Mortgage lender accuses SJP Investment Partners of diverting revenues, incurring unauthorized debts
A federal judge has denied a bid by guarantors Sonial Patel and Monica Patel to dismiss or indefinitely stay Wells Fargo’s $11 million loan enforcement action, instead granting a short-term discretionary stay while related proceedings continue in Alabama.
Judge Katherine Polk Failla of the US District Court for the Southern District of New York ruled that the bank’s suit to enforce a personal guaranty against the Patels can proceed after resolution of a parallel case against the primary borrower, SJP Investment Partners, LLC, pending in Jefferson County, Alabama.
The case stems from a $10.7 million commercial loan originally issued in 2019, secured by the Hotel Indigo Birmingham property in Alabama. Wells Fargo, as trustee for holders of the loan’s commercial mortgage-backed securities, alleges that SJP Investment Partners defaulted by diverting hotel revenues, incurring unauthorized debts, and failing to deposit proceeds into clearing accounts as required.
The Alabama state court action, initiated in October 2023, seeks the appointment of a receiver, sequestration of hotel revenues, and attorneys’ fees. The borrower, SJP Investment Partners, has counterclaimed, alleging that Wells Fargo acted in bad faith and materially breached the loan documents.
Separately, in February 2024, Wells Fargo sued the Patels in New York, invoking a recourse guaranty they signed to back the loan. The bank seeks full repayment of the outstanding $11 million loan balance, arguing that defaults triggered full recourse liability under the guaranty.
The Patels moved to dismiss the New York case under the Colorado River abstention doctrine, contending that the two actions are parallel and the Alabama litigation should be given priority. Alternatively, they sought a discretionary stay pending the outcome of the Alabama case or partial dismissal of the complaint.
Judge Failla rejected the defendants’ abstention argument, holding that the two cases are not strictly parallel. While both cases involve related loan documents and events, the parties and issues are not identical. The Alabama case concerns borrower defaults and remedies over the property, whereas the New York action focuses specifically on guarantor liability under the separate recourse guaranty.
Further, the relief sought in each case is distinct: the Alabama suit seeks receivership and management of hotel assets, while the New York case seeks a monetary judgment against the Patels.
Nevertheless, Judge Failla exercised the court’s inherent authority to grant a temporary stay, recognizing judicial efficiency and comity considerations. She noted that many factual issues — including alleged defaults and defenses based on lender misconduct — overlap, and the Alabama court’s determinations may clarify or narrow issues in the federal action.
The judge ordered both sides to provide a status update by September 10, 2025, or within five days of any significant development in the Alabama litigation, emphasizing that the stay is not intended to be indefinite.
Additionally, the court rejected the Patels’ motion to dismiss part of the complaint under Rule 12(b)(6). Defendants argued that a provision in the loan agreement triggering guarantor liability upon borrower defenses or counterclaims was unenforceable under New York public policy. Judge Failla disagreed, citing precedent upholding similar "springing recourse" provisions and finding no public policy violation.
Key takeaways for lenders and borrowers
- Parallel litigation scrutinized: Courts will carefully examine whether federal and state cases are truly parallel before abstaining.
- Recourse guaranties enforced: Provisions that convert non-recourse loans to recourse liability upon borrower misconduct or litigation tactics remain enforceable under New York law.
- Judicial economy considered: Even when abstention is inappropriate, federal courts may stay proceedings to avoid duplicative litigation and conflicting rulings.
Wells Fargo Bank v. Patel, 24 Civ. 1162 (KPF)
