Gaia House Mezz LLC v. State St. Bank

• Decision Date: 12 June 2013
• Docket Number: Docket No. 12–2481–cv.
• Citation: 720 F.3d 84
• Parties: GAIA HOUSE MEZZ LLC, Plaintiff–Counter–Defendant–Appellee, and West Sky, LLC, 200 11th 11S LLC, 24th Street Capital Group I LLC, Plaintiffs–Appellees, and Young Woo, Margarette Lee, Glauco Lolli–Ghetti, Counter–Defendants–Appellees, v. STATE STREET BANK AND TRUST COMPANY, Defendant–Counter–Claimant–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

720 F.3d 84

GAIA HOUSE MEZZ LLC, Plaintiff–Counter–Defendant–Appellee,

and

West Sky, LLC, 200 11th 11S LLC, 24th Street Capital Group I LLC, Plaintiffs–Appellees,

and

Young Woo, Margarette Lee, Glauco Lolli–Ghetti, Counter–Defendants–Appellees,

v.STATE STREET BANK AND TRUST COMPANY, Defendant–Counter–Claimant–Appellant. ^*

Docket No. 12–2481–cv.

United States Court of Appeals,Second Circuit.

Argued: April 8, 2013.

Decided: June 12, 2013.

Andrew C. Phelan (Dina R. Kaufman, on the brief), Bingham McCutchen LLP, Boston, MA, for Defendant–Counter–Claimant–Appellant.

Peter M. Ripin (Gary I. Lerner, on the brief), Davidoff Hutcher & Citron LLP, New York, NY, for Appellees.

Before: WALKER and CHIN, Circuit Judges, and RESTANI, Judge. ^**

RESTANI, Judge:

Appellee Gaia House Mezz LLC (“Gaia”) and State Street were bound by a mezzanine loan ¹ 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.

BACKGROUND

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.² 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 conditions, not relevant here, were satisfied. State Street reserved all rights and remedies with respect to the Events of Default and stated:

Nothing contained in this letter, including without limitation, State Street's willingness to agree to the exercise of the Fourth Extension Opinion as noted above despite the Specified Defaults, or any delay on the part of State Street in exercising any of its rights and remedies under the Loan Agreement ... shall be considered to be a waiver or modification thereof or of State Street's entitlement to the payment of Accrued Interest.

J.A. 1699 (State Street Jan. 7, 2011 Letter to Gaia).

In February 2011, Gaia obtained a loan from Doral Bank in order to purchase the remaining three unsold units and replace State Street as the lender. On March 15, 2011, Gaia notified State Street of its intention to exercise the Affiliate Purchase Right and purchase the remaining three units for the minimum contract price. On March 24, State Street responded that it did not object to Gaia's use of the Affiliate Purchase Right. State Street again observed that two Events of Default had occurred and declared that it was “not required to waive, and will not waive, the payment of Accrued Interest.” J.A. 1741 (State Street Mar. 24, 2011 Letter to Gaia). Gaia's affiliates purchased the remaining three units for the minimum contract price. The resulting proceeds did not cover all of Gaia's equity, and thus, State Street did not receive profits under the 50/50 profit sharing provision of the Lockbox Agreement.

In July 2011, Gaia paid off the remaining $4.1 million in principal. Under protest, Gaia also paid approximately $4.5 million in Accrued Interest and $370,000 in Professional Fees. Because Gaia had not planned to pay the Accrued Interest, it was forced to obtain $328,097 in additional financing from Doral Bank (the “Doral damages”) in order to make the final payment.

Gaia then initiated this litigation, alleging it was entitled to a return of the Accrued Interest and Professional Fees and that State Street was liable for the Doral damages. State Street counterclaimed for a declaratory judgment that it was entitled to the Accrued Interest and that it was not liable for the Doral damages. State Street also requested attorney fees incurred in this litigation pursuant to the Agreement's Professional Fee provision. Following a bench trial, the district court found equity required State Street to return the Accrued Interest and Professional Fees paid by Gaia and that State Street was liable for the Doral damages. State Street now appeals.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291. “Under New York law ... if a contract is unambiguous on its face, its proper construction is a question of law.” Metro. Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889 (2d Cir.1990) (citation omitted). Mixed questions of law and fact are reviewed de novo; factual findings are reviewed for clear error. Diesel Props S.r.l. v. Greystone Bus. Credit II LLC, 631 F.3d 42, 51–52 (2d Cir.2011).

DISCUSSION

I. Accrued Interest

It is undisputed that State Street did not violate any terms of the Agreement by demanding payment of the Accrued Interest and that Gaia failed to obtain the TCO for PH2 or attain Substantial Completion by the dates specified in the Agreement. The only issues on appeal are whether equitable estoppel, principles of good faith and fair dealing, or general principles of equity prevent State Street from keeping the Accrued Interest.

A. Equitable Estoppel

Under New York...