The debtor borrowed $38 million from lenders (for simplicity, the “bank”) to renovate its hotel. However, the debtor defaulted on the loan twice. The first event of default occurred when the hotel decided to close for at least four weeks in March 2020 because of COVID-19. This violated an operating covenant in the loan agreement requiring that the hotel “be operated, repaired and maintained as a … ‘first-class hotel.’” The second default event occurred when the debtor missed a loan payment. At the time of both defaults, the debtor requested the bank renegotiate the loan agreement. Eventually, the loan servicer sent a pre-negotiation letter to the debtor. It contained a provision that no agreement made in the discussions would constitute a binding obligation “unless and until [the parties] have executed a definitive written agreement.” The debtor signed the letter, and later, the parties signed a loan modification agreement that waived only the debtor’s second event of default for the missed payments; however, the debtor thought the agreement had also waived the default that arose from its having closed the hotel. This default provided that the debtor would be liable for additional default interest payments. For the next year, the debtor’s loan statements listed $0.00 due for past due default interest. The parties then signed a second loan modification agreement to address another issue. The second loan modification agreement contained an acknowledgment of an existing event of default. However, the loan statements continued to list $0.00 due for past due default interest. Meanwhile, the debtor was in discussions with potential third-party buyers about converting the hotel into a retail property with possible third-party investors. In connection with these negotiations, the loan servicer informed the debtor that the transition plan would require extensive modifications to the loan agreement or the debtor could pay off the loan early and face prepayment penalties. In response, the debtor approved the transfer of its loan to a special servicing division in the hope of getting the prepayment penalties reduced; however, the penalties were not reduced, and the debtor requested that the loan be transferred back out of the special servicing division. The debtor then requested a payoff quote from the loan servicer to use in its negotiations for the sale of the hotel. The quote, which the loan services sent on August 6, 2021, listed a charge of nearly $3 million in default interest. The debtor initially claimed August 9th was the first time it was made aware of the default interest, but later claimed it had actually been made aware of the default interest charges on July 22, before the sale negotiations had begun. The debtor challenged these interest charges and sued the bank and loan servicers for breach of the loan agreement, breach of the loan agreement’s implied covenant of good faith and fair dealing, breach of the special-servicing agreement, intentional misrepresentation, and negligent misrepresentation. The debtor sought consequential damages for a total of nearly $58 million; 80% of this total came from consequential damages the debtor believed it was owed from the threat of the default interest, which it claimed had forced it to sell the hotel for $48 million below the property’s market value.
In 360 N. Rodeo Drive, LP v. Wells Fargo Bank, No. 22-cv-767(AS), 2024 WL 4039643, 2024 U.S. Dist. LEXIS 158837 (S.D. N.Y. Sept. 4, 2024) (opinion not yet released for publication), the court held the debtor only succeeded on its claim for breach of the special servicing agreement. The court denied the debtor’s first claim that the bank breached the loan agreement because the debtor had believed the default interest had been waived under the first loan modification agreement. The court noted that the debtor had first breached its agreement by shutting down the hotel. Additionally, the court explained that the loan servicer acted within the bounds of the agreement when it listed zero default interest on one statement and then later added the charge. The debtor argued that its obligation under the operation covenant had been excused under the frustration-of-purpose doctrine because COVID-19 would have made operating the hotel valueless to the debtor. However, the court concluded that the debtor’s obligations to operate the hotel had not been removed, and even if operating the hotel would have been less profitable to the debtor, it failed to prove that operating it would have been wholly valueless. For this reason, the servicer had not breached the loan contract. Additionally, the court explained that because of the equal sophistication of both parties and the worth of the total contract, the court could not find the accrual of interest to be unconscionable. Next, the court denied the debtor’s second claim for breach of the loan agreement’s implied covenant of good faith and fair dealing. The debtor asserted that it had received inaccurate loan statements, but as explained previously, the loan statements only showed that the loan servicer exercised its discretion as to when to charge for default interest, which the agreement permitted. Thus, the court chose not to limit the loan servicer's discretion, because doing so would have been "inconsistent with the express terms of the contract." Next, the court ruled in favor of the debtor’s third claim for breach of the special-servicing agreement. It noted that the agreement to transfer the loan to the special-services division stated that “[the debtor] would pay $2,500 in special-servicing fees per month.” However, in negotiating this agreement, the loan servicer sent the debtor an email regarding the special-servicing fees, and the debtor responded with certain conditions to which the bank had not responded. By not responding to an offer made by the debtor and completing the transfer to the special-servicing division, the loan servicer had partially performed, which could have been considered a partial acceptance of the debtor’s counteroffer. Examining the initial agreement, the court concluded that the loan servicer had overcharged the debtor for fees; therefore, the court awarded the debtor $548,645.42 in damages for that breach. By contrast. the court denied the debtor’s fourth claim for intentional misrepresentation because the statements made by the bank were never guarantees upon which the debtor could act or could have reasonably relied. Lastly, the court denied the debtor’s fifth claim for negligent misrepresentation for the same reason and also because the bank could not have foreseen the debtor’s intent to sell the hotel. Therefore, the debtor could not recover consequential damages because the bank did not breach the contract. Ultimately, the court found for the debtor only on its special servicing agreement claim and for the loan servicer on all other claims.
By Alfio Castorina [email protected]
Edited By Callighan Ard [email protected]
Edited By Kristin Meurer [email protected]
Edited By Hayden Mariott: [email protected]