OPINION AND ORDER
This case involves the plaintiff’s attempt to appoint a receiver for the defendants’ properties because of the defendants’ default on loans for which the properties are collateral. U.S. National Bank (“U.S. Bank,” the “plaintiff,” or the “Trustee”) is the Trustee, pursuant to a March 2006 Pooling and Servicing Agreement (the “PSA”) of various loans, including loans made to the defendants. The defendants are limited liability companies which own and operate, under the Embassy Suites franchise, hotels that are collateral for the defendants’ loans. In an Opinion and Or^ der dated May 7, 2012, the Court denied the defendants’ motion to dismiss for lack of subject matter jurisdiction, determined that diversity jurisdiction pursuant to 28 U.S.C. § 1332 existed in this case, and ordered that an evidentiary hearing be held to determine whether the collateral is in jeopardy such that a receiver is justified. U.S. Bank Nat’l Ass’n v. Nesbitt Bellevue Prop. LLC,
The general background of this case is set forth in this Court’s previous Opinion and Order, U.S. Bank,
I.
Whether a federal court should appoint a receiver in a diversity action is governed by federal law. Varsames v. Palazzolo,
‘Fraudulent conduct on the part of defendant; the imminent danger of the property being lost, concealed, injured, diminished in value, or squandered; the inadequacy of the available legal remedies; the probability that harm to plaintiff by denial of the appointment would be greater than the injury to the parties opposing appointment; and, in more general terms, plaintiffs probable success in the action and the possibility of irreparable injury to his interests in the property.’ ”
Varsames,
As an initial matter, the parties dispute who bears the burden in this case. The plaintiff, citing D.B. Zwim Special Opportunities Fund, L.P. v. Tama Broadcasting, Inc.,
There are no allegations of fraud in this case, but courts have “appointed receivers even where there was no evidence of fraud.” D.B. Zwim,
However, the parties dispute the existence of any imminent danger of the diminution of the value of the properties. This is a critical factor in the analysis of whether to appoint a receiver. See, e.g., Melnick v. Press, No. 06 Civ. 6686,
A.
The eight collateral hotel properties (hereinafter, the “Hotels” or the “Collateral”) are all managed by Windsor Capital Group, Inc. (“Windsor”),
There is no dispute that, if the Hotels were to lose their licenses to operate under the Embassy Suites brand, that would substantially diminish their value. In April, 2012, Windsor received letters from the licensor with regard to each of the Hotels, explaining that each of the Hotels was in default of the license agreement “as a result of its failure to comply with required Embassy Suites brand and product quality standards.” (May 9, 2012 Evid. Hr’g, Exs. C-l, C-2, C-3, C-4, C-5, C-6, C-7, & C-8.) The letters explain that the Hotels must cure the default by July 19, 2012, and that if they do not do so, then the franchise licenses may be terminated on September 1, 2012. (Id.) The defaults relate to the Hotels’ failure to obtain a satisfactory score on Quality Assurance Evaluations (“QAs”) that took place between December, 2011 and March, 2012. (Id.)
At the evidentiary hearing, Patrick Nesbitt, the founder, CEO and Chairman of Windsor, explained that the QAs are given approximately every six months. (May 9, 2012 Evid. Hr’g Tr. at 55.) A hotel is awarded 4,000 points, which are spread evenly between 4 major categories, and between 10 and 50 weighted subcategories. (Id.) These categories include so-called “brand standards,” which are the latest brand-wide requirements. (Id.) An inspector then grades each subcategory and deducts points within each category. The total points are then added up. (Id.) A score of 2400 or less is considered a failing score which will put the hotel in default. (Id. at 59.)
After receiving the default notices, Nesbitt assembled a team of senior managers at Windsor to determine the most cost effective way to recover points on the QAs. (Id. at 58.) Nesbitt testified at the hearing that, if the defendants are able to raise their scores in the next round of QAs, the default notices will be “eliminated.” (Id. at 59-60.) The plan that Nesbitt and Windsor created comprises two stages of improvements that would cost a total of over $4.4 million. (Id. at 60-65; see also May 9, 2012 Evid. Hr’g, Exs. B & D.) Nesbitt could not testify that the $4.4 million dollars would keep the Hotels in compliance with the franchise license for the duration of license agreement, but only
B.
Neither the defendants nor Windsor has the $4.4 million to pay for the improvements necessary to avoid the imminent loss of the Embassy Suites franchise. (May 9, 2012 Evid. Hr’g Tr. at 75, 106.) It is also undisputed that the loans at issue have been in default for over a year. (See, e.g., id. at 76 (“Q: When did this loan mature? .... A: February 6, 2011. Q: Have you satisfied your obligations at that point? A: In terms of what? Q: Paying off your debt pursuant to the loan documents? A: We do not have the ability to pay off the entire debt, no.”).)
At the evidentiary hearing, Robert Ginsberg, the asset manager who manages the defendants’ loans for the plaintiff, explained that, because the loans are in default, all of the funds generated by the Hotels are trapped in a cash management account, over which Torchlight, the Special Servicer for the loan, has control. (Id. at 11.) The defendants, under Ginsberg’s supervision, then draw against the cash management account for their operating expenses, and Torchlight applies funds to the principal and interest payments due on the loan when there are sufficient funds in the cash management account that debt service would not “jeopardize the hotel’s operations.” (Id. at 11-12; see also id. at 14 (“A: So we’ve been allowing the debt service to fall further and further behind. If we do allow the debt service to fall behind, the trust makes an advance to the bondholders, which then starts to accrue interest. We don’t like to have it get behind, but we do because we don’t want the properties to be injured.”).) Ginsberg explained that approximately $1.2 million in combined principal and interest payments are due on the loans each month, and that the defendants are currently six months behind in their payments on the loans. (Id. at 12; see also May 9, 2012 Evid. Hr’g, Ex. Px. 1.) In addition, Ginsberg testified that the defendants are sixteen months in arrears on approximately $227,000 monthly payments for property maintenance reserves, and one month in arrears on an approximately $228,000 payment to a tax and insurance escrow account. (May 9, 2012 Evid. Hr’g Tr. at 15-16; see also May 9, 2012 Evid. Hr’g, Ex. Px. 1.) The property maintenance reserve account currently contains $300,000. (May 9, 2012 Evid. Hr’g Tr. at 17.) There are over $11 million in total payments in arrears. (May 9, 2012 Evid. Hr’g, Ex. Px. 1.)
The defendants have requested that Torchlight release funds from the management account to pay the $4.4 million cost of the two initial phases of improvements so that the Hotels will not lose the Embassy Suites franchise. (See May 9, 2012 Evid. Hr’g, Ex. D.) However, with respect to the requested $4.4 million, Ginsberg testified that “there isn’t any particular account that has that cash, unless you also count the cash which was available for operations.” (May 9, 2012 Evid. Hr’g Tr. at 19; see also id. at 31-37.)
C.
At bottom, the plaintiff faces a stark choice in the absence of a receiver. It can loan at least another $4.4 million, and possibly much more, to a debtor that has been in default for well over a year, adding the new loan to the one which is already in default and for which payments are in arrears. Or, if it does not do so, the Hotels that are its sole recourse as collateral for the loan will lose much of their value due to the loss of the Embassy Suites franchise license. The Hotels are in default of their franchise licenses, and unless improvements to the Hotels are made — improvements that there is no dispute that the defendants and Windsor cannot pay for — imminent and irreparable harm to the value of the Hotels is highly likely.
The defendants argue that it will be a greater harm to the properties if a receiver is appointed, because the receiver likely will hire a new management company to manage the Hotels, thus depriving the hotels of Windsor’s experience with these specific properties. (May 9, 2012 Evid. Hr’g Tr. at 66-69.) However, the plaintiff has proposed that the receiver be authorized to employ Crescent Hotels & Resorts LLC, (“Crescent”), a new property manager. Crescent has extensive experience managing properties that are distressed and has the resources to effect a seamless management transition. (George Decl. ¶ 8.) This would be a far more effective protection for the properties than a continuation of the current management. If the current management and ownership remain, there will be no money to make the improvements that are necessary to cure the Hotel’s pending default with respect to their franchises. While the defendants argue that the plaintiff should simply “be reasonable” and loan the defendants additional funds, (id. at 78), the plaintiff is not obligated to do so, and has every reason to seek to avoid loaning additional money to the defendants given the current status of the loan.
The defendants argue, rightly, that the appointment of a receiver, and the likely displacement of Windsor as the manager of the Hotels, will have a deleterious effect on Windsor. (Id. at 69.) However, any harm to Windsor is tempered' by the fact that, under Windsor’s management, all of the Hotels have been issued default notices by the franchisor' and all the Hotels are substantially in arrears of their obligations to the plaintiff.
The dispositive issue is whether the appointment of a receiver is “clearly necessary to protect plaintiffs interests in the property.” Nyland,
However, before the motion may be granted, the Court must consider the defendants’ motion for judgment as a matter of law.
II.
Relying on the Supreme Court’s decision in Gordon, the defendants argue that the Court should not appoint a receiver in this case because the receivership is not ancillary to some other final relief, and a receivership cannot be an end in itself.
Rule 66 of the Federal Rules of Civil Procedure contemplates the appointment of receivers by federal courts. See Fed. R.Civ.P. 66. The adoption of Rule 66 in 1938 did not revise existing receivership practice; rather the Federal Rules “provided that federal receiverships should continue to be governed as they had been before.” Bicknell v. Lloyd-Smith,
As a general matter, when a receiver is sought pursuant to Rule 66 in a diversity case, “the appointment of a receiver in equity is not a substantive right but is a remedy that is ancillary to the primary relief prayed for in the suit.” Wright, Miller, Kane & Marcus, Federal Practice and Procedure § 2983; see also id. at § 2981 & n. 9 (a receiver’s “appointment is incident to" other proceedings in which some form of primary relief is sought”) (collecting cases); accord Touchett v. Am. Tel. & Tel. Co., 71 F.Supp.
There is disagreement among district courts with respect to what, aside from a receiver, must be sought by a plaintiff for receivership to be appropriate. The classic example in which the appointment of a receiver is ancillary or incidental to some primary form of relief is where a plaintiff has brought a foreclosure action and requests a temporary receiver pending the foreclosure. See, e.g., Nyland, 889 F.2d at 95-96 (action for a receiver commenced simultaneously with foreclosure action in state court that was thereafter removed to federal court); U.S. Bank Nat’l Ass’n v. Crutch, No. 09 Civ. 998,
In this case, no immediate relief other than the appointment of a receiver is sought directly from the Court. See Complaint, U.S. Bank v. Nesbitt, No. 12 Civ. 423, Docket No. (S.D.N.Y. Jan. 18, 2012) (“Compl.”), at ¶¶ 36-51 & A-L. Torchlight asset manager Ginsberg confirmed this during the recent evidentiary hearing. (See May 9, 2012 Evid. Hr’g Tr. at 25 (“Q. To your knowledge is there any kind of relief that you are seeking from Judge Koeltl other than the appointment of this receiver on the terms described in your complaint? A. Not that I can think of.”).) Ginsberg also testified that U.S. Bank had not commenced any foreclosure action anywhere against the properties at issue, but asserted that this was “the intent.” (Id. at 24 (“A. Eventually we hope to foreclose on the properties. That’s one of the goals.
In this case, the appointment of a receiver is necessary to preserve the property for the secured lender and to effectuate the foreclosure and liquidation of the properties that are spread over six states. The Complaint asks not simply that a receiver be appointed to manage the properties and collect revenue from them. Compl. at ¶¶ B-F. The Complaint also asks that the “[pjlaintiff be permitted to commence and consummate, without further order of this Court, judicial and non-judicial foreclosure proceedings” against any of the Hotels, and that the proposed receiver “be authorized, upon request by Plaintiff, to list or otherwise advertise for sale ... and to sell the Hotels .... ” Compl. at ¶¶ I-J. In short, the plaintiff seeks to vindicate its right to the Collateral by liquidating the Collateral, and the plaintiff is seeking a receiver with the power to preserve the value of the Hotels, and to liquidate them. Moreover, the relief sought plainly contemplates foreclosure proceedings in the various states where the hotels are located. Cf 28 U.S.C. § 754 (providing for the ability of federal receivers to take control of property in different districts); 28 U.S.C. § 1692 (providing for the ability of federal receivers appointed in one district to serve and execute process in any district in which the property at issue is located). The foreclosure and ultimate liquidation of the Hotels is the final relief which requires the appointment of a receiver to preserve the Collateral while the receiver alleviates the danger. See, e.g., Gordon,
While receiverships should be “be watched with jealous eyes lest their function be perverted,” Kelleam, 312 U.S at 381,
The Court’s equitable power to appoint a receiver extends to situations where a plaintiff who is a secured creditor seeks the appointment of a receiver to avoid a substantial and preventable decline in the value of its collateral, where the only other proposed alternative is a large loan to a debtor who is already in default, and where an explicitly stated and contemplated end of the receivership is the sale of the properties. Because that is the case here, the defendants’ motion for judgment as a matter of law is denied. Moreover, because it is a proper use of the Court’s equitable power to grant the motion for a receiver in this case, and because there is a strong likelihood of imminent and irreparable harm to the value of the Hotels in the absence of the appointment of a receiver, the motion for a receiver will be granted.
CONCLUSION
The Court has carefully considered all of the parties’ arguments. To the extent not specifically addressed above, they are either moot or without merit. For the reasons stated above, the defendants’ motion for judgment as a matter of law is denied, and Windsor’s motion to intervene is denied without prejudice as moot. U.S. Bank’s motion for the appointment of a receiver is granted.
The plaintiff will provide a proposed order appointing a receiver by May 30, 2012.
The defendants should submit any objections by June 1, 2012.
The plaintiff should submit any reply to the defendants’ objections by June 2, 2012.
The Clerk is directed to close Docket Nos. 56 and 59.
SO ORDERED.
Notes
. Windsor has moved to intervene in this case on the basis that the Court should consider its interests in its consideration of "the injury to the parties opposing appointment.” Varsames, 96 F.Supp.2d at 365; (see May 9, 2012 Evid. Hr’g Tr. at 2-3 ("A: The only reason that we’re seeking to have Windsor join is in the analysis that the Court was supposed to do about whether to appoint a receiver, the cases speak, among other things, about the prejudice to the party opposing appointment of the receiver.... [I]t occurred to me that someone might argue or try to argue that they’re not technically opposing the appointment of the receiver because they’re not a party to this action and have not intervened. And that is the only reason that we’re seeking to intervene.”).) The Court will consider the potential harm to Windsor in its analysis to the extent that those issues were raised in the parties’ papers and at the evidentiary hearing. The motion to intervene is therefore denied without prejudice as moot.
. Windsor's CFO, Neil Cohen, testified that the $2.9 million figure cited by Ginsberg as the total amount in the cash management account as of the day before the evidentiary hearing was not correct, and should be higher, explaining that "[y]es, that’s what's in their account. But you haven’t added in May revenue.” (May 9, 2012 Evid. Hr’g Tr. at 95.) However, this argument is not credible. Ginsberg testified that the $2.9 million included all revenue received thus far that had not been released for operating expenses or otherwise put in the capital or tax reserve accounts or applied to debt service. While it is undis
. See, e.g., D.B. Zwim,
. By contrast, where a plaintiff brings a state law cause of action for the appointment of a receiver in federal court, pursuant to a state statute that creates the substantive right to a receiver, the appointment of a receiver may be considered both a right and a remedy. See Glenbrook Capital Ltd. P'ship v. Kuo,
. The plaintiff relies on Federal National Mortgage Association v. Wellington Investments, LLC, No. 11 Civ. 11414,