Argued: April 8, 2013
Appeal from the judgment of the United States District Court for the Southern District of New York (Griesa, Judge) finding Defendant - Counter-Claimant - Appellant State Street Bank and Trust Co. ("State Street") unlawfully demanded approximately $4.5 million in interest and $370, 000 in attorney fees, requiring State Street to return the same to Appellees, and finding State Street liable for $328, 097 in damages resulting from the unlawful demand. We find the district court erred in concluding that equitable estoppel, the principle of good faith and fair dealing, or general principles of equity prevented State Street from demanding payment of the interest and attorney fees. Accordingly, the judgment of the district court is REVERSED.
Andrew C. Phelan (Dina R. Kaufman, on the brief), Bingham McCutchen LLP, Boston, Massachusetts, for Defendant -Counter-Claimant - Appellant.
Peter M. Ripin (Gary I. Lerner, on the brief), Davidoff Hutcher & Citron LLP, New York, New York, for Appellees.
Before: Walker and Chin, Circuit Judges, and Restani, Judge.[**]
Appellee Gaia House Mezz LLC ("Gaia") and State Street were bound by a mezzanine loan agreement for the construction of a residential building in Manhattan. After a difference over monies owed, Gaia initiated this action, alleging principles of equity prevented State Street from demanding payment of approximately $4.5 million in interest and approximately $370, 000 in attorney fees. Following a bench trial, the United States District Court for the Southern District of New York (Griesa, Judge) entered judgment in favor of Gaia on the interest and attorney fee issues and required State Street to pay an additional $328, 097 in damages. We reverse and find that State Street is entitled to the $4.5 million in interest and attorney fees and is not liable for damages.
In December 2006, Gaia entered into a mezzanine loan agreement (the "Agreement") with Lehman Brothers to help finance the construction of a residential building. The Agreement was secondary to Gaia's loan with iStar FM Loans LLC ("iStar") of approximately $45 million. After Lehman Brothers' bankruptcy in September 2008, State Street assumed Gaia's loan. Gaia failed to pay off any of its debt to State Street by the initial Maturity Date of July 1, 2009 and committed several other Defaults. At the time of the initial Maturity Date, Gaia owed State Street approximately $20.7 million in principal and $10.1 million in interest.
In September 2009, State Street and Gaia modified the Agreement with the Second Loan Modification Agreement ("Second Modification"), which expressly waived Gaia's prior Defaults, including its failure to achieve Substantial Completion by the date specified in the Agreement. The Second Modification established a new Maturity Date of January 2010, with the option to extend the Maturity Date four times up to July 2011. The Second Modification included as Events of Default the failure to obtain a Temporary Certificate of Occupancy ("TCO") for Penthouse #2 ("PH2") by April 15, 2010 or the failure to attain Substantial Completion by June 30, 2010.
In addition to new deadlines, the Second Modification created several new provisions relevant here, including the Accrued Interest Waiver, the Affiliate Purchase Right, and the Lockbox Agreement. The Accrued Interest Waiver provides:
On the Maturity Date, the entire Debt, if not sooner paid, shall become due and payable in full. Notwithstanding the foregoing, if the entire Debt, other than the . . . [Accrued Interest], is paid in full on the Scheduled Maturity Date and no Event of Default occurs prior to such Scheduled Maturity Date, Lender shall waive the payment of Accrued Interest from Borrower . . . .
J.A. 802-03 (Second Modification). This had the effect of freezing interest at $10.1 million and providing an interest-free loan on the $20.7 million in principal, provided there were no future Events of Default. Gaia's monthly statements reflected the calculation of the monthly interest and tracked the total amount of interest accrued since the initial Maturity Date (the "Accrued Interest").
The Affiliate Purchase Right provision states that "Borrower or an Affiliate of Borrower shall be allowed to purchase any of Residential Units . . . 8N, . . . 11S, [or] PH1 . . . in order to satisfy the Loan and Senior Loan reduction covenants described above at the applicable 'Minimum Unit Sales Price.'" J.A. 809 (Second Modification). This provision enabled Gaia, or its affiliates, to purchase the specified units in order to avoid a default and a quick foreclosure. The Second Modification also incorporated the Amended and Restated Mezzanine Lockbox Agreement ("Lockbox Agreement"), which provided a mechanism for the distribution of proceeds from the sale of units. Proceeds would be distributed in a specified priority such that State Street's loan would be paid in full, then Gaia could recoup its equity investments, and any remaining proceeds would be split 50/50 between Gaia and State Street until all units were sold.
After the Second Modification, Gaia committed several Events of Default, including the failure to obtain a TCO for PH2 by April 15, 2010. In May 2010, the parties agreed to the Third Loan Modification Agreement ("Third Modification"). The Third Modification expressly waived the previous Event of Defaults, including the failure to obtain TCOs. The Third Modification also extended the deadline to obtain a TCO for PH2 and attain Substantial Completion to July 15, 2010 and extended the Maturity Date to January 15, 2011 pursuant to the Third Extension option. The Third Modification repeated relevant provisions of the Second Modification, including the Accrued Interest Waiver and the Affiliate Purchase Right.
Gaia failed to obtain a TCO for PH2 and failed to achieve Substantial Completion by the specified deadline of July 15, 2010. Despite these Events of Default, the parties took action otherwise required by the Agreement, Gaia closed on several apartments during the summer of 2010, and Gaia made its final payment to iStar in August 2010.
On December 2, 2010, State Street provided written notice that Gaia's failure to achieve Substantial Completion and obtain a TCO for PH2 by July 15, 2010 constituted Events of Default. On December 13, 2010, Gaia obtained the TCO for PH2. On January 7, 2011, State Street notified Gaia in writing that, because of the Events of Default, State Street was not required to waive the Accrued Interest. The letter also noted State Street would agree to the Fourth Extension option to the Maturity Date, despite the Events of Default, provided certain other ...