Nylim Real Estate Mezzanine Fund v.
Lembi
Filed 7/19/13
Nylim Real Estate Mezzanine Fund v. Lembi CA1/4
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying
on opinions not certified for publication or ordered published, except as
specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
ONE
NYLIM REAL
ESTATE MEZZANINE FUND II, L.P.,
Plaintiff and Respondent,
v.
FRANK
LEMBI, as Trustee, etc.,
Defendant and Appellant.
A135507
(City & County of San Francisco
Super. Ct. No. CGC-11-510281)
This
appeal has been taken from the trial court’s ruling that granted plaintiff’s
motion for summary judgment and the subsequent entry of judgment in favor of
plaintiff in an action for breach of a
loan guaranty agreement. Appellant
claims the agreement was not supported by consideration, and breach of the
agreement did not cause damages to plaintiff.
He also challenges the liquidated damages provision of the agreement as
an unenforceable penalty. We conclude
that the loan and guaranty modification was supported by consideration, the
breach of the agreement by failure to pay the loan caused plaintiff damages,
and the damages provision was not
unreasonable. We therefore affirm the
judgment.
STATEMENT OF
FACTS
In
March of 2007, Personality Hotels III, LLC and Hotel Metropolis II, LLC (the
Borrowers), obtained a loan from plaintiff’s predecessor, Nomura Credit &
Capital, Inc. (Nomura or the Lender) in the total amount of $75.9 million, to
finance the renovation of hotel properties.
The loan was secured by two promissory
notes executed by the Borrowers in favor of Nomura on March 30, 2007: Note
A in the amount of $58.4 million; Note B to secure the remaining $17.4
million. The loan agreement provided
that the lender was entitled to sell all or any portion of the loans and
security interests to third party investors as collateralized debt obligations,
and required the Borrowers to execute any amendments to the loan documents or
new component notes as requested by the Lender to facilitate the most favorable
loan-to-value ratios and rating levels for the securities.
Concurrently,
defendant Frank Lembi, acting in his individual capacity and as Trustee for the
Olga Lembi Revocable Trust (the Trust), and his son Walter Lembi, who were
indirect owners of the Borrowers, executed two documents guaranteeing the
Borrowers’ indebtedness to Nomura pursuant to Notes A and B: a Guaranty of
Payment Obligations (the Payment Guaranty), and an Indemnity and Guaranty
Agreement (the Indemnity Agreement).
Agreement to execute any documents requested by the Lender which did not alter
the “essential economic terms of the indebtedness†or impose a “greater
personal liability in connection with the indebtedness†of the guaranteed loan.
On
August 27, 2007, the original loan indebtedness of the Borrowers was modified
and split into two loans: one, secured by the real estate, in the amount of
$58.9 million; the other, a “mezzanine loan†to two affiliates of the
Borrowers, Personality Hotels III Mezz, LLC, and Hotel Metropolitis II, Mezz,
LLC, “special purpose entities†which secured the mezzanine loan in the amount
of $17.4 million with stock of the real estate holding companies owned by the
Guarantors.
title="">[2]
Pursuant
to the Modification Agreement the Borrowers executed two amended promissory
notes in favor of Nomura. Amended Note A
secured the Borrower’s repayment of $44.4 million of the $58.9 million “Senior
Loan.†Amended Note B in favor of Nomura
as the “Mezzanine Lender†secured the $17.4 million balance of the loan, and
provided that the entire debt was immediately payable upon any defined default
event by the Borrowers. The amount of
the loan guaranteed by the Guarantors under the original agreement was
effectively reduced from $17 million to $5 million. According to the Mezzanine Loan Agreement the
Borrowers agreed to make monthly interest payments over the life of the loan,
and a balloon payment equal to all outstanding balances and accrued interest at
the maturity date of the loan on November 9, 2009.
The
same day, Lembi, in his individual capacity and as Trustee of the Trust, executed
a Mezzanine Payment Guaranty and a Mezzanine Indemnity Guaranty at the request
of Nomura, that effectively guaranteed payment of the Mezzanine Note. According to the Mezzanine Payment Guaranty,
the Guarantors unconditionally and irrevocably guaranteed the Lender and its
assigns “payment and performance of the Guaranteed Obligations as and when
[those become] due and payable,†and unconditionally agreed to be “liable for
the Guaranteed Obligations as a primary obligor†in the amount of $12 million,
plus accrued interest, costs, and attorney fees, immediately upon the
Borrower’s default and the Lender’s request for payment. On September 17, 2007, Nomura assigned all
rights and obligations under the Mezzanine Loan Agreement, the Mezzanine
Payment Guaranty and the Mezzanine Indemnity Guaranty to plaintiff NYLIM Real
Estate Mezzanine Fund, L.P. (Nylim).
The
Borrowers defaulted on the loans, and after February of 2009 made no payments
on the Mezzanine Loan, including the $17 million principal balance due on the
maturity date. In March of 2010, the
Borrowers filed a Chapter 11 bankruptcy reorganization petition in an effort to
avoid foreclosure. When outside
investors failed to materialize to recapitalize the Borrowers, the
reorganization proceeding was converted into a Chapter 7 liquidation. A bankruptcy trustee was appointed to
effectuate non-judicial foreclosure sales of the hotels by the Lender in May of
2010.
Plaintiff NYLIM repeatedly demanded payment of the
Mezzanine Loan and costs by the Guarantors pursuant to the Mezzanine Payment
Guaranty. The Guarantors did not
respond.
The
present action for breach of contract was initiated by plaintiff NYLIM against
defendants Lembi individually and as trustee of the Trust on April 18, 2011.
for summary judgment, and entered judgment against Lembi as trustee in the
amount of $32,461,026.73 on February 28, 2012.
This appeal followed.
DISCUSSION
The Consideration for the Loan Modification.
Defendant
complains that triable issues of fact
remain to be litigated in plaintiff’s breach of contract case, one of which is
whether consideration was received for the loan modification in August of
2007. He claims that only plaintiff
benefitted from the modification, so the contract was not supported by
consideration and is unenforceable. He
therefore claims the trial court erred by granting plaintiff’s motion for summary judgment.
We
evaluate the trial court ruling on plaintiff’s motion for summary judgment in
accordance with well-settled law. (
Cal.App.4th 950, 962.) “ ‘[T]he
party moving for summary judgment bears the burden of persuasion that there is
no triable issue of material fact and that he is entitled to judgment as a
matter of law.’ [Citation.]†(Behnke
v. State Farm General Ins. Co. (2011) 196 Cal.App.4th 1443, 1463; see also
Cal.4th 1148, 1153–1154.) “A plaintiff
moving for summary judgment establishes the absence of a defense to a cause of
action by proving ‘each element of the cause of action entitling the party to
judgment on that cause of action.’
[Citation.] The plaintiff need
not, however, disprove any affirmative defenses alleged by the defendant. [Citation.]
Once the plaintiff’s burden is met, the burden of proof shifts to the
defendant ‘to show that a triable issue of one or more material facts exists as
to that cause of action or a defense thereto.’
[Citation.] In meeting this
burden, the defendant must present ‘specific facts showing’ the existence of
the triable issue of material fact.†(
215 Cal.App.4th 1068, 1081.)
“ ‘On
appeal “[w]e review a grant of summary judgment de novo; we must decide
independently whether the facts not subject to triable dispute warrant judgment
for the moving party as a matter of law.
[Citations.]†[Citation.]’ †(Jolley
v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 886, quoting
178 Cal.App.4th 243, 253; see also GuideOne
Mutual Ins. Co. v. Utica National Ins. Group (2013) 213 Cal.App.4th 1494,
1501.) “ ‘ “Review of a
summary judgment motion by an appellate court involves application of the same
three-step process required of the trial court.
[Citation.]†’
[Citation.] The three steps are
(1) identifying the issues framed by the complaint, (2) determining whether the
moving party has made an adequate showing that negates the opponent’s claim,
and (3) determining whether the opposing party has raised a triable issue of
fact.†(Food Safety Net Services v. Eco Safe Systems USA, Inc. (2012) 209
Cal.App.4th 1118, 1124.)
Looking
at the issues framed by plaintiff’s breach of contract complaint, the “essential
elements of a claim of breach of contract, whether express or implied, are the
contract, the plaintiff’s performance or excuse for nonperformance, the
defendant’s breach, and the resulting damages to the plaintiff.†(San
Mateo Union High School Dist. v. County of San Mateo (2013) 213 Cal.App.4th
418, 439 (San Mateo Union High); see
also ASP Properties Group, L.P. v. Fard,
Inc. (2005) 133 Cal.App.4th 1257, 1268–1269.) Essential to the existence of a contract is a
“ ‘sufficient cause or consideration, for a promise unsupported by
consideration has no binding force. . . .’ [Citations.]â€
(Torlai v. Lee (1969) 270
Cal.App.2d 854, 858.)
“Civil
Code section 1605 defines consideration as ‘[a]ny benefit conferred, or agreed
to be conferred, upon the promisor, by any other person, to which the promisor
is not lawfully entitled, or any prejudice suffered, or agreed to be suffered,
by such person, other than such as he is at the time of consent lawfully bound
to suffer, as an inducement to the promisor . . . .’ Thus, there are two requirements in order to
find consideration. The promisee must
confer (or agree to confer) a benefit or must suffer (or agree to suffer)
prejudice. We emphasize either alone is
sufficient to constitute consideration; ‘it is not necessary to the existence
of a good consideration that a benefit should be conferred upon the
promisor. It is enough that a “prejudice
be suffered or agreed to be suffered†by the promisee. [Citation.]’
[Citation.]†(
411, 420–421; see also Estate of Bray
(1964) 230 Cal.App.2d 136, 141–142.) It
is insufficient, however, to confer a benefit or suffer prejudice for there to
be consideration: The second requirement
is that the benefit or prejudice must actually be bargained for as the exchange
for the promise. Put another way, the
benefit or prejudice must have induced the promisor’s promise. (See Jara
v. Supreme Meats, Inc. (2004) 121 Cal.App.4th 1238, 1249.)
Here,
the parties had an original loan agreement that defined their mutual rights and
obligations. The original agreement
authorized the Lender to sell a portion of the loan, split the promissory note,
or modify the loan provisions to obtain more advantageous
rating levels. The Borrowers were required to execute any
amended loan documents and notes requested by the Lender, and the Guarantors
promised to cooperate with a modification by executing new guaranty
documents. The Modification Agreement
challenged by plaintiff in this action was nothing more than a restructuring of
the loan and guaranty provisions as provided by the original agreements. The governing loan rights and obligations
were superseded and replaced with updated provisions which did not impose
a greater personal liability on the Guarantors.
“ ‘[T]he
surrendering or foregoing of a legal right constitutes a sufficient
consideration for a contract if the minds of the parties meet on the
relinquishment of the right as a consideration.
[Citation.]’ [Citation.]†(Anchor
Cas. Co. v. Surety Bond Sav. & Loan Assn. (1962) 204 Cal.App.2d 175,
181; see also Estate of Bishop (1962)
209 Cal.App.2d 48, 55–56.) According to
settled law, the extinguishment of the preexisting notes and guarantees, and
the relinquishment of the Lender’s rights thereunder, constituted adequate
detriment and prejudice to the Lender to provide consideration to support the
Borrowers’ and Guarantors’ promises to repay the new notes. (See Popp
v. Exchange Bank (1922) 189 Cal. 296, 300; Stroud v. Thomas (1903) 139 Cal. 274, 276–277; Pierce v. Wright (1953) 117 Cal.App.2d 718, 723;
(1941) 46 Cal.App.2d 817, 821; Italo Pet.
Corp. of America v. Shingle (1937) 23 Cal.App.2d 422, 427.) Further, the Modification Agreement
and two amended promissory notes in favor of Nomura were executed concurrently with the Mezzanine
Payment Guaranty and a Mezzanine Indemnity Guaranty, and may serve as consideration for each
other. (See Glickman v. Collins (1975) 13 Cal.3d 852, 860; Pacific States Sav. etc. Co. v. Stowell (1935) 7 Cal.App.2d 280,
281.) By surrendering rights under the
original notes and guaranty, the Lender furnished consideration for the
Guarantors’ promises under the Mezzanine Payment Guaranty and a Mezzanine Indemnity
Guaranty. (Bank of America, supra, at p. 821.)
The
Guarantors of both the original agreement and the modification at issue here
were the same. They were officers and
shareholders of the Borrowers in these financial transactions. Upon execution of the agreement and then the
modification, they derived a benefit from the transactions, in itself valid
consideration for the guarantee. (
8 Cal.2d 110, 112; Patek & Co. v.
Vineberg (1962) 210 Cal.App.2d 20, 23.)
The Guarantors also experienced a reduction in the amounts they
personally guaranteed. Their original payment guaranty was reduced from $17
million to $5 million.
It is
also true that it was contemplated when the Borrowers and Guarantors signed the
original loan agreements that the Lender, Nomura, intended to sell the senior
Borrowers’ indebtedness to other investors like respondent NYLIM. The Guarantors agreed to cooperate in
Nomura’s efforts to sell this indebtedness, including executing and delivering
to Nomura or the transferees any necessary documents.
On
this record, we find sufficient evidence of lawful consideration to uphold the
trial court’s determination of the issue.
Defendant
also argues that element of causation was not eliminated as a triable issue of
fact. He asserts that the
cause damages to plaintiff, as alleged, but rather that “the damage was caused
by a non-judicial foreclosure against the three hotels, which the bankruptcy
attempted to prevent.†Therefore,
defendant complains that the requisite element of a “causal connection between
the breach and the damages claimed,†was not established by plaintiff.
We
have no disagreement with the principle that “[u]nder a contract theory
plaintiffs must establish that defendants’ breach of its obligation proximately
caused harm.†(San Mateo Union High, supra, 213 Cal.App.4th 418, 440.) Where we depart from defendant’s contention
is with his premise that only the bankruptcy filed by the Borrowers could serve
as the cause of damages in this case.
What caused plaintiff’s damages was the default of the Borrowers,
followed by the repeated failure of defendant as the Guarantor to abide by the
promise to satisfy the Mezzanine Payment Guaranty. The element of causation was conclusively
proved by plaintiff.
The Mezzanine Payment Guarantee as a Prohibited Penalty.
Finally,
defendant claims that the Mezzanine Payment Guaranty and Mezzanine Indemnity
Guaranty must be found unenforceable as a “prohibited penalty.†Defendant maintains that the agreements
required payment of the “entire loan balance†of $17 million following the
Borrowers’ breach, which under the circumstances “constitutes an improper
penalty where the provision was unreasonable under the circumstances existing
at the time the contract was made.â€
We
find that the loans and guarantees are not invalid as unenforceable
penalties. “To avoid uncertainty and
litigation if a default occurs, the parties to a contract may use a liquidated
damages clause to determine the measure of damages in advance. [Citation.]
A liquidated damages clause is generally valid unless the party
challenging it shows it was unreasonable under the circumstances existing at
the time the parties entered into the contract.
[Citations.] In the absence of a
reasonable relationship between the liquidated damages and the actual damages
the parties could have contemplated for breach, ‘a contractual clause
purporting to predetermine damages “must be construed as a penalty.†[Citation.]’
[Citation.] ‘ “A contractual
provision imposing a ‘penalty’ is ineffective, and the wronged party can
collect only the actual damages sustained.â€
[Citations.]’ [Citations.]†(Allen
v. Smith (2002) 94 Cal.App.4th 1270, 1278.)
In
nonconsumer contracts, Civil Code section 1671, subdivision (b), provides that
a liquidated damages provision is “valid unless the party seeking to invalidate
that provision ‘establishes that the provision was unreasonable under the
circumstances existing at the time the contract was made.’ †(Utility
Consumers’ Action Network, Inc. v. AT&T Broadband of Southern Cal., Inc.
(2006) 135 Cal.App.4th 1023, 1028.)
Thus, the statute creates “a presumption of validity of a liquidated
damages clause, and places the burden on the party who seeks invalidation†to
show the provision was unreasonable. (
(1997) 52 Cal.App.4th 645, 654.) Despite
defendant’s unsupported assertion that
the “entire loan balance†was not a “reasonable approximation of the damagesâ€
that would ensue from the bankruptcy of the Borrowers, we find the damages
provision valid. According to the
evidence presented, the sole valuable asset of the Borrowers was their
ownership interest in the hotel properties.
Upon bankruptcy and default of the Borrowers, a reasonable assumption
was that the entire $17 million of the Mezzanine Loan would not be paid or
secured. The liquated damages clause was
therefore reasonable.
Accordingly,
the judgment is affirmed.
__________________________________
Dondero,
J.
We
concur:
__________________________________
Margulies,
Acting P. J.
__________________________________
Banke,
J.
name="_ftn1" title="">[1] We will refer to defendant
Frank Lembi and his son Walter collectively as the Guarantors. Walter Lembi died before this action was
commenced and is not a party to this appeal.
name="_ftn2" title="">[2] Although the Mezzanine Loan
borrowing entities under the original and modified loan agreements were
different, even if related, for the sake of convenience we will refer to them
as the Borrowers.
