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reply brief to Bill Ackman / PSW / Winthrop Realty Trust over Stuy Town
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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -------------------------------------------------------------------x BANK OF AMERICA, N.A., as Trustee for the Registered Holders of Wachovia Bank Commercial Mortgage Trust 2007-C30, acting by and through its Special Servicer, CWCapital Asset Management LLC, BANK OF AMERICA, N.A., as Trustee for the Registered Holders of COBALT CMBS Commercial Mortgage Trust 2007-C2, acting by and through CWCapital Asset Management LLC pursuant to the authority granted under that certain Amended and Restated Co-Lender Agreement dated March 12, 2007 and U.S. BANK NATIONAL ASSOCIATION, as Trustee for the Registered Holders of Wachovia Bank Commercial Mortgage Trust 2007-C31, ML-CFC Commercial Mortgage Trust 2007-5 and ML-CFC Commercial Mortgage Trust 2007-6, acting by and through CWCapital Asset Management LLC pursuant to the authority granted under that certain Amended and Restated Co-Lender Agreement dated March 12, 2007, Plaintiffs, -against- PSW NYC LLC, Defendant.
: : : : :::: : : :::: : : : : : : : : : : : : : : : : :
Index No.: 651293/2010 Hon. Richard B. Lowe III Commercial Division IAS Part 56 Motion Sequence No. 001
PLAINTIFFS’ REPLY IN
FURTHER SUPPORT OF
THEIR MOTION FOR
PRELIMINARY INJUNCTION
-------------------------------------------------------------------x
FILED: NEW YORK COUNTY CLERK 08/31/2010 INDEX NO. 651293/2010
NYSCEF DOC. NO. 35 RECEIVED NYSCEF: 08/31/2010
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TABLE OF CONTENTS
PAGE
PRELIMINARY STATEMENT ............................................................................................1
ARGUMENT............................................................................................................................3
I. PSW, As a Junior Lender, is Subordinate in Every Relevant Respect to the Senior Lenders...........................................................................................................................3
II. Section 6(d) of the Intercreditor Agreement Requires the Senior Loan to be Paid in Full for Any Transfer of the Equity Collateral to Occur ...........................................6
III. PSW’s Interpretation of Section 11(d)(ii) is Irrelevant to the Motion Before The Court ............................................................................................................................10
IV. PSW’s Assertion That There Is No Justiciable Controversy Strains Credulity...........11
V. CWCAM Will Be Irreparably Harmed if PSW is Not Enjoined .................................11
VI. The Balance of Equities Do Not Favor a Junior Lender That is Attempting to Leap Frog Over the Rights of the Senior Lenders .......................................................13
VII. CWCAM Should Not be Required to Post More Than a De Minimis Bond...............14
VIII. PSW’s Recitation of the Facts Surrounding CWCAM’s Interest in the Mezzanine Loans is an Exercise in Revisionist History ................................................................14
CONCLUSION ......................................................................................................................15
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TABLE OF AUTHORITIES CASES PAGE
Bank of N.Y. Mellon v. Realogy Corp., 979 A.2d 1113 (Del. Ch. 2008)..................................................................................................7 Barrows v. Rozansky, 111 A.D.2d 105, 489 N.Y.S.2d 481 (1st Dep’t 1985) .......................................................10, 12 Beal Savings v. Sommer, 8 N.Y.3d 318, 865 N.E.2d 1210 (2007).....................................................................................5 City of N.Y. v. Delafield 246 Corp., 236 A.D.2d 11, 662 N.Y.S.2d 286 (1st Dep’t 1997) .................................................................8 Elliot Coal Min. Co., Inc. v. Dir., Office of Workers’ Comp. Programs,........................................8 17 F.3d 616, 630 (3d Cir. 1994) Excess Ins. Co. Ltd v. Factory Mut. Ins. Co., 3 N.Y.3d 577, N.E.2d 768 (2004)..............................................................................................5 Highland Park CDO I Grantor Trust v. Wells Fargo Bank, N.A., No. 08 Civ. 5723(NRB), 2009 WL 1834596 (S.D.N.Y. June 16, 2009).............................4, 11 In re Andrus’ Will, 281 N.Y.S. 831 (Sur. Ct. Westchester County 1935) ................................................................7 In re Erickson Ret. Cmtys., L.L.C., 425 B.R. 309 (Bankr. N.D. Tex. 2010)......................................................................................4 In re Rehab. of Frontier Ins. Co., 27 A.D.3d 274, 813 N.Y.S.2d 50 (1st Dep’t 2006) .................................................................14 J. Brooks Secs., Inc. v. Vanderbilt Secs., Inc., 484 N.Y.S.2d 472 (Sup. Ct. N.Y. County 1985) .....................................................................10 Marshall v. Commercial Trays. Milt. Acc. Ass’n of Am., 170 N.Y. 434, 63 N.E. 446 (1902).............................................................................................7 Matter of D & B Constr. of Westchester, Inc., 21 Misc. 3d 1125(A), 2008 N.Y. Slip Op. 52172(U) (Sup. Ct. Westchester County Nov. 3, 2008).............................................................................9
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McMillan v. Police Dogs, Inc., 52 A.D.2d 369, 384 N.Y.S.2d 36 (3d Dep’t 1976) ....................................................................7 N.Y. State Comm’r of Corr. v. Gulotta, 194 A.D.2d 540, 598 N.Y.S.2d 547 (2d Dep’t 1993) ..............................................................14 N.Y. State Urban Dev. Corp. v. Paul T. Freund Corp., 23 Misc. 3d 1102(A), 2009 Slip Op. 50553(U) (Sup. Ct. N.Y. County Mar. 31, 2009) ...........9 People v. Shrader, 16 N.Y.S.2d 424 (Nassau County Ct. 1939)..............................................................................8 PPM Fin., Inc. v. Norandal USA, Inc., 297 F. Supp. 2d 1072 (N.D. Ill. 2004) ...................................................................................4, 7 Sackman v. Maritas, 595 N.Y.S.2d 655 (Sup. Ct. Nassau County 1992)..................................................................10 Smith v. Davis Surgical Ctr. LLC, 472 F. Supp. 2d 1316 (D. Utah 2006)........................................................................................7 Union Commerce Leasing Corp. v. Kanbar, 155 A.D.2d 396, 548 N.Y.S.2d 22 (2d Dep’t 1989) ................................................................14 Vernon v. Vernon, 100 N.Y.2d 960, 800 N.E.2d 1085 (2003).................................................................................7 White v. Cont’l Cas. Co., 9 N.Y.3d 264, 878 N.E.2d 1019 (2007)...................................................................................13 Wilshire State Bank v. Unger, 25 Misc. 3d 1243(A), 2009 N.Y. Slip Op. 52559(U) (Sup. Ct. Queens County Dec. 16, 2009)...................................................................................9
SECONDARY SOURCES
Andrew R. Berman, Risks and Realities of Mezzanine Loans, 72 MO. L. REV. 993 (2007)...........3 Dee Martin Calligar, Subordination Agreements, 70 YALE L.J. 376 (1961)...................................3 Patrick Darby, Southeast and New England Mean New York: The Rule of Explicitness and Post-Bankruptcy Interest on Senior Unsecured Debt, 38 CUMB. L. REV. 467 (2008) .............. 3 David Kravitz, The Outer Fringes of Chap. 11: Nonconsenting Senior Lenders’ Rights Under
Subordination Agreements in Bankruptcy, 91 MICH. L. REV. 281 (1992) ............................... 3
PRELIMINARY STATEMENT
PSW plays a game throughout its brief attempting again and again to persuade the Court
that the Senior Lenders are the ones seeking a unique reading of the Intercreditor Agreement or
that the Senior Lenders are attempting to sneak something by the Court. PSW apparently
believes that the Court cannot or will not read the language that is at issue or the Intercreditor
Agreement as a whole. When the Court reads the Intercreditor Agreement, the inaccuracies of
PSW’s assertions will be quickly revealed.
By way of illustration, PSW asserts that the gravamen language of Section 6(d) which
requires all Senior Loan defaults to be cured prior to a transfer of Equity Collateral actually is
“designed to protect Junior Lenders by giving them the ability to prevent the Senior Lenders
from exercising rights they would otherwise have to accelerate the Senior Loans solely due to a
transfer of the Equity Collateral” (Opp. at 10), and “is wholly irrelevant where, as here, the
Senior Loan has already been accelerated” (Id. at 11). Yet, the Senior Lenders do not even have
the right to accelerate the Senior Loan merely because of a transfer of Equity Collateral. This
obvious error dooms all of PSW’s contentions but there is much more as PSW’s other
characterizations of the Intercreditor Agreement are equally hollow and simply wrong.
This is not the first time that a court has been asked to interpret similar intercreditor
provisions. And those courts have consistently found in favor of the senior lenders and the plain
reading advanced by CWCAM here. Highland Park, a decision rendered within the past year in
the Southern District of New York, is on point. PSW ignores this case altogether. Indeed, PSW
does not cite a single case, industry expert or secondary source material in support of the
intercreditor interpretations it advances. The absence of any support for PSW’s assertions is
striking, but explainable. No support exists.
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PSW owns mezzanine debt. As a holder of mezzanine debt, PSW’s rights are
subordinate in every relevant respect to the Senior Lenders’ rights. This is precisely how
mezzanine loans work – they are subordinated to senior debt and cannot be enforced or collected
upon until a senior loan default is satisfied. Despite the clear delineations of priority among
senior lenders and junior lenders, PSW seeks to turn this capital structure on its head. PSW even
has the chutzpah to claim that, through this action, the Senior Lenders are improperly trying to
“leap frog over PSW’s legitimate rights.” (Opp. at 5). But PSW has it backwards. It is the
Senior Lenders that have priority, and it is PSW that is improperly trying to leap frog over the
Senior Lenders’ rights by not complying with their contractual subordination.
PSW further argues that there will be no irreparable harm if the Court refuses to enter an
injunction because the Senior Lenders will retain the Senior Loan, but that if an injunction is
entered requiring a Senior Loan cure PSW will be deprived of the “opportunity” to control the
Property and a workout. This is precisely the point at issue. Intercreditor agreements like this
one apportion payment and control rights among creditors. The Senior Lenders bargained for
priority and control following an Event of Default. The Junior Lenders accepted a higher rate of
return in exchange for complete subordination and an opportunity to cure Senior Loan defaults.
When the Junior Lenders passed up the opportunity to cure the Senior Loan defaults, the
Senior Lenders began a nine month process to transition management of the Property away from
Tishman Speyer and to the Senior Lenders following what everyone believes to be a $3.66
Billion credit bid foreclosure sale. Failing to enter an injunction enforcing the terms of the
Intercreditor Agreement so that the process may continue will stand the creditors’ negotiated
agreement on its head and result in an unprecedented denial of the Senior Lenders’ rights.
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ARGUMENT
I. PSW, As a Junior Lender, is Subordinate in Every Relevant Respect to the Senior
Lenders
These principles of mezzanine financing are widely accepted and deeply entrenched:
(i) a junior lender’s rights are subordinate to the senior lender’s rights; and (ii) the junior loans
are subordinated to senior debt and cannot be enforced or collected upon until the senior loan
default is cured. Andrew Berman, an Associate Professor of Law at New York Law School,
wrote:
Mezzanine loans are structurally subordinated to the senior mortgage loan because of the legal superiority of the mortgage lender vis-a-vis the mezzanine lender. Notwithstanding this structural subordination, mezzanine loans are also typically contractually subordinated to the related senior mortgage loans pursuant to the terms of an intercreditor agreement entered into between the senior mortgage lender and mezzanine lender. [] These intercreditor agreements severely limit and restrict the ability of mezzanine lenders to enforce their rights and remedies under the mezzanine loan documents.
Andrew R. Berman, Risks and Realities of Mezzanine Loans, 72 MO. L. REV. 993, 1018 (2007).
An article in the Yale Law Journal provides:
[T]he basic concept of a subordination agreement is simple: It is the subordination of the right to receive payment of certain indebtedness (the subordinated debt to the prior payment of certain other indebtedness (the senior debt) of the same debtor. Put another way—in the circumstances specified in the subordination agreement, the senior debt must be paid in full before payment may be made on the subordinated debt and retained by the subordinating creditor.
Dee Martin Calligar, Subordination Agreements, 70 YALE L.J. 376, 376 (1961).1
1 See also David Kravitz, The Outer Fringes of Chap. 11: Nonconsenting Senior Lenders’ Rights Under Subordination Agreements in Bankruptcy, 91 MICH. L. REV. 281, 284 (1992) (“The basic concept behind subordinated debt is simple: the subordinated creditor agrees that under certain circumstances, the claims of specified senior creditors must be paid in full before any payment may be made to, and retained by, the subordinated creditor.”); Patrick Darby, Southeast and New England Mean New York: The Rule of Explicitness and Post- Bankruptcy Interest on Senior Unsecured Debt, 38 CUMB. L. REV. 467, 470 (2008) (“The defining feature of a subordination agreement is that one creditor defers payments on its claims until another creditor is paid in full. The subordinated creditor is often called the junior creditor and the beneficiary of the subordination the senior creditor”).
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Courts that have been asked to interpret analogous intercreditor agreements have
uniformly come to the same conclusion. In Highland Park CDO I Grantor Trust v. Wells Fargo
Bank, N.A., No. 08 Civ. 5723(NRB), 2009 WL 1834596 (S.D.N.Y. June 16, 2009), a decision
PSW hides from, the district court was asked to decide whether a junior lender could recover
from guarantors on the mezzanine loan before the senior lender recovered in full on the senior
loan. Id. at *3. Relying on subordination language virtually identical to the language found in
Sections 9 and 10 of the Intercreditor Agreement before this Court, the district court ruled that,
based on a plain reading of the agreement, the provisions therein “are obviously designed to
ensure that the senior loan is paid in full before [the junior lender] is permitted to keep any
money received in repayment of the mezzanine loan.” Id. at *4. Not only did the district court
dismiss the junior lender’s claim, but it granted the senior lender’s request for an injunction
and enjoined the junior lender “from exercising any right or remedy under the mezzanine
loan guaranty unless or until [the senior lender] or its successors and/or assigns shall have
received payment and performance in full of all amounts due under the senior loan.” Id. at *5
(emphasis added).2
The Intercreditor Agreement at issue here recognizes these principles as well. Section 9
of the Intercreditor Agreement, which is titled “Subordination of Junior Loans and Junior Loan
Documents,” plainly states that the Junior Loans are subordinate in every relevant respect to the
Senior Loan. Affidavit of Andrew J. Hundertmark dated August 17, 2010 (“Hundertmark Aff.”),
Ex. E at 60. Additionally, Section 10 of the Intercreditor Agreement, which is titled “Payment
2 See also PPM Fin., Inc. v. Norandal USA, Inc., 297 F. Supp. 2d 1072, 1081-82 & 1097 (N.D. Ill. 2004) (interpreting provision in subordination agreement and entering judgment in favor of senior lender against subordinate lender for monies received after default and dismissed the subordinate lender’s counterclaim), aff’d 392 F.3d 889 (7th Cir. 2004); In re Erickson Ret. Cmtys., L.L.C., 425 B.R. 309, 315 (Bankr. N.D. Tex. 2010) (agreeing with senior creditor that subordinate creditor’s attempt to file an examiner motion runs afoul of the subordination agreement). Additional cases for this proposition appear at page 11 of CWCAM’s opening brief. PSW does not even attempt to distinguish this body of caselaw.
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Subordination,” plainly states that the Senior Loan is to be paid in full before a Junior Lender is
permitted to keep any money received in repayment of the mezzanine loans. Id. at 61. The
conditions on Equity Collateral transfer found in Section 6(d) expressly requiring payment of the
Senior Loan are in addition to the language the court in Highland Park found sufficient to
warrant an injunction against the junior lenders.3
PSW misleadingly states that “Sections 10(a) and 10(d) also provide that a Junior
Lender’s rights to foreclose upon its own Equity Collateral is exempted from the general
provisions regarding payment subordination that CWCAM cites in its papers. (Opp. at 16).
Section 10(a) begins with “[e]xcept (i) as otherwise expressly provided in this Agreement . . .”,
(Hundertmark Aff., Ex. E at 61), and Section 10(d) includes the following language: “Subject to
the terms and provisions of Section 6” and “in accordance with the terms of this Agreement. . .”
(Hundertmark Aff., Ex. E at 63). PSW totally ignores this qualifying language and the
language in Section 10(b) which states in relevant part:
If . . . (ii) there shall have occurred and be continuing an Event of Default under the Senior Loan Documents, after giving effect to Junior Lender’s cure rights pursuant to Section 12, except as expressly otherwise provided herein, Senior Lender shall be entitled to receive payment and performance in full of all amounts due or become due to Senior Lender before any Junior Lender is entitled to receive any payment (including any payment which may be payable by reason of the payment of any other indebtedness of Borrower being subordinated to the payment of the Junior Loans) on account of any Junior Loan.
Id. (emphasis added). Here, the Senior Loan is indisputably in default. PSW’s rights to
foreclose are therefore not exempt from the payment subordination provisions.
3 It is a well recognized maxim that a court “should construe [an] agreement so as to give full meaning and effect to the material provisions.” Beal Savings v. Sommer, 8 N.Y.3d 318, 324, 865 N.E.2d 1210, 1213 (2007) (quoting Excess Ins. Co. Ltd v. Factory Mut. Ins. Co., 3 N.Y.3d 577, 582, 822 N.E.2d 768 (2004)). The material provisions of this Intercreditor Agreement are the subordination of the PSW’s rights and remedies, as a Junior Lender, to the rights and remedies of the Senior Lenders. PSW’s attempt to excise this subordination of rights and remedies by a strained and fanciful reading of Section 6(d) is unpersuasive, and violates both the New York law of contract interpretation and common sense.
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II. Section 6(d) of the Intercreditor Agreement Requires the Senior Loan to be Paid in
Full for Any Transfer of the Equity Collateral to Occur
PSW’s interpretation of Section 6(d) is incoherent. Although PSW concedes that the
“provided” language creates a condition precedent, (Opp. at 14-15), it offers up unsupported
reasons why CWCAM’s plain reading of Section 6(d) is not correct, and in the process reveals
its desperation. Section 6(d) plainly says what it means. If PSW conducts a UCC sale, no
transfer of title can occur to any Qualified Transferee (e.g., purchaser or credit bidder) unless, in
relevant part, (1) the purchaser assumes all obligations owing under the Intercreditor Agreement,
(2) the purchaser acquires the Equity Collateral subject to all terms of the Senior Loan
Documents, and (3) all defaults under the Senior Loan are cured.
Acceleration is Not the Issue
PSW’s primary contention is that Section 6(d) is concerned solely with preventing
acceleration. PSW writes that “Section 6(d) is designed to protect Junior Lenders by giving them
the ability to prevent the Senior Lenders from exercising rights they would otherwise have to
accelerate the Senior Loans solely due to a transfer of the Equity Collateral.” (Opp. at 10). Later
PSW goes so far as to assert that Section 6(d) “is wholly irrelevant where, as here, the Senior
Loan has already been accelerated and PSW is not seeking to prevent acceleration of the Senior
Loan.” (Opp. at 11).
This is non-sense. Indeed, under PSW’s reading of Section 6(d), the Senior Lenders
would never accelerate the Senior Loan because doing so would eliminate the cure obligation.
Section 6 is titled, “Foreclosure of Separate Collateral,” not “Acceleration.” There is nothing in
Section 6(d) that remotely suggests that it was concerned solely about acceleration. Critically,
the Senior Lenders do not have a contractual right under any reading of the Loan Agreement
or Intercreditor Agreement to accelerate the Senior Loans solely due to a transfer of the
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Equity Collateral done in accordance with the loan documents. The controlling language is
found in Section 9.02(a) of the Senior Loan Agreement:
a Transfer in connection with an exercise of remedies by a Mezzanine Lender shall not be prohibited hereunder, provided such Transfer is done in accordance with any intercreditor agreement that such Mezzanine Lender and Lender are party to in connection with the Loan and the Mezzanine Loan.
Hundertmark Aff., Ex. B at 89 (emphasis added). The sentence fragment of Section 6(d) that
PSW obsesses over simply makes clear that the Senior Lenders do not have this right. Given this
indisputable fact, the cure requirements embodied in Section 6(d)(B)(1) & (2) can only be a
condition to PSW acquiring or selling the Equity Collateral.
The Doctrine of Last Antecedent Is Inapplicable
Without any explanation, PSW injects the doctrine of last antecedent to convince this
Court that an entire clause that follows a semicolon modifies a sentence fragment that precedes
the semicolon. Once again, PSW’s assertions lack any legal support. Under New York law, it is
well-established that a semicolon creates independent and separate sentences. See Vernon v.
Vernon, 100 N.Y.2d 960, 971, 800 N.E.2d 1085, 1091 (2003) (rejecting interpretation that would
“conflate the two separate subsections” divided by a semicolon) (emphasis added).4
PSW is not the first subordinate lender to misapply the doctrine of last antecedent in an
effort to contort clearly worded intercreditor provisions to escape the economic consequences of
their subordination. In PPM Fin., Inc. v. Norandal USA, Inc., 297 F. Supp. 2d 1072 (N.D. Ill.
4 McMillan v. Police Dogs, Inc., 52 A.D.2d 369, 360, 384 N.Y.S.2d 36, 37 (3d Dep’t 1976) (holding that where clauses were separated “by a semicolon . . . a separate grouping is clearly indicated”) (emphasis added). Accord Marshall v. Commercial Travelers’ Mut. Ass’n of Am., 170 N.Y. 434, 437-38, 63 N.E. 446, 447 (1902); In re Andrus’ Will, 281 N.Y.S. 831, 852 (Sur. Ct. 1935). To avoid New York’s interpretation of semicolons, PSW searches far and wide outside of New York. It comes up with only two, inapposite cases. (Opp. at 13). In Smith v. Davis Surgical Ctr. LLC, 472 F. Supp. 2d 1316 (D. Utah 2006) the court was applying Utah law and focused on a “poorly drafted” four-word phrase with only one prior clause. Id. at 1317-18. Contrary to PSW’s false quotation, the Realogy opinion does not contain the term “provided however,” and the key issue there was the meaning of a “shall specify” clause. Compare Opp. at 13 with Bank of N.Y. Mellon v. Realogy Corp., 979 A.2d 1113, 1124 (Del. Ch. 2008)). In any event, this Delaware opinion does not even discuss the use of semicolons, much less upend New York law on semicolons.
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2004), aff’d 392 F.3d 889 (7th Cir. 2004), the district court held that the subordinate lender’s
reliance on the doctrine of last antecedent in support of its gloss of a provision in the
subordination agreement was not persuasive and refused to apply it. Id. at 1083.5 The doctrine
of last antecedent has no application here, and should be rejected by this Court.
All Five Subsections of Section 6 Apply to PSW’s Ability to Foreclose
PSW also advances the novel theory that only subsection (a) of Section 6 contains
conditions to a foreclosure sale by a junior lender. Section 6 is titled in its entirety “Foreclosure
of Separate Collateral.” Under this section heading, there are subsections (a) – (e). None of
these subsections are individually titled. Rather, they all relate to Foreclosure of Separate
Collateral, and each include different conditions/obligations inherent in any sale. The fact that
the requirements of subsection (d) are discussed in their own subsection and do not appear in
subsection (a) is of no consequence. PSW’s effort to impart more significance on subsection (a)
over subsection (d) is self-serving and unsupported by the plain language of the Intercreditor
Agreement. The language in subsection (d) that reads, “in accordance with the provisions and
conditions of this Agreement,” clearly reinforces the requirement that the Equity Collateral
cannot be acquired unless all conditions are satisfied, including those found in Section 6(d).6
PSW’s Obligation to Cure is a Condition Precedent to Transfer
PSW contends that Section 6(d) applies only after foreclosure of the Equity Collateral
has occurred. Nowhere in Section 6(d) is there any language that supports this reading. In fact,
the verbs used in Section 6(d) establish just the opposite (e.g., “To the extent that any Qualified
5 See also Elliot Coal Min. Co., Inc. v. Dir., Office of Workers’ Comp. Programs, 17 F.3d 616, 630 (3d Cir. 1994) (explaining that when punctuation separates the phrases, “the qualifying language is to be applied to all of the previous phrases and not merely the immediately preceding phrase”). 6 See City of N.Y. v. Delafield 246 Corp., 236 A.D.2d 11, 22, 662 N.Y.S.2d 286, 293 (1st Dep’t 1997) (noting document requiring “notice of violation in accordance with . . . any conditions or obligations contained herein” created condition precedent). See also People v. Shrader, 16 N.Y.S.2d 424, 428 (Nassau County Ct. 1939) (holding that erecting signs “in accordance with the conditions therein” was a condition precedent to the enactment of ordinance).
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Transferee acquires the Equity Collateral . . .”) Hundertmark Aff., Ex. E at 54. The fact that
clause (A) allows the Qualified Transferee a ten day period after the transfer to affirm in writing
that it is bound by the Senior Loan documents does not change the analysis. Clause (B) in fact
requires that defaults that can be cured “as of the date of such acquisition” must be cured as a
precondition to acquiring the Equity Collateral: “(B) all defaults under (1) the Senior Loan . . .
which remain uncured or unwaived as of the date of such acquisition have been cured by such
Qualified Transferee or in the case of defaults that can only be cured by the Junior Lender
following its acquisition of the Equity Collateral, the same shall be cured by the Junior Lender
prior to the expiration of the applicable Extended Non-Monetary Cure Period.” Id. (emphasis
added). It would be completely illogical to include the bold and italicized language above if the
Junior Lender could elect to cure after the transfer.
PSW’s Anticipatory Breach of Its Obligations
to Cure the Senior Loan Default is an Independent Ground for Injunctive Relief
Regardless of whether the obligation to cure Senior Loan defaults must be satisfied
before or after an Equity Collateral Transfer, PSW’s stated repudiation of any obligation to cure
entitles CWCAM to injunctive relief. The obligation to cure the defaults under the Senior Loan
must still be satisfied regardless of when the condition is satisfied.7 Without qualification, PSW
has stated that Section 6(d) does not require a purchaser of the Equity Collateral to pay off the
Senior Loan. Hundertmark Aff., Ex. T. As noted in CWCAM’s opening brief, injunctions are
7 Conditions can be performed simultaneous with or after execution of the act. See Wilshire State Bank v. Unger,
25 Misc. 3d 1243(A), 2009 N.Y. Slip Op. 52559(U), at *3 (Sup. Ct. Queens County Dec. 16, 2009) (enforcing lease amendment which “contained a condition precedent, to wit, the simultaneous execution of a subordination . . . . agreement” with mortgagees) (emphasis added); Matter of D & B Constr. of Westchester, Inc., 21 Misc. 3d 1125(A), 2008 N.Y. Slip Op. 52172(U) at *1 (Sup. Ct. Westchester County Nov. 3, 2008). See also N.Y. State Urban Dev. Corp. v. Paul T. Freund Corp., 23 Misc. 3d 1102(A), 2009 Slip Op. 50553(U) at *4 (Sup. Ct. N.Y. County Mar. 31, 2009) (enforcing condition subsequent requiring 20% repayment after the transaction).
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routinely entered by courts in the face of this type of anticipatory breach. See CWCAM Brief at
13.
III. PSW’s Interpretation of Section 11(d)(ii) is Irrelevant to the Motion Before The
Court
In a footnote, PSW concedes that “so long as it is a Junior Lender, its ability to solicit,
direct or cause the Senior Borrowers to institute bankruptcy proceedings is restricted by Section
11(d)(ii).” (Opp. at 17). The thrust of PSW’s argument, however, focuses on what it could
theoretically do as an owner of the Borrowers once a transfer of the Equity Collateral occurs.
Once a transfer/sale occurs, the second part of Section 11(d)(ii) imposes on PSW, as purchaser,
the additional requirements of the Borrowers under their organizational documents (e.g., a vote
of independent directors, etc.). Since no transfer has occurred, PSW must abide by the
restrictions quoted in the first part of Section 11(d)(ii), and it is the violation of these restrictions
by PSW that the Senior Lenders seek to enjoin.
Is there any legitimate dispute that either retaining bankruptcy counsel on behalf of the
Borrowers or threatening the use of bankruptcy to leverage negotiations with the Senior Lenders
is an act in furtherance of bankruptcy that is expressly prohibited by the Intercreditor
Agreement?8 Not surprisingly, PSW does not even address this argument in its brief. Although
the Senior Lenders disagree with PSW’s reading of what it can do after it purchases the Equity
Collateral those disputes are not germane here. Until PSW acquires the Equity Collateral
8 As CWCAM noted in its opening brief, PSW has freely admitted that it has contacted and retained Kirkland & Ellis to represent the Borrowers in a nonconsensual bankruptcy. PSW does not dispute this fact, and it must be accepted as true. See Barrows v. Rozansky, 111 A.D.2d 105, 107-08, 489 N.Y.S.2d 481, 484-85 (1st Dep’t 1985) (granting preliminary injunction after accepting as true plaintiff’s allegations that were controverted only by defense attorney’s affidavit not made on personal knowledge). Accord Sackman v. Maritas, 595 N.Y.S.2d 655, 656 (Sup. Ct. Nassau County 1992); J. Brooks Secs., Inc. v. Vanderbilt Secs., Inc., 484 N.Y.S.2d 472, 474 (Sup. Ct. N.Y. County 1985).
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pursuant to the requirements of Section 6, it should be enjoined from taking additional steps in
furtherance of bankruptcy.9
IV. PSW’s Assertion That There Is No Justiciable Controversy Strains Credulity
It is remarkable that PSW even makes this argument. First, as noted above, PSW is in
breach of Section 11(d)(ii) of the Intercreditor Agreement because it already has retained
bankruptcy counsel for the Borrowers. Second, PSW has made it very clear that contrary to
Section 6(d) it will not require a purchaser of the Equity Collateral to pay off the Senior Loan ,
describing any obligation to do so as “ludicrous.” Hundertmark Aff., Ex. T. PSW, however,
clearly intends to acquire the Equity Collateral through a credit bid and has formed six (6) shell
entities to accomplish its ends. Supplemental Affidavit of Andrew J. Hundertmark dated August
31, 2010 (the “Supp. Hundertmark Aff.”) ¶ 9. The names of these shell entities are: PSW PCV
1 LLC, PSW PCV 2 LLC, PSW PCV 3 LLC, PSW ST 1 LLC, PSW ST 2 LLC, and PSW ST 3
LLC. Id. (emphasis added). There is clearly a present controversy here.
V. CWCAM Will Be Irreparably Harmed if PSW is Not Enjoined
Just two weeks ago, PSW agreed to be bound by the provisions found in the Intercreditor
Agreement including the provision that any breach of the Intercreditor Agreement would
irreparably harm the Senior Lenders. Highland Park and multiple other decisions have enforced
virtually identical language, finding irreparable harm. See Highland Park, 2009 WL 1834596 at
*5 n.7; CWCAM’s Brief at 17-18 (citing additional cases in opening brief). By contrast, PSW is
unable to cite a single case rejecting an express provision in an operative agreement allowing for
irreparable harm and injunctive relief.
9 PSW perverts CWCAM’s argument in regard to Section 11(d)(ii). (Opp. at 19). CWCAM is not asking this Court to enjoin the Senior Borrowers from filing a bankruptcy petition. To the extent that PSW complies with Section 6(d), PSW is free to direct or cause the Senior Borrowers to file a bankruptcy petition.
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The Senior Lenders expressly bargained for the right to control the exercise of remedies
after a Senior Loan default. Part of the bargained for right was a prohibition against Junior
Lenders acquiring ownership and control of the Equity Collateral unless and until any then
existing Senior Loan defaults are cured. This bargained-for contractual right is completely
ignored by PSW. PSW does not even respond to it in its Opposition or the case law upon which
CWCAM relies. These cases clearly establish that the Senior Lenders’ loss of their bargained-
for contractual rights as set forth in the Intercreditor Agreement constitutes irreparable harm.10
Furthermore, PSW’s assertion with respect to its ability to immediately operate and
manage the Property lacks all credibility. This is a Property with more than 11,000 units and
25,000 residents. There are over 550 employees, including 350 union employees represented by
seven unions, some of which have expired collective bargaining agreements, and an 80 person
private security force with the powers of arrest that is integrated with the NYPD. It has costs
millions of dollars to rebuild the information technology systems at the Property, infrastructure
that is critical to the preservation of rent records, the administration of repairs and maintenance
and the oversight of the private security force. Supp. Hundertmark Aff. ¶ 3. Months have been
consumed and hundreds of thousands of dollars spent recruiting a new senior management team
to replace the employees that will be redeployed away from the Property. Id. Seven months
have been spent evaluating and working through environmental issues at the Property. Id. In
total, CWCAM has spent nine months and millions of dollars cooperatively working with the
10 PSW confuses the point made by CWCAM insofar as the $3.66 Billion that is at risk. Given PSW’s brief existence as a shell entity, CWCAM alleges that it likely does not have sufficient assets capable of compensating Plaintiffs in money damages equivalent to that amount. PSW did not controvert these facts and they should be accepted as true. See Barrows v. Rozansky, supra note 8. CWCAM cited cases ignored by PSW where injunctive relief was granted where the collection of money damages was deemed unlikely. See CWCAM Brief at 20-21.
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Borrowers to ensure a smooth transition of the Property.11 A last minute takeover by the
Mezzanine holders and resulting bankruptcy will undoubtedly throw these plans into disarray.
VI. The Balance of Equities Do Not Favor a Junior Lender That is Attempting to Leap
Frog Over the Rights of the Senior Lenders
PSW totally fails to respond to the points CWCAM makes in its opening brief on this
factor. Instead, PSW claims that it will lose out on the opportunity to invest in the Property, and
argues that this fact weighs in favor of not entering an injunction. PSW has every opportunity to
invest in the Property but it is conditioned on curing the defaults under the Senior Loan. PSW
does not have a “contractual” opportunity to undo and manipulate the Property at the expenses of
the Senior Lenders. To the extent PSW complies with the Intercreditor Agreement, it will have
the opportunity to invest in the Property. PSW also claims that it will suffer hardship because,
upon CWCAM’s real estate foreclosure, PSW will lose the entire economic value of its
mezzanine 1-3 loans. Unfortunately, for PSW this is not an issue of fairness. Rather, at issue is
an unambiguous contract,12 the enforcement of that contract negotiated between sophisticated
lenders, and as recognized by other courts, the inherent authority of the Senior Lenders to control
the exercise of their remedies.
If the Court were not to enjoin PSW from acquiring or selling the Equity Collateral
unless the Senior Loan default is cured and from taking any action in furtherance of bankruptcy,
PSW will have successfully circumvented the terms of the Intercreditor Agreement and a flood
of copycat actions will ensue at the instigation of mezzanine lenders in unrelated projects. The
balance of equities tips decidedly in favor of entering an injunction here.
11 PSW suggests that CWCAM is delaying its foreclosure for the singular purpose of collecting “massive servicer fees.” (Opp. at 7, n.5). This sort of baseless claim has no place in PSW’s brief and reveals PSW’s ignorance of the tremendous amount of time and effort that has been required to transition the Property. 12 “[I]f the agreement on its face is reasonably susceptible of only one meaning, a court is not free to alter the contract to reflect its personal notions of fairness and equity.” See White v. Cont’l Cas. Co., 9 N.Y.3d 264, 878 N.E.2d 1019, 1021 (2007).
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VII. CWCAM Should Not be Required to Post More Than a De Minimis Bond
All parties agree that the Property is not worth $3.66 Billion. PSW admitted that it paid
only 15 cents on the dollar, or $45 million, for the three mezzanine loans that have a face amount
of $300 million. Thus, PSW’s request for a bond in the amount of $300 million is specious.
In fact, a foreclosure on the Property by CWCAM will cause no damage to PSW. PSW’s
position and interests vis-à-vis the Equity Collateral securing its lien will be unchanged and
unaffected by the foreclosure sale. To the extent that PSW believes the Property that secures the
Trusts’ liens is worth more than $3.6 Billion its remedy is to bid at the foreclosure sale or allow a
third party to bid. Any resulting proceeds above what is owed to the Trusts would be distributed
to the Borrowers and available to satisfy PSW’s debt. Accordingly, the amount of any bond
should be negligible. CWCAM also respectfully requests that to the extent a bond is required
that it be permitted to secure a letter of credit in lieu of a bond.13
VIII. PSW’s Recitation of the Facts Surrounding CWCAM’s “Interest” in the
Mezzanine Loans is an Exercise in Revisionist History
Mr. Ashner, one of PSW partners, submitted an Affidavit where he suggests that
CWCAM sought to purchase the Mezzanine 1-3 Loans position. In fact, the Mezzanine 1-3
holders approached CWCAM requesting that CWCAM make an offer to purchase the position
because they had received an offer from a third party who was looking to “take control from the
13 PSW also requests that the Court stay CWCAM’s “mortgage foreclosure (including any advertising in furtherance thereof) pending final adjudication of this action.” (Opp. at 23). There is no support for PSW’s request, PSW has not sought any form of injunctive relief against CWCAM, and there is no authority supporting a state court enjoining or staying a federal court judgment. See In re Rehab. of Frontier Ins. Co., 27 A.D.3d 274, 275, 813 N.Y.S.2d 50, 52 (1st Dep’t 2006) (holding that “New York courts must give full faith and credit to a federal court judgment”); Union Commerce Leasing Corp. v. Kanbar, 155 A.D.2d 396, 396, 548 N.Y.S.2d 22, 22 (2d Dep’t 1989) (rejecting as impermissible a collateral attack made in a New York state court on a federal court judgment). See also N.Y. State Comm’r of Corr. v. Gulotta, 194 A.D.2d 540, 541, 598 N.Y.S.2d 547, 548 (2d Dep’t 1993) (noting that “Supremacy Clause considerations require a State court to respect Federal court judgments”). CWCAM has a judgment in the amount of $3,667,000,000 and an order directing foreclosure by the United States District Court for the Southern District of New York.
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Senior Lenders.”14 Supp. Hundertmark Aff. ¶ 5. While CWCAM investigated the position, it
rejected the greenmail approach.
Mr. Ashner asserts that CWCAM’s offer to purchase the loans was rejected by all of the
Mezzanine 1-3 holders. This is simply not true. Counsel for CWCAM indicated to Steven
Ostrow, an attorney representing the Mezzanine 1-3 holders, that CWCAM was going to “pass
and will not be purchasing the mez 1-3 position”:
The Trust, however, is very concerned that your clients would consider selling their positions to an individual/entity who they know to be acquiring the mez 1-3 position with the objective of attacking/undermining the rights and remedies of the Trust as Senior Lender. Please ask your clients to consider their actions carefully as the Trust will vigorously defend its rights under the intercreditor agreement.
Supp. Hundertmark Aff., Ex. A. In response to Mr. Cross’ email, Mr. Ostrow wrote:
We are disappointed with CW’s abrupt withdrawal. We had explained that we were not representing 100% of the senior mezz debt stack and that we did not have the entire debt stack on board yet. We disagree and take issue with the remainder of your email . . . .
Id. (emphasis added). Thus, PSW’s portrayal of events even as to this extraneous fact is
inaccurate.
CONCLUSION
For the reasons set forth herein and in CWCAM’s opening brief, Plaintiffs respectfully
request that this Court grant their motion for a preliminary injunction and award Plaintiffs such
other and further relief that this Court deems just and proper.
14 Although no disclosure was made to CWCAM during the initial approach, in the conversation that Mr. Ashner references in his Affidavit, he suggested that he did not want to sell his 9% interest in the loans while the holders of the other 91% were anxious to sell. Supp. Hundertmark Aff. ¶ 4.
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Dated: New York, New York August 31, 2010
Respectfully submitted,
VENABLE LLP
By: Gregory A. Cross (pro hac vice)
David E. Rice Colleen M. Mallon (pro hac vice)
750 East Pratt Street, Suite 900 Baltimore, Maryland 21202 Telephone: (410) 244-7400 Michael K. Madden Rockefeller Center 1270 Avenue of the Americas, 25th Floor New York, New York 10020 Telephone: (212) 307-5500 Attorneys for CWCapital Asset Management
LLC, Solely in Its Capacity as Special
Servicer
s/Gregory A. Cross