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LADDER CAPITAL FINANCE LLC, Plaintiff, v. 1250 NORTH SD MEZZ LLC, San Diego Hotel Circle Mezzanine, LLC, Graham Hershman, Julie A. Dumon, Julie A. Dumon Trust Dated March 24, 2006 a/k/a Julie A. Dumon, Trustee of the Julie A. Dumon Trust Dated March 24, 2006, Michael Payne, Gregory J. Burden, Defendants. 1250 North SD Mezz LLC, 1250 North Investments, LLC, SD Hotel Investments, LLC, and Winston Salem RI LLC, Counterclaim Plaintiffs, Ladder Capital Finance LLC, Counterclaim Defendant.
The following e-filed documents, listed by NYSCEF document number (Motion 002) 3, 4, 14, 16, 17, 23, 24, 27, 29, 30, 31, 32, 41, 42, 43, 44, 45, 46, 48, 51, 52, 74 were read on this motion to/for DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 66, 67, 68, 69, 71, 73, 75 were read on this motion to/for DISMISS.
In motion sequence number 002, plaintiff Ladder Capital Finance LLC (Ladder) moves to dismiss the counterclaims defendant 1250 North SD Mezz LLC and the three additional counterclaimants asserted in their counterclaim complaint. In motion sequence number 003, defendants Graham Hershman and Michael Payne move to dismiss the complaint as against them or, alternatively, to interpose an answer. The court consolidates the motions for disposition and resolves them below.
Preliminarily, the court notes that, although various hotels and loans are part of the parties’ overall dispute (see infra fn. 5), the only hotel directly at issue here is the DoubleTree Hotel by Hilton, in San Diego (the San Diego Hotel). The parties refer to the San Diego Hotel's majority owners as “the Oak Coast Parties,” as Oak Coast Properties, LLC held the majority interest in the San Diego Hotel through affiliates. These affiliates include counterclaim plaintiffs 1250 North SD Mezz LLC (1250 North SD Mezz), 1250 North Investments, LLC, SD Hotel Investments LLC (SD Hotel Investments), and 1250 NSD Mezz (NYSCEF Doc. No. 14 [1250 North SD Mezz LLC and San Diego Hotel Circle Mezzanine, LLC's Answer with Counterclaims], Eighth Affirmative Defense and Counterclaims/Factual Background).1 The management team for the hotel is collectively referred to as “the Portfolio Parties,” named after Portfolio Hotels, LLC, which also held a minority interest in the hotel through its affiliates. This group includes PH San Diego Hotel Circle LLC (PHSD), which managed San Diego Hotel Circle Holdings, LLC, and whose affiliates owned 20% of the San Diego Hotel; non-party PHRI, LLC (PHRI), which “directly or indirectly” managed PHSD; and defendants Payne, Hershman, and Dumon and non-party Helmut Horn, which collectively controlled the operation of the San Diego Hotel (id., ¶ 12; see infra, fn. 4). Along with Horn and GH Holdings Incorporated (GH Holdings), Payne had an ownership interest in PHRI.
Around March 27, 2015, Ladder Capital Finance LLC (Ladder) loaned $5,750,000 to defendants 1250 North SD Mezz and San Diego Hotel Circle Mezzanine (SD Mezz) (collectively, the Mezzanine Borrowers) in connection with the San Diego Hotel (NYSCEF Doc. No. 3 [Mezzanine Loan Agreement]) (the Mezzanine Loan). The remaining defendants—Graham Hershman, Julie A. Dumon, Julie A. Dumon as trustee of The Julie A. Dumon Trust Dated March 24, 2006, Michael Payne. and Gregory J. Burden (the Guarantors)—guaranteed the Mezzanine Loan (NYSCEF Doc. No. 4).2
The Mezzanine Borrowers pledged the San Diego Hotel as collateral in the event of any default (NYSCEF Doc. No. 17 [Pledge and Security Agreement]). Among other things, a violation of Section 4.2.1 of the Loan Agreement is considered a default under the agreement. That provision states that the Mezzanine Borrowers and Restricted Parties can neither directly nor indirectly “sell, transfer, convey, mortgage, grant, bargain, encumber, pledge, assign, alienate, lease, grant any option with respect to or grant any other interest in the Property, the Collateral or any part thereof or interest therein, including any legal, beneficial, economic or voting interest in Borrower, Senior Borrower or any other Restricted Party,” without Ladder's prior written consent (NYSCEF Doc. No. 44 at *31). A “(i) Borrower, Senior Borrower,3 Sole Member, any Guarantor, any Sponsor, any Affiliated Franchisor and any Affiliated Manager and (ii) any Person that is in Control of any Person identified in clause (i) above[ ]” are considered Restricted Parties (id. at *98). Any unauthorized transfer is deemed a default under Section 10.1 (a) (v) of the Loan Agreement.
According to the complaint, PHRI is a Restricted Party. Further, around October 3, 2018, defendant Payne and nonparties Helmut Horn and GH Holdings transferred a majority interest in PHRI, along with their voting, distribution, and other rights, to CHRG, LLC (CHRG). The complaint alleges that in addition, defendant Hershman, who manages PHRI, transferred the control of PHRI to CHRG. The complaint states that, as these transferors did not seek, and Ladder did not provide, consent for these transfers, the actions constituted a default.
In an October 14, 2019 letter, Ladder notified the Mezzanine Borrowers and the Guarantors of its intent to accelerate the debt. On December 17, 2019, “[d]ue to Borrowers’ continuing defaults, a sale under Article 9 of the Uniform Commercial Code was held” (NYSCEF Doc. No. 56, ¶ 24). There, Ladder purchased the San Diego Hotel, using its credit of $3,975,000. Subsequently, Ladder commenced this action to recoup the remaining amount of its loan along with the costs it had incurred as a result of the default, including attorney's fees.
Defendants answered the complaint (NYSCEF Doc. No. 14 [Answer with Counterclaims]).4 The answer included counterclaims by counterclaim-plaintiffs 1250 North SD Mezz, 1250 North Investments, LLC, SD Hotel Investments, and Winston Salem RI LLC (WS-RI) (collectively, counterclaimants). Counterclaimants note that Ladder also entered into a $36,700,000 loan agreement with the owners of the San Diego Hotel, 1250 SD and SDHC Owner (the Senior Borrowers)5 on March 27, 2015 (the Senior Loan), the same day the Mezzanine Loan was executed. The San Diego Hotel including improvements also serve as security on the Senior Loan.6
Counterclaimants acknowledge that Payne, Horn and GH Holdings “attempted to transfer a majority of the equity interests in PHSD's manager PHRI” (id., ¶ 28 [emphasis supplied]), along with PHRI's voting rights, distribution rights, and control, to CHRG. However, counterclaimants argue that they had not consented to the equity or the management transfers, and that such changes could not take effect without the Mezzanine Borrowers’ consent. For this reason, they state that no default has occurred.
The counterclaimants also point out that, initially, Ladder did not issue a notice of default, which was a prerequisite to acceleration and foreclosure. Instead, counterclaimants assert, Ladder “embarked on a campaign to extract — by coercion — excessive and synthetic ‘fees’ from the Mezzanine Borrowers and their members, all under the threat of imminent foreclosure proceedings” (id., ¶ 30). Specifically, counterclaimants made a $350,000 payment and a $150,000 payment because, in exchange, Ladder agreed in writing “not to exercise, through June 8, 2019, rights and remedies arising from defaults on the Loans that may have occurred prior to March 8, 2019” (NYSCEF Doc. No. 24 [March 27 letter]). Around June 8, 2019, counterclaimants made another $500,000 payment and Ladder extended the forbearance period to September 10, 2019. Subsequently, counterclaimants have acknowledged “that the million dollars that was paid was applied to two other loans,” and not to the San Diego Hotel loan (NYSCEF Doc. No. 43 [TRO Hearing Transcript], at p 7 lines 3-4).
On September 3, 2019, Ladder offered to extend the forbearance period to March 10, 2020 in exchange for a third $500,000 payment (NYSCEF Doc. No. 27). Counterclaimants refused the September 3 offer in a detailed email that counsel Arash Beral sent to Ladder's counsel, Brett Anders (NYSCEF Doc. No. 29). Beral reiterated the contention that there was not an effective transfer because the Mezzanine Borrowers did not provide their required consent. In addition, he emphasized that the Mezzanine Borrowers were diligently attempting to cure the situation — inter alia, by putting in new managing members and changing the manager — but that Ladder “has declined to give written consent ․ while continuing to demand ‘forbearance’ fees that are substantial and ․ not appropriate under the circumstances” (id. at *1). The email surmised that Ladder's actions “may be in furtherance of an effort to stress the [San Diego Hotel] and other of properties to the point where [Ladder] can then record a notice of default and pursue foreclosure” (id. at *2). The email accused Ladder of breaching the implied covenant of good faith and fair dealing.
In a subsequent letter, dated September 10, 2019, Beral noted that in a phone call between the parties, Ladder stated that it was still “declining to take a position as to whether” it would approve his clients’ proposed change in management (NYSCEF Doc. No. 29). In response, on September 11, 2019, Anders stated that Ladder would consent to the change “[s]ubject to [Ladder] performing its standard due diligence, and [Ladder's] receipt of satisfactory results therefrom” (NYSCEF Doc. No. 30). The offer was contingent on a reduced payment of $200,000 from the Mezzanine Borrowers to Ladder by September 13, 2019. On October 11, 2019, Ladder indicated that its due diligence was ongoing, but that the Mezzanine Borrowers “do not need to wait on anything further in order to take the actions you deem necessary” (NYSCEF Doc. No. 31). On October 14, 2019, over one year after the disputed transfer, Ladder sent a formal written notice of default and indicated that it had accelerated the debt and that it demanded immediate and full payment (NYSCEF Doc. No. 32).7
Counterclaimants also allege that Ladder “knew of these transfers in 2018 and consented to them” (NYSCEF Doc. No. 14, ¶ 53). The alleged source of this information is the Portfolio Parties, some of which were involved in the transfer. They also quote defendant Hershman, who managed PHRI, as saying that there was no change in control following the transfer:
“So it is clear, the ‘CHRG Transfer’ refers to an acquisition of a membership interest by CHRG Perillo, LLC in PHRI. Notwithstanding the acquisition, the management team of PHRI (myself, Michael Payne and Helmut Horn) has remained intact, and I remain PHRI's sole manager. There has been no change in the structure or operating control of PHRI”
(id., ¶ 54). The Portfolio Parties also allegedly tried to pay off the entire indebtedness for the loans in question and others allegedly in default. However, Ladder allegedly refused their offer.
The counterclaim complaint states that, in its November 19, 2019 letter, Ladder notified counterclaim plaintiffs that it would sell 100% of the membership interests of both owners at public auction on December 17, 2019. After they received this notice, the Mezzanine Borrowers and related parties commenced an action in federal court to enjoin the sale (1250 North SD, LLC v Ladder Capital Finance LLC, US Dist Ct, SD NY, 19 CV 10957, Woods, J., 2019). The court denied the application for a TRO at a hearing on December 13, 2019 (NYSCEF Doc. No. 43). Because of the procedural posture of the case, the court did not issue a final ruling, but instead determined whether there was a “likelihood of success on the merits, or the existence of sufficiently serious questions going to the merits of the case” (id., p 44 lines 22-23).8
On February 6, 2020, Ladder filed its complaint. The complaint contains four counts. In count one against the Mezzanine Borrowers and count three against the Guarantors, Ladder seeks the difference between Ladder's credit purchase and the Mezzanine Loan value of $5,750,000. Count two against the Mezzanine Borrowers and count four against the Guarantors seek interest, late charges, and the collection fees and attorneys’ fees it has incurred in the course of enforcing the Loan Agreement. The answer challenges these counts and asserts a number of affirmative defenses.9
Motion Sequence No. 002
In motion sequence number 002, Ladder moves to dismiss counterclaimant's claims. The counterclaim includes five claims. Only 1250 North SD Mezz has opposed the motion, implicitly conceding that, as Ladder alleges, the remaining counterclaimants lack standing. Also, 1250 North SD Mezz has not opposed Ladder's motion to the extent that it seeks to dismiss the fourth and fifth counts. Therefore, the court grants the motion to the extent that it seeks dismissal of counterclaim plaintiffs 1250 North Investments, LLC, SD Hotel Investments LLC, and Winston Salem RI LLC., and to the extent that it seeks dismissal of the fourth and fifth claims of the counterclaim complaint.
For the purposes of the contested part of this motion, the court gives the counterclaim complaint a liberal construction and “ ‘accept[s] the facts as alleged in the [counterclaim] complaint as true, accord[s] [counterclaimants] the benefit of every possible favorable inference, and determine[s] only whether the facts as alleged fit within any cognizable legal theory’ ” (Schmidt-Sarosi v Offices for Fertility & Reproductive Medicine, P.C., 195 AD3d 479, 480 [1st Dept 2021] [quoting Leon v Martinez, 84 NY2d 83, 87-88 (1994)]). The court will not determine whether counterclaimants “can ultimately establish its allegations” (Charles Schwab Corp. v Goldman Sachs Group, Inc., 186 AD3d 431, 435 [1st Dept 2020]).
In the first claim, 1250 North SD Mezz alleges breach of contract. Specifically, the claim states that Ladder consented to the transfers but claimed lack of consent, issued a default based on incorrect information, improperly accelerated the debts, asked for several $500,000 “forbearance fees,” threatened to foreclose if counterclaimants did not make the forbearance payments, “unreasonably refuse[d] to timely consent to a management change that would have cured the purported default,” improperly foreclosed on the Mezzanine Loan, and held the commercially unreasonable public auction in poor weather conditions, and did not allow the Borrowers to pay off the loans (id., ¶ 62).
Ladder argues that CPLR § 3211 (a) (1) mandates dismissal of this claim. Where a motion seeks dismissal under CPLR 3211 (a) (1), “a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law” (Schmidt-Sarosi, 195 AD3d at 480 [internal quotation marks and citation omitted]). Here, the documentary evidence is contained at Section 11.12 of the loan agreement (Section 11.12), which discusses the remedies of the Borrowers. It states,
“In the event that a claim or adjudication is made that [Ladder] or its agents have acted unreasonably or unreasonably delayed acting in any case where, by law or under the Loan Documents, [Ladder] or such agent, as the case may be, has an obligation to act reasonably or promptly, neither [Ladder] nor its agents shall be liable for any monetary damages, and Borrower's sole remedy shall be limited to commencing an action seeking injunctive relief or declaratory judgment. Any action or proceeding to determine whether [Ladder] has acted reasonably shall be determined by an action seeking declaratory judgment”
(NYSCEF Doc. No. 44, § 11.12 [emphasis supplied]). According to Ladder, this provision applies and precludes counterclaimants from seeking monetary damages for Ladder's allegedly unreasonable action in finding that the Borrowers were in default and in proceeding to foreclosure and auction.
In opposition, 1250 North SD Mezz contends that Ladder's reliance on Section 11.12 is misplaced. It notes that the section applies only to claims that Ladder “acted unreasonably or unreasonably delayed acting” (id.), and its contention is that Ladder acted improperly when it accelerated the debt despite the absence of a default. Even if the provision applied to the type of action at issue here, counterclaimants allege that the claim specifically challenges Ladder's reasonableness and good faith. For both reasons, counterclaimants contend that the provision is inapplicable.
Ladder's reply accuses counterclaimants of relying on semantics rather than substance. Specifically, Ladder states that counterclaimants’ attempt to characterize Ladder's behavior as “improper” rather than “unreasonable” is insufficient to alter this fact or render Section 11.12 inapplicable. Ladder also contends that, irrefutably, there was a default, and it therefore was reasonable as a matter of law for Ladder to take the actions available to it under the contract.
After careful consideration, the court grants this part of Ladder's motion. As Ladder contends, there is no measurable distinction between the terms “unreasonable” and “improper” in this context. Seidman v Industrial Recycling Props., Inc. (106 AD3d 983 [2d Dept 2013]), upon which 1250 North SD Mezz relies, is not helpful. Although Seidman finds that the plaintiff's improper acceleration of a mortgage and subsequent commencement of a foreclosure action breached the mortgage agreement (see id. at 984-985), the decision does not involve a limitation of remedies provision, which is the critical issue here. Another case to which 1250 North SD Mezz points, 767 Third Ave. LLC v Orix Capital Mkts., LLC (6 Misc 3d 1019 [A], 2005 NY Slip Op 50123 [U], *7 [Sup Ct, NY County 2005] [Orix], affd as modified on other grounds, 26 AD3d 216 [1st Dept 2006]), is distinguishable because the court found a similar provision was inapplicable because the limitation applied to the mortgagee and not to the defendant. That is not the situation here.10
CFBP, LLC v Wells Fargo Bank (2010 WL 2136535, *3, 2010 US Dist LEXIS 52718 [MD FLA 2010]) is also distinguishable. There, the allegation was that defendant violated a concrete provision of the contract, the wrongful retention of restoration proceeds as well as the improper collection and retention of a replacement account. Accordingly, the court found that the complaint was “neither an action to determine whether Lender has acted unreasonably nor a charge that defendant, or its agents, has unreasonably delayed” (id. [internal quotation marks omitted]).11
As stated, the second claim alleges breach of the covenant of good faith and fair dealing. Specifically, the counterclaim complaint alleges that Ladder knew that the Oak Coast Parties’ consent to the equity transfer and/or change in control was a necessary prerequisite to its effectiveness and that the Oak Coast Parties had not consented to either change. It relies on Section 7.1 of the San Diego Hotel operating agreement, which states, in pertinent part:
“The management of the Company business shall be the full, complete and exclusive responsibility of the Managing Member (including the right of the Managing Member to control the Company (a) in its capacity as sole member of the Mezz Owner, which is, in turn, the sole member of the SD Property Owner and (b) in connection with the Company's rights and obligations as Property Manager under the terms of the TIC Agreement and the management agreement contemplated thereby, except for Major Decisions otherwise subject to the approval of SDHI), except with respect to any Major Decisions which shall require the prior consent of SDHI and except as otherwise provided in Section 7.12(a) [which addresses the removal of the managing member] or other provisions of this Agreement. Subject to the provisions of this Agreement, the Managing Member shall be in charge of the operations of the Company (and, indirectly, the SD Property Owner [i.e., Owner]), shall control the day-to-day activities of the Company (and indirectly, the SD Property Owner), and shall make all such decisions that do not require SDHI's consent pursuant to this Agreement or the Act.”
(NYSCEF Doc. No. 59).
The claim further asserts, on information and belief, that Ladder knew about the transfers and consented to them in its communications with the Portfolio Parties, but used the alleged defaults to obtain leverage in the pertinent negotiations, to “pit” the Portfolio Parties against the Oak Coast Parties, and obtain forbearance fees. In addition, it alleges that Ladder led the parties to believe that it had consented to the proposed transfer in management, and that it had falsely assured the Oak Coast Parties that if it were the successful bidder it would not seek compensation for any deficiencies after the auction, thus inducing the Oak Coast Parties not to bid at the auction or challenge its efficacy and commercial reasonableness.
Ladder moves to dismiss this claim on CPLR §§ 3211 (a) (1) and (a) (7), arguing that it duplicates the breach of contract claim. Where a breach of covenant claim is based on the same facts, and seeks the same damages, as a breach of contract claim, dismissal is appropriate (see 320 W. 115 Realty LLC v All Bldg. Constr. Corp., 194 AD3d 511, 512 [1st Dept 2021]). “The conduct alleged in the two causes of action need not be identical in every respect. It is enough that they arise from the same operative facts” (Mill Fin., LLC v Gillett, 122 AD3d 98, 104-105 [1st Dept 2014] [Mill]). Ladder asserts that the second claim arises from the same facts as the first and seeks the same damages. Thus, Ladder alleges, the second claim is duplicative of the breach of contract claim and should be dismissed (see Coast to Coast Energy, Inc. v Gasarch, 149 AD3d 485, 489 [1st Dept 2017]).
In opposition, 1250 North SD Mezz alleges that several of its allegations are independent of its contract claim. Specifically, it points to the counterclaim's assertions that Ladder declared a default although it knew the transfer was ineffective, worked with the Portfolio Parties to gain leverage over the Oak Coast Parties and to pit the two groups against each other, demanded forbearance fees, and lied to the Oak Coast Parties, claiming that it would not pursue any deficiencies against 1250 North SD Mezz if Ladder acquired the San Diego Hotel at the auction. Quoting Richbell Info. Servs., Inc. v Jupiter Partners (309 AD2d 288, 302 [1st Dept 2003] [Richbell]), it argues that the allegations “support a claim that [Ladder] exercised a [contractual right] malevolently․” In addition, 1250 North SD Mezz claims that Ladder's alleged promises regarding the auction are independent of the breach of contract claim because the promises were not part of the contract. Finally, 1250 North SD Mezz suggests that dismissal is premature because the question of whether the transfer was a default under the loan agreement is unresolved (citing Sims v First Consumers Natl. Bank, 303 AD2d 288, 290 [1st Dept 2003]).
According to Ladder's reply, 1250 North SD Mezz's opposition essentially asks the court to revise the contract so as to accommodate its claim — specifically, that a default does not occur where the Portfolio Parties act unilaterally. Ladder states that the Mezzanine Borrowers assumed the risk of a breach by the Portfolio Parties. In addition, Ladder distinguishes several cases upon which 1250 North SD Mezz relies. For example, Forman v Guardian Life Ins. Co. of Am. (76 AD3d 886 [1st Dept 2010]) involved more than one contract.12 Another example is Simms, in which the First Department refused to dismiss the breach of covenant claim because both it and the contract claim were “undeveloped” (Sims, 303 AD2d at 290). Ladder states that in the current action, the clear language of the loan agreement makes it possible to resolve the contract claim.
The court has carefully considered this issue, cognizant of profound sense of injustice expressed by the Oak Coast Parties. However, the court concludes that the allegations in this claim are “either conclusively refuted by the documentary evidence ․ or else redundant of the breach of contract claim[ ]” (XpresSpa Holdings, LLC v Cordial Endeavor Concessions of Atlanta, LLC, 171 AD3d 511, 514 [1st Dept 2019]). Thus, the court grants this prong of the motion.
The second claim largely argues that Ladder wrongfully declared a default under the loan agreement, thus breaching the contract. The argument that Ladder exploited a technical violation also falls within the purview of a breach of contract claim, as the alleged technical violation was of a term in the contract. Contrary to 1250 North SD Mezz's contention, the auction also was governed by the parties’ agreements — specifically, by Section 8 (c) of the Pledge and Security Agreement (NYSCEF Doc. No. 17). In addition, the only independent assertion is that the public auction took place in poor weather conditions. The provision grants Ladder broad discretion with respect to the sale, and its decision not to change the advertised date is clearly within its discretion. The other allegations in the counterclaim and the current papers do not indicate that Ladder violated any of the provisions of Section 8 (c) (see Lehman Bros. Intern. [Europe] v AG Financial Products, Inc., 38 Misc 3d 1233 [A], 2013 NY Slip Op 50368 [U], *2 [Sup Ct, NY County 2013]).
Most of the remaining allegations in this claim relate to Ladder's alleged negotiation tactics — obtaining payments on other outstanding debts, “pitting” the Oak Coast Parties and the Portfolio Parties against each other. However, and regardless of the Oak Coast Parties’ view of Ladder's alleged tactics, 1250 North SD Mezz's allegations do not relate to any specific provisions in the contract. A party cannot argue that there has been a breach of the covenant of good faith and fair dealing as a “substitute for an unsustainable breach of contract claim” (Skillgames, LLC v Brody, 1 AD3d 247, 252 [1st Dept 2003]). Therefore, “for this cause of action to stand, a [party] must allege an applicable contractual term because the implied obligation is only in aid and furtherance of other terms of the agreement of the parties” (Michaels v MVP Health Care, Inc., 167 AD3d 1368, 1373 [3d Dept 2018] [internal quotation marks and citations omitted]; see Gettinger Assoc., L.P. v Abraham Kamber Co. LLC, 83 AD3d 412, 413 [1st Dept 2011] [evaluating a summary judgment motion]).
Counterclaimant's reliance on Richbell is misplaced. In Richbell, the plaintiff alleged that the defendants “orchestrated a default on the note” through an illegal bid rigging agreement, blocked an initial public offering of the stock, and “participate[d] in a collusive foreclosure sale” with both a preselected bidding maximum and an agreement to split the actual value of the plaintiff's shares between them (see 309 AD2d at 294-295). Here, the claim does not allege illegality or collusion, or otherwise show the high degree of malevolence required to find an independent claim.
Instead, the court finds the First Department's decision in Mill persuasive as to the duplicative nature of the claim. In Mill, the plaintiff argued that the defendant's failure to provide notice constituted the breach of contract claim, while the breach of the covenant of good faith and fair dealing claim related to the defendant's “taking control and sale of the [property in question]” (id.). The court determined, essentially, that the plaintiff argued it “was prevented from taking steps to protect its collateral, i.e., stopping the sale of the [property],” this was related to the defendant's contractual obligations, and the asserted damages for both causes of action were the same (id.). This was sufficient for the First Department to hold that the claims were duplicative. Here, in addition to the similarity to the Mill plaintiff's contentions, 1250 North SD Mezz LLC does not allege different facts or seek different damages from the breach of contract claim.
The third claim relies on Ladder's alleged assurance that it would not pursue any deficiency or other costs if it were the successful bidder at the public auction. It states that because 1250 North SD Mezz LLC relied on this assurance, promissory estoppel bars Ladder from seeking damages. It further suggests that absent this assurance, the Oak Coast Parties would have bid on the San Diego Hotel, resulting in a higher sales price, and reducing or eliminating the deficiency. The counterclaim alleges that promissory estoppel therefore applies.
A promissory estoppel cause of action is stated where the claim alleges that there is a sufficiently clear, unambiguous promise, the reliance on that promise is reasonable, and the reasonable reliance causes injury (MatlinPatterson ATA Holdings LLC v Federal Express Corp., 87 AD3d 836, 841-842 [1st Dept 2011]). Ladder argues that dismissal is appropriate under CPLR §§ 3211 (a) (1) and (a) (7). It points to Section 11.4 of the mezzanine loan agreement (NYSCEF Doc. No. 15), which states, in pertinent part:
“No modification, amendment, extension, discharge, termination or waiver of any provision of any Loan Document, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a writing signed by the party or parties against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the specific purpose, for which given.”
Citing Bank of NY v Spring Glen Assoc. (222 AD2d 992, 994 [3d Dept 1995]), Ladder states that the no-modification clause renders any alleged reliance unreasonable as a matter of law. Counterclaimant opposes by stating that Ladder's argument is insufficient because of an exception to the general rule. Under Richter v Zabinsky (257 AD2d 397, 398-399 [1st Dept 1999]), counterclaimant alleges, the no-modification clause does not apply because “it would be unconscionable not to enforce this agreement [that is, Ladder's alleged promise].”
The court grants this prong of the motion, as the documentary evidence — that is, the loan documents — establish that counterclaimant's reliance on the alleged promises was unreasonable. “Any reliance upon [Ladder's] alleged representations would not have been justified ․ in light of the express provisions in the agreement that it may not be modified except through a signed writing” (F.B. Tr. Rd. Corp. v DRT Constr. Co., 241 AD2d 930, 931[4th Dept 1997]; see Sparks Assoc., LLC v North Hills Holding Co. II, LLC, 94 AD3d 864, 866 [2d Dept 2012]).
Richter is not persuasive for a contrary determination. In Richter, the court rejected a party's attempt to assert the statute of frauds as a defense where there was no written contract and the parties’ pattern of behavior evidenced their intent to honor the oral agreement. Here, on the contrary, there is a written agreement. Thus, the statute of frauds is not at issue, and the exception described in Richter is inapplicable (see Matter of Hennel, 29 NY3d 487  [Hennel] [discussing exception to statute of frauds]; Castellotti v Free, 138 AD3d 198, 204 [1st Dept 2016] [same]). Moreover, counterclaimant, a sophisticated party represented by counsel, assumed the risk of this loss under the contract.13
Motion Sequence No. 003
Defendants Graham Hershman and Michael Payne (movants), two of the guarantors, move to dismiss the action as against them or, alternatively, to file an answer to the complaint. Movants base their application for dismissal on CPLR § 3211 (a) (1). For the reasons below, the court denies the prong of the motion seeking to dismiss the complaint, but grants the prong of the motion seeking leave to file an answer.
Movants point to Section 1.2 (ii) of the guarantee agreement, which states that their obligations exist only “from and after the date that any springing recourse event occurs as described in Section 11.22 (1)-(13) of the Loan Agreement” (NYSCEF Doc. No. 4 [emphasis supplied]). Section 11.22 (5) of the loan agreement states that a recourse event occurs when “Borrower fails to obtain Lender's prior consent to any Transfer (including, without limitation, any change in Control), except to the extent expressly permitted by the Loan Documents ․” (NYSCEF Doc. No. 3). Movants also point to Section 4.2.1 of the loan agreement, which states that the borrowers and “any other Restricted Party” cannot “sell, transfer, convey, mortgage, grant, bargain, encumber, pledge, assign, alienate, lease, grant any option with respect to or grant any other interest in the Property, the Collateral or any part thereof or interest therein ․” (id.). Under Section 4.2.1, a restricted party can be the property, collateral, mezzanine borrower, senior borrower, sole member, guarantor, sponsor, affiliated franchisor, affiliated manager, or someone who controls one of the restricted parties. Movants allege that the transfers at hand do not qualify as springing recourse events when considered in light of these provisions.
Like the counterclaim plaintiff, movants argue that the transfer of interest in PHRI was not a transfer within the meaning of Section 4.2.1 because no restricted party was involved in the transfer (see NYSCEF Doc. No. 15, *98; infra at p 3). First, without dispute, PHRI is not the property, collateral, mezzanine borrower, or senior borrower. Second, movants argue that, based on the definitions in the loan documents, PHRI also does not qualify as a guarantor, sponsor, affiliated franchisor, or affiliated manager.
Third, movants claim that PHRI lacked control over any of the restricted parties because it was not a majority owner of all equity interests, and it could not take major actions without obtaining approval. They state that PHRI was not the majority owner of the senior borrowers, the mezzanine borrowers, or San Diego Hotel Circle Holdings, LLC, as PHRI owned only a 44.7% stake in them. In support, they point to the proposed organizational chart at pages 109-113 of the mezzanine loan agreement (NYSCEF Doc. No. 3).
As for control, movants point to Section 7.1 of the Operating Agreement, which gives the managing member of the San Diego Hotel “full, complete and exclusive responsibility” over the hotel's day-to-day activities and its operations, “except with respect to any Major Decisions which shall require the prior consent of SDHI and except as otherwise provided in Section 7.12 (a) or other provisions of this agreement” (NYSCEF Doc. No. 59, § 7.1 [underlining in original]). The Operating Agreement lists 24 types of decisions that require prior consent. Among other things, this precludes the management from entering into “any contract or related series of contracts that require a payment or series of payments which ․ exceed Fifty Thousand Dollars ($50,000) in any twelve (12) month period or that have a term of more than one (1) year or are not terminable upon thirty (30) days’ notice from the Company or Property Owners or that SDHI specifically requests in writing to review and approve ․ (id., § 9.3 [in definition of “major decisions”]). Additionally, they note that under Section 7.12 (a) of the operating agreement, SDHI had the power to remove a managing member from his or her position if that person performed a bad act or was responsible for a management failure, even before there was an arbitrable question concerning the alleged behavior.
Ladder counters that PHRI is a restricted party because it controls PH San Diego Circle LLC, the manager of San Diego Hotel Circle Holdings, LLC, which, in turn, manages one of the mezzanine borrowers and one of the senior borrowers. In the context of a motion to dismiss its complaint under CPLR § 3211, Ladder notes, this allegation from the complaint must be accepted as true. Ladder argues that the issue of control is a factual one and thus is not the proper basis for dismissal. Further, Ladder states that movant Payne, along with Horn and GH Holdings comprise a restricted party because they collectively owned and transferred a majority interest of PHRI to CHRG. This means that CHRG has the power to replace PHRI's manager, Ladder states. Therefore, Ladder asserts that the transfer effectuated a change in control, which Section 11.22 (5) of the loan agreement also prohibits. As for movants’ arguments to the contrary, Ladder contends that “there is a very specific definition of control in our loan documents” and, in the case at hand, it has been satisfied (NYSCEF Doc. No. 75 [Tr. of Oral Argument] p 29 lines 3-4). Under the loan agreement, there is a change in control if
“either (A) there is any change in the identity of any individual or entity or any group of individuals or entities who have the right, directly or indirectly, by virtue of any ․ agreement, with or without taking any formative action, to cause a Restricted Party to take some action or to prevent, restrict or impede Restricted Party from taking some action which, in either case, such Restricted Party could take or could refrain from taking were it not for the rights of such individuals, or (B) the individual or entity or group of individuals or entities that ‘Control’ such Restricted Party as described in clause (A) ever cease to own or Control entities that own an equity interest (direct or indirect) in such Restricted Party.”
(NYSCEF Doc. No. 15, *85). Full control, Ladder argues, is not required. Therefore, it argues that there was a triggering event despite the limitations on the management's powers.
Movants reiterate that because the San Diego Hotel's majority owners had to consent to any major decisions that PHRI made, PHRI was not a restricted party. Movants allege that the San Diego Hotel operating agreement, which sets forth this requirement in Section 7.1, comprises documentary evidence necessitating dismissal. Movants point to USHA SOHA Terrace, LLC v Robinson Brog Leinwand Greene Genovese & Gluck, P.C. (2014 NY Slip Op 31813 [U] [Sup Ct NY County 2014] [USHA] [Schweitzer, J]) in support of their position. In that case, the court concluded that the plaintiff lacked double derivative standing because it owned shares of the developer, which did not control the property.14 The court relied on several indicia that are also present in the case at hand.
The court denies the motion to dismiss. As this court noted at oral argument, although movants have raised a viable argument as it relates to the merits of the case, “here the burden is on [movants] to show that there's no scenario, assuming everything they say is true,” in which Ladder can prevail (NYSCEF Doc. No. 75, p 33 lines 11-12). In their papers, movants have not repudiated all possible arguments. Movants have not conclusively refuted Ladder's position that the operating agreement's restriction on transfer either renders the transfer ineffective, or that this and the other limitations on the management's powers show that there was no change of control within the meaning of the loan agreement. They also do not resolve the issue of whether the collective transfer of a majority interest renders the transfer improper. Therefore, denial of this prong of the motion is appropriate (see Mill, 122 AD3d at 103). Also, although USHA raises points that could be persuasive in a summary judgment motion, the case is not dispositive on the issue of control. In USHA, the court evaluated the very specific issue of control in the context of a double derivative claim, and it did not rely on any contractual agreements or terms that defined “control” or supported a contrary interpretation.15
Next, the court grants the prong of the motion that seeks leave to answer the complaint. “Under CPLR 3012 (d), a trial court has the discretionary power to extend the time to plead, or to compel acceptance of an untimely pleading ‘upon such terms as may be just,’ provided that there is a showing of a reasonable excuse for the delay” (Emigrant Bank v Rosabianca, 156 AD3d 468, 472 [1st Dept 2017]). The court must make a balanced determination and consider such factors as “the length of the delay, the excuse offered, the extent to which the delay was willful, the possibility of prejudice to adverse parties, and the potential merits of any defense” (id. at 472-473). Furthermore, in evaluating an application to serve a late pleading, courts consider the “strong public policy of deciding cases on the merits” (801-803, LLC v 805 Ninth Ave. Realty Group, LLC, 188 AD3d 478, 478 [1st Dept 2020]; see Cuenca v Beach 65 LLC, 192 AD3d 452, 452 [1st Dept 2021]).
Here, movants argue that due to the multiple lawsuits involving these and related parties, the fact that movants live out of state, and ongoing issues related to the Covid-19 pandemic, collectively comprise a reasonable excuse for their delay. For the reasons set forth in support of their application for dismissal, movants also allege that they have asserted a meritorious defense. They also note that, at this stage in the litigation there has been no discovery, and thus they claim there has been no prejudice.
In opposition, Ladder stresses that movants have made this application five and seven months, respectively, after their answer was due. It contends that the excuses proffered are not reasonable within the meaning of the statute, particularly as movants are sophisticated parties who had consented to jurisdiction in this State. Ladder also argues that movants do not have a meritorious defense to the action — arguing, among other things, that Payne, Horn, and GH Holdings collectively comprise a restricted party and they transferred over 65 percent of PHRI to CHRG. Ladder states that, based on the contracts, it expected that only previously vetted parties had an interest in the hotel ownership and management.
The court exercises its discretion and grants this prong of the motion. As the court indicated at oral argument, movants have set forth potentially meritorious arguments. The problems movants have asserted are sufficient to comprise a reasonable excuse. “Pandemic-related confusion” can constitute a reasonable excuse where the party has explained the connection between the pandemic and the delay (e.g., Allstate Ins. Co. v DHD Medical, P.C., 70 Misc 3d 1207 [A], 2021 NY Slip Op 50011 [U], *2-3 [Sup Ct, NY County 2021] [untimely reply to counterclaim constituted reasonable excuse]).16 Notably, Ladder has not claimed the late filing prejudices it any respect (see Epstein Becker & Green, P.C. v Samson Mgt. LLC, 188 AD3d 454, 455 [1st Dept 2020]). For all these reasons, the court concludes that movants have the right to file their answer. However, as they have delayed and necessitated the litigation of this issue, movants are required to pay Ladder motion costs of $500.00.
Accordingly, it is
ORDERED that motion sequence number 002 is granted in its entirety and the counterclaim complaint is severed and dismissed; and it is further
ORDERED that the remainder of the case shall continue; and it is further
ORDERED that the Clerk is to amend the caption, removing the counterclaim complaint, and the parties are to use the amended caption going forward; and it is further
ORDERED that motion sequence number 003 is denied to the extent that it seeks dismissal of the complaint and granted to the extent that movants seek leave to serve and file an answer; and it is further
ORDERED that, as a condition precedent, movants are responsible for $500.00 in motion costs, payable to plaintiff; and it is further
ORDERED that movants shall file and serve copies of their answer within 25 days of entry of this order; and it is further
ORDERED that the plaintiff and the answering defendants shall serve a response to the answer, if appropriate, within 30 days from the date of said service; and it is further
ORDERED that the caption is amended to reflect the changes in this order, to read:
LADDER CAPITAL FINANCE LLC, Plaintiff,
1250 NORTH SD MEZZ LLC, SAN DIEGO HOTEL CIRCLE MEZZANINE, LLC, GRAHAM HERSHMAN, JULIE A. DUMON, JULIE A. DUMON TRUST DATED MARCH 24, 2006 A/K/A JULIE A. DUMON, TRUSTEE OF THE JULIE A. DUMON TRUST DATED MARCH 24, 2006, MICHAEL PAYNE, GREGORY J. BURDEN, Defendants.
and the Clerk is to amend the caption accordingly, and the parties are to use the new caption going forward; and it is further
ORDERED that the parties shall file a request for a preliminary conference as soon as possible after the joinder of issue.
1. Winston Salem RI LLC also is one of the Oak Coast Parties.
2. Ladder has discontinued its claims against Gregory J. Burden.
3. “Senior borrower” refers to the entities involved in the senior loan (see infra at p 4).
4. Except where otherwise noted, citations to this document are to the counterclaims.
5. 1250 SD owned a 55.23% share of the hotel, while SDHC Owner owned the remaining 44.77% (NYSCEF Doc. No. 14, ¶ 12).
6. Further, the counterclaimants point out that Ladder had loaned money to other hotels in which the Oak Coast Parties were also majority investors. Specifically, the counterclaims reference transactions involving the Residence Inn South Bend (the South Bend hotel) and the Residence Inn Winston-Salem (the Winston-Salem hotel). Ladder loaned the owner of the South Bend hotel $5,550,000 (the South Bend loan), which was secured by a mortgage, assignment of leases and rents and security agreement (NYSCEF Doc. No. 23). Ladder loaned the owner of the Winston-Salem hotel $4,920,000 (the Winston-Salem loan), which was secured by a deed of trust, assignment of leases and rents, security agreement, and fixture filing (NYSCEF Doc. No. 20). The loans for these hotels were issued on July 5, 2018 (NYSCEF Doc. Nos. 18, 19, 21, 22 [loan agreements and notes]).
7. Ladder sent virtually identical default letters to the Winston-Salem and the South Bend hotel owners as a result of the CHRG transfers, and allegedly has taken similar actions against them. In addition, the counterclaim indicates that the San Diego owners commenced a lawsuit against PH San Diego Hotel Circle, LLC (NYSCEF Doc. No. 14, ¶ 49). There are other related lawsuits as well.
8. The federal court ultimately dismissed the case as there was no diversity jurisdiction (see NYSCEF Doc. No. 75 [Motion Hearing Transcript], at p 7 lines 20-23).
9. Ladder does not seek to strike the affirmative defenses.
10. The court did note, in dicta, that damages would not have been precluded because the defendant alleged bad faith rather than unreasonableness (id.). However, that related to the portion of the contract claim that relied on the breach of the covenant of good faith and fair dealing. In the case at hand, it is the second claim for relief that alleges a breach of the implied covenant of good faith and fair dealing (see NYSCEF Doc. No. 14, ¶¶ 64-72). Different issues exist with respect to that claim. Moreover, the case is persuasive but not controlling authority.
11. Further, like Orix, this case is not controlling authority.
12. The court notes that the contracts in Forman were between the same parties and related to the same job, and there was a question as to whether the parties’ course of conduct effectively continued the earlier agreement (76 AD3d at 888).
13. Even if the exception applied and the result were unfair to counterclaimant, the court's decision would not change. “[W]hat is unfair is not always unconscionable” (Hennel, 29 NY3d at 497).
14. “[A] shareholder may bring a double derivative action not only for wrongs inflicted directly on the corporation in which he holds stock, but for wrongs done to that corporation's subsidiaries which make indirect, but nonetheless real, impact upon the parent corporation and its stockholders” (Matter of Pokoik v 575 Realties, Inc., 143 AD3d 487, 489 [1st Dept 2016] [internal quotation marks and citation omitted]).
15. The federal court decision is insufficient to support the motion to dismiss the counterclaims, as the court did not make any final determinations. However, in light of its reasoning that Ladder had made strong showings that defendants Hershman and Payne were not likely to prevail on the merits, the decision suggests that movants’ arguments are not conclusive, CPLR § 3211 dismissal of the complaint is inappropriate (cf. Facebook, Inc. v DLA Piper LLP [US], 134 AD3d 610, 614 [1st Dept 2015] [granting of TRO “created a presumption that [the party] had probable cause to bring the case”]).
16. The court also takes notice of Executive Order 202.8, dated March 20, 2020, which reads, in part, that “In accordance with the directive of the Chief Judge of the State to limit court operations to essential matters during the pendency of the COVID-19 health crisis, any specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding, as prescribed by the procedural laws of the state ․ is hereby tolled from the date of this executive order until April 19, 2020.”There was a subsequent extension through August 6, 2020. Although the parties do not discuss this executive order, it shows that the courts of this State are sensitive to the issues that have arisen due to the pandemic.
Robert R. Reed, J.
Response sent, thank you
Docket No: Index No. 650848/2020
Decided: January 07, 2022
Court: Supreme Court, New York County, New York.
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