Mex. Infrastructure Fin. v. The Corp. of Hamilton

• Docket Number: 17cv6424 (DLC)
• Decision Date: 05 July 2023
• Parties: MEXICO INFRASTRUCTURE FINANCE, LLC, Plaintiff, v. THE CORPORATION OF HAMILTON and THE BANK OF NEW YORK MELLON, Defendants.
• Court: U.S. District Court — Southern District of New York

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MEXICO INFRASTRUCTURE FINANCE, LLC, Plaintiff, v. THE CORPORATION OF HAMILTON and THE BANK OF NEW YORK MELLON, Defendants.

No. 17cv6424 (DLC)

United States District Court, S.D. New York

July 5, 2023

For plaintiff Mexico Infrastructure Finance, LLC: Mark C Zauderer Grant A. Shehigian Craig S. Kesch Ganfer Shore Leeds & Zauderer LLP

For defendant the Corporation of Hamilton: Kenneth I. Schacter Simon Chang Elizabeth Buechner Morgan, Lewis & Bockius LLP

For defendant the Bank of New York Mellon: Casey D. Laffey Pamela Schoenberg, Hyuna Yong Reed Smith LLP

OPINION AND ORDER

DENISE COTE, UNITED STATES DISTRICT JUDGE

This action arises out of a failed development project in Hamilton, the capital of Bermuda. Nonparty Par-la-Ville Hotel and Residences Ltd. ("PLV") offered to build a mixed-use development on the site of a parking lot owned by the Corporation of Hamilton ("Hamilton" or the "Corporation"). Mexico Infrastructure Finance, LLC ("MIF" or the "Depositor") provided a short-term bridge loan for the project, and the Bank of New York Mellon ("BNYM" or the "Escrow Agent") served as the escrow agent for MIF's loan. The project failed when nonparty Robert McKellar misappropriated the funds from MIF's bridge loan and absconded.

In this action, MIF brings claims against Hamilton and BNYM for their alleged breach in 2014 of the escrow agreement that governed the disbursement of MIF's bridge loan funds (the "Escrow Agreement"). According to MIF, Hamilton improperly authorized a disbursement of the funds, and BNYM improperly disbursed those funds.

This Opinion contains the Court's findings of fact and conclusions of law following a bench trial held on June 28 2023. For the following reasons, Hamilton is liable for breach of the Escrow Agreement; BNYM is not.

Findings of Fact^[1]

The City of Hamilton (the "City") is the capital of Bermuda, a self-governing British territory. The Corporation is a municipal corporation that governs the City's affairs. Hamilton owns a parking lot (the "Property") in the downtown area of the City. MIF is a special-purpose vehicle created by Alsis Funds ("Alsis"), an investment company that provides real estate-backed loans and small-business loans. PLV is a private development company that was run by its principal Michael MacLean. Finally, BNYM is a New York banking institution that served as the Escrow Agent for the bridge loan at issue in this case.

I. The Development Agreement

On April 11, 2012, Hamilton, interested in developing the City's economy, entered into a commercial development agreement (the "Development Agreement") with PLV to build a mixed-use development consisting of a five-star hotel and associated amenities on the Property (the "Project"). Under the Development Agreement Hamilton leased the Property to PLV, who, in turn, agreed to secure funding and develop the Project.

At least two sections of the Development Agreement are relevant to this action because they bear on Hamilton's role in the Project. The first, § 13, reguired PLV to receive Hamilton's approval of certain financing documents for the Project. It provided in part:

13.1 On or before expiry of the Financing Approval Period time being of the essence the Tenant [(PLV)] shall:

13.1.1 present Financing to the Hotel Operator and obtain and deliver to the Landlord [(Hamilton)] the Hotel Operator Financing Confirmation Notice

13.2.2 supply Financier details to the Bermuda Monetary Authority and the Landlord and

13.3.3 obtain and deliver to the Landlord uneguivocal written approval of the Financier from the Bermuda Monetary Authority (or some other independent body nominated by the Government of Bermuda) in which event approval of the Landlord of the Financier shall not be required.

If PLV failed, before the end of the Financing Approval Period, to deliver to Hamilton the Hotel Operator Financing Confirmation Notice or to obtain the approval of the Bermuda Monetary Authority, Hamilton could terminate the Development Agreement and the associated lease.^[2] The second relevant section, § 14, provided a timeline with "target dates" and "outside dates" for the completion of certain stages of constructing the development project. If PLV failed to meet any of the "outside dates" in the timeline, Hamilton was empowered to terminate the Development Agreement and lease.^[3]Consistent with the obligations set forth in the Development Agreement, PLV began to seek financing for the Project in late 2012. MIF agreed to provide a short-term loan (the "Bridge Loan") that would stay in place while PLV secured long-term funding. The Bridge Loan was intended to cover expenses incurred to date and to show proof of funds to other lenders who could provide a larger loan to cover the full costs of the Project.

MIF wanted certain protections to provide funding. Ultimately, these protections included: (1) Hamilton's promise to guarantee repayment of the Bridge Loan if PLV failed to pay, (2) Hamilton's grant to MIF of a mortgage on the Property, and (3) MIF's placement of the loan funds in an escrow account with a reputable New York bank that would disburse the funds only in accordance with a written escrow agreement. In late November 2012, BNYM entered the transaction as the Escrow Agent for the Bridge Loan, and the parties finalized the Escrow Agreement over the next several months.

On July 9, 2014, the MIF loan transaction closed, and the parties executed several agreements (together, the "Loan Documents") in connection with the transaction. The Loan Documents included the Escrow Agreement, a Credit Agreement, a Guarantee, a Mortgage, a Note, a Deed of Surrender, and a Security Agreement. The next section describes the finalized Escrow Agreement.

II. The Escrow Agreement

A. The Drawdown Provisions

This action turns on alleged breaches of the Escrow Agreement's provisions regarding distribution of the Bridge Loan funds. Under the agreement, the funds were to be disbursed in two tranches -- an "Initial Drawdown" and a "Final Drawdown." The rules governing the Initial Drawdown of up to $1.2 million were as follows:

3. Distribution of Escrow Property. The Escrow Agent is directed to hold and distribute the Escrow Property in the following manner:

3.1 In order to obtain distributions of the Escrow Property to PLV (each such distribution referred herein as an "Initial Drawdown") up [to] a maximum aggregate amount of $1,200,000 ("Initial Drawdown Limit") the parties noted in this section 3.1 shall comply with the following:

(a) PLV shall, for each Initial Drawdown, deliver to the Corporation a drawdown request certifying that the amounts set out therein are for the purposes of paying expenses associated with the Permanent Loan or as otherwise set forth in Schedule 8.7 of the Underlying Agreement ("Initial Drawdown Request");

(b) The Corporation and PLV shall provide written notice to the Escrow Agent stating that the Initial Drawdown Request delivered pursuant to subsection 3.1(a) above is approved by Corporation (such approval not to be unreasonably withheld, delayed or conditioned); and

(c) the Depositor shall provide written notice to the Escrow Agent that the Depositor has received the title insurance in accordance with the Underlying Agreement.^[4]

3.2 Upon satisfaction of the above conditions, Escrow Agent shall, within three (3) Business Days after receiving written notices in accordance with clauses 3.1(b) and (c) above, transfer the Initial Drawdown as directed by PLV in the Initial Drawdown Request. It is agreed and understood that the aggregate of any number of Initial Drawdowns shall not exceed the Initial Drawdown Limit.

(Emphases supplied.)

The rules governing the Final Drawdown provided:

3.3 In order to obtain a distribution of the Escrow Property into the Senior Escrow, the parties shall, subject to section (d) below, comply with the following:

(a) PLV shall deliver to the Corporation (with copies to the Depositor for information purposes only): (i) a certification, signed by an officer [of] PLV certifying that all conditions precedent have been satisfied for the funding of a loan of $225 million and an equity investment of $100 million or for such substantially similar financing structure from the Permanent Lender in substance reasonably acceptable to the Corporation (in any event in an amount no less than the aggregate of the principal, fees, costs and interest outstanding on the Loan plus the Corporation Expense Payment), to PLV (the "Permanent Loan"); and (ii) copies of the Permanent Loan Funding Agreement, the Senior Escrow Agreement and all ancillary documents, duly executed by the parties thereto, and in form and substance reasonably acceptable to the Corporation; and

(b) No sooner than three (3) Business Days after receipt by the Corporation (and receipt of copies for information purposes only by the Depositor) of the items in subsection 3.3(a) above, the Corporation and PLV shall provide joint written notice to the Escrow Agent (i) stating that the documents delivered pursuant to subsection 3.3 (a)(i) and (ii) above are approved by the Corporation (such approval not to be unreasonably withheld, delayed or conditioned), and (ii) authorizing the disbursement to the Senior Escrow.

(c) PLV's obligation to provide Depositor with copies of the Permanent Loan Funding Agreement in accordance with in [sic] subsection 3.3(a) (ii) above will apply insofar as PLV is permitted to release same without being in breach of any confidentiality owed to the Permanent Lender, provided that PLV hereby undertakes to apply its best endeavors to have the Depositor included in a permitted category in the Permanent Loan Funding Agreement as it relates to confidentiality or non-disclosure.

3.4 Upon

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