BANQUE ARABE ET INTERN. D'INV. v. MD. NAT. BANK, No. 90 Civ. 6433 (RJW).

• Decision Date: 23 April 1993
• Docket Number: No. 90 Civ. 6433 (RJW).
• Citation: 819 F. Supp. 1282
• Parties: BANQUE ARABE ET INTERNATIONALE D'INVESTISSEMENT v. MARYLAND NATIONAL BANK.
• Court: U.S. Court of Appeals — Fifth Circuit

819 F. Supp. 1282

BANQUE ARABE ET INTERNATIONALE D'INVESTISSEMENT v. MARYLAND NATIONAL BANK.

No. 90 Civ. 6433 (RJW).

United States District Court, S.D. New York.

April 23, 1993.

Joseph H. Levie, Mark Holland, Joanne M. Scalard, Donald E. Griffith, Rogers & Wells, New York City, for plaintiff.

James A. Moss, Harvey S. Feuerstein, Susan L. Meekins, Herrick, Feinstein, New York City, for defendant.

OPINION

ROBERT J. WARD, District Judge.

Defendant Maryland National Bank ("MNB") has moved, pursuant to Rule 56, Fed.R.Civ.P., for summary judgment in the above-captioned action. Plaintiff Banque Arabe et Internationale d'Investissement ("Banque Arabe") opposes the motion. For the reasons that follow, the motion is granted in part and denied in part.

This action arises in the aftermath of a real estate deal gone sour. In 1988, defendant arranged a $35 million package of loans to eight real estate partnerships, each owned or controlled by Robert K. Marceca. Plaintiff is the former beneficial owner of BAII Banking Corp. ("BAII"),¹ which purchased a $10 million participation interest in this $35 million loan package. The real estate partnerships ultimately defaulted on their loans and the collateral securing the loans was sold at a substantial loss, thereby virtually insuring that the real estate partnerships will be unable to repay the bulk of the $10 million loan purchased by BAII. The question now before this Court is whether the holder of the participation interest (Banque Arabe by way of BAII) or the packager of the participation interests (MNB) must bear the loss resulting from the unpaid loan.

BACKGROUND

The instant motion is made upon a set of stipulated facts. The undisputed facts which are relevant to a determination of the legal questions involved are as follows:

The Marceca Loan and Participations

On June 23, 1988, MNB made a mortgage loan ("the Marceca loan"), arranged by its merchant banking affiliate, MNC International Bank ("MNCIB"), in the principal amount of $35 million, to 1 East 93rd Associates, 36 East 64th Associates, 55 West 89th Associates, 57 West 89th Associates, 405 East 72nd Owners Corporation, 51st Owners Corporation, 107 East 63rd Owners Corporation and 342 East 67th Owners Corporation (collectively "the Marceca borrowers"). Each of these borrowers was owned or controlled by Robert K. Marceca. Repayment of the loan was secured by individual mortgages ("the Marceca mortgages") on eight rent-controlled or rent-stabilized apartment buildings located in Manhattan (collectively "the Marceca properties").² The purpose of the Marceca loan was to finance the acquisition, renovation and conversion to cooperative or condominium ownership of the eight Marceca properties.

The MNB officers who were assigned to work on the Marceca loan in 1988 were employed by MNCIB and were compensated, in part, in the form of bonuses based upon the profitability of MNCIB. Sales of participation interests in the Marceca loan would have increased MNCIB's profitability in 1988, which then would have increased the amount of compensation received by those MNCIB officers who were assigned to the Marceca loan and the effort to sell participations in this loan.

Four banks unaffiliated with MNB purchased a total of $25 million in participation interests in the $35 million Marceca loan.³ Part of this $25 million package was the $10 million participation interest purchased by BAII. This interest was effectuated by a participation agreement between BAII and MNB which was executed on September 29, 1988 and became effective October 3, 1988 ("the Participation Agreement"). On October 3, 1988, BAII paid $10 million to MNB.⁴

BAII's Due Diligence and the June 1988 Loan Paydown Schedules

MNCIB first approached BAII concerning the possible purchase of a participation interest in the Marceca loan in May 1988. Arm's length negotiations between MNCIB and BAII ensued. In June 1988, MNCIB provided BAII with projected loan paydown schedules ("the June 1988 loan paydown schedules"). These schedules were initially prepared by the Marceca borrowers and submitted to MNCIB, which reviewed and discussed them with the Marceca borrowers. The repayments referred to in the June 1988 loan paydown schedules were, and were understood by BAII to be, projected prepayments of the principal amount of the proposed Marceca loan to be made out of the proceeds from the conversion to cooperative ownership of the eight apartment buildings identified in the schedules. BAII was aware that the June 1988 loan paydown schedules were based on a number of assumptions, including, inter alia, that (a) the first projected repayment allocable to each building would be made at the time of the closing of the conversion of the building to cooperative ownership, and (b) the closing of the conversion of each building would occur 90 days after an offering plan for the conversion of the building was accepted for filing by the New York State Department of Law ("the Department of Law").

The parties agree that the June 1988 loan paydown schedules were "realistic" based on the information available to the Marceca borrowers at the times the schedules were prepared. Stipulation of Agreed Facts for Defendant's Summary Judgment Motion at ¶ 31 (hereinafter "Stipulation of Agreed Facts"). MNCIB knew that BAII would use these loan paydown schedules in making its credit analysis of the Marceca loan and would rely on them in deciding whether to purchase a participation interest in the loan.

In June and July of 1988, BAII conducted its own due diligence investigation and credit analysis of the Marceca loan. As part of this process, officers of BAII reviewed documents supplied by MNCIB and had numerous conversations with MNCIB. These conversations included a meeting with Robert K. Marceca.

BAII completed its due diligence investigation by July 13, 1988. At no time during its investigation and credit analysis did BAII request any information or documents from the Department of Law concerning the proposed conversion of the apartment buildings. On July 13, 1988, BAII informed MNCIB of its intention to purchase a $10 million participation interest in the Marceca loan.

Procedure for Department of Law Approval of Apartment Conversion Plans

Before an apartment building may be converted to cooperative ownership in New York State, the conversion plan must be accepted for filing by the Department of Law. This process involves three steps: the "red herring stage," the "black book stage," and the "post-effectiveness stage."

In the red herring stage, the sponsor submits a draft proposed offering plan, or "red herring", to the Department of Law and simultaneously provides copies of the red herring to existing tenants of the building. The Department of Law reviews the contents of the red herring and either accepts the plan for filing, issues a deficiency letter to the sponsor, or rejects the plan for filing. The Department of Law is required to take one of these actions within six months of the red herring's submission. During the red herring stage, no advertising, offers, or sales can legally take place. If the Department of Law issues a deficiency letter, the sponsor is given an opportunity to cure the deficiencies. If the Department of Law rejects the red herring, a revised red herring must then be filed if the sponsor wishes to proceed with the conversion.

If the Department of Law determines that there is full and fair disclosure in the plan and complete regulatory and statutory compliance, the Department of Law advises the sponsor that the plan will be accepted for filing as soon as a final plan, called a "black book," is filed. Once the black book is filed, the sponsor may begin to advertise the apartments for sale and enter into contracts, subject to the right of tenants to purchase their apartment units. No closings can take place, however, until the plan is declared effective. The contracts entered into during the black book stage are called "subscription agreements" and are contingent upon the plan becoming effective. The plan becomes effective when the sponsor enters into subscription agreements with tenants in occupancy for a fixed percentage of apartments and files an amendment to the plan declaring it effective. Only after the plan is declared effective can the closing of the conversion of the building to cooperative ownership and the closing of the sale of individual apartment units occur.

Delays in Converting the Marceca Properties and the Co-Sponsorship Issue

A red herring for 1 East 93rd Street was submitted by the Marceca borrowers to the Department of Law in January 1987. Some time before September 1988, a deficiency letter was issued by the Department of Law for this red herring. The black book offering plan for 1 East 93rd Street was not accepted for filing by the Department of Law until June 1989. No apartment units in this property were ever sold by the Marceca borrowers.

In March 1988, a red herring for 305-315 West 13th Street was filed by the previous owner of that property. Ownership changed in June 1988. On or about October 28, 1988, the Marceca borrowers submitted revised offering plan documents reflecting the June 1988 change in ownership. The offering plan for this property was accepted for filing by the Department of Law in April 1989. No apartment units in that building were ever sold by the Marceca borrowers.

Thus, at the time the Marceca loan closed on June 23, 1988, red herrings had been submitted for the conversions of properties at 1 East 93rd Street and 305-315 West 13th Street. A red herring was submitted to the Department of Law for 36 East 64th Street by the Marceca borrowers in May 1989, but was never accepted for filing. No red herrings were ever submitted for the remaining five Marceca properties.

By the end of 1989, the Marceca borrowers had not converted any of the Marceca properties to cooperative ownership. The inability of the...