Bronx Miracle Gospel Tabernacle: Lender’s Nightmare Continues

April 30, 2021Herrick Restructuring Review

The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.

In a recent appeal to the Second Circuit, Bronx Miracle Gospel Tabernacle Word of Faith (the “Church”), asks the Second Circuit for relief from the sale of its property by a bankruptcy trustee. The Church’s action seeks damages against the trustee and her counsel and the bankruptcy judge who approved the sale. The action claims that the Church’s religious rights under the Religious Freedom Restoration Act (“RFRA”) and the Constitution have been violated in the bankruptcy court. The Church’s appeal is the latest installment in a foreclosure battle that began with a mortgage loan in 2008. Although the Church has been largely unsuccessful in its years of litigation against its lender, this is nevertheless a cautionary tale about how a determined borrower can take advantage of the legal system to fight on for years to recycle previously dismissed claims and to promote claims of misconduct which lack substantiating evidence.

The story begins in 2008, when Newell Funding (“Newell”) made a one-year $425,000 loan to the Church, secured by a mortgage on its property at 2910 Barnes Avenue in the East Bronx. When the mortgage matured on March 5, 2009, the Church failed to repay the loan, which triggered 24% default interest. In 2015, Newell filed a foreclosure action in Supreme Court, Bronx County, and on March 2, 2017, a foreclosure judgment was entered against the Church for approximately $1.2 million. The difference between the original principal amount of the loan and the foreclosure judgment was largely driven by the accrual of eight years of 24% default interest. In May 2017, the Church sought a stay of the foreclosure sale, which was denied. On May 22, 2017, the Church filed for chapter 11 to stay a foreclosure sale scheduled for later that day.

In bankruptcy court, Newell, whose loan had been in default for eight years, moved for relief from the automatic stay to complete its foreclosure. The Church consented to the relief from stay, telling the bankruptcy court that it believed it had a basis to vacate Newell’s foreclosure judgment. On December 13, 2017, the bankruptcy court granted Newell’s motion for relief from the automatic stay.

On December 14, 2017, Newell noticed the sale of the property for February 5, 2018. On February 2, 2018, the Church filed an action in state court to vacate the foreclosure judgment and stay the sale. The state court judge who had granted the foreclosure judgment and denied the May 2017 stay application was not available to hear the February 2018 stay application. The new stay application was presented to a different state court judge who, being new to the case, granted the application and stayed the sale. In April 2018, the Church tried to vacate the foreclosure judgment, claiming that the mortgage loan was unauthorized, and that Newell had engaged in misconduct. In a hearing on the merits, the state court denied the motion to vacate and lifted the stay.

On May 9, 2018, Newell noticed the property for sale on June 25, 2018. On May 24, 2018, the bankruptcy court dismissed the Church’s chapter 11 case. The court rejected the Church’s claims that it could successfully challenge the foreclosure judgment and assert claims against Newell.

On June 22, 2018, the Church presented yet another order to show cause to the state court, again seeking to stay the sale and to initiate another motion to vacate the foreclosure judgment. The new order to show cause did not disclose the previous motion to vacate the foreclosure judgment, which had been denied on April 26, 2018. Once again, the new order to show cause was presented to a state court judge who had no background with the matter. The judge denied the stay request, but signed the order to show cause, initiating a new motion to vacate the foreclosure judgment. The judge made the order to show cause returnable on June 25, 2018 so that Justice Barbato, who had granted the foreclosure judgment could decide the stay request before the scheduled time for the sale. On June 23, 2018, the Rev. Keith Elijah Thompson, who had guaranteed the Newell loan, filed a personal bankruptcy case, again staying the sale. On September 5, 2018, the bankruptcy judge handling Rev. Thompson’s personal bankruptcy vacated the automatic stay to permit Newell to continue to seek foreclosure.

The Church’s motion to vacate the foreclosure judgment was scheduled for November 26, 2018, and was opposed by Newell, which moved to dismiss the guarantors from their guaranties to prevent further delays to the foreclosure action. On May 3, 2019, the state court denied the Church’s motion to vacate the foreclosure judgment and the guarantors were released from their guaranties. On June 14, Newell noticed the fourth sale of the property for July 29, 2019. On July 28, 2019, the Church filed its second chapter 11 petition.

On December 9, 2019, Newell moved for the appointment of a chapter 11 trustee or relief from the automatic stay. In January 2020, the US Trustee’s office supported the appointment of a chapter 11 trustee and on January 27, 2020, the court appointed Deborah Piazza as the trustee. Pursuant to her authority, the trustee sought to sell the property. On March 16, 2020, the trustee, her broker and a prospective buyer arrived to inspect the property, but the Church locked her out, which triggered further litigation in the bankruptcy court. On March 24, 2020, the bankruptcy judge directed the Church to surrender possession of the property to the trustee and authorized the US Marshall’s service to assist her in enforcing the order.

The trustee then sought bankruptcy court approval to sell the property and an auction via Zoom was held on July 20, 2020, attended by six bidders and Newell, the mortgagee. After several rounds of bidding, the property was sold for $2.85 million. The bankruptcy court approved the sale on July 23, 2020. But the Church was not done fighting. On August 5, 2020, it filed a motion to vacate the sale, have the trustee dismissed, and have the Church reinstated as a debtor in possession. The Church raised new claims, arguing for the first time that (a) the appointment of the trustee substantially burdened the religious freedom of the Church and its members and violated the RFRA, the Religious Land Use and Institutionalized Persons Act of 2000 (“RLUIP”) and the Free Exercise Clause and Establishment Clause of the First Amendment; (b) the appointment of the trustee was not authorized under the Bankruptcy Code; (c) the trustee violated the Free Exercise Clause and Establishment Clause; and (d) the trustee violated RLUIP. The court rejected each of those arguments.

On September 10, 2020, the Church sought emergency ex parterelief in the United States District Court for the Southern District of New York. Its emergency petition reprised all the claims denied by the Bankruptcy Court in August 2020 and sought a stay of the sale of the property. On September 11, 2020, the District Court denied the emergency petition, noting that the Church had not served any of the other parties to the litigation, and expressing a view that the papers filed had not established a basis for ex parterelief. On February 23, 2021, the Church filed a separate complaint against the trustee and her counsel seeking $50 million in damages for the trustee’s alleged misconduct in the chapter 11 case.

In its appeal, the Church asks the Second Circuit for a declaration to undo the purchase of its property and to find the sale, trustee’s appointment, and seizure of the Church’s property in violation of the Bankruptcy Code, federal religious protection laws, and the U.S. Constitution.

“There is nothing left for the Church. This is not justice,” the Church wrote in its brief after noting that about $2 million of the sale proceeds were used to pay off a “usurious lender,” Newell, and the remainder went to the trustee’s legal fees.

Now, in its brief, the Church tells the Second Circuit that the bankruptcy trustee’s business judgment “was completely taken over by the lender” but the bankruptcy court failed to consider claims based on the same.

The Church also criticized the bankruptcy court for finding the trustee to be a private party and not a state actor. Because the court so found, it held that federal religious protection laws and the U.S. Constitution were inapplicable to the Church’s case.

“There is a fear now with the religious denomination that they cannot enter into bankruptcy protection as they will be stripped of[] their religious rights and or other federal protections or face financial ruin and the loss of church property,” the Church wrote in response to the bankruptcy court’s dismissal of RFRA protections. The bankruptcy court ruled also that the church had waived its RFRA claims because it voluntarily embraced bankruptcy. But the church argued that by making a voluntary filing under Chapter 11, an institution does not surrender its RFRA protections.

The case is In re Bronx Miracle Gospel Tabernacle Word of Faith Ministries, Case No. 20-3313 (2d Cir. Sept. 10, 2020).

For more information on this alert or other restructuring & finance litigation matters please contact:

Stephen B. Selbst at +1 212 592 1405 or [email protected]
Rodger T. Quigley at +1 212 592 1577 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.