THE PEOPLE OF THE STATE OF NEW YORK,
by ERIC T. SCHNEIDERMAN
120 Broadway, 3rd Floor
New York, New York 10271
Mark Ladov (email@example.com)
Elena González (firstname.lastname@example.org)
Attorney General of the State of New York
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
EAST VILLAGE PROPERTIES LLC, et al.,
Case No. 17-22453 (RDD)
DECLARATION OF MARK LADOV
I, Mark Ladov, declare pursuant to 28 U.S.C. § 1746, as follows:
- I am an Assistant Attorney General in the Bureau of Consumer Frauds and Protection in the Office of the New York State Attorney General (NYAG).
- I submit this Declaration in support of the Objection of the New York Attorney General as a Party in Interest to the Proposed Final Consent Order Authorizing and Directing Use of Cash Collateral Pursuant to 11 U.S.C. § 363(C), (II) Granting Adequate Protection Pursuant to 11 U.S.C. § 361, and (III) Granting Related Relief.
- I am familiar with the facts and circumstances of this proceeding. The facts set forth in this Declaration are based upon information contained in the investigative files of the NYAG, and my review of the evidence generated by the NYAG’s investigation of Raphael Toledano (“Toledano”), the shareholder and prior manager of the Debtors in this bankruptcy proceeding, as well as various parties associated with Toledano.
- Attached to this Declaration are documents that the NYAG has collected in the course of its ongoing investigation, including tenant complaints and affidavits; contracts and underwriting documents relating to these properties; and inspection reports detailing health and safety violations.
- Annexed as Exhibit 1 is a true and correct copy of the Expert Report of Prof. David Reiss (“Reiss Report”). Professor Reiss, an expert on real estate law and financing at Brooklyn Law School, has reviewed underwriting documents relating to Madison Realty Capital’s (“Madison”) loan to the Debtors to purchase the East Village Portfolio (the “Portfolio”), and has concluded that “the transaction was not structured in full accordance with applicable law nor to succeed on its own terms.” See “Reiss Report” at 13.*
- Annexed as Exhibit 2 is a true and correct copy of New York City’s Department of Housing Preservation and Development’s (HPD) evaluation of underwriting documents from Madison’s loan to the Debtors, as provided in a letter to the NYAG dated May 11, 2017. HPD’s evaluation identifies fatal flaws in the underwriting for Madison’s loan to the Debtors, including that the deal failed to account for the loss of income that would result from aggressive plans to vacate and renovate apartments; that the parties failed to account for necessary costs of operating these apartment buildings in a safe and lawful manner; and that the appraisal at origination over-valued the Portfolio by approximately 40 percent (or by over $40 million).
- Annexed as Exhibit 3 is a true and correct copy of pages from a Signature Bank Loan Data File provided to the NYAG pursuant to investigative subpoena. The information in this file includes an email between Signature Bank employees Joseph Fingerman and Brian Twomey dated April 27, 2016, which discusses Signature’s investment in the loan made by Madison to the Debtors. This email discusses Madison’s business practices and observes that Madison “would have no problem foreclosing and or owning” the Portfolio when the loan to Toledano entered into default.
- Annexed as Exhibit 4 is a true and correct copy of a Signature Bank Corporate Credit Offering Memorandum dated Aug. 18, 2015 (“Signature Memo”), also produced by Signature to the NYAG pursuant to investigative subpoena. Signature’s memo reviews Madison’s proposed loan to the debtors and observes that this deal is consistent with Madison’s management of many of its own properties, where Madison “purchased the buildings, gut renovated units and re-leased them at substantially higher rents.” See Signature Memo at 6.
- Annexed as Exhibit 5 is a true and correct copy of a report on Raphael Toledano prepared by EGS Financial Investigative Services and dated Aug. 17, 2015. This report is addressed to Madison, and was produced by Madison to the NYAG pursuant to investigatory subpoena. The report informs Madison of Toledano’s criminal record, including his sentence to two years’ probation for a felony of aggravated assault in 2012, as well as his arrest in 2009 on felony charges (later dismissed) of “theft by deception” for an alleged scheme to fraudulently withdraw money from a bank.
- Annexed as Exhibit 6 is a true and correct copy of a Mortgage and Security Agreement dated September 10, 2015, included in the East Village Portfolio loan files produced by Madison to the NYAG pursuant to investigative subpoena.
- Annexed as Exhibit 7 is a true and correct copy of correspondence produced by Toledano to the NYAG and the Tenant Protection Unit of New York State Homes and Community Renewal (TPU) pursuant to investigative subpoena. In this email and letter from March 2014,Toledano falsely represented to the owner of property located at 444 East 13th Street in Manhattan that he was a lawyer with the Weissman Law Firm; that he represented Josh Zegen (one of Madison’s founders and principals); and that he was seeking a 1031 exchange deal on Zegen’s behalf. News reports later quoted Zegen as denying that Toledano had ever represented him in such a capacity. See Hiten Samtani, “Raphael Toledano, Esq.?: Investor may be tied to fake law firm,” The Real Deal (published Dec. 14, 2015, 10:10 a.m.), available at https://therealdeal.com/2015/12/14/raphael-toledano-esq-investor-may-be-tied-to-fake-law-firm/.
- Annexed as Exhibit 8 is a true and correct copy of the Verified Petition in Bello, et al., v. Toledano, et al., Index No. HP 1158/2015 (New York City Civil Court, Housing Part B, filed June 30, 2015). This petition was filed by tenants living at 444 East 13th Street, many of whom were immigrant families, who accused Toledano of attempting to harass them into surrendering their rent-regulated apartments. As alleged in the Verified Petition, Toledano engaged in the following tactics: he employed private investigators and others to harass tenants and dig up information that he could use to try to evict them; threatened to file baseless eviction cases against tenants; locked tenants out of their homes; increased their rents without regard to the protections of New York’s rent stabilization laws; withheld essential services, including gas, hot water, and heat; rendered the building uninhabitable by performing dangerous construction and demolishing the building; and falsely reported tenants to the police for illegal activities.
- Annexed as Exhibit 9 is a true and correct copy of the Purchase and Sale Agreement included in the East Village Portfolio loan files produced by Madison to the NYAG pursuant to investigative subpoena. According to this document, this contract was executed on or about May 27, 2015 between Toledano (as managing member of East Village Owners Group LLC) and the former property owners (which were three separate LLCs controlled by members of the Tabak family).
- Annexed as Exhibits 10-13 are true and correct copies of the four loan notes included in the East Village Portfolio loan files produced by Madison to the NYAG pursuant to investigative subpoena. These notes were executed between Madison and the Debtors on September 10, 2015 for the purchase of the East Village Portfolio; each of these loans is currently subject to a default interest rate of 24%:
- Exhibit 10 is a true and correct copy of the First Loan Note for $89,667,660.00, which initially accrued interest at a rate of 9.00%, with interest payments of 6% due on an ongoing basis and 3% due on maturity;
- Exhibit 11 is a true and correct copy of the Second Loan Note for $20,000,000, which initially accrued interest at a rate of 20.00%;
- Exhibit 12 is a true and correct copy of the Building Loan Note for a line of credit up to $10,068,000, which could be drawn down for construction and other “hard costs,” and which initially accrued interest at a rate of 9.00%, with interest payments of 6% due on an ongoing basis and 3% due on maturity; and
- Exhibit 13 is a true and correct copy of the Project Loan Note for a line of credit up to $4,249,340, which could be drawn down for tenant buyout payments and other “soft costs,” and which initially accrued interest at a rate of 9.00%, with interest payments of 6% due on an ongoing basis and 3% due on maturity.
- Annexed as Exhibit 14 is a true and correct copy of a Settlement Agreement between Toledano and Aaron Jungreis, included in the East Village Portfolio loan files produced by Madison to the NYAG pursuant to investigative subpoena. This Agreement settled allegations that Jungreis was supposed to be Toledano’s partner in this Portfolio but that Toledano cut him out of the promised deal following the execution of the May 2015 contract of sale. Pursuant to this Agreement, Jungreis purchased one of the properties (95 East 7th Street) that was originally part of the Portfolio for $6,015,000.
- Annexed as Exhibit 15 is a true and correct copy of a Prepaid Interest Agreement dated September 10, 2015, included in the East Village Portfolio loan files produced by Madison to the NYAG pursuant to investigative subpoena. This fund of slightly more than $4 million was taken from the interest-bearing proceeds provided by Madison to the Debtors under the First Loan and the Project Loan. These interest-bearing loan proceeds were retained by Madison and used to pay for the Debtors’ initial monthly interest payments. Upon information and belief, the prepaid interest fund was required because of Toledano’s inability to pay for monthly interest payments out of the rental income generated by the Portfolio.
- Annexed as Exhibit 16 is a true and correct copy of the Tenant Buy Out Agreement dated September 10, 2015, included in the East Village Portfolio loan files produced by Madison to the NYAG pursuant to investigative subpoena. This agreement included the terms by which Madison funded, supervised and approved the buyout and surrender agreements sought from tenants in the Portfolio.
- Annexed as Exhibit 17 is a true and correct copy of Proposed Architectural Layouts included in the East Village Portfolio loan files produced by Madison to the NYAG pursuant to investigative subpoena. These architectural renderings were intended to support renovation plans, agreed upon by Toledano and Madison, to add bedrooms to units in the East Village Portfolio. As the architectural renderings for these renovations acknowledged on their face, only some of these proposed rooms are “code compliant” bedrooms; many of the new rooms described as “bedrooms” in loan underwriting documents were actually windowless rooms that may not be legally advertised and rented as bedrooms in New York City.
- Annexed as Exhibit 18 is a true and correct copy of a letter dated May 4, 2016 from East Village elected officials to the NYC Department of Health and Mental Hygiene (DOHMH). This letter was written to alert DOHMH Commissioner Dr. Mary Bassett to “an alarming pattern of lead exposure” in buildings owned and operated by Toledano.
- Annexed as Exhibit 19 is a true and correct copy of lead testing results provided to the DOHMH following inspections at 233 East 5th Street, 235 East 5th Street and 514 East 12th Street in March 2016. As shown in these documents, testing at all three buildings found that tenants were exposed to construction dust contaminated with lead at levels above the threshold (40 micrograms per square foot) that State and Federal environmental agencies consider an unacceptably hazardous level.
- Annexed as Exhibit 20 is a true and correct copy of a test result for dust samples collected on April 14, 2017 at 514 East 12th Street. Upon information and belief, tenants have reported that this dust contamination was caused when property managers removed plastic sheeting from apartment doors during an inspection of “dumpster apartments” filled with construction debris. DOHMH’s environmental test found dust in one hallway with lead contamination of 82 micrograms/square foot, which is twice the threshold defined by the EPA as hazardous.
- Annexed as Exhibit 21 is a true and correct copy of a test result for dust samples collected on April 21, 2017 at 233 East 5th Street. Upon information and belief, tenants have reported that this dust contamination resulted from efforts to clean out dumpster apartments. One of the two dust samples taken showed lead concentrations of 58 micrograms per square foot, again above the legally-defined threshold for hazardous contamination.
- Annexed as Exhibits 22-24 are true and correct copies of affidavits submitted to the NYAG by East Village Portfolio tenants, including the affidavits of Zoe Lake (Exhibit 22), Jessica Lee (Exhibit 23), and Joanna Sanchez (Exhibit 24). These affidavits recount allegations of harassment by Toledano and his agents, including pressure tactics used to encourage tenants to accept buyout and surrender agreements, as well as the health and safety problems these tenants have faced since Toledano took over ownership and management of the Portfolio.
I declare under penalty of perjury that the foregoing is true and correct.
Dated: May 15, 2017
New York, New York
Assistant Attorney General
* Professor Reiss’s report lists the documents he relied upon, including an internal underwriting memo stamped as Confidential by Madison. HPD’s evaluation letter, annexed as Exhibit 2 to this Declaration, relied on this same memo. Although the NYAG does not believe that this document is confidential or would need to be filed under seal, the NYAG is not submitting Madison’s underwriting documents into the public record at this time. The NYAG is prepared to provide all of the documents relied upon by Professor Reiss and HPD upon the Court’s request or at a later date.