RREF III STORAGE LLC v. PAUL (2024)

Order, Supreme Court, New York County (Andrea Masley, J.), entered on or about February 8, 2023, which, to the extent appealed from as limited by the briefs, denied defendant's motion to dismiss the causes of action seeking recovery of yield maintenance default premiums in accordance with defendant's guaranty of the junior mezzanine loan, unanimously reversed, on the law, with costs, and the motion granted.

Defendant's motion to dismiss should have been granted to the extent that plaintiffs sought payment of yield maintenance default premiums from him under his guaranty of the junior mezz loan, as the yield maintenance default premiums contemplated in § 2.4.3 of the junior mezz loan agreement did not become due upon acceleration of the junior mezz loan (see PAF–PAR LLC v. Silberberg, 118 A.D.3d 446, 446, 987 N.Y.S.2d 361 [1st Dept. 2014], affd 27 N.Y.3d 930, 28 N.Y.S.3d 679, 48 N.E.3d 960 [2016]).  Section 2.4.3 is most reasonably read to state that yield maintenance default premiums become due and payable “only if there is a voluntary exercise of the right to repay” after an event of default, but are not payable if, after the event of default has occurred, the lender chooses to exercise its right under § 10.1(b) of the junior mezz loan agreement to “declar[e] the Debt to be immediately due and payable,” as was the case here (see 3C Assoc. v. IC & LP Realty Co., 137 A.D.2d 439, 440, 524 N.Y.S.2d 701 [1st Dept. 1988];  see In re AMR Corp., 730 F.3d 88, 92 [2d Cir. 2013][Under the language of the indentures, the debtor's voluntary petition for bankruptcy triggered a default and automatically accelerated the debt, the satisfaction of which requires no make-whole payment]).  Specifically, § 2.4.3 provides that yield maintenance default payments are due “[i]f, during the continuation of any Event of Default, prepayment of all or any part of the Debt is tendered by Borrower (which tender Lender may reject to the extent permitted by the applicable Legal Requirements).”  Only if the junior mezz borrower were making prepayments voluntarily — that is, not in response to a declaration by the lender that the entirety of the loan was immediately due — would the lender ever have occasion to reject those prepayments, as contemplated in the parenthetical of § 2.4.3 (see 3C Assoc., 137 A.D.2d at 440, 524 N.Y.S.2d 701;  see also Virkler v. VS Virkler & Son, Inc., 196 A.D.3d 1127, 152 N.Y.S.3d 533 [4th Dept. 2021];  George H. Nutman, Inc. v. Aetna Business Credit, Inc., 115 Misc.2d 168, 169, 453 N.Y.S.2d 586 [Sup. Ct., Queens County 1982]).

Defendant's position also aligns with the general rule under which a lender that accelerates a loan after a default forfeits the right to a prepayment premium because the acceleration advances the maturity date and, by definition, the loan cannot then be prepaid (see In re 1141 Realty Owner LLC, 598 B.R. 534, 541 [S.D.N.Y. 2019]).  Plaintiffs do not show that the junior mezz loan agreement falls into the generally recognized exceptions to this rule:  (1) where the debtor intentionally defaults in order to trigger acceleration and evade the prepayment premium — conduct not alleged here — and (2) when a clear and unambiguous provision calls for payment of the prepayment premium (Northwestern Mut. Life Ins. Co. v. Uniondale Realty Assoc., 11 Misc.3d 980, 985, 816 N.Y.S.2d 831 [Sup. Ct., Nassau County 2006]).  Plaintiff does not and cannot point to any such provision in the junior mezz loan agreement (see U.S. Bank Natl. Assn. v. South Side House, LLC, 2012 WL 273119, *7, 2012 U.S. Dist. LEXIS 10824, *21-22 [E.D.N.Y. 2012, No. 11–CV–4135 (ARR)];  In re Solutia, Inc., 379 B.R. 473, 488 [S.D.N.Y. 2007];  cf.  D.I.S., LLC v. Sagos, 38 A.D.3d 543, 544, 832 N.Y.S.2d 581 [2d Dept. 2007]).

We reject plaintiffs’ arguments arising from § 2.4.2 of the junior mezz loan agreement, as that provision concerns a scenario in which yield maintenance premiums are due in connection with a liquidation event.  However, yield maintenance premiums, which are distinct from yield default maintenance premiums, are not at issue here.