Chemical Bank v. Flushing Sav. Bank

• Decision Date: 10 January 1989
• Citation: 146 A.D.2d 473,536 N.Y.S.2d 442
• Parties: CHEMICAL BANK, et al., Plaintiffs-Respondents, v. FLUSHING SAVINGS BANK, Defendant-Appellant.
• Court: New York Supreme Court — Appellate Division

Page 442

536 N.Y.S.2d 442

146 A.D.2d 473

CHEMICAL BANK, et al., Plaintiffs-Respondents, v. FLUSHING SAVINGS BANK, Defendant-Appellant.

Supreme Court, Appellate Division First Department.

Jan. 10, 1989.

S.M. Rathkopf, New York City, for plaintiffs-respondents.

J.B. Grant, Jr., New York City, for defendant-appellant.

Before KUPFERMAN, J.P., and ROSS, ROSENBERGER and SMITH, JJ.

MEMORANDUM DECISION.

Order and Judgment, Supreme Court, New York County (Walter Schackman, J.), entered on or about May 18, 1988 and entered June 6, 1988, respectively, granting plaintiffs' motion for partial summary judgment in the amount of $1,487,677.90, unanimously reversed, on the law, and the motion for partial summary judgment denied and the judgment vacated, with costs.

Plaintiffs, three of the participants in a construction loan agreement, challenge certain expenses and interest on expenses deducted from their pro rata shares of the loan proceeds by the defendant, a participant in the agreement and lead lender. This appeal raises the question of whether considering the language in the loan agreement, material issues of fact exist sufficient to warrant denial of summary judgment as to the parties' intention with respect to the payment of expenses incurred in protecting the loan and the payment of interest on those expenses.

On August 26, 1976 plaintiffs, Chemical Bank (hereinafter "Chemical"), the Lincoln Savings Bank, FSB (hereinafter "Lincoln"), and Mortgagee Affiliates Corp. (hereinafter "Mortgagee Affiliates") together with the defendant Flushing and others entered into a Participation Agreement (hereinafter, "the agreement"). Pursuant to the agreement each of the parties contributed to a fourteen million dollar construction loan mortgage to Parr Meadows Racing Association (hereinafter Parr Meadows) to complete construction of a race track in Yaphank, New York. Chemical contributed 23.21 percent, Lincoln 10 percent and Mortgagee Affiliates 16.30 percent. Flushing contributed 10 percent and acted as lead lender, receiving a "packaging fee" of $280,000.

Pursuant to paragraph 6 of the Participation Agreement, Flushing was to reimburse itself for out-of-pocket expenses secured by the mortgage from monies paid by the borrower on the note. The other lenders were only to contribute their share of the loan principal. Paragraph 6 provides in relevant part as follows:

Except as hereinafter expressly provided, all sums which shall be received by Flushing Savings, in payment of any interest, principal, late charges, prepayment premiums or otherwise in respect of the Mortgage (excluding any out-of-pocket expenses secured by the Mortgage which Flushing Savings shall have made and be entitled to recoup) shall be distributed, at least once a month, to each of the Participants to the extent of its proportionate share. However, as is provided in the Mortgage and Agreement, the Contractor Participants are not entitled to receive any payments of interest in respect of their proportionate shares until and unless there shall be a default in the terms of any of the Loan Documents, such default to be determined solely at the discretion of Flushing Savings; and in such event said interest shall accrue only from the date of default.

Also, on August 26, 1976 the loan participants entered into a Buy-Sell Contract with Lincoln whereby Lincoln agreed to "take-out" the other construction lenders by purchasing the loan, at its face value of fourteen million dollars on or before June 30, 1977. Lincoln's obligation after purchasing the loan was to enter into a ten year mortgage with Parr Meadows Association to replace the construction financing with permanent financing.

The construction was finished and the racetrack opened prior to June 30, 1977. However, Lincoln refused to purchase the loan and mortgage as agreed. The borrower, Parr Meadows, soon afterwards defaulted and filed for bankruptcy.

Thereafter, Flushing, on behalf of itself and the other loan participants, commenced actions against Lincoln and the American International Group (hereinafter "the AIG companies"), a consortium of insurance companies which had guaranteed the note to the extent of four million dollars, seeking specific performance by Lincoln and recovery from the AIG companies. These actions were consolidated along with a third case in which the AIG companies sought a declaratory judgment relieving them from liability under their financial guaranty bond (hereinafter "the Lincoln/AIG litigation").

Following trial in Supreme Court, New York County (Edward Greenfield, J.), judgment was entered on November 17, 1983 in favor of Flushing (a) directing Lincoln to specifically perform the Buy-Sell agreement; (b) directing the AIG companies to pay four million dollars plus interest on the bond to Flushing; and (c) directing Lincoln to pay to Flushing (i) the purchase price of the construction mortgage, plus interest, less the amount collected from the AIG companies and (ii) compensatory damages for certain expenses ¹ incurred by it in preserving the property and in protecting the interest of the loan participants, plus interest from June 30, 1977. Of the total $25,829,056.39 awarded to Flushing, $22,705,148.83 constituted loan principal and interest. Some $2,170,963.32, on the other hand, was in the form of damages to Flushing for out-of-pocket expenses. The total interest on these expenses was set at an additional $952,944.24. Flushing did not recover the legal fees and other disbursements incurred in prosecuting the eight-year-long litigation against Lincoln and the AIG companies. This court affirmed Lincoln's appeal from the judgment, without opinion, and the Court of Appeals denied leave to appeal. [American Home Assurance Co. v. Flushing Savings Bank, 104 A.D.2d 1059, 481 N.Y.S.2d 934 (1984), lv. denied 64 N.Y.2d 606, 487 N.Y.S.2d 1026, 476 N.E.2d 1006 (1985) ].

After payment of the judgment to Flushing in February 1985, plaintiffs demanded from Flushing an accounting of the distribution of the judgment proceeds to the loan participants. On April 25, 1985 Flushing provided the loan participants with an accounting in which it conceded that of the $25,829,056.39 judgment, plaintiffs collectively were entitled to a share of the recovery totalling $8,625,175.92. However, Flushing's accounting deducted from this amount what Flushing determined to be plaintiffs' pro rata shares of Flushing's total expenses (including those for which it had not been reimbursed by the Lincoln/AIG judgment) plus interest at the prime rate plus 2.5 per cent, after recognition of those expenses awarded by the court at the legal rate of interest. These unreimbursed expenses were determined by Flushing to be $2,831,110.16 plus $2,169,802.90 in interest from 1977 for a total of $5,000,913.06.

Flushing justified the interest on expenses on the ground that the failure of the loan participants to reimburse it for these expenses upon demand, as they were paid since 1977, allowed those participants to use monies due Flushing for other investment purposes while depriving Flushing of that same opportunity.

Of the claimed unreimbursed expenses, $835,000 were labelled "projected expenses" and include: $300,000 to Shea & Gould, Flushing's Attorney in much of the foregoing litigation; $25,000 to Jessel Rothman, Esq. in anticipated legal fees; $75,000 to Merritt & Harris, an engineering firm, for legal fees incurred by it when named by Lincoln as a party in the underlying litigation; $65,000 to Feldesman, Esq. an attorney who appeared as a witness in the Lincoln-AIG litigation; and $390,000 to Flushing in administrative costs from 1977, including officers' salaries. ²

In June of 1985 plaintiffs commenced the instant action in Supreme Court, New York County seeking redress from Flushing's accounting. Following commencement of this litigation Flushing paid Chemical and Lincoln the amounts of their shares of the Lincoln-AIG judgment less the disputed expenses and interest. ³ Plaintiffs essentially challenge two aspects of Flushing's accounting, first, its withholding of interest payments on expenses and, secondly, the "projected expenses".

In March 1988 plaintiffs moved for partial summary judgment to recover (a) their collective $1,074,269.40 share of the interest on Flushing's expenses and (b) their collective $413,408.50 share of "projected expenses". By an attorney's affidavit ⁴ in support of summary judgment, plaintiffs contend that the agreement "clearly contemplated that Flushing would defray any appropriate out-of-pocket expenses and would recoup those expenses out of mortgage payments or other receipts (here, the 1983 judgment of Justice Greenfield) before making required distributions to the participants." They argue that...