United States District Court, S.D. New York
For Madeleine, L.L.C., Plaintiff: Jonathan James Kelson, Jonathan Paul Whitcomb, Richard E. Castiglioni, Scott M. Harrington, Diserio Martin O'Connor & Castiglioni LLP, Stamford, CT.
For Alan I. Casden, Defendant: Amy Terry Sheehan, LEAD ATTORNEY, Manatt, Phelps & Phillips, LLP(TimesSq), New York, NY; Kenneth David Friedman, Michael Robert Gordon, LEAD ATTORNEYS, Manatt, Phelps & Phillips, LLP(NYC), New York, NY; Robert H. Platt, LEAD ATTORNEY, PRO HAC VICE, Manatt, Phelps & Phillips, LLP, Los Angeles, CA.
OPINION & ORDER
KATHERINE B. FORREST, United States District Judge.
This diversity action for breach of contract, conversion, and an accounting was initially filed on March 22, 2012. (Compl., ECF No. 1.) An Amended Complaint was filed on February 11, 2013. (Am. Compl., ECF No. 26) Plaintiff Madeleine, LLC (" Madeleine" ) sues Alan I. Casden for amounts it claims are due and owing under a promissory note dated March 11, 2002 (the " Promissory Note" or " Note" ), secured by a Pledge and Security Agreement dated as of March 11, 2002. This Court held a two-day bench trial on April 29 and 30, 2013, during which it heard from the two principals involved: Casden, on behalf of himself, and Ron Kravit, on behalf of Madeleine. For the reasons discussed below, this Court finds that Casden has not breached his obligations under the Note. Judgment is therefore entered in defendant's favor.
The Court's findings of fact and conclusions of law are as follows:
I. FINDINGS OF FACT
Casden and Cerberus Partners, L.P. (" Cerberus" ), a New York-based private equity firm with more than $25 billion under management, have engaged in a number of business transactions over the years. Among those transactions was the creation of a Real Estate Investment Trust (" REIT" ), Casden Properties Inc. (" CPI" ). Ninety-five percent of CPI was owned by a combination of Casden (49%) and Cerberus (51%).
Shortly before September 11, 2001, Casden and Cerberus explored a potential merger of CPI with a large, publicly traded REIT, Apartment Investment and Management Company, Inc. (" AIMCO" ). Casden and his attorneys acted on his behalf; Kravit, a Senior Managing Director of Cerberus (and a Vice President of the Cerberus entity, Madeleine), along with various attorneys, acted for Cerberus.
Casden and Cerberus discussed AIMCO's possible acquisition of CPI for consideration in the vicinity of a billion dollars. In connection with AIMCO's acquisition, Casden, Cerberus, and AIMCO intended to create a new entity, Casden Properties LLC (" CPLLC" ), to pursue future residential real estate development opportunities in Southern California. Cerberus would own 60% of the new entity, and Casden and AIMCO were each to own 20%. CPLLC was also referred to as " Development LLC" or " DevCo." AIMCO insisted that Casden have at least a 20% ownership interest in CPLLC (Tr. 99, 237-38) -- to insure that he had sufficient motivation with respect to the success of the development efforts.
Following the market upheaval associated with 9/11, AIMCO lowered the amount it was willing to pay for CPI to approximately $800 million. Casden and Cerberus discussed ways in which they could increase the amount of consideration. Ultimately, as part of their agreement with AIMCO to sell CPI and create CPLLC, AIMCO agreed that Casden and Cerberus would be paid an additional $125 million: $50 million guaranteed and to be paid out in equal quarterly amounts in accordance with their respective ownership percentages in CPI, and a possible additional $75 million in other fees (referred to as " Development Fees" in various documents). The Court finds that both the $50 million guaranteed and the 75 million in additional fees were part of the overall transaction consideration with AIMCO.
As CPLLC developed projects requiring capital, AIMCO, Casden, and Cerberus each were required to contribute funds in percentages commensurate with their ownership participation. According to the transaction documentation establishing CPLLC, Cerberus committed to fund up to 150 million, and AIMCO and Casden each agreed to fund up to $50 million.
On December 3, 2001, the day before AIMCO was scheduled to announce the merger, Kravit and Stephen Feinberg of Cerberus informed Casden that Cerberus wanted a larger participation percentage in CPLLC. Cerberus wanted to own 70% of CPLLC. To that end, it sought to acquire half of Casden's 20% interest (sometimes referred to herein as the " 10% Interest" ). While Casden was not happy that this request was being made -- and made at the last minute -- he agreed to it in order to consummate the overall transaction.
The structure of the ensuing transaction -- effecting the transfer of rights and obligations in Casden's 10% Interest in CPLCC, forms the heart of the dispute before the Court. It is essential to understanding the complexity of the transaction to place it against the background of AIMCO's requirement that Casden have a 20% interest in CPLLC. To maintain that 20% as an outward appearance, Cerberus and Casden agreed to a complicated transaction that was, as explained below, structured as a " loan" of the funding amounts for CPLLC that was associated with the 10% Interest. (That is, since Casden was obligated to fund up to $50 million for his 20% interest when he transferred the rights to the 10% Interest to Cerberus, Cerberus similarly took over the obligation to fund the $25 million associated with that portion of the interest.) (Id. at 99 (" Court:
So was the loan to AIC for the purpose essentially of paying for that 10 percent of the 20 percent, but doing it under the radar so that AIMCO still believed that Mr. Casden had 20 percent overall interest? [Kravit]: Yes." ); see also id. at 237, 239.) The Court finds that the Supplemental Agreement was structured as a loan in order to obscure the fact that Cerberus was acquiring half of Casden's interest in CPLLC.
Casden and Kravit subsequently stayed up the better part of the night negotiating documentation that would reflect how this transfer of Casden's 10% Interest would be effected. (Id. at 260.) Casden and Cerberus entered into a side, supplemental agreement (" Supplemental Agreement" ), dated December 3, 2001. (Trial Ex. 2.)
The Supplemental Agreement provided that Casden would effectively " borrow" from Cerberus the 25 million necessary to meet the funding obligation corresponding to the 10% Interest he was transferring to Cerberus. In return for that $25 million, Cerberus would receive payment of principal and interest as CPLLC successfully developed properties. Kravit testified clearly and without hesitation that at the time that he and Casden entered into the Supplemental Agreement, he intended that Cerberus would be repaid out of the cash flows of CPLLC. (Tr. 108.) He also testified clearly and without hesitation that at the time that he entered into the Supplemental Agreement with Casden -- which was one day before the AIMCO acquisition of CPI was announced -- he did not intend that any portion of the $25 million would come out of the guaranteed $50 million to be paid quarterly by AIMCO to Cerberus and Casden as part of CPI's merger with AIMCO. (Id. at 110, 169 (" Q: Now it wasn't your intent when you negotiated the documents to have the consulting fees be used to pay the [N]ote, correct? [Kravit]: Correct." ).) Casden testified consistently with Kravit. When asked whether there was any discussion of how the Loan would be repaid he stated: " Well, the loan would be repaid as if [Cerberus] owned the 10 percent. So it was only out of profits and distributions from the sale and development of properties." (Id. at 240; see also id. at 264 (" [Casden]: . . . [I]t was to be repaid from the development -- from the profits and proceed from the real estate developments . . . Q: So was there ever any discussion that the consulting fees or the office building fees would be used to repay the loan? [Casden]: No. I would never have agreed to that and they didn't ask for it." ).)
Casden testified that the agreement for repayment was structured around the fact that with respect to his 10% Interest that was being acquired by Cerberus, he was " a warm body where it passed through . . . I wasn't supposed to have any liability on that 10 percent. If they owned it directly, I wouldn't have any liability on it and we were putting them in the same standing as if they owned it." (Id. at 244.) Then Casden stated:
[T]he consulting fees and office building fees were separate and apart from the ownership of DevCo. Because that had already been negotiated with AIMCO to get that money as a result of our ownership in [CPI] and had nothing to do with DevCo. I mean, those were monies that we specifically negotiated to get as additional
consideration for the assets we were selling.
(Id. at 245.) Casden testified that if the consulting and office building fees were used to pay down the Note, that would have put Cerberus in a better financial position than had they just received Casden's 10% Interest in DevCo -- because they would effectively be getting a piece of the 41% of CPI he had sold to AIMCO. (Id.) The Court finds that the parties never intended that Casden would be personally liable for the Loan. The Court also finds that the parties specifically did not intend that the Loan would be repaid from the Consulting Fees.
The Supplemental Agreement makes little sense unless placed into the context the parties described at trial. Importantly, a plain reading of the Supplemental Agreement does not reveal that the purpose of the " loan" was to effect a transfer of Casden's 10% Interest in CPLLC to Cerberus. This is perhaps not surprising in light of AIMCO's requirement that Casden maintain a 20% interest in the project. For instance, Section 5 of the Supplemental Agreement states:
Development LLC Matters.
(a) Loan to AIC [Alan I. Casden]. At the request of AIC, pursuant to mutually agreed documentation which includes the terms described herein, Blackacre shall lend up to an aggregate of $25 million to AIC in one or more installments on the following terms and conditions. The interest on the loans shall be (i) 15% per annum (compounded annually) plus (ii) contingent interest equal to 67% of all profits and distributions on the interest of AIC (and his affiliates) in Development LLC acquired with the proceeds of the loans. The loans shall be secured by a pledge of a percentage of the interest of AIC (and his affiliates) in Development LLC equal to a percentage equivalent of a fraction, the numerator of which is the amount of loans made by Blackacre pursuant to this Section and the denominator of which is the amount of capital AIC (and his affiliates) have contributed to Development LLC. Interest and principal shall be payable only from distributions received by AIC (or his affiliates) from the interests Development LLC (but the maturity date of all such loans in any event shall be ten years from the date of closing of the Merger) pledged to secure the loans and shall otherwise be non-recourse to AIC. Proceeds of each of the loans would be used by AIC (or his affiliates) solely to make 50% of a capital contribution to be made to Development LLC by AIC (or his affiliates) . . . The documentation for a loan hereunder shall include other customary terms and conditions (including provisions regarding events of default and acceleration of amounts owed under the loans).
(Trial Ex. 2 at Sec. 5(a).) Kravit testified that it was his intention for the " documentation" referred to in the last sentence of Section 5 quoted above to generally describe and reflect the terms set forth in Section 5(a). (Tr. 104, 105.)
The transaction with AIMCO was announced on December 4, 2001 and closed in March 2002. The Agreement and Plan of Merger was between AIMCO, CPI, and a newly created entity in which Casden and Cerberus own the majority interest, " XYZ Holdings." (Trial Ex. 1; see also Trial Ex. 5 (XYZ Holdings LLC agreement).)
In connection with the closing, Casden and a Cerberus entity, Madeleine LLC, entered into a Promissory Note for $25 million. (Trial Ex. 6.) The Promissory Note provided the mechanism for the loan draw downs -- and required that when Casden requested a loan draw, ...