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Madeleine L.L.C v. Brian Street and James H. Cohen

December 23, 2010


The opinion of the court was delivered by: Cedarbaum, J.


This is a diversity action between Madeleine L.L.C., the lender of a multimillion dollar mezzanine loan, and Brian Street and James H. Cohen, the loan's guarantors. The complaint asserts two claims, denominated the First and Second Causes of Action. The parties have cross-moved for summary judgment on the second claim, which complains that the encumbrance of collateral securing the loan triggered a full recourse provision in the guaranty.*fn1

Madeleine seeks summary judgment against Street and Cohen for the full outstanding balance of the loan. Street and Cohen seek summary judgment dismissing the second claim. They argue that the full recourse provision of the guaranty was never triggered, and that, even if it had been, it would be unenforceable under New York law. For the reasons that follow, defendants' motion is granted, and plaintiff's motion is denied. Accordingly, the second claim of the complaint is dismissed.


At all times relevant to this lawsuit, Street and Cohen controlled a group of interlocking companies engaged in real estate development in Florida. In 2006, Madeleine provided a mezzanine loan of up to $275 million ("the Loan") to some of these companies ("the Borrowers") for the development of several condominium projects ("the Properties"). The terms of the Loan were laid out in the Mezzanine Loan and Security Agreement ("the Loan Agreement").

Under the lending arrangement, title to a given Property did not belong to a Borrower. Instead, it belonged to an entity in which a Borrower held equity ("the Property Owner"). In other words, the Property Owner owned the Property, and the Borrower owned some portion of the Property Owner.

Madeleine secured the Loan through two forms of collateral. First, each Property was subject to a separate Pledge and Security Agreement ("Pledge Agreement"), under which the Borrower for that Property pledged certain ownership interests in its subsidiary Property Owner. The various Pledge Agreements shared the same substantive provisions, differing only in the names of the entities to which they applied. Second, under a separate Recourse Carveouts Guaranty ("the Guaranty"), Street and Cohen agreed to guaranty the Loan.

Section 2.2(b) of the Guaranty is a full recourse provision enumerating certain limited circumstances in which Street and Cohen become personally liable to Madeleine for the full amount of the Loan. Under Section 2.2(b)(i), one such circumstance is "[a]n Event of Default by reason of the voluntary transfer or encumbrance of any collateral for the Loan in violation of the terms of the Loan Agreement which remains uncured 10 days after Lender's written demand upon the Guarantor." Although the term "Event of Default" is not defined in the Guaranty, Section 6.11 of the Guaranty specifies that any undefined, capitalized term shall have the meaning given to it in the Pledge Agreement. Section 9(a) of the Pledge Agreement supplies that meaning. It lists eight different events, each of which qualifies as an Event of Default. Because this list prescribes the only ways in which an Event of Default may occur under the Pledge Agreement, the occurrence of at least one of the events listed is a necessary condition for full recourse liability under Section 2.2(b)(i) of the Guaranty.

This dispute arose when Madeleine concluded that a Property Owner, BLIA Developers, Ltd., had caused one of those Events of Default to occur. BLIA Developers held title to one of the Properties, a luxury condominium development known as Biscayne Landing. Purchasers of units in Biscayne Landing made cash deposits that were placed in escrow on behalf of BLIA Developers. According to Madeleine, only BLIA Developers was entitled to the interest that accrued on those escrowed deposits. On two occasions in 2007, however, a representative of Street and Cohen directed the escrow agent to transfer accrued interest to the management company that administered all of the Properties. After the escrow agent executed the transfers, the management company used those funds, approximately $490,000 in total, to help pay other Properties' expenses.

When Madeleine discovered these transfers in 2008, it notified Street and Cohen that the transfers qualified as an Event of Default under Section 9(a) of the Pledge Agreement for Biscayne Landing. Consistent with the terms of Section 2.2(b)(i) of the Guaranty, Madeleine's notice demanded that Street and Cohen repay the transferred amount plus interest within ten days. Street and Cohen balked at this demand. They denied that any Event of Default had occurred and, consequently, that any duty to cure existed. Following this exchange, Madeleine informed Street and Cohen that under Section 2.2(b)(i) of the Guaranty, their failure to cure rendered them liable for the full outstanding balance of the Loan plus interest--by that point, well over $188 million. Street and Cohen again refused to pay, and this action followed.


Summary judgment should be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."

Fed. R. Civ. P. 56(a). A genuine dispute as to a material fact exists when the evidence is such that a reasonable finder of fact could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986).

Under New York law, which the parties agree governs this dispute, the "initial interpretation of a contract is a matter of law for the court to decide." K. Bell & Assocs., Inc. v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir. 1996) (internal quotation mark omitted). If the contract is unambiguous, that is, only susceptible to one ...

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