Alden Global Value Recovery Master Fund, L.P. v. Keybank Nat'l Ass'n, 5203–5203A

• Decision Date: 29 March 2018
• Docket Number: Index 650928/16,5203–5203A
• Citation: 159 A.D.3d 618,74 N.Y.S.3d 559
• Parties: ALDEN GLOBAL VALUE RECOVERY MASTER FUND, L.P., etc., Plaintiff–Appellant, v. KEYBANK NATIONAL ASSOCIATION, et al., Defendants–Respondents, Wells Fargo Bank, N.A., etc., Nominal Defendant.
• Court: New York Supreme Court — Appellate Division

159 A.D.3d 618

74 N.Y.S.3d 559

ALDEN GLOBAL VALUE RECOVERY MASTER FUND, L.P., etc., Plaintiff–Appellant,

v. KEYBANK NATIONAL ASSOCIATION, et al., Defendants–Respondents,Wells Fargo Bank, N.A., etc., Nominal Defendant.

5203–5203A

Index 650928/16

Supreme Court, Appellate Division, First Department, New York.

Entered: March 29, 2018

Duval & Stachenfeld LLP, New York (Kirk L. Brett of counsel), for appellant.

Steptoe & Johnson, Chicago, IL (Michael Dockterman of the bar of the State of Illinois, admitted pro hac vice, of counsel), for KeyBank National Association, respondent.

Loeb & Loeb LLP, New York (Gil Feder of counsel), for Berkadia Commercial Mortgage LLC, respondent.

Miller Field Paddock & Stone, P.L.C., Troy, MI (James L. Allen of the bar of the State of Michigan, the State of Ohio and the State of Illinois, admitted pro hac vice, of counsel), for Berkadia Commercial Mortgage LLC, respondent.

Friedman, J.P., Kahn, Gesmer, Kern, Moulton, JJ.

Orders, Supreme Court, New York County (Anil C. Singh, J.), entered November 29, 2016, which granted defendants KeyBank National Association and Berkadia Commercial Mortgage LLC's motions to dismiss the complaint as against them with prejudice, unanimously affirmed, without costs.

The principal issue before us is whether, in granting defendants' motions to dismiss in this purported derivative action for breach of an Amended and Restated Pooling and Servicing Agreement (PSA), Supreme Court improperly interpreted the term "default," as employed in one provision of the PSA, as synonymous with the term "Event of Default," as defined in a preceding provision of the PSA. We find that Supreme Court's determination was correct, and therefore affirm.

I. Background

This appeal arose from the sale of a commercial mortgage loan for allegedly less than "fair value."

In 2007, the Bryant Park Hotel, located at 40 W. 40th Street, borrowed funds from the J.P. Morgan Chase Commercial Mortgage Securities Trust Series 2007–CIBC18 (the Trust), which was created pursuant to a pooling and servicing agreement dated March 7, 2007. Under the terms of that agreement, defendant Wells Fargo Bank was designated as the Trustee and Paying Agent, defendant Berkadia was designated as the Master Servicer and defendant KeyBank was designated as the Special Servicer. The Bryant Park Hotel loan was pooled with other commercial mortgage loans and securitized into the Trust.

Section 6.03 of the PSA limits the potential claims of liability that may be brought against the servicers of the Trust to willful misfeasance, bad faith, negligence or negligent disregard of their duties under the PSA. That section also provides that the servicers will be indemnified by the Trust for all expenses unless incurred by reason of bad faith, willful misconduct, negligence or negligent disregard.

Article VII of the PSA, entitled "Default," includes alternative definitions of the term "Event of Default" (Section 7.01[a] ). The parties agree that the only definition of "Event of Default" applicable to the circumstances presented in this case is the following:

"[A]ny failure on the part of the Master Servicer [or] the Special Servicer ... duly to observe or perform in any material respect any of its other covenants or obligations contained in this Agreement which continues unremedied for a period of 30 days ... after the date on which written notice of such failure, requiring the same to be remedied, shall have been given ... to the Master Servicer [or] the Special Servicer ... as the case may be, with a copy to each other party to this Agreement, by the Holders of Certificates evidencing Percentage Interests aggregating not less than 25%" (Section 7.01[a] [iii] [emphasis added] ).

Section 12.03(c) of the PSA (the "no-action" clause) sets forth the limited circumstances under which a certificateholder may institute suit. Section 12.03(c) provides, in pertinent part:

"No Certificateholder shall have any right by virtue of any provision of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement or any Mortgage Loan, unless, with respect to any suit, action or proceeding upon or under or with respect to this Agreement, such Holder previously shall have given to the Trustee and the Paying Agent a written notice of default hereunder, and of the continuance thereof, as herein before provided, and unless also (except in the case of a default by the Trustee) the Holders of Certificates of any Class evidencing not less than 25% of the related Percentage Interests in such Class shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding" (emphasis added).

The PSA sets forth no definition of the term "default" as employed in section 12.03(c).

In October 2011, the borrower defaulted on the loan, and Berkadia, which had been responsible for servicing the loan as Master Servicer, transferred that responsibility to KeyBank, as Special Servicer. KeyBank, as Special Servicer, was tasked with determining the "fair value" of the loan, and Berkadia, as Master Servicer, was responsible for reviewing KeyBank's fair value determination.

Effective February 27, 2012, the original pooling and servicing agreement was amended, restated and replaced by the PSA.

In April 2014, KeyBank obtained an appraisal of the land and building by Cushman & Wakefield of $71 million. Thereafter, KeyBank valued the loan at $65,058,844, even though the amount owed on the loan was $85.5 million. The nonparty Controlling Class Option Holder (the certificateholder with the largest balance of certificates in the "Controlling Class") (CCOH) elected to exercise its option to purchase the loan from the Trust. Later that month, Berkadia, as Master Servicer, approved KeyBank's valuation.

On May 20, 2014, the CCOH consummated the purchase of the loan from the Trust, but the Trust received approximately $59 million, approximately $6 million less than KeyBank's and Berkadia's valuation. A few weeks later, the loan was restructured and refinanced by a lender for more than $100 million.

On May 18, 2015, plaintiff Alden Global Recovery Master Fund, L.P., a holder of at least 25% of the Class C group of certificates, sent a letter to Wells Fargo as Trustee and Paying Agent notifying them of defaults by KeyBank and Berkadia. In that same letter, plaintiff related the above appraisal history and requested that Wells Fargo institute a suit against both KeyBank and Berkadia and offered Wells Fargo "such reasonable indemnity as it may require."

In mid-July 2015, counsel for Wells Fargo orally advised plaintiff that it would not institute a suit.

On February 23, 2016, plaintiff commenced the instant action, alleging that both KeyBank, as Special Servicer, and Berkadia, as Master Servicer, breached their duties under the PSA by failing to comply with their obligations in determining the fair value of the loan. Specifically, plaintiff alleged that KeyBank placed its reliance on a single appraisal from Cushman and Wakefield and undervalued the loan. Plaintiff further alleged that Berkadia failed in its duty to review KeyBank's valuation by ignoring KeyBank's blatant errors, which should have raised substantial doubts about the reliability of the valuation. Additionally, plaintiff alleged that neither of those defendants was entitled to indemnification and that KeyBank had failed to act in good faith.

In separate motions, both Berkadia and KeyBank moved to dismiss the complaint. As stated above, by order entered November 29, 2016, Supreme Court granted both motions on both CPLR 3211(a)(1) and (7) grounds.

On this appeal, plaintiff's principal argument is that Supreme Court erred in granting defendants' motions to dismiss based upon its incorrect interpretation of the undefined term "default," as employed in section 12.03(c) of the PSA, as having the same meaning as the term "Event of Default" as defined in section 7.01(a)(iii), in that the cases upon which Supreme Court relied are either legally or factually inapposite to the instant case. Relying on Teachers Ins. & Annuity Assn. of Am. v. CRIIMI MAE Servs. Ltd. Partnership, 681 F.Supp.2d 501 [S.D. N.Y.2010], affd 481 Fed. Appx. 686 [2d Cir. 2012], cert denied 568 U.S. 1010, 133 S.Ct. 616, 184 L.Ed.2d 394 (2012), plaintiff maintains that application of the term "Event of Default" is limited to the removal of a servicer and is, therefore, inapplicable to the initiation of certificateholder litigation. Plaintiff further contends that, in any event, dismissal of the complaint was improper because the language of section 12.03(c) is ambiguous. Additionally, plaintiff argues that there is case law precedent for the principal that uncapitalized, undefined general terms in a contract should not be interpreted to have the same meaning as capitalized terms defined elsewhere in the same contract.

Defendants maintain that there is controlling precedent for upholding Supreme Court's determination that the two terms in question have the same meaning, that plaintiff cannot advance its ambiguity argument on this appeal because it did not raise it before the motion court, and that, in any event, the argument lacks merit because the phrase "as herein before provided" clearly refers to default provisions of the PSA preceding section 12.03(c). Defendants further argue that the cases cited by plaintiff in support of its argument that an uncapitalized contract term should not be interpreted as synonymous with a contractually defined contract term are neither binding precedent nor factually apposite to the instant case.

II. Legal...