| D.B. Zwirn Special Opportunities Fund, L.P. v SCC Acquisitions,Inc. |
| 2010 NY Slip Op 04923 [74 AD3d 530] |
| June 10, 2010 |
| Appellate Division, First Department |
| D.B. Zwirn Special Opportunities Fund, L.P.,Respondent, v SCC Acquisitions, Inc., Appellant, et al.,Defendants. |
—[*1] Greenberg Traurig, LLP, New York (Daniel R. Milstein of counsel), and Eric V. Rowen,East Santa Monica, Cal., of the bar of the State of Cal., admitted pro hac vice, forrespondent.
Order, Supreme Court, New York County (Michael D. Stallman, J.), entered September 22,2009, which, in an action on two guarantees, granted plaintiff's motion for summary judgment asto liability and denied defendant's cross motion for summary judgment dismissing the complaint,unanimously reversed, on the law, without costs, plaintiff's motion denied, and defendant's crossmotion granted. The Clerk is directed to enter judgment dismissing the complaint.
Plaintiff is a large New York based hedge fund that invests its money in high risktransactions, including high risk real estate transactions and loans. Defendant and its affiliates,SunCal Copper Canyon, LLC (Copper Canyon) and SunCal-Southwind JV, LLC (Southwind),are residential and commercial real estate developers that engage in high risk transactions.
In July 2005, plaintiff loaned Copper Canyon $35 million for a project in Nevada. About ayear later, in May 2006, plaintiff made a $75 million revolving loan to Southwind for threeprojects in California. In 2007, both Copper Canyon and Southwind defaulted on their loans,prompting plaintiff to hold two nonjudicial foreclosure sales at which it bid on and obtained titleto the Nevada and California properties. Plaintiff's bids were significantly lower than theoutstanding debt on the properties, resulting in substantial deficiencies.
In May 2008, plaintiff commenced this action against defendant to recover the Southwindand Copper Canyon deficiencies plus interest, costs, and attorneys' fees. The action is basedupon defendant having executed and delivered to plaintiff a separate carve-out guaranty inconnection with each loan, in which defendant becomes liable for all or part of its affiliates'payment obligations upon the occurrence of certain events.At issue is whether defendant is liable under section 1 (b) (ii) (e) of these carve-out guarantees,which states, in pertinent part, that defendant is responsible for "the outstanding principalamount [*2]of the Loan[s], and all other amounts due and owingunder the Loan Documents, together with reasonable attorneys' fees, court costs and costs of theappeal" if the affiliate(s) "admit[s], in writing, its insolvency or inability to pay its debts as theybecome due." Plaintiff contends that certain financial reports that Southwind and Copper Canyonprovided to it constituted such admissions.
The Copper Canyon documents were provided to plaintiff in accordance with the terms ofthe loan. They consisted of a balance sheet, an income statement, a project cost summary, aproject cost detail and a general ledger for July 2007. Plaintiff claims that the balance sheetconstituted a written admission because it listed Copper Canyon's cash and cash equivalents as$3,706, current assets as $191,001, and liabilities as $36,781,734.
The Southwind financial documents were provided to plaintiff in connection withSouthwind's request to restructure its loan. The documents consisted of net operating income(NOI) calculations, a financial summary based upon its current capital structure, and a financialsummary based upon a proposed new capital structure. The current financial summary listedSouthwind's net sales proceeds as $131,436,223, total costs as $142,267,080, and current loss onthe project as $17,684,533. The NOI calculations listed the purchase price of the Californiaproperties as approximately $73 million and their current value as approximately $38 million.
Plaintiff claims the only conclusion that could be drawn from these financial documents isthat the affiliates were insolvent and unable to pay their debts as they become due. The motioncourt agreed, reasoning that when financial statements show a borrower's liabilities exceed itsassets, the borrower is effectively stating that it is insolvent.
It is well settled that a contractual provision that is "clear . . . on its face mustbe enforced according to the plain meaning of its terms" (Duane Reade, Inc. v Cardtronics, LP, 54 AD3d 137, 140 [2008]).Section 1 (b) (ii) (e) is clear and requires an affiliate to actually admit in writing that it isinsolvent or unable to pay its debts as they became due. This requirement was not satisfiedmerely because plaintiff, following its review of the data contained in the affiliates' financialreports, concluded the affiliates were unable to make their loan payments (see Magten AssetMgt. Corp. v Bank of N.Y., 15 Misc 3d 1132[A], 2007 NY Slip Op 50951[U], *4-6 [Sup Ct,NY County, May 8, 2007, Fried, J.]).
Although the affiliates' financial reports show they were experiencing financial difficulty,the statements contained in the reports were not written admissions as contemplated by section 1(b) (ii) (e) because they did not contain the express statement required by the contract. Notably,two months after plaintiff received the reports, plaintiff's attorney twice sent correspondence tothe attorney for the affiliates and defendant attempting to elicit written admissions of insolvency.Both the e-mail and the letter posed the same questions: "(i) [A]re the Southwind and CopperCanyon borrowers out of money, and (ii) will those borrowers make the loan payments that arepast due and coming due this month?" It is abundantly clear that these questions were designedto extract written admissions from the affiliates. Thus, it is reasonable to conclude that plaintiffnever believed that the financial reports it had already received contained the requisite writtenadmissions, and that it needed further statements from the affiliates.
Plaintiff now contends that its questions were merely a request for clarification and it"desire[d] to give the [b]orrowers the opportunity to present all evidence available to them toavoid triggering liability under the Guarantees." This argument is inherently inconsistent withplaintiff's claim that the affiliates' financial documents contained written admissions triggeringdefendant's liability. If plaintiff truly believed the affiliates had made the requisite written [*3]admissions, then it would not have sent the correspondencedescribed above. Rather, it would have promptly sought to hold defendant liable for theoutstanding debt by invoking section 1 (b) (ii) (e) of the guarantees.
Likewise, the fact that both affiliates defaulted on their loans is not dispositive becausesection 1 (b) (ii) (e) is solely concerned with whether a written admission was made, not whetheran affiliate had financial problems or failed to make payments when due (see Magten,2007 NY Slip Op 50951[U], *5; Atel Fin. Corp. v Quaker Coal Co., 132 F Supp 2d1233, 1238 [ND Cal 2001], affd 321 F3d 924 [9th Cir 2003]). If the parties had intendedto make defendant liable upon being in financial distress, language stating the same could haveeasily been included in the guarantees. Here, the guarantees did not include such language andthe parties signed carve-out guarantees, rather than general guarantees.
Defendant's affirmative defense of fraudulent inducement has been rendered moot since thecomplaint is being dismissed. Concur—Friedman, J.P., Sweeny, DeGrasse, Richter andManzanet-Daniels, JJ. [Prior Case History: 2009 NY Slip Op 32270(U).]