The opinion of the court was delivered by: Richter, J.
Donerail Corp. N.V. v 405 Park LLC
Appellate Division, First Department
Decided on October 9, 2012
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.
Angela M. Mazzarelli, J.P. David Friedman James M. Catterson Rosalyn H. Richter Sallie Manzanet-Daniels,JJ.
405 Park LLC appeals from the order of the Supreme Court, New York County (Shirley Werner Kornreich, J.), entered February 8, 2011, which, to the extent appealed from as limited by the briefs, denied its motion for summary judgment on its first cause of action for breach of contract and fourth cause of action for foreclosure of a common law contract vendee's lien, and from the order of the same court and Justice, entered September 27, 2011, which, to the extent appealed from as limited by the briefs, denied its motion for leave to renew its motion for summary judgment, denied its motion to compel discovery, granted Donerail Corporation N.V.'s motion for leave to renew its cross motion for summary judgment, and upon renewal, granted Donerail's cross motion for summary judgment on its first cause of action for breach of contract and its cross motion for summary judgment dismissing 405 Park's complaint. Meister Seelig & Fein, LLP, New York (Stephen B. Meister, Kevin Fritz and Remy J. Stocks of counsel), for appellant. Kelly Drye & Warren, LLP, New York (Michael C. Lynch, William C. Heck and Joel A. Hankin of counsel), for respondents.
In this failed real estate transaction, we are asked to decide whether the seller, Donerail Corporation N.V., is entitled to retain the earnest money deposit paid by the purchaser, 405 Park LLC, pursuant to a contract for sale of an office building in New York City. When the time-of-the-essence closing failed to occur, 405 Park initiated an action against Donerail seeking return of the deposit, alleging that Donerail had breached the parties' contract by failing to tender an unencumbered title at closing. Donerail brought a separate action, asserting that it was entitled to retain the deposit because 405 Park had breached the agreement by failing to pay the balance of the purchase price. Because Donerail demonstrated that it was ready, willing and able to close the transaction, and 405 Park refused to close, we conclude that Donerail is entitled to retain the deposit.
On June 11, 2007, Donerail and 405 Park entered into a Purchase and Sale Agreement (the agreement) whereby Donerail agreed to sell, and 405 Park agreed to buy, a 17-story office building located at 405 Park Avenue in Manhattan. The purchase price was $178,500,000, and in accord with the agreement, 405 Park wired an earnest money deposit of $38,550,000 to Donerail's escrow agent. Several months later, the parties entered into a Second Amendment to the agreement (the amendment) pursuant to which the earnest money deposit was released from escrow and delivered to an intermediary of Donerail, and $600,678.58 in accrued interest on the deposit, denominated "Pre-Effective Date Interest," was paid to 405 Park.
Pursuant to section 6.1 of the agreement, if 405 Park failed to complete the purchase for reasons other than Donerail's default, Donerail's sole remedy was to terminate the agreement and receive the earnest money, along with interest, as liquidated damages for the breach. The amendment further provided that if 405 Park defaulted in its obligation to close, 405 Park was required to pay Donerail the $600,678.58 in Pre-Effective Date Interest it had received. On the other hand, if the closing did not occur for reasons other than 405 Park's default, then the earnest money deposit, along with certain other sums, was to be refunded by Donerail to 405 Park.
Although the closing date was initially scheduled for January 15, 2008, the parties agreed to a number of extensions, and a final closing date was set for June 29, 2009. During the two-year period between the contract date and the closing date, there was a sharp decline in the market value of office buildings in Manhattan. At a December 10, 2008 meeting, Avi Banyasz, a representative of 405 Park, told David E. Barry, Donerail's president, that because of the decline in the market value of the property, 405 Park could not complete the purchase for the $178,550,000 contract price.
According to Donerail, if 405 Park were to purchase the property, it would stand to lose upwards of $90,000,000. On the other hand, if 405 Park were to break the contract, its liability would be much lower -- the amount of the earnest money deposit, $38,500,000, plus the $600,678.58 in accrued interest. Thus, Donerail maintains that the drop in real estate values made it more financially advantageous for 405 Park to simply walk away from the deal rather than complete the purchase. 405 Park's inclination not to close is evident from a May 27, 2009 e-mail between two of its investors. In that e-mail, the investors discussed a plan to "attend the closing and try for a defective tender and then sue on that basis." Even on appeal, 405 Park concedes that the real estate market had declined and that its preference was not to close.
At the time the agreement was entered into, the property was encumbered by an existing mortgage in the amount of approximately $25,000,000. The mortgage loan contained terms which were very favorable to Donerail at that time -- it was interest-only until the maturity date and bore an interest rate of 5.03%. Although the promissory note secured by the mortgage did not allow for prepayment, Donerail could obtain a satisfaction of the mortgage by a process defined in the note as "defeasance." Specifically, Donerail could purchase defeasance collateral in the form of securities, chosen by the mortgage lender, which would be used to pay the remaining ...