GSO RE Onshore LLC v Sapir

[*1] GSO RE Onshore LLC v Sapir 2010 NY Slip Op 52138(U) [29 Misc 3d 1234(A)] Decided on November 24, 2010 Supreme Court, New York County Fried, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 November 24, 2010
Supreme Court, New York County

GSO RE Onshore LLC, Plaintiff,

against

Tamir Sapir, Defendant.



650367/10



For Plaintiff

Kobre & Kim LLP

800 Third Avenue

New York, New York 10022

(Michael S. Kim;

Elizabeth Wolstein)

For Defendant

Meister Seelig & Fein LLP

2 Grand Central Tower

140 East 45th Street, 19th Floor

New York, New York 10017

(Stephen B. Meister; James M. Ringer;

Thomas L. Friedman)

Bernard J. Fried, J.

Motion Sequences Nos. 001 and 002 are consolidated for disposition.

In Sequence No. 001, Plaintiff GSO RE Onshore LLC (GSO) moves, pursuant to CPLR 3213, for summary judgment in lieu of complaint, awarding it judgment in the amount of $130,606,369, plus, in accordance with the governing loan documents, interest as it continues to accrue, attorneys' fees and costs. Defendant Tamir Sapir (Sapir) cross-moves, pursuant to CPLR 3211 (a) (8), for an order dismissing the complaint for lack of personal jurisdiction, based on the failure to effectuate proper service upon him.

On October 24, 2006, GSO, as lender, and SDS William Street Mezz LLC (SDS), as borrower, entered into an agreement under which GSO would loan SDS a principal amount of up to $65.5 million, at an interest rate of 18% per year. SDS sought the loan to fund the development and construction of a building of condominium apartments, with ancillary parking [*2]and retail, at 15 William Street, New York, New York (the Project). The loan was evidenced by an October 24, 2006 note made by SDS to the order of GSO, obligating SDS to pay GSO the principal sum of $58 million, plus interest.

The original loan agreement was amended twice, on May 8, 2007, and on July 14, 2008. The second amendment increased the maximum principal amount of the loan to $66,199,781 and raised the interest rate, from and after July 14, 2008, to 20% per year. The promissory note was correspondingly amended on May 8, 2007 and July 14, 2008. GSO explains that the original loan agreement, together with the two amendments thereto (collectively, the Loan Documents), set forth the complete terms of the loan. Under the Loan Documents, SDS was not required to pay interest during the term of the loan, but rather was required to repay the entire loan principal and all accrued interest on the maturity date.

As a condition for making the loan, GSO required that it be personally guaranteed by someone with the ability to repay it in the event of SDS's default. SDS offered Sapir, an investor in the Project, as the guarantor. On October 24, 2006, Sapir and GSO entered into a guaranty (the Guaranty) in which Sapir personally and unconditionally guaranteed payment and performance of all of SDS's obligations under the Loan Documents. In paragraphs 3 and 10 of the Guaranty, Sapir agreed to waive any defenses that he might have to an action against him under the Guaranty, except for the defense of actual timely performance of his obligations under the Guaranty. Sapir further agreed to waive any right to notice of default or demand for payment.

The original loan agreement had a maturity date of November 1, 2009. Although SDS had the option of extending the maturity date under certain circumstances, it did not do so. GSO asserts that SDS failed to repay the loan principal and accrued interest on the maturity date, and has not done so since then, which failure constitutes an "Event of Default" under section 7.1 (i) of the original loan agreement. Section 2.5 (d) of the original loan agreement requires SDS to pay interest at a "Default Rate" from the time an event of default occurs until the date when the amount owed to GSO is paid in full. GSO states that the Default Rate is 25%, based on the term's definition in the original loan agreement as "the lesser of (a) 5.0% per annum in excess of the Applicable Interest Rate and (b) the maximum rate allowable by applicable law."

GSO argues that it is entitled to summary judgment in lieu of a complaint because the undisputed facts show that GSO made a loan to SDS, that Sapir unconditionally guaranteed SDS's obligation to repay the loan and that SDS defaulted on the loan by failing to repay it in full, with interest, on the maturity date. GSO calculates that, as of the maturity date, SDS owed $66,199,781 in principal and $48,730,696 in interest on the loan, for a total of $114,930,477. GSO asserts that, as of May 5, 2010, with interest accruing at the Default Rate of 25%, SDS owed it a total of $130,606,369.

Thus, GSO contends that it is entitled to judgment as a matter of law on the Guaranty in the amount of $130,606,369, plus interest from May 5, 2010, as it continues to accrue on the unpaid principal, plus attorneys' fees and costs as provided in the Guaranty. GSO asserts that there is no impediment to judgment in its favor because the Guaranty expressly waives any defenses Sapir could assert.

In opposition to the motion and in support of the cross motion, Sapir's son, Alex Sapir (A. Sapir) submits an affidavit in which he explains that he is the president of the Sapir Organization and a member of The Sapir Group LLC (the Sapir Group), a privately held, New York-based real estate holding and development firm. Sapir is the chairman of the Sapir [*3]Organization. A. Sapir states that he ran the Sapir Group's day-to-day negotiations of the loan transactions underlying this action.

A. Sapir explains that, in 2005, the Sapir Group started to develop the Project. In connection therewith, the Sapir Group partnered with an entity controlled by S. Lawrence Davis and an entity controlled by the Sapir Group's attorney in connection with the Project, Robert J. Ivanhoe (Ivanhoe) of the law firm Greenberg Traurig LLP. Ivanhoe formed Strategic William Street LLC, the entity through which he was a partner in the Project, with a 5% interest therein. A. Sapir states that Ivanhoe continued to represent SDS, including the Sapir Group (which holds a 90% interest in the Project) in the negotiation of the terms of the loan, including the Guaranty.

A. Sapir contends that GSO knew from the beginning that Ivanhoe was representing the Sapir Group in connection with the loan as well as Sapir in connection with the Guaranty. According to A. Sapir, GSO realized that Ivanhoe, as a partner in the Project, had a conflict of interest. A. Sapir explains that, in the stronger economic times of 2006, the parties predicted profits in the Project that would have netted Ivanhoe's company $15 million, such that GSO knew that Ivanhoe had a strong incentive to complete the deal. According to A. Sapir, because of this knowledge, GSO presented the one-sided Guaranty to Ivanhoe, who then presented it to Sapir. A. Sapir asserts that GSO was aware that a disinterested lawyer without a conflict of interest would not advise Sapir to sign the Guaranty. In his affirmation, Sapir's attorney, Stephen B. Meister, states that it is unheard of for investors such as GSO to earn such high rates of return when there is no risk involved because the returns are guaranteed by a net worth guarantor.

A. Sapir argues that GSO obtained the Guaranty as part of a well thought out plan by which it would get Sapir's attorney to breach his fiduciary duty to Sapir and leave Sapir personally responsible for the entire amount of the loan, plus all accrued interest. A. Sapir contends that Ivanhoe's judgment was clouded by his substantial interest in the Project, such that he breached his fiduciary duty to Sapir by advising him to sign the Guaranty.

In support of the cross motion, Sapir contends that the instant action should be dismissed, pursuant to CPLR 3211 (a) (8), for GSO's failure to effectuate proper service of process of the summons and 3213 motion papers upon him. He explains that the papers were served solely on Ivanhoe, purportedly as "Service Agent" authorized to accept service of such papers on Sapir's behalf. Sapir states that he learned about this lawsuit after he received a copy of the summons and motion papers from Ivanhoe, or someone at his law firm.

Pursuant to section 24 (c) of the Guaranty, Ivanhoe was designated as Sapir's "Service Agent," authorized to accept service of process on Sapir's behalf. Section 24 (d) of the Guaranty states Guarantor agrees to execute, deliver and file all such further instruments or documents as may be necessary under the laws of the State of New York or the laws of the United States in order to make effective (i) the appointment of Service Agent as agent for service of process as provided above and (ii) Guarantor's consent to jurisdiction as provided for in this Guaranty.

Sapir states that, although he received a copy of the summons and motion papers from Ivanhoe, such purported service is insufficient to effectuate service through a designated agent as provided in CPLR 318, such that the cross motion to dismiss should be granted.

CPLR 318 states, in part, that [*4] A person may be designated by a natural person ... as an agent for service in a writing, executed and acknowledged in the same manner as a deed, with the consent of the agent endorsed thereon. The writing shall be filed in the office of the clerk of the county in which the principal to be served resides or has its principal office.

Sapir contends that he did not file any document with the New York County Clerk's office designating Ivanhoe as his agent authorized to accept service. Sapir states that no writing was signed by Ivanhoe wherein he accepted designation as Sapir's agent to receive service. Finally, Sapir points out that no writing authorizing Ivanhoe to act as his agent was acknowledged before a notary. Therefore, Sapir argues that GSO has not complied with CPLR 318, and the service of the summons and 3213 motion papers on Ivanhoe was invalid. Sapir contends that, because he was never personally served with the motion by any of the methods permitted for service on a natural person under CPLR 308, and because any purported service on him through service on Ivanhoe is defective, the cross motion should be granted and the action dismissed.

Sapir argues that, if the court denies his cross motion, then the motion for summary judgment in lieu of complaint should also be denied, and this proceeding should be converted to a plenary action, so that he can interpose appropriate counterclaims and cross claims and adjudicate the validity of the Guaranty before GSO is granted relief.

Sapir further argues that GSO may not avail itself of the streamlined procedures set forth in CPLR 3213 because it relies on extrinsic evidence outside the purported money-only instrument. Sapir also contends that GSO's motion papers lack sufficient evidence to support its calculation of the indebtedness. Specifically, according to Sapir, GSO has not provided any business records or other admissible evidence substantiating its calculation of interest and unpaid principal totaling more than $130 million. Finally, Sapir argues that material issues of fact exist as to the legal validity of the Guaranty, thereby precluding summary judgment at this time. He contends that GSO sought and procured the wildly "non-market" full recourse personal guaranty despite the 18% interest rate accruing under the loan, by aiding and abetting a breach of fiduciary duty by Ivanhoe. According to Sapir, Ivanhoe was so conflicted as to deprive Sapir from having independent and effective counsel.

Sapir's arguments in favor of its cross motion are unavailing and the cross motion is denied. It is undisputed that GSO served Ivanhoe, Sapir's "Service Agent" pursuant to the Guaranty, in the manner expressly permitted in paragraph 24 (e) of the Guaranty. To the extent documentation described in CPLR 318 was not filed with the County Clerk, that is because Sapir failed to comply with the terms of the Guaranty in which he agreed to file such documents. In any case, compliance with CPLR 318 is not required for a valid designation of a service agent. Parties can contractually agree to other methods of service beyond those set forth in the CPLR, and a contract provision designating a party's service agent is valid. National Equip. Rental, Ltd. v Szukhent, 375 US 311 (1964); Orix Credit Alliance v Fan Sy Prods., 215 AD2d 113, 113-14 (1st Dept 1995) (citing to National Equip. Rental, Ltd. v Szukhent, supra, for proposition that service upon a designated agent, pursuant to terms of a lease and guaranties, "clearly suffices").

Under CPLR 3213, a plaintiff may commence an action "based upon an instrument for the payment of money only" by serving "with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint." The purpose of this summary procedure is "to provide a speedy and effective means of securing a judgment on claims [*5]presumptively meritorious." Interman Indus. Prods. v R. S. M. Electron Power, 37 NY2d 151, 154 (1975).

One party's guaranty of another's payment obligations "is clearly an instrument for the payment of money only upon which a motion pursuant to CPLR 3213 may be brought." First Interstate Credit Alliance v Sokol, 179 AD2d 583, 583 (1st Dept 1992). The fact that reference must be made to documents beyond the Guaranty does not take it out of the purview of CPLR 3213, because liability under a guaranty necessarily depends on the existence of a third party's obligation defined in other documents. Bank of Am., N.A. v Solow, 19 Misc 3d 1123(A), 2008 NY Slip Op 50830(U) (Sup Ct, NY County, April 17, 2008, Fried, J., index No. 601892/07), affd 59 AD3d 304 (1st Dept 2009).

GSO has established its prima facie entitlement to judgment as a matter of law because the undisputed facts establish GSO's underlying loan to SDS, Sapir's personal guaranty thereof and the failure to make payment in accordance with their terms. E.D.S. Sec. Sys. v Allyn, 262 AD2d 351, 351 (2d Dept 1999); see also Hotel 71 Mezz Lender LLC v Mitchell, 63 AD3d 447, 448 (1st Dept 2009).

Sapir has not established the existence of any defense to GSO's prima facie case, because the Guaranty contains a waiver-of-defenses provision. Such a provision in a guaranty is valid and enforceable, and bars, as a matter of law, any defenses a guarantor might otherwise assert in an action to recover under its guaranty. Citibank v Plapinger, 66 NY2d 90 (1985); Red Tulip LLC v Neiva, 44 AD3d 204, 209-10 (1st Dept 2007).

I stated at oral argument, without opining on the merits, that Sapir may have a claim against Ivanhoe. GSO also notes in its papers that Sapir, if he can prove his claims, may seek to bring a separate damages action against Ivanhoe for alleged breach of fiduciary duty and/or legal malpractice, and against GSO for allegedly aiding and abetting Ivanhoe's alleged breach. Any such possible claims, however, can not be asserted as defenses to an unconditional guarantee.

Turning to Sequence No.002, in which SAPIR seeks to supplement the record in connection with Sequence #001. At oral argument on #001, following the completion of Sapir's oppositional argument, and after I stated that "I'm prepared to listen very briefly to the plaintiff's response, counsel for Sapir asked to "make a statement off the record at some point". When I declined to permit him to do so, and then denied a request to seal "this portion of the proceedings", counsel asked for a short recess "to contact my client...for permission to make [a] statement". After the recess, defense counsel reported that when the motion response was being prepared, he "was at that time communicating with" the defendant's son. And that after he had done so, the defense counsel met with the defendant, whom he stated "was incomprehensible " Then, reading from what was apparently a medical report (the document was not then submitted, and has never been submitted), counsel stated that the defendant "is diagnosed with aphasia, and the examination revealed that he had not written anything other than signing his name for 10 years." Defense counsel stated that this presented a "real dilemma" because Sapir "owns many other premises on which there are other very, very substantial debts", so "we elected not to put it in for fear that we would be subject to those other predatory lender actions".

Undisputably, the client, or his son, were only contacted during the recess to obtain this so-called permission to disclose because of the way the oral argument was proceeding, i.e., he perceived that he was losing the waiver argument. As defense counsel put it: he "called my client, Alex Sapir, who is running the company at this point, to ask him permission because, [*6]quite frankly, my reading of your Honor's view, although I respectfully disagree with it, was that the waiver was binding." (Emphasis added)

These events led to the filing of Sequence #008, in which Sapir seeks to supplement the record by submitting a September 6, 2010 report written by Sharon Hassin, MD, Specialist in Neurology, Chaim Sheba Medical Center, Israel. Dr. Hassin opines that "[i]t is very probable that [Mr. Sapir's] subtle cognitive and behavioral abnormalities...began several years ago....and could have affected his ability to fully understand aspects of professional issues, the implications of certain contractual and person obligations in a consistent and comprehensive manner and to make logical and professional (financial/business as well as personal decisions)".

The motion to supplement the record (#008) is denied. It is obvious that there has been no good cause shown (CPLR 221[c]); this is emphatically demonstrated by the comment of defense counsel that he sought permission from his client to submit this information - initially informally during the proceedings; and then by formal motion[FN1] - was motivated by his perception that the plaintiff's motion for summary judgment in lieu of complaint would be granted. This, alone, is more than ample reason to deny the motion to supplement. Furthermore, even if the proposed supplemental evidence, i.e., Dr. Hassin's Report were to be accepted, it does not demonstrate that Sapir, at the time he executed the 2006 Guaranty, he "lacked the requisite contractual capacity" (e.g., Blatt v. Manhattan Medical Group, 131 AD2d 48, 52 [1st Dept., 1987]). Moreover, Sapir has only been "a patient of " Dr. Hassin, since 2008. And the Report refers to examinations in 2008 and 2009 (by other doctors), and in 2008 and 2010 (by Dr. Hassin). There are no medical references to 2006; rather, just references, unsupported by affirmation or affidavit, by "his family" to issues "over 5 years ago"; "over 7 years ago", and "five years ago". To me, this submission wholly fails to raise, or establish, that there is a disputed issue of material fact regarding his mental capacity in 2006 to have entered into the Guaranty.

Since the plaintiff has clearly demonstrated its entitlement to summary judgment on the unconditional loan guaranty summary judgment in lieu of complaint is granted as to the amount of the unpaid principal, and a special referee will address the amount of attorneys' fees as well as the applicable pre-judgment and post-judgment interest, applying, where appropriate, the rates set forth in the Loan Documents. See eg Bank of Am., N.A. v Solow, 19 Misc 3d 1123 (A), supra.

Accordingly, it is

ORDERED that plaintiff's motion is granted to the extent that plaintiff is granted summary judgment in lieu of complaint on the principal amount of the loan and the Clerk is directed to enter judgment in favor of plaintiff and against defendant in the amount of $66,199,781.00; and it is further

ORDERED that the remainder of the action is severed; and it is further [*7]

ORDERED that the issues of the amount of pre-judgment and post-judgment interest and the amount of reasonable attorneys' fees to be paid by defendant to plaintiff are referred to a Special Referee to hear and report with recommendations, except that, in the event of and upon the filing of a stipulation of the parties, as permitted by CPLR 4317, the Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further

ORDERED that this motion is held in abeyance pending receipt of the report and recommendations of the Special Referee and a motion pursuant to CPLR 4403 or receipt of the determination of the Special Referee or the designated referee; and it is further

ORDERED that counsel for the party seeking the reference or, absent such party, counsel for the plaintiff shall, within 30 days from the date of this order, serve a copy of this order with notice of entry, together with a completed Information Sheet,[FN2] upon the Special Referee Clerk in the Motion Support Office in Rm. 119 at 60 Centre Street, to arrange a date for the reference to a Special Referee; and it is further

ORDERED that defendant's cross motion is denied.

Dated: November 24, 2010

ENTER:

_______________________

J.S.C. Footnotes

Footnote 1:On September 14, 2010, defendant's subsequent letter request to supplement the record was rejected in an Order which stated: "The record on plaintiff's pending motion will not be supplemented by informal letter application."

Footnote 2:Copies are available in Rm. 119 at 60 Centre Street, and on the Court's website.