construction resumes, the project will hit the necessary benchmarks in as little as six months.

However, the complaint alleges, the lender decided to take advantage of the pandemic to try to take control of the project through a "sham" auction of a related Hidrock-controlled corporate entity that was used as collateral for the loan, which would give the buyer control of the project.

It also alleges the sale itself, scheduled to occur at Paul Hastings' office in Manhattan, would violate emergency orders prohibiting all but essential activities. 

12E48 Mezz hit back that the lawsuit was a "shameless attempt to use the global pandemic to direct the court's focus away from the fact that plaintiff and its subsidiaries mismanaged this project for years." 

Despite aid from the Silverman-backed entity, the project had missed its substantial completion deadline of Dec. 31, 2019, long before construction was halted due to the pandemic, 12E48 Mezz said. The Hidrock entity was then unable to obtain new financing to pay off its loan from 12E48 Mezz, according to the opposition to the request for a preliminary injunction.

"Plaintiff conveniently glosses over the history of the transaction in its papers and instead seeks to paint the false picture that defendant is using the global pandemic opportunistically," the opposition said. "Plaintiff is the one using the current state of emergency as a basis to advance novel theories to frustrate defendant's express contractual remedies."

The judge sided with 12E48, noting there was no dispute that 1248 Associates was in default of the loan agreement and saying it had not demonstrated it was likely to succeed on the merits of the case, which is a necessary requirement for a preliminary injunction.

The judge did, however, reiterate that the auction would not qualify as an essential activity.

Peter Olsen and Jodi Kleinick, counsel for 12E48 Mezz, told Law360 in a statement Wednesday, "We and our client were extremely pleased that the court resolved this matter quickly, and determined that the mezzanine lender was entitled to proceed."

The auction has been rescheduled for 10 a.m. June 1, the attorneys added, and will be conducted remotely via teleconference. 

Counsel for 1248 Associates did not respond to a request for comment Wednesday.

1248 Associates is represented by Jacob S. Pultman, Bradley S. Pensyl and Michael F. Westfal of Allen & Overy LLP.

12E48 Mezz is represented by Jodi Kleinick, Peter Olsen, Harvey Strickon, James Ferguson and Mary Wolfe of Paul Hastings.

The case is 1248 Associates Mezz II LLC v. 12E48 Mezz II LLC, case number 651812/2020, in the Supreme Court of the State of New York, New York County.

--Editing by Janice Carter Brown.

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