Metropolitan Capital Funding, LLC v Nomura Credit & Capital, Inc.

[*1] Metropolitan Capital Funding, LLC v Nomura Credit & Capital, Inc. 2009 NY Slip Op 50278(U) [22 Misc 3d 1125(A)] Decided on February 9, 2009 Supreme Court, New York County Kapnick, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on February 9, 2009
Supreme Court, New York County

Metropolitan Capital Funding, LLC, Plaintiff,

against

Nomura Credit & Capital, Inc., Defendant.



603959/07



Plaintiff was represented by Kenneth J. Kelly, Esq., Epstein, Becker & Green, P.C., 250 Park Avenue, New York, New York 10177

Tel. (212)351-4500.

Defendant was represented by Daniel S. Cahill, Esq., Cahill Wink LLP, 60 Railroad Place, Saratoga Springs, New York 12866

Tel. (518-584-1991

Barbara R. Kapnick, J.

Plaintiff Metropolitan Capital Funding, LLC ("MetroCap") is engaged in the business of commercial real estate lending. Defendant Nomura Credit & Capital, Inc. ("Nomura") is in the business of purchasing and selling mortgage loan facilities. This action arises out of a credit or warehouse loan facility (the "Master Repurchase Agreement") entered into by MetroCap and Nomura in December 2006, after significant negotiation.

According to the First Amended Complaint, the facility was structured as a one-year repurchase agreement and provided MetroCap with a maximum credit line of $100,000,000. Under the agreement, MetroCap would generate and partly fund loan transactions meeting certain criteria, and Nomura, as Creditor, would purchase the loans according to a negotiated pricing matrix, thereby providing the balance of the funding required under the loans, with an agreement to sell the loans back to MetroCap after a specified time.

There is no dispute that plaintiff paid defendant a $500,000 "Facility Fee" (or origination fee) upon the execution of the agreement.

Plaintiff, however, claims that from the outset of the relationship, defendant refused to honor its contractual obligations. Specifically, plaintiff contends that defendant refused to accept any of [*2]MetroCap's proposed transactions (representing over $87 million in loans) under the terms of the facility agreement, even though plaintiff alleges that each of the transactions qualified according to the objective criteria set forth in the agreement.

Plaintiff further claims that in order to preserve some of the transactions it had developed, plaintiff was forced to attempt to restructure each of the proposed loans on terms much more favorable to Nomura and less favorable to MetroCap than the terms negotiated in the facility agreement.[FN1] According to plaintiff, these renegotiations deprived MetroCap of nearly all of the financial benefit negotiated for in the agreement.

Defendant, on the other hand, contends that it acted within its rights since pursuant to the Pricing Side Letter (the "PSL") dated December 22, 2006, no funds were required to be advanced unless defendant, at its "sole discretion", accepted the mortgage asset as an "Eligible Asset" as defined in Section 1, p. 1. Nomura claims that it legally exercised its business discretion in an attempt to manage its risk.

Moreover, defendant contends that plaintiff's remedy under the agreement was to exercise an option to terminate the contract prior to the expiration of the 364-day contractual period, if defendant failed "to purchase more than 50% of the Assets for which [MetroCap] has delivered Transaction Notices during the first six (6) calendar months following the Effective Date, the first Business Day of the seventh (7th) calendar month following the Effective Date".

There is no dispute that plaintiff never attempted to exercise this option.

Plaintiff also alleges in the First Amended Complaint that defendant acted in bad faith after defendant decided in the Spring of 2007 to exit the business of financing real estate loans in the United States, and refused to negotiate with plaintiff to reduce the total amount of the credit facility, or to return, reduce or eliminate the "non-utilization fee," or return the $500,000 origination fee paid by plaintiff at the outset of the agreement.

In addition, plaintiff claims that Nomura's Director, Jeremy Stoler, explicitly stated in July 2007 that Nomura did not expect any loans submitted by MetroCap would fit the matrix pricing criteria set forth in the agreement, thus signaling that plaintiff would be forced to renegotiate the terms of all loans that it submitted.

Moreover, plaintiff asserts that in August 2007, defendant suddenly demanded an unsubstantiated margin call under the agreement, requiring MetroCap to pay approximately $750,000 within two days. Plaintiff claims that it met the margin call in a timely manner to avoid what it perceived as defendant's bad faith attempt to cause MetroCap to default under the Agreement. A similar set of events allegely occurred again in November 2007. [*3]

MetroCap claims that it attempted to open negotiations with Nomura in or about August 2007 to extend the agreement beyond the scheduled termination date of December 2007, but that defendant failed to inform MetroCap that it did not intend to extend the agreement; rather, plaintiff alleges that defendant falsely represented that a deal would "get done." As a result, plaintiff claims that defendant falsely induced MetroCap into an expectation that Normura would extend or renew the Agreement, which was essential to protecting MetroCap's outstanding equity. Plaintiff further claims that it declined to go forward with other loan facilities in October and November 2007 that would have provided relatively reasonable terms substantially more favorable to the terms MetroCap was forced to accept when it ultimately refinanced in December 2007.

Plaintiff's First Amended Complaint seeks to recover damages for defendant's purported breach of contract, including the loss of the $500,000 origination fee, payment of the two unwarranted margin calls totaling $1.4 million, payment of unnecessary "non-utilization" fees totaling $54,670.01, out-of-pocket expenses incurred in developing the loans, lost profits by having to contribute more equity and pay higher prices for the loans through the forced' renegotiation process, needless counsel and accountants' fees, and an allegedly excessive $1 million origination fee with plaintiff's new partner.

Defendant now moves for an order pursuant to CPLR § 3211(a) (1) and (7) dismissing plaintiff's First Amended Complaint on the grounds that:

1.a defense is founded upon documentary evidence, and plaintiff has failed to state a cause of action, in that New York law does not allow a sophisticated business like plaintiff to bring an action that is directly contradicted by the terms of written contracts that it negotiated, drafted and signed;

2.pursuant to the written contract, defendant had the "sole discretion" on whether to purchase one or more of the collateral debt obligations offered by plaintiff MetroCap for sale, and thus plaintiff's lawsuit is directly contradicted by the plain meaning of the written contract (see, NYNEX Corp. v Shared Resources Exchange, Inc., 1990 WL 605347 [Sup. Ct., Westchester Co.], which found that the court could not re-write the parties' agreement to limit the application of a "sole discretion" provision to certain circumstances);

3.plaintiff's action improperly seeks to extend the term of the contract, which was specifically stated as "364 days" from December 22, 2006; and

4.plaintiff's request for damages, including lost profits and other consequential damages, is precluded by the terms of paragraph 23(b) of the agreement which provides, in relevant part, as follows: Seller [i.e., MetroCap] also agrees not to assert (and to cause Servicer not to assert) any claim against Buyer [i.e., Nomura] or any of its Affiliates, or any of their respective officers, directors, employees, attorneys and agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to the Program Documents, the actual or proposed use of the proceeds of the Transactions, this Agreement or any of the transactions contemplated thereby.

[*4]See, Metropolitan Life Insur. Co. v Noble Lowndes International, Inc., 84 NY2d 430, 436 (1994), rearg. denied, 84 NY2d 1008 (1994), which held that "[a] limitation on liability provision in a contract represents the parties' Agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed, which the courts should honor."

Plaintiff argues in opposition that defendant's conduct was inconsistent with the covenant of good faith and fair dealing, and that defendant's right to exercise "sole discretion" on whether or not to approve assets came with an obligation to perform its obligations and exercise its discretion in good faith. See, Maddaloni Jewelers, Inc. v Rolex Watch U.S.A., Inc., 41 AD3d 269, 270 (1st Dep't 2007) which held that [a]lthough the ... Agreement made the acceptance of plaintiff's orders and the timing of deliveries subject to [defendant's] discretion, the implied covenant obligated [defendant] to exercise such discretion in good faith, not arbitrarily or irrationally (citations omitted).

Plaintiff also contends that it was entitled to expect that at least some of the transactions would have been approved by the defendant in accordance with the terms as they were originally negotiated (as opposed to renegotiated terms), since plaintiff claims that the transactions met the criteria set forth in the agreement.[FN2]

Plaintiff further argues that defendant's interpretation of the agreement - i.e., in placing all the emphasis on the "sole discretion" provision - renders a majority of the agreement (including 13 separate provisions of the PSL which define the term, "Eligible Asset") meaningless.

In addition, plaintiff argues that MetroCap reasonably relied to its detriment upon Nomura's promise to renew the agreement, since Normura repeatedly assured MetroCap beginning in August 2007 that it expected to extend the agreement beyond the December 2007 termination date.[FN3]

Finally, plaintiff argues that it is entitled to consequential damages because its claims in this case arise out of "willful misconduct" engaged in by the defendant. Paragraph 23(b) specifically provides that THE FOREGOING INDEMNITY AND AGREEMENT NOT TO ASSERT [*5]CLAIMS EXPRESSLY APPLIES, WITHOUT LIMITATION, TO THE NEGLIGENCE (BUT NOT GROSS NEGLIGENCE OR WILLFUL MISCONDUCT) OF THE INDEMNIFIED PARTIES.

However, in reviewing an almost identical contract provision, the Court of Appeals held in Metropolitan Life Insur. Co. v Noble Lowndes International, Inc., supra at 439, that a defendant's nonperformance of a contract which is "motivated exclusively by its own economic self-interest" does not constitute a "willful act".

Thus, the exception to Nomura's general contractual immunity from liability for consequential damages set forth in paragraph 23(b) does not apply and plaintiff must be held to the terms of the parties' contract, including the agreement not to assert such claims.

Therefore, even were plaintiff to establish that defendant breached the covenant of good faith and fair dealing by failing to approve any of the transactions under the original terms, plaintiff may not recover any of the damages sought herein.

Accordingly, based on the papers submitted and the oral argument held on the record on November 12, 2008, defendant's motion to dismiss the First Amended Complaint is granted.

The Clerk may enter judgment dismissing the First Amended Complaint with prejudice and without costs or disbursements.

This constitutes the decision and order of this Court.

Dated: February , 2009

Barbara R. Kapnick

J.S.C.

Footnotes

Footnote 1:There is no dispute that Nomura funded over $13 million in mortgages pursuant to the renegotiated terms during the term of the contract.

Footnote 2:Plaintiff claims that defendant's actions in rejecting every proposal submitted by MetroCap under the agreed upon matrix denied MetroCap the benefits of the contract, which never contemplated the renegotiation of the objective criteria for determining acceptable assets.

Footnote 3:Plaintiff contends that it is standard practice in the industry to routinely extend such agreements.