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Lender Ordered to Fund Construction Loan for Commercial Project; Green Financing Cited
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July 12, 2010
By Laura Bourgeois
Destiny USA Holdings, LLC and Citigroup Global Markets Realty Corp. entered into a loan agreement under which Citigroup was to provide financing for Phase I of the Destiny USA expansion project. It was to be an 800,000 square foot shopping center/tourist destination in Syracuse, New York. Other phases were to include a hotel and retail, entertainment and dining facilities.
The Destiny USA project was to be funded using a unique financing model for green economic development. Total financing for Phase 1 was $330 million. It was to come from Destiny Holdings, from bonds issued by the City of Syracuse Industrial Development Agency and from Citigroup’s $155 million construction loan.
Under the loan agreement, Citigroup acted as agent for all of the lenders to the project, and Citigroup was responsible for approving all advances of loan funds, whether from itself or from the other sources. Destiny Holdings submitted monthly draw requests, and if they were approved, Citigroup made loan advances.
Citigroup could deny draw requests if it determined that a deficiency existed. A deficiency occurred when the money needed to complete the required improvements under the loan agreement exceeded undisbursed loan funds and certain other funds.
Citigroup approved and funded the first 16 draw requests. In the summer of 2008, in considering the 17th, 18th and 19th draw requests, Citigroup claimed that deficiencies existed. In calculating the deficiencies, Citigroup included the cost of tenant improvements. Destiny Holdings disputed that TI costs should be included in deficiency calculations. After meetings between Destiny Holdings and Citigroup, TI costs were excluded from deficiency calculations for the 20th through 26th draw requests.
In April 2009, Citigroup denied the 27th draw request, claiming a $15 million deficiency, virtually all of which was attributable to the inclusion of TI costs in the calculation. When Destiny Holdings failed to cure the deficiency within 10 days, Citigroup declared the loan to be in default. Citigroup refused to fund the 28th and 29th draw requests submitted by Destiny Holdings.
At the time funding was cut off, Destiny Holdings contended that the project was 90 percent complete and that Citigroup had not funded $68.4 million of its $155 million loan.
Destiny Holdings filed suit for breach of contract and moved for a preliminary injunction, seeking to compel Citigroup “to fund the pending loan advances... or, alternatively, enjoining Citigroup from refusing to fund such pending advances” and to comply with procedures of the loan agreement in considering draw requests, particularly in calculating deficiencies. The trial court granted the preliminary injunction. Citigroup appealed, arguing that equitable relief was unnecessary because Destiny Holdings could be adequately compensated with monetary damages.
The Appellate Division affirmed the trial court’s grant of a preliminary injunction but reversed other aspects of its order. Destiny USA Holdings, LLC v. Citigroup Global Markets Realty Corp., 69 A.D.3d 212, 889 N.Y.2d 793 (2009).
To obtain a preliminary injunction, the appeals court wrote, the moving party must establish by clear and convincing evidence that: 1) likelihood of success on the merits; 2) the prospect of irreparable injury if the provisional relief is withheld; and 3) a balance of equities tipping in the moving party’s favor.
The appeals court acknowledged that money damages are an adequate remedy for most claims of breach of contract, even when specific performance is sought. It noted that money damages usually are adequate in disputes over loan agreements because the borrower can be expected to borrow elsewhere at higher cost and can recover the difference from the original lender as damages.
Noting that the crux of the matter was whether TI costs should be included in deficiency calculations, the appeals court found that Destiny Holdings “established a likelihood of success on the merits by submitting clear and convincing evidence that TI Costs should not have been included in Citigroup’s calculation of a Deficiency.”
While acknowledging that the loan agreement gave Citigroup powers to determine whether a deficiency existed, the appeals court found that tenant improvement costs were not specifically included in the loan agreement’s definition of “Required Improvements” and that tenant improvements were not included the project’s plans and specifications at the time of the injunction. It rejected Citigroup’s argument that tenant improvement costs were implicitly included in Required Improvements because any other interpretation would result in a core and shell only and not a complete project.
The appeals court acknowledged that “irreparable injury generally cannot be established where any damages sustained are calculable, because the plaintiff in such a case would have an adequate remedy in the form of monetary damages.” However, the court found that an exception to that general rule was necessary in this case for three reasons. “First, cases of construction mortgages are an exception” to the general rule. The court, noting prior cases holding that an agreement to buy land could be specifically enforced because land is considered unique, extended the rule to construction loans because the loan proceeds are an integral part of buying or developing land.
Second, the appeals court held that the unique character of the financing for the project warranted an exception. It noted that Citigroup had told the U.S. Green Building Council that the project was “visionary” and created a “new financing paradigm” for green economic development that was “revolutionary.” The appeals court noted that the then-chairman and chief executive officer of Citigroup had called the use of newly created Federal Green Bonds in financing the project “groundbreaking” and a step forward in addressing climate change. Because the unprecedented nature and scope of the project made it unique, the appeals court held, there is no established market value for it and damages could not be calculated with reasonable precision.
Third, the appeals court held, Destiny Holdings had established enormous potential for harm to its reputation and to the project’s reputation – harm for which money damages are insufficient.
In response to Citigroup’s argument that Destiny Holdings could have sought replacement financing and that there was no evidence that it had sought such financing, the appeals court took judicial notice of economic conditions existing at the time Citigroup cut off funding in April 2009.
The court, with little discussion, concluded that “a balancing of the equities favors granting the preliminary injunction,” satisfying the third element. It acknowledged considering the interests of the public as well as the litigants in making this determination.
However, the appeals court held that the trial court erred by deferring determination of whether Destiny Holdings should post an undertaking. The appeals court ordered that a $15 million undertaking – equal to the amount of the claimed deficiency for tenant improvements -- be posted within 20 days.
The appeals court also held that the trial court granted relief beyond what was requested by Destiny Holding and made determinations that should have been left for trial. Accordingly, the appeals court:
|  | Conditioned enforcement of the injunction requiring Citigroup to fund the 27th, 28th and 29th draws on Destiny Holdings posting the $15 million undertaking.
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| | Vacated the trial court’s determination that the Notice of Deficiency and the Notice of Default were null and void.
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| | Vacated the trial court’s determination that the term “Deficiency” in the loan agreement did not include TI costs.
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| | Vacated the trial court’s determination that Citigroup had breached the loan agreement.
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| | Vacated the trial court’s order that Citigroup promptly fund all future draw requests.
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| | Let stand the trial court’s scheduling of a hearing to determine whether a deficiency currently existed.
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Two of the five judges on the Appellate Division panel dissented, asserting that “there is no authority under New York law that entitles a party to a preliminary injunction requiring a lending institution to loan money.” The dissent also pointed to the principle that a preliminary injunction is not appropriate when money damages are available and asserted that money damages would be sufficient here. The dissent notes that only two exceptions to the general rule existed: 1) when “equitable relief in the case was granted under the procedures independent of CPLR [Civil Practice Laws and Rules] 6301”; and 2) when “the suit involves claims of the plaintiff to a specific fund.” The dissent asserted that neither exception was applicable. It noted that Destiny Holdings pointed to no specific fund in which it claimed an interest. The dissenters were not persuaded that the nature of the project or its financing involved anything more than an ordinary construction loan.
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