Bear, Stearns Funding v. Interface Group-Nevada

Citation361 F.Supp.2d 283
Decision Date21 March 2005
Docket NumberNo. 03 Civ. 8259(CSH).,03 Civ. 8259(CSH).
PartiesBEAR, STEARNS FUNDING, INC., Plaintiff and Counterclaim Defendant, v. INTERFACE GROUP-NEVADA, INC., Defendant and Counterclaim Plaintiff.
CourtU.S. District Court — Southern District of New York

Cadwalder, Wickersham & Taft LLP, Jonathan D. Polkes, Esq., Michael M. Gordon, Esq., Of Counsel, New York, NY, for Plaintiff.

Wasserman, Grubin & Rogers, LLP, Richard Wasserman, Esq., Of Counsel, New York, NY, for Defendant.

MEMORANDUM OPINION AND ORDER

HAIGHT, Senior District Judge.

This diversity case is before the Court on the motion of plaintiff and counterclaim defendant Bear, Stearns Funding, Inc., ("Bear Stearns")1 for summary judgment on its claim for breach of contract and to dismiss the Third through Sixth Counterclaims of defendant and counterclaim plaintiff Interface Group — Nevada, Inc. ("Interface").2

I. BACKGROUND

Bear Stearns is in the business, among other things, of extending credit to clients, secured by a lien on real property. Bear Stearns then treats the loan as a commodity and sells, sells participations in, securitizes, or otherwise transfers its interest in those loans to third parties or into capital markets.3 Interface is the wholly owned subsidiary of a holding company, of which Sheldon G. Adelson is the sole shareholder. Adelson is also the Chairman of Interface's Board. Interface owns and operates the Sands Expo Center, located in Las Vegas, Nevada, the largest privately owned convention center in the United States. Through his corporate affiliates, Adelson — who has been called, not pejoratively, a Las Vegas'"mogul" — also owns the Venetian Resort Hotel Casino which is physically attached to the Sands. Christopher Palmeri, A Vegas Mogul Cashes in on Some Chips, BUS. WK., December 13, 2004, at 14.

On June 28, 2001, Bear Stearns entered into an agreement (the "Loan Agreement") with Interface. Pursuant to the Loan Agreement, Bear Stearns loaned Interface $141 million secured by a mortgage encumbering the Sands Expo Center. The Loan Agreement contains provisions enabling Bear Stearns to assign or securitize all or part of the loan. Specifically, § 9.1 of the agreement, entitled "Sale of Notes and Securitization," authorizes Bear Stearns to:

sell all or any portion of the Loan and the Loan Documents, or issue one (1) or more participations therein, or consummate one (1) or more private or public securitizations of rated single- or multi-class securities ("the Securities") secured by or evidencing ownership interests in all or any portion of the Loan and the Loan Documents or a pool of assets that include the Loan and the Loan Documents (such sales, participations, and/or securitizations, collectively a "Securitization").

However, Bear Stearns' right to sell or assign the loan is not unlimited. Section 10.24, entitled "Limitations on Lender's Assignment," prohibits Bear Stearns from assigning all or part of the loan to a "Competitor" of Interface (the "competitor limitation"):

Unless an Event of Default shall then exist, Lender shall not consummate an assignment or participation to any person that then (i) owns or operates (or is an Affiliate of a Person that owns or operates) a casino that is located in the State of Nevada or the State of New Jersey, (ii) owns or operates [(]or is an Affiliate of a Person that owns or operates) a Competing Facility and/or (iii) is a union pension fund (any such Person, a `Competitor') ....

Though the competitor limitation restricts Bear Stearns' right to sell or assign the loan to a competitor, it does "not apply to a Securitization of the Loan," as "Securitization" is defined in § 9.1, above (the "securitization exemption"). Specifically, § 10.24 provides that the competitor limitation "shall not apply to a Securitization of the Loan and shall be void and of no further force and effect after a Securitization of the Loan."

The rationale behind the Loan Agreement's exemption of securitizations from the competitor limitation is offered in the affidavit of Interface's president, Richard Heller.

If Bear Stearns entered into a securitization transaction — a transaction in which part of the loan was combined with other loans, packaged, and sold on Wall Street, much the way stock in General Motors might be sold — we recognized that, once this "security" was trading in the marketplace, it would be impossible to identify the owners of small individual shares or pieces. That would be a very different situation, however, from the sale of a single, large piece, of the loan to an identifiable entity that, either directly or indirectly through an affiliate, was a competitor who would be in a situation to make use of our information and, equally important, through holding a significant part of our debt, potentially exert an influence over our operations.

Heller Aff., ¶ 8. Moreover, as described above, in addition to exempting securitizations from the competitor limitation, § 10.24 also provides that the competitor limitation is of no further force and effect after a securitization.

To recapitulate: Bear Stearns has the right to sell or securitize the $141 million loan. If Bear Sterns sells the loan, it is prohibited by the competitor limitation from selling any portion of the loan to a competitor of Interface. However, if Bear Stearns securitizes the loan, the securitization exemption allows it to sell those securities to any party, including competitors of Interface, and once the securitization is complete, the exemption provides that the competitor limitation is of no further effect.

The Loan Agreement also contains a provision, § 10.25, which obliges Bear Stearns to protect the financial information of Sheldon G. Adelson and to use "commercially reasonable efforts" to require that confidentiality agreements be signed prior to the release of such information to third parties. Section 10.25 contains language, similar to the securitization exemption language in § 10.24, which discharges Bear Stearns' confidentiality obligations "in connection with a Securitization."

On August 1, 2002, Bear Stearns securitized a portion of the loan, but left $34,401,788 out of the securitization. This unsecuritized portion of the loan is known as the "subordinate component," and the circumstances of its disposition form the grounds for this action. Subsequently, on August 13, 2002, the parties entered into another agreement, the "Revised4 Sharing Agreement." The Revised Sharing Agreement was apparently consummated in anticipation of Bear Stearns' sale of the subordinate component of the loan to a third party, Beal Capital Markets ("Beal"). The Revised Sharing Agreement provides that Interface is required to pay Bear Stearns for the "costs of Securitzation"5 and sets forth a formula based on actual and estimated costs, pursuant to which the payment will be calculated. It also provides that if the sale to Beal is successful, Bear Stearns would require Beal to sign agreements not to transfer Beal's interest in the loan to a competitor of Interface. If the sale to Beal is unsuccessful, Bear Stearns is required by the Revised Sharing Agreement to "use diligent efforts to market and sell the Subordinate Component subject to the Subordinate Component Restriction." Compl., Ex. 2.

For reasons neither disclosed by the parties nor relevant to this motion, the sale of the subordinate component of the loan to Beal was never consummated. In July 2003, however, Bear Stearns did sell the subordinate component of the loan to another entity, SOF-IV Bond Corporation ("SOF-IV") and, pursuant to the formula contained in the Revised Sharing Agreement, demanded payment from Interface of $1,477,992 for the expenses of the securitization. Interface has refused to remit the $1,477,992, alleging that the sale of the subordinate component of the loan to SOF-IV violated provisions of both the Loan and Revised Sharing Agreements, because SOF-IV is a competitor of Interface.6

Interface alleges that a tangled web of transactions — some directly related to the $141 million loan, others indirectly related to that loan — actually form the prelude to this dispute. According to Interface, its disputes with Bear Stearns have their genesis in a wholly distinct transaction: a 2002 refinancing of debt related to the Venetian Resort Hotel Casino, another of Adelson's Las Vegas properties (the "Venetian Refinancing"). According to Interface, though initially included in the transaction, Bear Stearns was ultimately excluded from participation in the Venetian Refinancing. Interface avers that shortly after Bear Stearns' exclusion in April 2002, its chairman and CEO, James Cayne, notified Interface that unless Bear Stearns were reinstated into the refinancing negotiations, it would "make life difficult for Interface on the [$141 million] loan." Heller Aff. ¶ 11. Bear Stearns was not reinstated into the Venetian Refinancing negotiations. Interface contends that Bear Stearns promptly commenced a campaign of "harassment" in retaliation for Interface's refusal to reinstate Bear Stearns in the Venetian negotiations and in an attempt to be reinstated into the refinancing, Answer, Affirmative Defenses and Counterclaims (collectively the "Answer"), ¶ 38, a campaign which allegedly culminated in Bear Stearns' sale of the subordinate component of the loan to a purported Interface competitor, SOF-IV, in July 2003. Consequently, Interface claims that the sale of the subordinate component to SOF-IV, and the conduct of Bear Stearns in making that sale, constitute a breach of the Loan and Revised Sharing Agreements, thereby excusing its payment to Bear Stearns of the $1,477,992 for the expenses of the securitization.

On October 17, 2003 Bear Sterns filed suit in this Court alleging that by its refusal to pay, Interface breached the Revised Sharing Agreement and the Loan Agreement. Bear Stearns demands $1,477,992.07, as...

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