Opinion
No. 602108/09.
2011-02-2
DONERAIL CORPORATION N.V., Plaintiff, v. 405 PARK LLC, Defendant.
Michael Charles Lynch, William C. Heck, Seunghwan Kim, Damaris M. Diaz, Joel A. Hankin, for Donerail Corporation N.V. Stephen B. Meister, Kevin A. Fritz, Christopher J. Major, Remy J. Stocks, for 405 Park LLC.
Michael Charles Lynch, William C. Heck, Seunghwan Kim, Damaris M. Diaz, Joel A. Hankin, for Donerail Corporation N.V. Stephen B. Meister, Kevin A. Fritz, Christopher J. Major, Remy J. Stocks, for 405 Park LLC.
Michael Charles Lynch, for Two Riverway Holdings, LLC.
SHIRLEY WERNER KORNREICH, J.
These actions arise out of a purchase and sale agreement (the Agreement) concerning real property located at 405 Park Avenue, Manhattan (the Property), between Donerail Corporation N.V. (Donerail or Seller) and 405 Park LLC (405 Park or Purchaser). On July 8, 2009, Donerail brought an action against 405 Park asserting claims for breach of contract and breach of the implied covenant of good faith and fair dealing (Seller's Action). Then, on July 16, 2009, 405 Park brought an action against Donerail asserting claims for: (1) breach of contract; (2) foreclosure of common law contract vendee's lien on the Property; and (3) imposition of a constructive trust upon and sale of a certain Houston property owned by Two Riverway Holdings, LLC (Riverway), an affiliate of Donerail (Purchaser's Action). Riverway, the other defendant in this action, allegedly acquired the Houston property by using Purchaser's down payment on the Property. Donerail counterclaimed for breach of contract and breach of the implied covenant of good faith and fair dealing.
405 Park now moves for summary judgment on its breach of contract and foreclosure claims. Donerail opposes and cross-moves for summary judgment on its claims, and 405 Park opposes.
I. Background
On June 11, 2007, 405 Park agreed to buy the Property for $178,500,000. See Banyasz Aff., Exh. A, § 1.3. The closing was scheduled for January 15, 2008, at the law offices of Donerail's counsel, Kelley Dry & Warren LLP (Kelley Dry). Id. § 4.1. Pursuant to the Agreement, 405 Park deposited $38,550,000 “Earnest Money” in escrow with Kelley Dry as a down payment for the Property (the Deposit). Id. § 1.5.
An August 10, 2007 amendment to the Agreement (the First Amendment) adjourned the closing to March 3, 2008. See Banyasz Aff., Exh. C. On October 5, 2007, the Agreement was further amended (the Second Amendment) to adjourn the closing to September 30, 2008. See Banyasz Aff., Exh. D. The Second Amendment also increased the down payment by $2,410,000 (Deemed Additional Deposit). See Id. §§ 2(d)-(e). The closing was adjourned a third time to May 15, 2009 by an August 27, 2008 amendment (the Third Amendment). See Banyasz Aff., Exh. F. On May 15, 2009, 405 Park adjourned the closing, one last time, to June 29, 2009. Donerail “grant[ed] the adjournment” but declared that “timing was of the essence with respect to Purchaser's obligation to close” on June 29, 2009. See Banyasz Aff., Exh. G. The closing never occurred.
On June 29, 2009, representatives from both parties met at Kelley Dry's offices, but the closing was not consummated. The parties offer different explanations for the failure. Donerail contends 405 Park refused to pay the balance of the purchase price, because the Property's value fell by approximately $92 million from the time of Agreement to the time of closing. Barry Aff. ¶ 28. In making this argument, Donerail calculates the Property's immediate resale value and relies on figures reflecting the real estate market seven months prior to the date of the closing. See Banyasz Reply Aff. ¶ 6.
405 Park claims that it was ready, willing, and able to pay the balance of the purchase price to protect its Deposit. It contends that the closing did not occur because Donerail failed to deliver the quality of property title required by the Agreement. More particularly, 405 Park claims that Donerail did not comply with its obligation under Section 2.2 of the Agreement “to pay, discharge, or remove of record,” on or prior to the closing, a securitized mortgage on the Property in the principal amount of approximately $25,000,000 (the Existing Mortgage), and failed to deliver a deed conveying “insurable title” as required by Section 4.2(a) of the Agreement.
A transcript of the closing is submitted. It shows that, at various times, Stephen B. Meister (Meister), counsel for 405 Park, represented that Purchaser was “ready, willing, and able to close.” Meister, however, also stated that he was “not going to wire money [the balance of the purchase price], when there is a 25 million dollar mortgage [the Existing Mortgage] against the property .” Fulton Aff., Exh. N at 74:17–19. Donerail contends, and 405 Park does not dispute, that the Existing Mortgage was disclosed to 405 Park in the Title Report. Additionally, the closing transcript contains the following statements by Donrail's counsel, Thomas B. Kinzler (Kinzler) and Karyn Fulton (Fulton):
Kinzler: We are prepared to hand the title free and clear. You tell me you [Purchaser] are prepared to fund, which quite frankly, I will accept at face value for the moment. So why don't we just get in line with our respective financial banks and fund. Fulton Aff. Exh. N at 65:19–24.
* * * *
Kinzler: We are prepared to pay off that mortgage [the Existing Mortgage]. We are prepared to get the satisfaction today. Fulton Aff. Exh. N at 74:10–12.
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Kinzler: We are willing to do it [pay off the Existing Mortgage] simultaneously [with Purchaser paying the balance of the purchase price]. Fulton Aff. Exh. N at 76:19.
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Kinzer: I am telling you, you want to hold back the amount of the mortgage [the Existing Mortgage], hold back. Fulton Aff. Exh. N at 77:2–4.
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Fulton: Hold back twice the amount of the mortgage [the Existing Mortgage]. Fulton Aff. Exh. N at 77:5–6Meister rejected these offers, responding that while “you [Seller] are saying you are going to pay off the mortgage, you are not. And you can't. And I am not going to give you 130 million dollars.” Fulton Aff. Exh. N at 75:1–4. Meister later explained his position by adding: “How do I know that the mortgage is repayable? Quite frankly we are not willing to put up money for you [to] walk out [of] the room and you not fund it.” Fulton Aff. Exh. N at 75:8–12.
The Existing Mortgage secured repayment of a debt evidenced by a promissory note from Donerail (Borrower) to Prudential Mortgage Capital Company LLC (Lender). See Meister Aff. Ex. M, Section 1 .03. The terms of the promissory note controlled both the repayment of the debt and the release of the Property from the Existing Mortgage. The debt evidenced by the promissory note was pre-payable. See Meister Aff. Ex. M, Sections 1.02(b) and “Definitions”: “Lock-out Period.” However, the Property could not be “released” from the Existing Mortgage by pre-paying the debt. Release required a so-called “defeasance” of the Existing Mortgage. See Meister Aff. Ex. M, Section 3.01–3.04. Defeasance, in turn, involved payment by Donerail to Lender of a certain sum of money (the “Defeasance Deposit”). See Meister Aff. Ex. M, Sections 3.01(d). Lender would use the money to purchase substitute collateral (the “Defeasance Collateral”), which would consist of U.S. Treasury Bills (the Defeasance Securities). Id. The Defeasance Securities would produce income to pay the debt in accordance with the terms of the promissory note. See Meister Aff. Ex. M, Section 3.01(f)(v). The Property would be “released” from the Existing Mortgage in exchange for the creation of a new, first priority mortgage in the Defeasance Securities. See Meister Aff. Ex. M, Sections 3.01(e), 3.04. Under the promissory note, Donerail was entitled to the release of the property from the Existing Mortgage upon payment of the Defeasance Deposit and delivery of certain specified documents to Lender. See Meister Aff. Ex. M, Sections 3.01–3.04.
The mechanics of the defeasance transaction in the case are complicated but important. Fidelity Title Insurance Company (Fidelity) was to act as an escrow agent for the transaction. See Meister Aff. Exh. T. In that capacity, Fidelity received from Lender a “Satisfaction of Mortgage” and a UCC 3 Termination Statement that would release the Property from the Existing Mortgage. See Meister Aff. Exh. S. Lender also designated the Defeasance Securities that were to be used as substitute collateral. Donerail, in turn, through Commercial Defeasance, LLC (Commercial Defeasance) purchased the Defeasance Securities on credit for $27,743,368.74. Barry Aff. ¶ 40. As part of the transaction, Commercial Defeasance was to transfer the Defeasance Securities to a “Securities Intermediary,” Wells Fargo Bank, N.A. (Wells Fargo), in return for a $27,743,368.74 payment. See Meister Aff. Exh. T. Wells Fargo was to receive the funds from Fidelity. See id. Fidelity, in turn, was to receive the funds, on the day of the closing, from Donerail. Donerail claims that the $27,743,368.74 payment for the Defeasance Securities would constitute “payment” of the Existing Mortgage and entitle Donerail to its discharge. Barry Aff. ¶ 40.
Even though Donerail claims that it offered to wire $27,743,368.74 to Fidelity on the day of the closing, it, ultimately, never wired the funds. According to Donerail, wiring the funds would have been futile because 405 Park refused to pay the balance of the purchase price. The Defeasance Securities were later sold in the open market at a $402,982.25 loss to Donerail. Donerail maintains that 405 Park is liable for this loss because it forced Donerail to purchase the Defeasance Securities on credit even though 405 Park had no intention to close.
The Existing Mortgage was of record on the day of the closing, and there is evidence that it would continue to be of record for another day after the closing, even if Donerail paid for the Defeasance Securities. See Meister Aff., Exh. R. Donerail provides evidence, in the form of an affidavit from a commercial defeasance expert, that “title insurance companies regularly issue title insurance, without exception for a mortgage, under these circumstances.” See Ahern Aff. ¶ 9. Moreover, counsel averred that Donerail received assurances that “Fidelity would insure title to the property ... without exception for the [Existing Mortgage].” Fulton Aff. ¶ 32. Thus, Donerail claims that it tendered at closing, a deed conveying “insurable title” to the Property as required by Section 4.2(a) of the Agreement.
II. Discussion
A motion for summary judgment is granted only if no material issues of fact exist. Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 325, 508 N.Y.S.2d 923, 501 N.E.2d 572 (1986). The moving party must make a prima facie showing that there are no material issues of fact to be tried. Id. at 324, 508 N.Y.S.2d 923, 501 N.E.2d 572. Failure to make such a showing requires denial of the summary judgment motion, regardless of the sufficiency of the opposing party's evidence. Ayotte v. Gervasio, 81 N.Y.2d 1062, 1063, 601 N.Y.S.2d 463, 619 N.E.2d 400 (1993); see also Bray v. Rosas, 29 A.D.3d 422, 815 N.Y.S.2d 69 (1st Dept 2006). However, once the movant meets the initial burden, the burden shifts to the party opposing the motion, who must establish, through admissible evidence, that there are disputed material issues of fact to be resolved at a trial. CPLR 3212(b); Zuckerman v. City of New York, 49 N.Y.2d 557, 562, 427 N.Y.S.2d 595, 404 N.E.2d 718 (1980). The court examines the evidence submitted by the parties in the light most favorable to the party opposing the motion. Martin v. Briggs, 235 A.D.2d 192, 663 N.Y.S.2d 184 (1st Dept 1997). The court must deny the motion if it has any doubt as to the existence of a material issue of fact. Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223, 231, 413 N.Y.S.2d 141, 385 N.E.2d 1068 (1978). A. 405 Park's Motion
“The construction of a plain and unambiguous contract is for the court to pass on, and ... circumstances extrinsic to the agreement will not be considered when the intention of the parties can be gathered from the instrument itself.” West, Weir & Bartel, Inc. v. Mary Carter Paint Co., 25 N.Y.2d 535, 540, 307 N.Y.S.2d 449, 255 N.E.2d 709 (1969). A provision is unambiguous on its face if it is reasonably susceptible of only one meaning. White v. Continental Casualty Co., 9 N.Y.3d 264, 267, 848 N.Y.S.2d 603, 878 N.E.2d 1019 (2007). “[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.” Id. The parties are bound by the clear and unambiguous language of their contract. CIT Group/Business Credit, Inc. v. Walentas, 28 A.D.3d 224, 813 N.Y.S.2d 370 (2006).
1. The Deposit
Section 2(a) of the Second Amendment provides that “[t]he Earnest Money [the Deposit] is non-refundable to Purchaser except as provided in Sections 2.2, 6.2 and 7.2 of the Agreement and in Section 2(d) [of the Second Amendment].” [emphasis supplied] See Banyasz Aff., Ex. D. 405 Park claims that it is entitled, as a matter of law, to a refund of the Deposit. The court disagrees.
Even if Purchaser is correct that the default rule in New York is that “buyer is entitled to the return of its down payment” where “the seller could not or would not convey title in accordance with the purchase agreement,” here, the return of the Deposit is governed by an express provision in the purchase agreement which trumps the default rule.
Section 2.2 of the Agreement
Section 2.2 entitles 405 Park to the Deposit, only if 405 Park terminates the Agreement upon Donerail's election not to cure or inability to cure “New Objections” to the title within sixty days of the closing. Section 2.2 defines “New Objections” as “objections to title not disclosed in the Title Report or the Survey that are not Permitted Exceptions.” See Banyasz Aff., Ex. D. The only title objection asserted in 405 Park's complaint is the Existing Mortgage. However, the parties do not dispute that the Existing Mortgage was disclosed in the Title Report. See Costello Associates v. Standard Metals Corporation, 99 A.D.2d 227, 229, 472 N.Y.S.2d 325 (1st Dept 1984) (on summary judgment motion facts appearing in movant's papers which opposing party does not controvert are deemed admitted). Since 405 Park's right to recover the Deposit under Section 2.2 is triggered only by Donerail's election not to cure or inability to cure a “New Objection,” it cannot be triggered by the Existing Mortgage, which, undisputably, was not a “New Objection.” Hence, Section 2.2 does not entitle 405 Park to the Deposit.
Section 7.2 of the Agreement
Nor does Section 7.2 entitle Purchaser to the Deposit. Section 7 .2 provides that “[i]n the event of a major loss or damage” to the Property, “the Earnest Money [the Deposit], together with all interest earned thereon, if any, shall be returned to Purchaser,” if certain other conditions are satisfied. There are no allegations by either party that the Property suffered a major loss or damage in this case. Consequently, 405 Park cannot recover the Deposit under Section 7.2.
Section 6.2 of the Agreement and Section 2(d) of the Second Amendment
Nonetheless, material issues of fact exist. Section 6.2, titled “Default by Seller” provides:
[i]n the event that Seller fails to consummate the transactions contemplated by this Agreement for any reason other than Purchaser's default or the permitted termination of this Agreement by Seller or Purchaser as herein expressly provided, Purchaser shall be entitled, as its sole remedy, [to elect] to receive the return of the Earnest Money [the Deposit] together with all interest earned thereon .... [emphasis supplied] See Banyasz Aff., Ex. A.
A parallel provision in Section 6.1, titled “Default by Purchaser” provides:
[i]n the event that Purchaser fails to consummate the transactions contemplated by this Agreement for any reason other than Seller's default or the permitted termination of this Agreement by Seller or Purchaser as herein expressly provided, Seller shall be entitled, as its sole remedy, to terminate this Agreement and receive the Earnest Money [the Deposit], together with any interest earned thereon .... [emphasis supplied] See Banyasz Aff., Ex. A.
Section 2(d) of the Second Amendment reaffirms the protections to 405 Park contained in Section 6.2:
[i]f the Closing does not occur for any reason other than Purchaser's default, then the Earnest Money [the Deposit], plus the Deemed Additional Deposit (as defined in Section 2(e) below), plus the Applicable Imputed Interest Amount (as hereinafter defined), if any (collectively “The Outstanding Deposit”), shall be paid to Purchaser .... [emphasis supplied] See Banyasz Aff ., Ex. D.
It is undisputed that the closing did not occur in this case. Under Sections 6.2 and 2(d), 405 Park would reacquire the Deposit only if the closing did not occur “for any reason other than Purchaser's default.” The Agreement does not define “default,” and, therefore, the court assigns “default” its ordinary meaning—failure to perform a contractual obligation. Black's Law Dictionary 376 (4th ed 1979). Sections 4.2 and 4.3 of the Agreement define, respectively, Donerail's and 405 Park's obligations at closing, and Section 4.1 states that “the performance of [these] obligations shall be concurrent conditions.”
“[C]oncurrent conditions are in legal effect mutual conditions precedent.” Williston on Contracts § 43:31. “[I]f neither party performs or tenders performance, the duty of neither party becomes due under the contract, and neither party can be in breach of contract [default], despite the fact that each party has failed to perform as promised.” Id.; see also Ilemar Corp. v. Krochmal, 44 N.Y.2d 702, 703, 405 N.Y.S.2d 444, 376 N.E.2d 917 (1978) (purchaser must tender performance and demand good title to place vendor of realty in default); Gargano v. Rubin, 200 A.D.2d 554, 555, 606 N.Y.S.2d 314 (2d Dept 1994) (where contract requires seller to deliver insurable title, burden of producing insurable title is a condition precedent to seller holding purchaser in default).
“[I]f the parties meet as agreed, and one of them, with the objectively apparent ability to do so, offers to perform if the other will simultaneously render the return performance, but the other refuses to do so, the refusal would constitute a breach of the contract [default].” Williston on Contracts § 43:31; Restatement (Second) Contracts § 238, illus. 2. “Actual performance is not necessary; what is required in order to satisfy the constructive condition is simply an offer of performance, made under circumstances that would lead a reasonable person in the position of the other party to believe that performance will be forthcoming.” Williston on Contracts § 43:31.
405 Park claims that “while a seller and buyer's closing performances are concurrent ... there is a definite sequencing to their performances ... [t]hat ... requires that the seller make a conforming tender prior to the buyer becoming obligated to tender the purchase price.” [emphasis supplied] Purchaser Mem. at 15–16 ( citing Gindi v. Intertrade International Ltd., 12 Misc.3d 1182A * 4 (Sup Ct N.Y. County 2006) aff'd 50 A.D.3d 575, 856 N.Y.S.2d 104 (1st Dept 2008)). This statement of the law is only partially correct and, as a result, misleading. Gindi, the case that Purchaser cites in support of its position, also holds that “in order for a purchaser of real property to place a seller in default for failure to provide clear title, the purchaser must first tender performance and demand good title.” [emphasis supplied] Gindi, at *4. Therefore, consistent with this court's statement of the law, Gindi only holds that each party's performance is a condition precedent to the other party's duty becoming due, and, consequently, the other party's default. Gindi does not require a particular “sequence” of performances, let alone that Seller perform its contractual obligations first.
The law on concurrent conditions, thus, delineates four mutually exclusive and jointly exhaustive causes for a failure to close a real estate transaction. Those are: (1) only the seller defaults (Category 1); (2) only the purchaser defaults (Category 2); (3) neither the seller nor the purchaser defaults (Category 3); and (4) both the seller and the purchaser default (Category 4).
Here, 405 Park is entitled to the Deposit under Sections 6.2 and 2(d) only if this were a Category 1 case, where the closing did not occur only because of Donerail's default. The Agreement does not entitle 405 Park to the Deposit in a Category 3 or Category 4 case—where neither party defaults, or where both parties default—because Sections 6.2 and 2(d) do not address those cases. The phrase “for any reason other than Purchaser's default” in Sections 6.2 and 2(d) should be interpreted consistently with the parallel phrase in Section 6.1—“for any reason other than Seller's default.” If one of these parallel phrases is interpreted to refer to the Category 3 or Category 4 case, so should the other. They cannot, however, both refer to a Category 3 or Category 4 case because if they did, the respective provisions (6.2/2(d) and 6.1) would give rise to a contradiction. That is, Sections 6.2 and 2(d) would require that in a Category 3 case, the deposit go to Purchaser, while Section 6.1 would require that in the same case, the deposit go to Seller. The same would be true with respect to a Category 4 case.
A Category 3 case would occur where the time for performance under the contract has expired and neither party has performed or offered to perform its closing obligations. In that case, neither party's duty to perform becomes due as a result of the other party's failure to perform, or offer to perform its obligations. Consequently, the closing would not occur, and, yet, neither party would be in default. By contrast, in a Category 4 case, the closing would not occur because both parties offer to perform but neither performs by the time the deadline for performance expires. In that case, each party's offer to perform renders due the other party's duty to perform and by failing to perform both parties are in default.
The first part of Section 2(d) confirms that 405 Park is not entitled to the Deposit in a Category 4 case. It states, without qualification as to Seller's default, that “[i]f Purchaser defaults in its obligation to close under the Agreement, in addition to Seller's remedies under Section 6.1 of the Agreement, Purchaser shall pay to Seller the amount of Pre–Effective Date Interest,” which is elsewhere defined in the Agreement. Seller's remedies under Section 6.1 include retention of the Deposit. The reference to Section 6.1 in the first part of Section 2(d) also confirms that Section 2(d) did not amend Seller's rights under Section 6.1 other than to expand them by adding Seller's entitlement to “Pre–Effective Date Interest.” Purchaser's rights under Section 2(d) therefore, should be interpreted to be in harmony with the language of Section 6.1.
The court interprets the phrase “for any reason other than Purchaser's default” in Sections 6.2 and 2(d) to mean “only for reason of Seller's default” (Category 1 case). By the same token, the court interprets the phrase “for any reason other than Seller's default” in Sections 6.1 to mean “only for reason of Purchaser's default” (Category 2 case). These readings preserve the consistency between Sections 6.2 and 2(d) on the one hand and Section 6.1 on the other. They also are consistent with, and expressive of, the titles of Sections 6.1 and 6.2, respectively, “Default by Purchaser” and “Default by Seller.” In sum, Sections 6.2 and 2(d), entitle 405 Park to the deposit only where the closing does not occur only by reason of Donerail's default.
For the sake of completing the analysis, Section 6.1 entitles Seller to the Deposit where only Purchaser defaults (a Category 2 case). Section 2(a) of the Second Amendment also entitles Seller to the Deposit in all cases where the Deposit is non-refundable to Purchaser. Under Section 2(a), the Deposit is non-refundable to Purchaser except as provided in Sections 2.2, 7.2, 6.2 of the Agreement and Section 2(d) of the Amendment. The court has already ruled, as a matter of law, that Sections 2.2 and 7.2 do not entitle Purchaser to the Deposit in this case. Hence, the Deposit is non-refundable to Purchaser except as provided in Section 6.2 of the Agreement and Section 2(d) of the Amendment, which is to say except in a Category 1 case. Since the Deposit is non-refundable to Purchaser except where only Seller defaults (a Category 1 case), Seller is entitled to the Deposit if this were a Category 2, Category 3, or Category 4 case.
A material issue of fact exists as to whether Donerail was in default. To make a prima facie case that Donerail was in default, 405 Park must show that it paid or offered to pay the purchase price “under circumstances that would lead a reasonable person in the position of the [Seller] to believe that performance will be forthcoming.” SeeWilliston on Contracts § 43:31. It is undisputable that 405 Park did not pay the balance of the purchase price “in immediately available wire transferred funds,” as required by Section 4.3 of the Agreement.
An offer to perform a concurrent condition can be contingent on performance by the other party. See Geary v. Dade Development Corp., 29 N.Y.2d 457, 461, 329 N.Y.S.2d 569, 280 N.E.2d 359 (1972). For example, a representation from a mortgagor's attorney to the mortgagee that it was ready to pay the obligation secured by the mortgage in return for release from the mortgage of certain tracts of land, coupled with a representation by the attorney that it possessed the check for the relevant amount, would constitute an offer to perform, even where the attorney did not actually mail the check for the stated amount to the mortgagee. Id. at 459, 461, 329 N.Y.S.2d 569, 280 N.E.2d 359. At various times during the closing, 405 Park's counsel claimed that 405 Park was “ready, willing, and able to close.” However, he also stated that he was “not going to wire money [the balance of the purchase price], when there is a $25 million mortgage against the property.” An issue of fact exists as to whether this declaration was a simple refusal to pay the balance of the purchase price, which is inconsistent with an offer to pay, or rather, a conditional offer to pay provided Donerail perform its obligations under the contract with respect to the $25 million Existing Mortgage.
Moreover, as noted earlier, if Donerail performed or offered to perform its closing obligations, 405 Park would not be entitled to the Deposit, even if it offered to pay the balance of the purchase price.
405 Park fails to make a prima facie showing that Seller defaulted in its obligation to deliver “insurable title” under Sections 4.2(a).
If Seller performed his closing obligations and Purchaser did not pay the balance of the purchase price, Purchaser would be in default and, thus, not entitled to the deposit (Category 2 case). If both Purchaser and Seller offered to perform, but neither actually performed, both parties would be in default, and Purchaser would not be entitled to the deposit (Category 4 case). See notes 4, 5 supra and accompanying text.
Section 4.2(a) provides:
At the Closing ... Seller shall deliver to Purchaser a bargain and sale deed without covenants against grantor's acts (the “Deed”) in recordable form conveying insurable title to the Land and Improvements, subject only to Permitted Exceptions, duly executed and acknowledged by Seller .... [emphasis supplied] See Banyasz Aff., Ex. A.
“Insurable title” is title that a reputable insurance company would insure. Stenda Realty, LLC v. Kornman, 67 A.D.3d 996, 997–99, 889 N.Y.S.2d 639 (2d Dept 2009). Tittle insurance is an indemnity contract the main object of which is to protect against defects in title, other than defects that are excepted by the insurance policy. See Walker Rogge, Inc. v. Chelsea Title & Guaranty Co., 116 N.J. 517, 528, 562 A.2d 208, 214 [1989]. When a seller contracts for insurable title, “he breaches his contract when the title company refuses to insure title unconditionally and without exception .... unless the exceptions are those contemplated by the contract.” Laba v. Carey, 29 N.Y.2d 302, 307–08, 327 N.Y.S.2d 613, 277 N.E.2d 641 (1971)
It is up to the parties to a contract to agree to the kind of title to be conveyed. In the absence of agreement otherwise, a buyer is entitled to a marketable title .... However, by contracting for an insurable title, the parties abrogate the general rule. [emphasis supplied]
Creative Living, Inc. v. Steinhouser, 78 Misc.2d 29, 31, 355 N.Y.S.2d 897 (Sup Ct Bronx County 1974), judgment aff'd, 47 A.D.2d 598, 365 N.Y.S.2d 987 (1st Dept 1975).
Here, the parties contracted for insurable, not marketable, title. 405 Park, however, further contends that even if Fidelity was “willing” to issue an insurance policy on the title without exception for the Existing Mortgage, the “insurable title” provision in Section 4.2(a) required “actual” issuance of the policy. See Purchaser Mem. at 26. That is not the law. If, on the day of the closing, Fidelity was willing to insure title unconditionally and without exception, other than the exceptions contemplated by the Agreement, Donerail complied with its obligation to deliver “insurable title,” under Section 4.2(a). See Stenda Realty, at 997–99, 889 N.Y.S.2d 639;Laba, at 307–08, 327 N.Y.S.2d 613, 277 N.E.2d 641.
Finally, 405 Park argues that Donerail breached Section 2.2 of the Agreement. Section 2.2 provides:
Notwithstanding anything to the contrary contained herein, Seller shall, on or prior to the Closing pay, discharge or remove of record or cause to be paid, discharged or removed of record, at Seller's sole cost and expense, (a) all mortgages ... encumbering the Property (other than Permitted Exceptions)
which are in liquidated amounts and which may be satisfied by the payment of
money .... [emphasis supplied] See Banyasz Aff., Ex. A.
The case law provides:
Where the time for performance on one side is fixed and the contract does not state when performance on the other side is to take place, it will be inferred, unless the nature of the contract or the surrounding circumstances make a contrary inference imperative, that the one performance is to be rendered at the same time as the other, and concurrent conditions will be implied. [citations omitted]
Aviation Development Co. PLC v. C & S Acquisition Corp., 1999 LEXIS 3627 *34 (SDNY 1999); see also Ilemar Corp., 44 N.Y.2d 703 (to place vendor of realty in default for a title defect, purchaser must first tender performance himself and demand good title).
405 Park's payment of the purchase price was fixed as the time of closing. By contrast, under Section 2.2, the time for Donerail's performance was left open as “on or before Closing.” Therefore, performances by both parties were concurrent conditions unless “the nature of the contract or the surrounding circumstances make a contrary inference imperative.” See Aviation Development, at *34. The “nature of the contract” supports the inference that Donerail and 405 Park were to perform concurrently since both conditions could be achieved at closing. As discussed above, “[a]ctual performance [of a concurrent condition] is not necessary; what is required ... is simply an offer of performance, made under circumstances that would lead a reasonable person in the position of the other party to believe that performance will be forthcoming.” Williston on Contracts § 43:31. As also discussed, an offer to perform a concurrent condition can be conditional on performance by the other party. See Geary, 29 N.Y.2d 461.
405 Park fails to make a prima facie showing that Donerail defaulted on its obligation under Section 2.2 to “pay, discharge or remove of record or cause to be paid, discharged or removed of record” the Existing Mortgage “on or prior” to the closing. At various times during the closing, counsel for Donerail offered to pay the Existing Mortgage on the condition that 405 Park, simultaneously, pay the balance of the purchase price. See Fulton Aff. Exh. N at 65:19–24;74:10–12; 76:19; 77:2–4; 77:5–6. 405 Park, however, contended, both during the closing and in its moving papers, that despite these “offers” to pay, actual performance was not “reasonably forthcoming” because the Existing Mortgage was not “payable.” See Fulton Aff. Exh. N at 75:1–4; Fulton Aff. Exh. N at 75:8–12. 405 Park argues that Donerail could only pay for the Defeasance Securities, which would serve as substitute collateral for the Existing Mortgage and that such payment would not be tantamount to “payment of the mortgage” under Section 2.2. 405 Park, therefore, argues that the “pay” option, under Section 2.2, was not available to Donerail whose only choice was to “remove of record” the Existing Mortgage on the day of the closing. This argument lacks merit.
The Existing Mortgage was “payable.” “A mortgage is an interest in land providing security for the performance of a duty or the payment of a debt.” [citations omitted] Moon v. Moon, 6 A.D.3d 726, 797, 775 N.Y.S.2d 561 (3d Dept 2004). Technically, it is the debt (principal and interest) that is paid; the security interest (mortgage) in the collateral is discharged. See N.Y. Real P § 275. In an ordinary case, a sufficient condition for the discharge is full payment of the principal and interest of the debt secured by the mortgage. Id. A mortgage can, therefore, be “paid” only in the colloquial sense that the borrower satisfies the conditions that entitle him to a discharge. Discharge of a mortgage is evidenced by a “certificate of discharge,” (in this case, the “Satisfaction of Mortgage”) which can, then, be recorded. See N.Y. Real P §§ 275, 321. “Paying,” “discharging,” and “removing of record” a mortgage are distinct legal concepts.
Section 2.2 requires that Donerail “pay, discharge or remove of record” the Existing Mortgage or cause the occurrence of the same. [emphasis supplied] See Banyasz Aff., Ex. A. The court cannot interpret the term “pay” to give Donerail the same option with respect to the Existing Mortgage as the terms “discharge” and/or “remove of record,” because the Agreement uses different terms and because these terms have distinct legal meanings. NFL Enterprises LLC v. Comcast Cable Communications LLC, 51 A.D.3d 52, 60–61, 851 N.Y.S.2d 551 (1st Dept 2008) (use of different terms in same agreement strongly implies that words are to be accorded different meanings). To “pay” the Existing Mortgage under Section 2.2, therefore, means what “paying” a mortgage generally means—the borrower satisfying the conditions that entitle him to a discharge.
The Existing Mortgage was “payable” because the satisfaction of certain conditions entitled Donerail, as borrower, to a discharge. The Existing Mortgage secured repayment of a debt evidenced by a promissory note from Donerail (Borrower) to Prudential (Lender).
Under the promissory note the conditions entitling Donerail to a discharge required the so-called “defeasance” transaction. This transaction, like the ordinary discharge of a mortgage through payment of the underlying debt, involved payment by Donerail to Lender of a certain sum of money—the Defeasance Deposit. Unlike in the ordinary case, Lender would not keep the money in satisfaction of the debt but use it to purchase substitute collateral—the Defeasance Securities. Id. The Existing Mortgage in the Property would be discharged in exchange for the creation of a new mortgage in these securities. Stated differently, the security interest (mortgage) would shift from the Property to the securities, thus releasing the Property from the Existing Mortgage. Donerail was entitled to this shift and discharge upon payment of the Defeasance Deposit and delivery of certain specified documents to Lender. In other words, contrary to what 405 Park claims, the Existing Mortgage was “payable” and by offering to pay for the Defeasance Securities, Donerail offered to pay the Existing Mortgage. In sum, 405 Park fails to make a prima facie case that Donerail was in default of its obligations under Section 2.2, and its motion for summary judgment seeking a return of the Deposit is denied.
Contrary to 405 Park's allegations, the debt evidenced by the promissory note was pre-payable. See Meister Aff. Ex. M, Sections 1.02(b) and “Definitions”: “Lock-out Period.” The Existing Mortgage, however, could not be discharged and the property could not be released by prepaying the debt. See Meister Aff. Ex. M, Section 3.04. Nevertheless, it does not follow that the mortgage was not “payable.” Like every mortgage, the Existing Mortgage was “payable” by satisfying the conditions entitling the borrower to a discharge.
2. The Imputed Interest and the Deemed Additional Deposit
Under Section 2(d) of the Second Amendment, if the Closing did not occur “for any reason other than Purchaser's default,” Purchaser is entitled to an “Imputed Interest Amount” (the Imputed Interest)—as later defined by Section 2(d)—and the Deemed Additional Deposit. The court interprets “for any reason other than Purchaser's default” to mean “only for reason of Seller's default.” As discussed previously, 405 Park fails to make a prima facie showing that the closing did not occur only by reason of Donerail's default. Thus, 405 Park's motion for summary judgement seeking the Imputed Interest and Deemed Additional Deposit is denied.
3. Foreclosure
405 Park seeks to recover the Deposit, the Deemed Additional Deposit, and the Imputed Interest by enforcing its alleged “vendee's lien” on the Property through a foreclosure sale. An executed contract for purchase and sale of land confers on the vendee an equitable lien on the land as security for the purchase money it has already paid. See Elterman v. Hyman, 192 N.Y. 113, 122, 84 N.E. 937 (1908). “[W]here the sale contract fails, absent fault of the purchaser, courts in New York will enforce in favor of the purchaser (vendee) a lien on the subject property to the extent of monies paid so that the purchaser may assert his rights in a court of equity to get out of the land what he paid on it.” [emphasis supplied] In re 85–02 Queens Boulevard Associates, 212 B.R. 451, 456 (Bankr Ct E.D.N.Y.1997); see also Rosen v. Calf Creek, LLC, 52AD3d 590, 592 (2d Dept 2008) (where vendor fails to deliver title to property in accordance with contract of sale, and where vendee has right to rescind under contract in event of such default, vendee is entitled to foreclose on his lien against property).
405 Park's motion for summary judgment on its foreclosure claim is denied. Since 405 Park has not demonstrated its right to recover the Deposit, the Deemed Additional Deposit or the Imputed Interest, a fortiori, it is not entitled to a foreclosure sale of the Property. B. Donerail's Motion 1. The Deposit
Donerail is entitled to the Deposit if only 405 Park defaulted, if neither party defaulted, or if both defaulted.
As discussed above, material issues of fact exist as to whether Donerail defaulted. As a result, Donerail's cross-motion for summary judgment that it is entitled to the Deposit and to a dismissal of 405 Park's claims is denied.
See note 5 supra and accompanying text.
2. Pre–Effective Date Interest
Donerail is entitled to “Pre–Effective Date Interest” under Section 2(d) of the Amendment only if 405 Park defaulted on its obligations to close. See Banyasz Aff., Exh. D. 405 Park's closing obligations, however, were concurrent with Donerail's obligations under Sections 2.2 and 4.2. If Donerail did not perform or offer to perform its obligations under these sections, 405 Park's closing obligations did not become due, and, thus, 405 Park did not default even if it failed to perform as promised. See Williston on Contracts § 43:31; see also Gargano, 200 A.D.2d 555 (where contract requires seller to deliver insurable title, burden of producing insurable title is condition precedent to seller holding purchaser in default).
Donerail has succeeded in making a prima facie case that it offered to perform its obligations under Section 2.2, because it offered to “pay” for the Defeasance Securities. 405 Park's claim that the Satisfaction of Mortgage would not have been released from escrow and recorded until after the closing is irrelevant. Section 2.2 did not require actual release and recording of the Satisfaction of Mortgage on the day of the closing. See Banyasz Aff., Exh. A. It only required that Donerail “pay” the Existing Mortgage, which, as explained, meant Donerail satisfying the conditions for its discharge.
Additionally, 405 Park's argument that payment for the Defeasance Securities did not entitle Donerail to a discharge is without merit. According to 405 Park, further conditions attached to the release of the Satisfaction of Mortgage held in escrow by Fidelity. These alleged “conditions” are contained in two separate documents: the promissory note from Donerail (Borrower) to Prudential (Lender) and a letter from Lender's counsel, Bryan Cave LLP, to Fidelity. See Meister Aff., Exhs. M, S. The conditions contained in the promissory note were indeed conditions precedent to the Donerail's entitlement to a discharge, but 405 Park does not allege which, if any, of these conditions were not satisfied or offered to be satisfied by Donerail at the closing. See Meister Aff., Exh. M § 3.01(a)-(b), (e)-(f) (listing conditions). The alleged “conditions” contained in Bryan Cave's letter to Fidelity were administrative instructions concerning the mechanics of Fidelity's receipt and disbursement of Donerial's payment for the Defeasance Securities and release of the Satisfaction of Mortgage. They were not conditions precedent to Donerail's entitlement to the discharge. Once the conditions set out in the promissory note were satisfied, Donerail was entitled to a discharge of the Existing Mortgage. Bryan Cave's letter to Fidelity is irrelevant. See Meister Aff., Exh. M, § 3.04.
A material issue of fact, however, exists as to whether Donerail performed or offered to perform its obligations under Section 4.2(a). The Existing Mortgage was of record on the day of the closing, and there is evidence that it would continue to be of record for another day after the closing, even if Donerail paid for the Defeasance Securities. Donerail provides evidence that “title insurance companies regularly issue title insurance, without exception for a mortgage, under these circumstances” and that Donerial received assurances that “Fidelity would insure title to the property ... without exception for the [Existing Mortgage].” See Ahern Aff. ¶ 9; Fullton Aff. ¶ 32. In the absence of testimony by Fidelity, however, that it was willing to issue an insurance policy without exception for the Existing Mortgage, Donerail is not entitled to a summary finding that it delivered insurable title at the closing. See e.g. Conklin v. Davi, 76 N.J. 468, 601–02, 388 A.2d 598 [1978] (condition of insurable title satisfied where vice-president of title insurance company testified that company would insure title, even though title was imperfect of record). Donerail's motion for summary judgment seeking “Pre–Effective Date Interest” under Section 2(d) of the Second Amendment is, therefore, denied.
3. The Covenant of Good Faith and Fair Dealing
The court denies Donerail's motion for summary judgment on its claim for breach of the covenant of good faith and fair dealing. Donerail argues that 405 Park forced it to purchase the Defeasance Securities even though Purchaser had no intention of consummating the Agreement. The parties do not dispute that Donerail later sold the Defeasance Securities at a $402,982.25 loss. This loss is at issue in this claim.
“[I]n all contracts, there exist[s] an implied covenant of good faith and fair dealing. It is implied that neither party will do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” [citations omitted] Pernet v. Peabody Engineering Corp., 20 A.D.2d 781, 782, 248 N.Y.S.2d 132 (1st Dept 1964). The covenant will be enforced, however, “only to the extent it is consistent with the provisions of the contract.” Phoenix Capital Investments LLC v. Ellington Management Group, LLC, 51 A.D.3d 549, 550, 859 N.Y.S.2d 46 (1st Dept 2008). Good faith and fair dealing require a party “to speak” if it does not intend to perform an express or implied promise under the agreement. See Barlow v. Scott, 24 N.Y. 40, 42 (1861).
The court denies Donerail's motion for summary judgment on its claim for breach of the covenant of good faith and fair dealing because a material issue of fact exists as to whether 405 Park intended to consummate the Agreement. Intent “is generally an issue of fact to be established at a hearing or trial.” See Shaw v. Shaw, 97 A.D.2d 403, 504, 467 N.Y.S.2d 231 (1st Dept 1983). The emails exchanged by various investors in 405 Park are relevant but do not establish, as a matter of law, 405 Park's lack of intent to close. Donerail's President avers that “no rational investor would consummate the purchase of the Property ... because the loss it would incur in doing so [$92 million] far exceeded the loss that it would incur if it walked away [under $40 million].” In doing so, he relies on figures reflecting the real estate market seven months prior to the date of the closing. The evidence concerning the real estate market in the following months is relevant but insufficient for inferring that the Property's value decreased or remained the same. Moreover, the alleged “loss” that 405 Park would have incurred is measured by the Property's immediate resale value. This would not be the relevant measure absent a showing that 405 Park's business plans contemplated the Property's immediate resale. Accordingly, it is
ORDERED that 405 Park's motion for summary judgment and Donerail's cross-motion for summary judgment are denied in their entirety.