Sheffield57 foreclosure clears hurdle, but others remain

By David Jones | July 15, 2009 12:18PM

A state Supreme Court judge rejected a request to appoint a receiver to complete the Sheffield57 condominium conversion, a decision that could help clear the way for Fortress Investment Group to foreclose on millions of dollars in defaulted loans and take control of the property.

Judge Bernard Fried ruled that Sheffield57 investors Yair Levy and Serge Hoyda failed to prove that the condo was in imminent danger of being lost or destroyed, despite their lawsuit accusing developer Kent Swig of misappropriating millions of dollars in construction funds.

“Indeed plaintiffs here have not proven that the property at issue, unsold condominium units, will be removed, lost, injured or destroyed,” Fried wrote in his decision. “At best, plaintiffs have shown that the units are likely to be sold at a discount from their actual value. This can be remedied by the payment of money damages.”

The June lawsuit alleged that Swig, the managing partner in the Sheffield57 condominium conversion, spent millions of dollars in construction money on personal and other uses unrelated to the project. In May, the state attorney general halted sales at the condominium, and the mortgage lender and senior mezzanine lender declared their loans in default.

Swig entered an agreement with Fortress in June that would allow the investment bank to foreclose on the notes, pay off millions of dollars in unpaid common charges and mechanic’s liens and effectively take control of the property after an Aug. 6 auction of the mezzanine debt.

Levy and Hoyda want to block Fortress, which acquired those loans from Wells Fargo and Guggenheim Structured Real Estate, respectively, from foreclosing on the loans and taking over the building. Such an action would effectively wipe out the 70 percent ownership stake in Sheffield57 controlled by Levy and Hoyda.

Stephen Meister, attorney for Levy and Hoyda, said the judge is separating the issue of whether there is a legitimate need to delay the Fortress deal with Swig before the auction, and whether the receivership is the best way to accomplish that.

“I think the judge is reserving his right to make a decision on the preliminary injunction and that is how the judge is going to deal with these issues on an immediate basis,” Meister said.

Meister has raised concerns about the agreement between Swig and Fortress, as questions remain about whether Swig would derive some financial benefit from Sheffield57. Swig attorney Y. David Scharf said that the terms of that agreement are confidential, but said that Swig would no longer be an equity partner in the building. Scharf says, without providing any specifics, that the deal between Fortress and Swig would benefit the entire Sheffield57 entity, and not just Swig.

Judge Fried is still scheduled to hear arguments on Monday, on whether to grant an injunction to Levy and Hoyda that would block the Aug. 6 auction and allow their attorneys to depose Swig and Fortress.

Scharf expressed confidence that the court is leaning towards the defendants.

“The way I look at it is, it’s one down, one to go,” he said.