On January 18, 2024, New York’s Appellate Division rejected a junior mezzanine lender’s contention that it was fraudulently induced to amend the parties’ intercreditor agreement, because it failed to identify specific misrepresentations or support a duty to disclose. The court strictly applied the terms of the agreement to defeat the junior mezzanine lender’s claims. The court also reversed a preliminary injunction and allowed the senior mezzanine lender to proceed with a U.C.C. foreclosure sale.
The case centers on the project to transform the historic Century Plaza hotel in Century City, California. The project was originally financed by a senior mortgage loan from JPMorgan Chase, a senior mezzanine loan from CDCF IV Century Mezz, LLC, and a $450 million junior mezzanine loan from plaintiff CMB Export Infrastructure Investment Group 48, LP. CDCF sought to amend the parties’ intercreditor agreement to allow Reuben Brothers to acquire part of the senior mezzanine loan. CMB claimed that CDCF concealed that CDCF and Reuben Brothers were simultaneously entering into a side “Participation Agreement” preventing CDCF from selling any of its remaining interest in the senior mezzanine loan without Reuben Brothers’ approval. CMB also alleged that it agreed to allow Reuben Brothers to increase the Senior Mezzanine Loan by $275 million because it expected that the additional funds would be used to complete the project, but instead, they were used to retire debt on the senior mortgage loan, which Reuben Brothers had acquired from JP Morgan Chase. After an evidentiary hearing, the trial court denied the defendants’ motion to dismiss the complaint and granted a preliminary injunction preventing the senior mezzanine lenders from proceeding with a U.C.C. foreclosure sale.
The First Department reversed. On the fraudulent inducement count, it held that CMB’s claim—that it was “led to believe” the additional funds were being advanced in good faith to facilitate project completion, when they were actually part of a “preconceived scheme to bury the project in debt, buy it cheap at a UCC foreclosure sale, and take it over”—failed to identify any specific misrepresentations. On the fraudulent concealment claim, the First Department held that CDCF and Reuben Brothers had no obligation to disclose the transfer restrictions in their Participation Agreement; the intercreditor agreement provided that the relationship between the lenders was solely arm’s length, and the parties did not owe each other fiduciary duties. While the court noted that a duty to disclose “may arise” under the special facts doctrine, it did not apply in this case, where a term sheet shared with CMB disclosed that there would be a participation agreement with unspecified “transfer restrictions,” and CMB did not ask for the agreement or more information.
The First Department also held that CMB’s claim for breach of the implied covenant of good faith and fair dealing should have been dismissed. The claim was predicated on the theory that the Participation Agreement between CDCF and Reuben Brothers deprived CMB of its right under the ICA to acquire an interest in the Senior Mezzanine Loan. The court held that CMB failed to exercise its right to acquire an interest when it had the opportunity; it otherwise needed the Senior Mezzanine lenders’ consent, and the Participation Agreement did not change that requirement.
Finally, the First Department held that the U.C.C. sale should not have been enjoined because, in addition to failing to show a likelihood of success on the merits for the reasons above, CMB’s feared loss of its investment could be compensated in money damages and therefore failed to demonstrate irreparable harm.
The case is CMB Export Infrastructure Investment Group 48, LP v. Motcomb Estates, Ltd., No. 2023-01142 (N.Y. App. Div. Jan. 18. 2024). The plaintiffs is represented by Lewis Brisbois Bisgaard & Smith LLP. The defendants are represented by Fried, Frank, Harris, Shriver & Jacobson LLP. The opinion is available here.
