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HSH Nordbank AG New York Branch v. Swerdlow

November 23, 2009


The opinion of the court was delivered by: Denise Cote, District Judge


Plaintiff HSH Nordbank AG New York Branch ("plaintiff" or "HSH") seeks to recover from defendants monies due pursuant to two written guaranties of payment executed in connection with a real estate construction loan. On July 21, 2009, plaintiff moved for summary judgment. For the reasons stated herein, the motion is granted.


1. The Loan Agreement

On December 15, 2005, HSH agreed to loan Holly Hill I Associates, Ltd. ("Borrower") up to $192 million (the "Loan") to finance the development of two 25-story residential condominium towers comprising 486 units in Holly Hill, Florida (the "Development Project"). The Borrower was a single-purpose entity, of which defendants Michael Swerdlow ("Swerdlow"), Brian Street ("Street"), and James Cohen ("Cohen") (collectively "defendants" or "Guarantors") were principals at the time of the Loan. Defendants are experienced real estate developers who have delivered guaranties similar to those at issue in this case in other projects. Pursuant to the Loan Agreement, Borrower executed and delivered to HSH a Promissory Note dated December 15, 2005, with a principal face amount of $192 million (the "Note"). The Loan was scheduled to mature on December 18, 2008 -- one year after the scheduled completion of construction -- to give Borrower time to close sales of sufficient units to repay the Loan.*fn1

The Loan Agreement required HSH to advance Loan proceeds to Borrower pursuant to "Draw Requests" based on actual expenditures in constructing the Development Project. Draw Requests had to be supported by invoices, budget information, or other construction-related documentation. Draw Requests seeking release of "retainage" withheld on behalf of Borrower also had to meet certain conditions specified in the Loan Agreement.*fn2

The Loan Agreement imposed several conditions on HSH's obligation to fund advances, including: (1) no monetary or material default*fn3 as of the date of the advance; (2) receipt and approval by HSH of a Draw Request for the advance; (3) no notice or claim of any lien which has not been discharged or insured against by the title insurer to the satisfaction of HSH; (4) receipt by HSH of the written report from Lenders' Inspecting Engineer; and (5) receipt and approval of evidence that the Loan was "in balance."*fn4 HSH had complete discretion to determine whether these and other conditions precedent to its obligation to fund Borrower's advances were satisfied.*fn5 In the event that HSH acquiesced to Borrower's non-compliance with any condition precedent for a particular Draw Request, such acquiescence did not waive any of the above requirements with respect to future Draw Requests. Section 7.2 of the Loan Agreement provides that Borrower's right to request, and HSH's obligation to fund, advances ended on the scheduled completion date of the Development Project of December 14, 2007 (the "Funding Deadline"). The Loan Agreement states that it may only be amended by a writing executed by all parties.

2. The Guaranties Contemporaneous with the Loan Agreement and Promissory

Note, defendants executed on December 15, 2005 a guaranty in support of their obligations under the Loan Agreement. Defendants jointly and severally guaranteed, inter alia, "full payment when due of all interest on the Loan . . . and all expenses (including reasonable counsel fees and expenses) incurred by [HSH] in enforcing any rights under this Guaranty" (the "Payment Guaranty"). In July 2006, defendants executed an additional guaranty, which jointly and severally guaranteed, inter alia, the "payment when due, whether at stated maturity, by acceleration, lapse of time or otherwise, of the outstanding principal balance of the Loan . . . up to but not in excess of $40,000,000" and "any and all expenses (including reasonable counsel fees and expenses) incurred by [HSH] in enforcing any rights under this Guaranty" (the "Principal Guaranty") (collectively, with the Payment Guaranty, the "Guaranties"). The Guaranties provide that they are to be governed by, and construed in accordance with, New York law.*fn6

HSH required the Principal Guaranty as additional security prior to consenting to modifications to the Loan Agreement sought by defendants in 2006. Specifically, Street and Cohen wished to buy out Swerdlow's interest in Borrower and the Development Project and also wished to secure a mezzanine financing facility (the "Mezzanine Loan") for the Development Project (and other projects) from Cerberus Capital Management ("Cerberus").*fn7 The ownership change was effectuated, in part, through a Third Amendment to the Loan Agreement. The Principal Guaranty states that HSH's approval of the ownership change and the Mezzanine Loan was conditioned on defendants, including Swerdlow notwithstanding the ownership change, executing and delivering the Principal Guaranty. When the Mezzanine Loan closed in July 2006, HSH and Cerberus entered into an Intercreditor Agreement dated July 6, 2006, which required, inter alia, HSH's consent to any transfer of Street and Cohen's interest in Borrower and the Development Project to Cerberus in the event of a default on the Mezzanine Loan.

The Guaranties contain provisions designed to maintain Guarantors' liability irrespective of any change in circumstances with respect to the underlying Loan. Each Guaranty states that it is "an irrevocable, absolute, continuing guaranty of payment and performance and not a guaranty of collection."*fn8 The Payment Guarantee states that the liability of Guarantors is "absolute and unconditional" irrespective of, inter alia, "any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from the Note" or "any other circumstance which might otherwise constitute a defense available to, or a discharge of, Borrower or a guarantor." The Guaranties further provide that HSH, without notice to or further consent of any Guarantor, may at any time extend the time of payment of, exchange or surrender any collateral for, or renew any of the Obligations, and may also make any agreement with Borrower or with any other party to or person liable on any of the Obligations, or interested therein, for the extension, renewal, payment, compromise, discharge, or release thereof, in whole or in part, or for any modification of the terms thereof or of any agreement between Administrative Agent and Borrower or any of such other party or person, without in any way impairing or affecting this Guaranty.

Defendants also waived any and all forms of "notice with respect to any portion of the Obligations and this Guaranty" and any requirement that HSH "exhaust any right or take any action against Borrower or any other person or entity or any collateral." Each guaranty states that it is "a continuing guaranty and shall remain in full force and effect until payment in full of the Obligations."

3. Events of Default

The Development Project began to experience difficulties in 2007, including a slowdown in unit sales, the filing of a lawsuit by unit purchasers alleging that Borrower made material misrepresentations in its promotional materials, and a growing number of "problem units."*fn9 In late November 2007, Borrower informed HSH that construction of the Development Project would not be completed by the December 14, 2007 Funding Deadline. On December 14, HSH sent a letter to the Bank Group requesting the other lenders' approval to fund advances past the Funding Deadline and ...

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