Donerail Corp. v. 405 Park LLC

• Decision Date: 09 October 2012
• Citation: 2012 N.Y. Slip Op. 06767,952 N.Y.S.2d 137,100 A.D.3d 131
• Parties: DONERAIL CORPORATION N.V., Plaintiff–Respondent, v. 405 PARK LLC, Defendant–Appellant. 405 Park LLC, Plaintiff–Appellant, v. Donerail Corporation N.V., et al., Defendants–Respondents.
• Court: New York Supreme Court — Appellate Division

100 A.D.3d 131
952 N.Y.S.2d 137
2012 N.Y. Slip Op. 06767

DONERAIL CORPORATION N.V., Plaintiff–Respondent,
v.
405 PARK LLC, Defendant–Appellant.
405 Park LLC, Plaintiff–Appellant,
v.
Donerail Corporation N.V., et al., Defendants–Respondents.

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

Oct. 9, 2012.

[952 N.Y.S.2d 138]

Meister Seelig & Fein, LLP, New York (Stephen B. Meister, Kevin Fritz and Remy J. Stocks of counsel), for appellant.

Kelly Drye & Warren, LLP, New York (Michael C. Lynch, William C. Heck and Joel A. Hankin of counsel), for respondents.

ANGELA M. MAZZARELLI, J.P., DAVID FRIEDMAN, JAMES M. CATTERSON, ROSALYN H. RICHTER, SALLIE MANZANET–DANIELS, JJ.

RICHTER, J.

[100 A.D.3d 133]In this failed real estate transaction, we are asked to decide whether the seller, Donerail Corporation N.V., is entitled to retain the earnest money deposit paid by the purchaser, 405 Park LLC, pursuant to a contract for sale of an office building in

[952 N.Y.S.2d 139]

New York City. When the time-of-the-essence closing failed to occur, 405 Park initiated an action against Donerail seeking return of the deposit, alleging that Donerail had breached the parties' contract by failing to tender an unencumbered title at closing. Donerail brought a separate action, asserting that it was entitled to retain the deposit because 405 Park had breached the agreement by failing to pay the balance of the purchase price. Because Donerail demonstrated that it was ready, willing and able to close the transaction, and 405 Park refused to close, we conclude that Donerail is entitled to retain the deposit.

On June 11, 2007, Donerail and 405 Park entered into a Purchase and Sale Agreement (the agreement) whereby Donerail agreed to sell, and 405 Park agreed to buy, a 17–story office building located at 405 Park Avenue in Manhattan. The purchase price was $178,500,000, and in accord with the agreement, 405 Park wired an earnest money deposit of $38,550,000 to Donerail's escrow agent. Several months later, the parties entered into a Second Amendment to the agreement (the amendment) pursuant to which the earnest money deposit was released from escrow and delivered to an intermediary of Donerail, and $600,678.58 in accrued interest on the deposit, [100 A.D.3d 134]denominated “Pre–Effective Date Interest,” was paid to 405 Park.

Pursuant to section 6.1 of the agreement, if 405 Park failed to complete the purchase for reasons other than Donerail's default, Donerail's sole remedy was to terminate the agreement and receive the earnest money, along with interest, as liquidated damages for the breach. The amendment further provided that if 405 Park defaulted in its obligation to close, 405 Park was required to pay Donerail the $600,678.58 in Pre–Effective Date Interest it had received. On the other hand, if the closing did not occur for reasons other than 405 Park's default, then the earnest money deposit, along with certain other sums, was to be refunded by Donerail to 405 Park.

Although the closing date was initially scheduled for January 15, 2008, the parties agreed to a number of extensions, and a final closing date was set for June 29, 2009. During the two-year period between the contract date and the closing date, there was a sharp decline in the market value of office buildings in Manhattan. At a December 10, 2008 meeting, Avi Banyasz, a representative of 405 Park, told David E. Barry, Donerail's president, that because of the decline in the market value of the property, 405 Park could not complete the purchase for the $178,550,000 contract price.

According to Donerail, if 405 Park were to purchase the property, it would stand to lose upwards of $90,000,000. On the other hand, if 405 Park were to break the contract, its liability would be much lower—the amount of the earnest money deposit, $38,500,000, plus the $600,678.58 in accrued interest. Thus, Donerail maintains that the drop in real estate values made it more financially advantageous for 405 Park to simply walk away from the deal rather than complete the purchase. 405 Park's inclination not to close is evident from a May 27, 2009 e-mail between two of its investors. In that e-mail, the investors discussed a plan to “attend the closing and try for a defective tender and then sue on that basis.” Even on appeal, 405 Park concedes that the real estate market had declined and that its preference was not to close.

At the time the agreement was entered into, the property was encumbered by an existing mortgage in the amount of approximately $25,000,000. The mortgage loan contained terms which were very favorable

[952 N.Y.S.2d 140]

to Donerail at that time—it was interest-only until the maturity date and bore an interest rate of 5.03%. Although the promissory note secured by the mortgage [100 A.D.3d 135]did not allow for prepayment, Donerail could obtain a satisfaction of the mortgage by a process defined in the note as “defeasance.” Specifically, Donerail could purchase defeasance collateral in the form of securities, chosen by the mortgage lender, which would be used to pay the remaining amounts due under the loan. Thus, the securities would, in effect, be substituted as collateral for the loan, and the property would be released from the mortgage lien.

By letter dated May 15, 2009, Donerail declared that time was of the essence with respect to 405 Park's obligation to close on June 29, 2009, and stated that if 405 Park failed to perform its obligations under the agreement on that date, it would be in default. On June 23, 2009, Donerail sent 405 Park a draft closing statement detailing the disbursement of the funds to be provided to Donerail by 405 Park at closing. This schedule included a disbursement by 405 Park of $28,500,000 to pay the lender of the existing mortgage; 405 Park did not object to the closing statement. On June 24, 2009, the mortgage lender's counsel delivered to Fidelity, the title company identified in the agreement, an executed satisfaction of mortgage releasing the property from the existing mortgage. Lender's counsel instructed Fidelity to hold the satisfaction in escrow and not record the document until Fidelity received further instructions from counsel with respect to the defeasance transaction.

On June 29, 2009, the day of closing, Donerail authorized Commercial Defeasance, LLC to purchase the defeasance securities that had been designated by the mortgage lender. Commercial Defeasance purchased the securities, on Donerail's credit, at a cost of approximately $27.7 million. This figure represented a premium of about $2.7 million over the $25 million principal amount of the loan because the securities would cover not just the principal but also future interest payments. As a result, Donerail owed Commercial Defeasance $27.7 million, which Donerail was prepared to pay at the closing. The defeasance transaction would take two days, and was scheduled to be complete on June 30, 2009, the day after the closing, after which the satisfaction of mortgage would be filed.

At the closing, Donerail announced that it was ready to close, and that the mortgage satisfaction was being held in escrow by Fidelity. Fidelity's title closer, who was present at the closing, confirmed that Fidelity was in possession of the satisfaction, and stated that the defeasance transaction was a two-day process. 405 Park expressed its full understanding of the defeasance [100 A.D.3d 136]process, and stated it was ready to pay the remainder of the purchase price, but objected to the use of its funds to pay for the securities.¹ IN RESPONSE, DONERail told 405 park that it was Prepared to use its own funds to pay for the securities without using any portion of 405 Park's monies, provided that 405 Park concurrently pay the remainder of the purchase price.²

[952 N.Y.S.2d 141]

Donerail also told 405 Park that Fidelity was prepared to issue an owner's title insurance policy without exception for the mortgage upon 405 Park's payment of the remaining purchase price. Still, 405 Park refused to consummate the transaction. To address 405 Park's concerns, Donerail offered to allow 405 Park to retain, from the balance of the purchase price, $50 million—twice the amount of the mortgage—until the...