ERC 16W Ltd. Partnership v Xanadu Mezz Holdings LLC
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Andrias, J.P., Friedman, Catterson, Moskowitz, Roman, JJ.
Order, Supreme Court, New York County (Bernard J. Fried, J.), entered September 27, 2010, which, to the extent appealed from as limited by the briefs, granted defendants' motion to dismiss the first four causes of action, modified, on the law, to deny the motion as to the first, second and fourth causes of action, and otherwise affirmed, with costs to plaintiff.
Plaintiff ERC 16W Limited Partnership (ERC) is the borrower under a $1.015 billion "Construction Loan Agreement," dated March 30, 2007 (hereinafter, the loan agreement), intended to finance the development of the Meadowlands Sports Complex in East Rutherford, New Jersey. Defendant Xanadu Mezz Holdings LLC (XMH) was not one of the "Lenders" that was originally a party to the entire loan agreement. Rather, XMH was a "Closing Date Participant," meaning that it was assigned a participation interest in the loan pursuant to a participation agreement, also dated March 30, 2007, to which ERC is not a party. As a closing date participant, XMH executed the loan agreement (as stated over its signature thereto) "for the sole purpose of acknowledging its agreement to Sections 2.9.2(e), (f) and (g) and Section 2.11" thereof.
In the first cause of action of the amended verified complaint, ERC asserts a claim against XMH for breach of the loan agreement based on XMH's failure to fund its ratable portion of advances on the loan that were called for in January, February, March and April of 2009. Supreme Court granted XMH's motion to dismiss the complaint pursuant to CPLR 3211(a)(1) and (7), holding, with regard to the first cause of action, that the portions of the loan agreement to which XMH was a party -- the aforementioned sections 2.9.2(e), (f) and (g) and section 2.11 -- did not obligate XMH to fund the loan [*fn1]. The court agreed with XMH that any obligation XMH had to fund the loan arose solely from the participation agreement, to which ERC was not a party and which expressly precludes the construction of any of its provisions as "be[ing] for the benefit of or enforceable by any Person not a party hereto."
On ERC's appeal, we determine, as a matter of law, that the provisions of the loan agreement to which XMH is a party unambiguously create a contractual obligation running from XMH to ERC to fund advances on the loan. The first of these provisions, section 2.9.2(e), provides in pertinent part: "Borrower [ERC] agrees that for purposes of funding Advances hereunder and funding any Deficiencies, the Lender holding the $485MM Note shall not be responsible for funding its Ratable Share of each Advance; instead, each Closing Date Participant shall be treated in the same manner as each Lender, with each such Closing Date Participant holding a Ratable Share equal to its Closing Date Participant Share and a Maximum Commitment equal to its Closing Date Participant Maximum Commitment, and the provisions of Sections 2.9[.]2(f) and (g) below shall govern the failure of any Closing Date Participant to fund its Closing Date Participant Ratable Share of any Advance on the Requested Advance Date" (emphasis added). The requirement that each participant "be treated in the same manner as each Lender" with regard to, inter alia, its "Closing Date Participant Maximum Commitment" -- a term defined by the loan agreement to mean the participant's "obligation . . . to fund Advances of the Loan to Borrower" (emphasis added) -- can only mean that each closing date participant is obligated to fund advances on the loan to the extent of its interest. Stated otherwise, the use in section 2.9.2(e) of the defined term "Closing Date Participant Maximum Commitment" incorporates by reference the statement in the definition of that term that a closing date participant has an "obligation . . . to fund Advances of the Loan to Borrower."
It does not follow from the foregoing conclusion that a closing date participant assumed all of the obligations of a "Lender" set forth in the loan agreement. The requirement of section 2.9.2(e) that a participant "be treated in the same manner as each Lender" is modified immediately thereafter by the provision setting forth the portion of each advance for which each closing date participant is responsible; hence, a participant is to "be treated in the same manner as [a] Lender" only for purposes of the obligation to fund advances on the loan. This is confirmed by the phrase "for purposes of funding Advances hereunder and funding any Deficiencies" in the opening clause of the sentence, which naturally modifies the sentence as a whole. Also unavailing is XMH's argument that the phrase "Borrower [ERC] agrees" at the beginning of the sentence implies that the sentence creates obligations on the part of ERC alone; XMH, in executing the loan agreement as a closing date participant, expressly "acknowledg[ed] its agreement to Section 2.9.2(e)," meaning all provisions of that subsection. Moreover, the opening phrase "Borrower agrees" merely reflects that only ERC, as borrower, could agree to release a lender from its promise to fund the loan, but other provisions referenced in the sentence involved rights and obligations of all parties, including the closing date participants.
Also pertinent is section 2.9.2(f), which provides in pertinent part: "If and to the extent that any Closing Date Participant (the Defaulting Closing Date Participant') shall not have made available to Agent [under the loan agreement] on the Requested Advance Date its Closing Date Participant Ratable Share of any Advance . . . , Agent shall notify the Lenders, the other Closing Date Participants and Borrower of such default. Each of the Closing Date Participants agrees that Borrower [ERC], Agent or any of the other Closing Date Participants shall have the right to proceed directly against any Defaulting Closing Date Participant in respect of any right or claim arising out of the default of such Defaulting Closing Date Participant hereunder" (emphasis added). The first of the two sentences just quoted establishes that a closing date participant's failure to fund an advance due on the loan in accordance with its "Closing Date Participant Ratable Share" (a term defined to mean "the percentage that such Closing Date Participant's Maximum Commitment then constitutes of the Maximum Commitment of the holder of the $485MM Note") constitutes a "default." Plainly, failing to fund the loan could constitute a "default" only if the closing date participant is obligated to provide such funding. The next sentence provides that ERC, as borrower, has "the right to proceed directly against any Defaulting Closing Date Participant in respect of any right or claim arising out of . . . [its] default . . . hereunder." Again, the natural implication of the language is that failing to fund the loan is a "default" under this very provision.
XMH argues that the language entitling ERC "to proceed directly against any Defaulting Closing Date Participant" extends "only to the exclusive remedies provided in Sections 2.9.2(e), (f), (g), and 2.11" (meaning, in substance, termination and transfer of the defaulting participant's interest and its indemnification of the agent, lenders, and other closing date participants). This construction is not tenable. The contractual remedies to which XMH refers (and which the loan agreement itself does not characterize as "exclusive") are primarily for the benefit of parties other than the borrower, yet the borrower is expressly afforded "the right to proceed directly against [the] Defaulting Closing Date Participant." If these sophisticated parties had intended, at the same time they agreed that ERC would "have the right to proceed directly against any Defaulting Closing Date Participant," to bar ERC from seeking the aid of the courts to require a defaulting participant to honor its obligation to fund the loan under sections 2.9.2(e) and (f), they would have expressly so provided.
The dissent asserts that the provision of section 2.9.2(f) entitling ERC, as borrower, to "proceed directly" against a defaulting closing date participant means nothing more than that ERC may "obtain an Eligible Assignee to replace [the] Defaulting Closing Date Participant" as provided in section 2.9.2(g). Specifically, the dissent takes the position that the only way in which ERC is entitled to "proceed directly" against a defaulting closing date participant is to enforce its right to require the defaulting participant to assign its interest to an eligible assignee. Obviously, this right is of little use in the event a willing and eligible assignee cannot be found, as appears to be the case here. In any event, we reject this counterintuitive reading of the loan agreement.
The dissent does not explain how one can tell that the provision of section 2.9.2(f) permitting ERC to "proceed directly" against a defaulting closing date participant means only that ERC may force an assignment to a substitute for the defaulting participant; no such limitation is expressed in section 2.9.2(f). Again, the relevant sentence of section 2.9.2(f) states: "Each of the Closing Date Participants agrees that Borrower, Agent or any of the Other Closing Date Participants shall have the right to proceed directly against any Defaulting Closing Date Participant in respect of any right or claim arising out of the default of such Defaulting Closing Date Participant." As previously discussed, section 2.9.2(e) -- to which each closing date participants is a party -- gives rise to an obligation, owed by each closing date participant to the borrower, to fund its assigned portion of the loan. It follows that the failure of a closing date participant to provide such funding when due constitutes a breach of contract subjecting it to a "claim [by the borrower] arising out of [the closing date participant's] default," on which claim the borrower may "proceed directly" against the defaulting closing date participant. Given that XMH was directly obligated to ERC to fund its portion of the loan, we see nothing in the governing documents that compels, or even supports, the dissent's narrow reading of ERC's "right to proceed directly" against XMH.
At bottom, the position of XMH and the dissent that ERC cannot state a claim for breach of contract based on XMH's default in meeting its loan-funding obligation rests on the premise that we should look beyond the actual governing provisions of the loan agreement and assume that this deal was a typical loan syndication. Both parties agree that, in the typical loan syndication, there is no direct contractual relationship between the borrower and loan participants who have been assigned their interests by the lender with which the borrower contracted; the contracting lender remains obligated to the borrower for the full amount of its commitment, regardless of any assignment of participatory interests. The written agreements documenting this transaction establish that this is not what occurred here. In specified provisions of the loan agreement to which XMH made itself a party, ERC excused the lenders with which it contracted from responsibility for ...