A New York federal district court recently ruled that a lender could not recover under a guaranty of a multi-million dollar mezzanine loan where the alleged actions giving rise to the breach were committed by an escrow agent who was not mentioned in the underlying default provision. Madeleine L.L.C. v. Street, No. 08 Civ. 10520, 2010 U.S. Dist. LEXIS 136070 (S.D.N.Y. 2010). The decision turned on tightly drafted sections of the Pledge Agreement, Loan Agreement and Guaranty (“Guaranty”) that limited defaults to the acts and omissions of specifically named parties.  


Madeleine L.L.C. provided a mezzanine loan for up to $275 million for the construction of several condominium projects. Each project and associated property was owned by a separate corporate Property Owner. Through Pledge Agreements for each of the projects, the borrowers pledged their interests in the Property Owners as collateral. Two principals, Brian Street and James Cohen, issued a Guaranty of the loan. The Pledge Agreements set forth eight events that constituted defaults thereunder, which were incorporated into the Guaranty. Thus, to trigger the recourse provision of the Guaranty, an enumerated event of default must have occurred under a Pledge Agreement.

In 2007, the lender became convinced that of one the Property Owners, BLIA Developers, had caused an event of default to occur. Specifically, BLIA had allegedly deposited in an interest bearing account the down payments made by condominium purchasers, and the lender alleged that BLIA violated the Pledge Agreement by transferring the interest earned in that account to a management company that administered all of the properties. The transfers allegedly were done at the direction of the guarantors Street and Cohen, but were physically accomplished by an escrow agent, and the funds were allegedly used to pay expenses on other properties.

Madeleine asserted that these transfers constituted events of default under the Pledge Agreement, and demanded payment of the outstanding loan amount from Street and Cohen under the Guaranty. When the guarantors refused to pay, the lender brought suit.

Lender’s Arguments  

The court began its analysis by noting that the dispute centered on a basic point of contract interpretation. The court examined the Pledge Agreement applicable to the property at issue, Biscayne Landing, to determine whose actions could constitute a breach of that agreement, thereby triggering the Guaranty. One of the events of default in that Pledge Agreement was as follows: “Pledgor transfers or encumbers any portion of the Collateral in violation hereof or of the Loan Agreement.” As the court noted, this event of default only covers actions taken by “Pledgor.” The Pledge Agreement identified only one party as the Pledgor: North Miami Land Holdings, Limited (“NMLH”), which was the Property Owner. Thus, the court found, only NMLH was capable of committing an event of default thereunder. But, as the court noted, NMLH was not the party that actually made the challenged transfers. It was BLIA Developers, not NMLH, that owned the account in which the funds were held. While it was alleged that Street and Cohen, not NMLH, directed the funds be transferred, it was the escrow agent, not NMLH, that carried out that transfer. The court thus found that the “plain language . . . [of the Pledge Agreement] identifies only one entity as the Pledgor: North Miami Land Holdings, Ltd. (‘NMLH’). Therefore, only NMLH is capable of committing an Event of Default under Section 9(a)(i) of the applicable pledge agreement.”

The lender attempted to overcome this plain language by arguing that any distinction between the entities should be ignored. To support this theory, the lender argued that NMLH held nearly all of the equity in BLIA, making any transfer by BLIA effectively a transfer by NMLH. The court rejected this argument as BLIA was not included in the definition of “Pledgor.” Further, BLIA was included in the definition of “Issuer.” The court noted that, while several events of default covered both Issuers and Pledgors, the event of default on which the lender premised its action did not apply to Issuers. The court concluded that “[t]he selective use of the term ‘Issuer’ indicates a deliberate distinction between Events of Default that an Issuer is not capable of triggering.”

Alternative Arguments

The lender next argued that BLIA violated other provisions of the Loan Agreement, thereby triggering a default. The Loan Agreement contained a catchall provision stating that any failure of the entities, including BLIA, to perform under that agreement would constitute a default. The lender argued that BLIA violated two sections of the loan agreement, and should therefore be considered in default. The court found this argument unpersuasive writing that “[a]n event of default under the Loan Agreement is defined differently from an Event of Default under the Pledge Agreement . . . . They should not be conflated. As a result, an Event of Default under the Loan Agreement is irrelevant except to the extent that its occurrence somehow triggers an Event of Default under the Pledge Agreement.”

In an attempt to bolster its position, the lender pointed to a provision of the Pledge Agreement that provided that a “Loan Document Event of Default” shall constitute an event of default under the Pledge Agreement. Since the Loan Agreement was a Loan Document, the lender argued that BLIA’s default under the Loan Agreement constituted default under the Pledge Agreement, thereby triggering the Guaranty. The court similarly rejected this argument by looking to the definition of “Loan Document Event of Default” which clearly stated that the default must be committed by a Pledgor—and BLIA was not within the definition of Pledgor.


This decision demonstrates the importance of thoughtful drafting of loan documents based on a full understanding of the inter-relationship of various parties in complicated commercial transactions. By using language here—whether intentional or not—that only the acts or omissions of specifically named entities could constitute defaults under the Pledge Agreement, the lender effectively agreed that defaults caused by other parties, here the escrow agent at the direction of the guarantors, would not trigger the Guaranty.