A New York state trial court recently granted the motion of plaintiffs Bank of America, N.A. (Bank of America) and U.S. Bank National Association for a preliminary injunction enjoining defendant PSW NYC LLC (PSW) from acquiring or selling certain equity collateral without first paying plaintiffs the outstanding amounts owed to them under a senior loan made in connection with the financing of the acquisition of the residential housing development known as Peter Cooper Village and Stuyvesant Town. In Bank of America, N.A., et al. v. PSW NYC LLC, No. 651293, 2010 WL 4243437 (N.Y. Co. Sept. 16, 2010), the court determined that the Intercreditor Agreement entered into in connection with the loans was unambiguous and that the plain language mandated that the senior lenders be paid in full prior to any acquisition or sale of the collateral.

The Loans

In 2007, Tishman Speyer Development Corp. (Tishman) purchased Peter Cooper Village and Stuyvesant Town (the “Property”) for $5.4 billion. Tishman financed the transaction though a $3 billion Senior Loan and 11 Junior Loans totaling $1.4 billion. The Senior Loan was financed by Tishman through various related entities (the “Borrowers”) that obtained the $3 billion loan from Wachovia Bank, N.A. (Wachovia) and Merrill Lynch Mortgage Lending, Inc. (“Merrill,” and together with Wachovia, the “Senior Lenders”). In connection with that financing, the Borrowers delivered six notes totaling $3 billion (the “Notes”), which were held in a mortgage securitization trust of which the plaintiffs were the trustees. The Borrowers granted the Senior Lenders security interests in the Property.

The $1.4 billion in Junior Loans consisted of 11 mezzanine loans issued by Junior Lenders in exchange for pledges by the Borrowers’ parent companies (the “Junior Borrowers”) of their interests in the Borrowers and their respective general partners. The priority of the Junior Loans was in sequential order with Junior 1 Loan the most senior and Junior 11 Loan the most junior. Junior Loans 1-3 were each in the original principal amount of $100 million. Wachovia and Merrill were the original Junior Lenders on Junior Loans 1-3, among others. Pursuant to separate Pledge and Security Agreements, each Junior Lender was granted a first priority security interest in its corresponding Junior Borrower’s ownership interest in its corresponding subsidiary Borrower or Junior Borrower and that entity’s general partner (Equity Collateral).

In connection with these financings, Wachovia and Merrill, in their capacities as Senior and Junior Lenders, entered into an Intercreditor Agreement.

The Default

On January 8, 2010, the Borrowers defaulted on the Notes. Plaintiff Bank of America, through its Special Servicer CWCapital Asset Management LLC (CWCAM), sent Borrowers a notice of default in which it demanded that the Borrowers pay all outstanding amounts. CWCAM also notified the Junior Lenders of the default which, under the Intercreditor Agreement, the Junior Lenders had the opportunity to cure. None of the Junior Lenders allegedly exercised those cure rights. CWCAM then notified both the Borrowers and the Junior Lenders that, because the default had not been cured, all unpaid debt outstanding under the Notes was accelerated and immediately due. On February 16, 2010, CWCAM, on behalf of the Senior Lenders, filed a complaint in the Southern District of New York seeking foreclosure of the Property. On June 21, 2010, the Southern District of New York entered a Judgment of Foreclosure and Sale of the Property in the amount of $3,666,734,464, which constituted the amount due under the Notes and related Senior Loan documents. Bank of America, N.A., et al. v. PCV ST Owner LP, et al., No. 10-Civ-1178.

Defendant’s Intended Sale of the Equity Collateral

On August 6, 2010, Wells Fargo, as successor to Wachovia, notified the Senior Lenders that it had transferred its interest in Junior Loans 1-3 to PSW, a “Qualified Transferee” under the Intercreditor Agreement. At the same time, PSW executed a “Representation Certificate” agreeing to be bound by the Intercreditor Agreement with respect to Junior Loans 1-3. On August 7, 2010, PSW notified the Senior Lenders that it intended to sell the Equity Collateral at a UCC public sale, and published in The New York Times a “Notice of Public Sale of Collateral” for Junior Loans 1-3, setting a sale date of August 25, 2010. In response, the Senior Lenders requested confirmation from PSW that, pursuant to Section 6(d) of the Intercreditor Agreement, it would cure the Senior Loan default as a condition to any acquisition or transfer of the Equity Collateral. Specifically, Section 6(d) provided:

To the extent that any Qualified Transferee acquires the Equity Collateral pledged to a Junior Lender pursuant to the Junior Loan Documents in accordance with the provisions and conditions of this Agreement (including, but not limited to Section 12 hereof), such Qualified Transferee shall acquire the same subject to (i) the Senior Loan and the terms, conditions and provisions of the Senior Loan Documents and (ii) the applicable Senior Junior Loans and the terms, conditions and provisions of the applicable Senior Junior Loan Documents, in each case for the balance of the term thereof, which shall not be accelerated by Senior Lender or the related Senior Junior Lender solely due to such acquisition and shall remain in full force and effect; provided, however, that (A) such Qualified Transferee shall cause, within ten (10) days after the transfer, (1) Borrower and (2) the applicable Senior Junior Borrowers, in each case to reaffirm in writing, subject to such exculpatory provisions as shall be set forth in the Senior Loan Documents and the related Senior Junior Loan Documents, as applicable, all of the terms, conditions and provisions of the Senior Loan Documents and the related Senior Junior Loan Documents, as applicable, on Borrower’s or the applicable Senior Junior Borrower’s, as applicable, part to be performed and (B) all defaults under (1) the Senior Loan and (2) the applicable Senior Junior Loans, in each case 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.

PSW responded in a letter by calling the Senior Lenders’ statements about Section 6(d) of the Intercreditor Agreement “ludicrous” and stating that Section 6(d) “does not require the payment of the Senior Loan as a condition to a transferee acquiring the Equity Collateral.”

Discussion

Bank of America and U.S. Bank National Association filed a complaint seeking: (i) a declaration of their rights under the Intercreditor Agreement and (ii) injunctive relief preventing PSW from acquiring or selling the Equity Collateral without first paying the outstanding amounts owed to plaintiffs under the Senior Loan and from causing commencement of bankruptcy while the Senior Loan is outstanding. In addition, plaintiffs moved, by order to show cause, for a preliminary injunction enjoining the sale of the Equity Collateral and commencement of bankruptcy.

Likelihood of Success on the Merits

In granting plaintiffs’ motion for a preliminary injunction, the court focused its analysis on the relevant provisions of the Intercreditor Agreement, including Section 6(d). The court explained: “‘[W]here the language [of a contract] is clear, unequivocal and unambiguous, the contract is to be interpreted by its own language’, and the ‘writing should as a rule be enforced according to its terms.’” The court concluded that the Intercreditor Agreement was unambiguous and that “[i]ts plain language obligates PSW to cure all Senior Loan defaults if PSW acquires the Equity Collateral, which includes the $3.6 billion Indebtedness resulting from the Default.” Therefore, as PSW made clear its intention to acquire the Equity Collateral at the UCC sale and not to comply with its obligations under Section 6(d) to cure the Senior Loan default, “plaintiffs have ‘show[n] a likelihood of success on the merits by showing that [their] claims have prima facie merit.’”

The court rejected PSW’s argument that there was no justiciable controversy alleged in the complaint. In its August 2010 letter, PSW made clear that it did not intend to cure the Senior Loan default prior to acquiring the Equity Collateral when it characterized its obligations under Section 6(d) as “ludicrous.” Moreover, it was clear that PSW intended to acquire the Equity Collateral by virtue of its Notice of Public Sale of Collateral published in The New York Times and its formation of six shell entities to act as buyers. Accordingly, the court determined “there is clearly a justiciable controversy here, where plaintiffs are seeking ‘to adjudicate the parties’ rights before a wrong actually occurs in the hope that later litigation will be unnecessary.’”

The court denied, however, plaintiffs’ request for a preliminary injunction with respect to Section 11(d)(ii) of the Intercreditor Agreement, which prohibited PSW from orchestrating a Borrower’s bankruptcy unless the Senior Loan was paid in full. Although PSW retained bankruptcy counsel to represent the Borrowers once the UCC sale was completed, the court explained that “[t]he Intercreditor Agreement does not prevent PSW, as a Junior Lender, from seeking legal advice or planning for future contingencies.” Moreover, given that the court granted the preliminary injunction with respect to Section 6(d), “plaintiffs’ request to enjoin PSW concerning Section 11(d)(ii) of the Intercreditor Agreement is moot, and the purported hazard posed by plaintiffs is ‘speculative and abstract,’ and, therefore, nonjusticiable.”

Irreparable Harm

With respect to irreparable harm, the court noted: “Irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction. To prevail, the movant must establish not a mere possibility that it will be irreparably harmed, but that it is likely to suffer irreparable harm if equitable relief is denied.” Additionally, “the loss of a bargained-for contractual right of control can constitute irreparable harm.” Here, the court explained that the Senior Lenders “expressly bargained” for a contractual provision that prevents junior lenders like PSW from acquiring ownership and control of the Equity Collateral without first paying off the outstanding indebtedness of the Senior Loan. Accordingly, “[a]ny loss of control is in violation of the Intercreditor Agreement and would constitute irreparable harm to plaintiffs.”

Additionally, the court noted that Section 34 of the Intercreditor Agreement “reinforces” this conclusion, as it provides that “injunction, declaratory judgment, and specific performance” are available remedies for breaches of the Intercreditor Agreement and “monetary damages are not an adequate remedy to redress a breach by the other hereunder and that a breach by any party hereunder would cause irreparable harm to any other party to this Agreement.” Notably, PSW agreed to be bound by the terms of the Intercreditor Agreement—including Section 34—by executing the Representation Certificate. Accordingly, as the parties “set down their agreement in a clear, complete document . . . their writing should . . . be enforced according to its terms.”

Balancing of the Equities

Finally, the court explained that “[i]n balancing the equities, the court must weigh the harm suffered by the plaintiff if the injunction were denied against the harm suffered by the defendant if the injunction were granted.” The court also noted that in balancing the equities, the court must also consider the public interest involved. Here, the court determined that “the balance clearly tips in favor of the plaintiffs, who merely seek to hold PSW, as a Junior Lender, to its contractual obligations under the Intercreditor Agreement.” Additionally, the court determined that “the public interest is served by maintaining stability in what PSW concedes ‘is the largest residential property in Manhattan and home to a significant portion of the city’s moderate income housing.’”

Outcome

The court granted plaintiffs’ motion for a preliminary injunction enjoining PSW from acquiring or selling the Equity Collateral without prior payment of the total outstanding indebtedness (in excess of $3,666,000,000) of the Senior Loan. The court conditioned the order upon the posting by plaintiffs of a bond pursuant to CPLR § 6312 in the amount of $4,500,000 (the undisputed price at which PSW purchased Junior Loans 1-3). Although PSW initially filed a notice of appeal of the court’s preliminary injunction order, on October 26, 2010, the parties entered into a stipulation withdrawing PSW’s appeal. On November 12, 2010, the court approved the parties’ stipulation of voluntary discontinuance.

Conclusion

This case demonstrates that when the language of the Intercreditor Agreement is clear and unambiguous, courts will hold the parties to the terms—even at the expense of junior lenders. As this court commented, in the context of its analysis of the equities, enjoining the acquisition or sale “is entirely consistent with the recognition that subordinated loans are inherently more risky than their senior counterparts-a reality of which [the Junior Lender], as a sophisticated party, was no doubt aware when it acquired the mezzanine loan here.”