In an action arising out of two loan agreements, a New York trial court recently dismissed counterclaims brought by a commercial development company, D.A.B. Group (“DAB”), alleging that two banks, Brooklyn Federal Savings Bank (“Brooklyn”) and State Bank of Texas (“State Bank”), and their assignee, Orchard Hotel, LLC (“Orchard”), fraudulently misrepresented their intention to extend the maturity date of the loans, breached the loan agreement by delaying to fund loan advances, and exaggerated the amount due on the loan. Orchard Hotel, LLC v. D.A.B. Group, LLC, 35 Misc. 3d 1206(A), 2012 N.Y. Slip Op. 50576(U) (Sup. Ct. N.Y. County 2012). The court held that DAB had failed to plead its claims with the requisite particularity, and found that (1) DAB had not sufficiently alleged the reliance requirement for a claim of fraudulent representation, (2) Brooklyn and State Bank were not obligated to fund advances, and (3) DAB failed to articulate a cognizable legal theory.
Background
In November 2007, DAB, a company that does business in the “construction and property industry,” and Brooklyn executed a promissory note in connection with Brooklyn’s $5.5 million project loan to DAB. A Loan Modification Agreement dated August 21, 2009 extended the loan’s maturity date to September 1, 2009, and, at the bank’s option, allowed for three additional extensions to March 1, 2011. In August 2008, the same parties executed a second promissory note in connection with a $19.05 million building loan (“Building Loan”), maturing on September 1, 2009, with three extension terms at the option of the bank to March 1, 2011. Both notes were secured by a mortgage on DAB’s real property located on Orchard Street in New York City. Although its name did not appear on any of the loan documents, State Bank agreed to participate in the funding of both the Project Loan and the Building Loan through a participation agreement with Brooklyn.
At some point after the execution of the loan agreements and before the loan maturity dates, DAB, Brooklyn and State Bank executed an estoppel certificate, providing for “confirmation, renewal, and extension of certain rights.” In that agreement, DAB acknowledged that Brooklyn, its successors and assigns had no obligation to provide any advances other than as provided in the Building Loan Agreement, and further that DAB was estopped from raising any claims to the contrary.
The lenders agreed to extend both maturity dates to March 1, 2011. On the date the loans matured, DAB had not made payment on them. By a letter dated March 23, 2011, Brooklyn informed DAP that both of the notes secured by the mortgages were in default and therefore were immediately payable. On June 17, 2011, Brooklyn assigned the Notes and Mortgages to Orchard. Orchard subsequently filed suit on July 1, 2011, seeking to foreclose upon the mortgages.
Counterclaims
In response to Orchard’s foreclosure action, DAB asserted three counterclaims against Brooklyn, Orchard as assignee, and State Bank by virtue of its agreement to participate in the funding of the loans. DAB alleged that Brooklyn and State Bank fraudulently misrepresented their intention to extend the maturity of the loans beyond March 1, 2011. DAB also asserted that Brooklyn breached its contract with DAB by improperly delaying additional fundings, which prevented DAB from paying its contractors and subcontractors.
Finally, DAB alleged that both Brooklyn and Orchard miscalculated interest and late charges, thereby exaggerating the amount owed by DAB, and further rendering DAB unable to satisfy or refinance the loans.
Brooklyn, Orchard and State Bank moved to dismiss the counterclaims on the basis that they failed to state a claim and that they were contradicted by the documentary evidence. With regard to the counterclaim for fraudulent misrepresentation, the lenders asserted that DAB’s pleadings were vague and conclusory, and did not satisfy the particularity required by an action for fraud under New York law. The lenders further argued that the allegations of breach of contract failed to articulate which contractual provision was allegedly breached, and that DAB failed to plead that it had fully complied with the terms of the Building Loan Agreement.
Fraudulent Misrepresentation
As part of DAB’s claim of fraudulent misrepresentation, DAB alleged that, prior to March 1, 2011 — the maturity date of the loans under the loan extensions — it had negotiated with Brooklyn and State Bank for a further extension of the maturity dates on the two loans. To support this claim, DAB alleged that, in connection with these purported negotiations, Brooklyn and State Bank approved a contract between DAB and a co-defendant construction company, Flintlock Construction Services, LLC, that provided for a construction completion date past March 1, 2011. DAB additionally asserted that “in furtherance of their express approval” of the contract, Brooklyn and State Bank drafted and required DAB to execute an estoppel certificate, wherein both parties confirmed, renewed and extended certain rights. According to DAB, Brooklyn and State Bank both “repeatedly represented to DAB that the maturity date would be extended beyond March 1, 2011.”
DAB claimed that these and other representations were false and known to be false by Brooklyn and State Bank when they were made, and that they were made to induce DAB’s reliance on them. DAB further alleged that its reliance was justified in light of Brooklyn’s approval of the Flintlock contract, and the “confirm, renew and extend” language contained in the Estoppel Certificate. Relying on the oral representations that the maturity dates had been extended, DAB asserted that it “delayed in seeking a refinance of the loan or sale of the business project,” and was thus damaged in an amount in excess of $50 million.
Even crediting all of DAB’s factual assertions in the pleadings and supporting affidavits as true, the court declined to find that DAB’s alleged reliance was justified. As an essential element of a claim of fraudulent misrepresentation, reliance must be pled with particularity pursuant to a standard that is more stringent than for other types of complaints. The court found that DAB’s alleged reliance on oral representations made by Brooklyn and State Bank were in contravention to express provisions in the loan documents “prohibit[ing] oral amendment or termination,” in the absence of a further agreement that is “in writing signed by Holder.” Another such provision in the loan documents stated that “[n]o course of dealing between Maker, the endorser(s) or guarantor(s) hereof, or any of them, shall be effective to change or modify in whole or in part, this Note.” Given these “bargained-for, and agreed-upon contractual provisions” barring any amendment or termination of the loan agreement without a written, signed agreement by the parties, the court rejected DAB’s assertion of justified reliance. Accordingly, the court dismissed DAB’s counterclaim of fraud.
Breach of Contract
DAB’s second counterclaim for breach of contract alleged that Brooklyn had failed and refused to make appropriate loan advances during the term of the building loan in a manner that was wrongful and without cause. In a supporting affidavit, DAB’s majority and managing member averred, inter alia, that Brooklyn had failed to fund the project for seven months, that it subsequently withheld funding for four months, that it refused to fund requisitions totaling $1.5 million dollars, and that it failed to honor an agreement to reserve $960,000 for the payment of a mechanic’s lien filed by a subcontractor. According to DAB, these refusals and delays prevented DAB from paying subcontractors, which resulted in judgments against DAB. Thus, DAB charged, the actions of Brooklyn, State Bank and Orchard constitute a breach of the loan agreements.
As with its finding on the claim of fraudulent misrepresentation, the court stated that it was granting DAB the benefit of every favorable inference on this issue, but concluded nevertheless that DAB had failed to state a claim for breach of contract. The court based its decision in part on provisions in the Estoppel Certificate that provided that Brooklyn and its successors “shall have no obligation to provide any Advances . . . except as provided for in the Building Loan Agreements . . .”, and further that DAB is “hereby estopped from raising any claims or making any defenses contrary to the foregoing.” Accordingly, the court concluded that DAB’s allegation relating to denial of funding was “flatly contradicted by documentary evidence and need not be considered.”
The court similarly addressed and dismissed DAB’s remaining allegations for breach of contract. Regarding DAB’s claim that Brooklyn and State Bank failed to set aside $960,000 for payment to a subcontractor, the court noted that DAB did not point to any written agreement relating to the $960,000 payment to subcontractor, and further that the Estoppel Certificate contained no agreement providing for such a payment. As to the DAB’s claim that Brooklyn and State Bank failed to fund two other funding requisitions, the court found that Brooklyn had no obligation to fund these requisitions in light of (1) the fact that DAB defaulted on its loans prior to their submission, and (2) the “plain language in the Building Loan Mortgage Agreement stating that Brooklyn had “no obligation to fund Advances if an Event of Default . . . shall have occurred or will be continuing.” Thus, finding no contractual obligations underlying DAB’s alleged breaches, the court dismissed both claims.
Claim of Exaggeration of the Amounts Due
DAB’s third counterclaim alleged that Brooklyn and Orchard “exaggerated the amounts due and owing on the Loans, leaving DAB unable to satisfy, or refinance them.” Even assuming the truth of these allegations, the court found that it could not “discern any cognizable legal theory into which they might fit.” Accordingly, the court dismissed this counterclaim.
Conclusion
The holding in Orchard Hotel, LLC v. D.A.B. Group demonstrates the challenges that borrowers in foreclosure actions may face when attempting to countersue lenders where language in the loan agreement effectively insulates lenders from the claims. In this case, the court declined to find that the borrower had reasonably relied on alleged oral misrepresentations where the loan agreement expressly prohibited changes to the loan agreements in the absence of a written agreement signed by the holder. Similarly, claims alleging breach of contract were dismissed as DAB acknowledged in the Estoppel Certificate that Brooklyn shall have no obligation to provide any advances “except as provided for in the Building Loan Agreement and based upon the Advances to date . . . [and] is hereby estopped from raising any claims or making any defenses contrary to the foregoing.”
