On June 17, 2024, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a developer’s “loan-to-own” claims against a bridge lender. As we reported in previous editions (here and here), after Georgia-based developer entities affiliated with Stanley Thomas were unable to permanently refinance a loan to build the Wade Park mixed-use project in Texas, the developer obtained bridge financing, in the amount of $83 million (not the $196 million originally sought) from Gamma Real Estate Capital LLC (and affiliates).  The developer remained unable to secure permanent financing and so continued to extend its bridge loan with Gamma.  Eventually, the developer defaulted on a separate loan, resulting in a default of the Gamma loan.  To avoid foreclosure, the developer agreed to a deed-in-lieu transaction in which it retained the ability, for a certain time, to repurchase the property.  The developer was unable to raise the funds, and Gamma acquired full title to the property.

After filing for bankruptcy, the developer filed an 18-count complaint against Gamma and its principal alleging a conspiracy by Gamma to improperly take over the property.  The district court dismissed that complaint but ultimately allowed the developer to re-plead its claim that the deed-in-lieu transaction was an avoidable fraudulent transfer.  The district court then dismissed that claim on the ground that the developer failed to allege that it did not receive “reasonably equivalent value.” The developer appealed, arguing that two appraisals for the property showed it to be worth much more than the outstanding loan balance.  The Second Circuit rejected the argument however, for multiple reasons.  First, the court held that the developer’s appraisal allegations were implausible based on the history of its unsuccessful refinance attempts—from both before and after the developer obtained limited bridge financing from Gamma in an amount far below the alleged appraised value.  Second, the court found that the alleged appraisals were unreliable because they depended on inputs from the developer itself.  Finally, the court held that the deed-in-lieu transaction itself suggested value because it allowed the developer to avoid foreclosure and preserve opportunity to re-acquire the property—an opportunity with value apart from the property itself.  The court thus affirmed the dismissal.

The case is Wade Park Land Holdings, LLC v. Kalikow, No. 23-591 (2d Cir. June 17, 2024).  The developer entities are represented by Stone & Baxter, LLP, RMP LLP, Caplan Cobb LLC, and Slarskey LLC.  Gamma and its affiliates are represented by Kramer Levin Natfalis & Frankel LLP.  The opinion is available here.