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Sigh of relief from senior lenders as court tosses mezz claim

-December 23, 2009

The Supreme Court of New York has dismissed a lawsuit brough by a mezzanine lender alleging mismanagement of its loan in the wake of the market freefall.

Morrison & Foerster's Distressed Real Estate Group represented the senior lender, Bank of New York: Mellon (BNYM), in the case and received the favorable ruling.

In 2005, BNYM originated a loan for the construction and development of a cond project in Westchester County. Two years later, HRC Fund IV DomestiC, LLC, an affiliate of Hudson Realty Capital, originated a mezzanine loan for the project to the equity owner of the real property owner and mortgage borrower.

In 2008, with the condo project not yet complete and the market in recession, the borrowers on both BNYM's and Hudson's loans defaulted.

The two lenders began proceedings to foreclose, however, both borrowers filed for bankruptcy before the foreclosures could be completed. In May 2009, with both foreclosure actions stayed as a result of the bankruptcy and the real estate market in freefall, Hudson filed an action against BNYM in hopes of recovering some or all of the outstanding balance of its mezzanine loan.

The crux of Hudson's complaint was allegations that reports drafted by the construction consultant hired by BNYM with respect to the condo project contained misleading and/or insufficient information and that Hudson relied on these reports to its detriment. Hudson alleged that the construction consultant's reports were provided to Hudson by BNYM and the construction consultant, and that Hudson acted reasonably in relying on the reports.

In dismissing the suit, Judge Melvin Schweitzer held that only under special circumstances have New York courts found that a fiduciary relationship exists between parties to an" arms-length transaction" such as the BNYM and Hudson deal. Schweitzer held that the fact that Hudson chose to relyon the reports it received from BNYM's own consultant was "of no moment."

With many projects in workout and foreclosure, mezzanine lenders who are out of the money are and will continue to look for alternative methods for collecting on their loans, says Morrison & Foerster. "In rejecting Hudson's attempt to create a fiduciary relationship between itself and BNYM, Judge Schweitzer cut off one of the most obvious routes for mezzanine lenders to seek recovery from senior lenders.

"The upshot for mezzanine lenders is that they should take all action necessary, under their own documents, to protect their positions in the capital stack."

At Capital Link's 111h Annual Invest in Greece Forum, which took p~ace in New York this month, nearly 500 business and political leaders from the US and Greece gathered to discuss the country's investment opportunities in 2010. Closing the conference was the real estate panel "Business &. Investment Opportunities in Greece and Southeastern Europe" moderated by Eric F. Trump, executive vice president of development&. acquisitions at The Trump Organization (right) with panelists George T. Constantin, president and chief executive officer of New York-based Heritage Realty Services; Petros Machas, partner at Athens-based Lykourezos Law offices.