Judge denies Sheffield57 injunction, paving way for auction

By David Jones | July 30, 2009 04:20PM

Developer Kent Swig won a major legal challenge this morning as a state Supreme Court judge denied a request by investors Yair Levy and Serge Hoyda to question him under oath and to block the auction of the Sheffield57 condominium.  

As part of a blockbuster suit filed in New York state Supreme Court, Levy and Hoyda sought to block the Aug. 6 auction of Sheffield57, arguing that Fortress Investment Group helped orchestrate a “loan to own” scam with Swig’s lenders that would wipe out their stake in the building.

Fortress, a Manhattan-based hedge fund, acquired about $100 million in defaulted mortgage and mezzanine loans in June, which were used to convert Sheffield57 into a luxury condominium.   

Judge Bernard Fried agreed with defense claims that Levy and Hoyda are not direct investors in The 322 West 57th Street entity that controls the building and said that any claim they have can be settled monetarily at a later date. Therefore Fried said that the auction would not preclude Levy and Hoyda from recovering damages after trial.

“Specifically, plaintiffs have not shown that the sale they seek to enjoin will result in irreparable harm to them or that they are likely to succeed on the merits of their claims,” Fried wrote in his decision.  

Attorney Y. David Scharf, who represents Swig, praised the decision and said the ruling will help clear the way for the auction to take place.

“We obviously feel strong about our position about the lack of overall merit to the complaints,” Scharf said. “As of this moment, there is no impediment to the foreclosure.”

Attorney Stephen Meister, who represents Levy and Hoyda, disagreed with the decision, saying the terms of the auction were designed to “chill” any bidding by rival investors. However, he noted that the court would allow his clients to seek monetary damages.

“Judge Fried overlooked my argument that Fortress’ foreclosure sale was commercially unreasonable and therefore illegal,” Meister said. “The notice of foreclosure incorrectly states that the sponsor owns the building. It doesn’t; it owns unsold condominium units.”

Attorney Robert Braverman, who represents the Sheffield57 condominium owners group, said his clients were pleased by the decision.

“We’re pleased that the foreclosure sale is going to go forward as scheduled and look forward to working with whomever the purchaser of the sponsor entity is going to be,” Braverman said.

Despite the apparent victory, one of Swig’s original mezzanine lenders has thrown a monkey wrench into the case. Gramercy Warehouse Funding filed suit today, alleging that Swig has colluded with Fortress and other lenders to conduct a sham auction. The lender asked the court for an injunction blocking the auction.

“Fortress’ plan, abetted by the Swig defendants, is to go through the motions of a foreclosure on the Sheffield property pursuant to Article 9 of the Uniform Commercial Code,” Gramercy said in its complaint, “but in reality [is] to rig the foreclosure and auction process so that Fortress will be allowed to bid on the property without competitors and acquire the Sheffield property for pennies on the dollar.”

Responding to the Gramercy allegations, Fortress urged the court to deny the injunction, calling the move a “desperate” attempt to recover a “worthless” mezzanine loan, according to a court filing.