RESTANI, Judge:
Appellee Gaia House Mezz LLC ("Gaia") and State Street were bound by a mezzanine loan
In December 2006, Gaia entered into a mezzanine loan agreement (the "Agreement") with Lehman Brothers to help finance the construction of a residential building. The Agreement was secondary to Gaia's loan with iStar FM Loans LLC ("iStar") of approximately $45 million. After Lehman Brothers' bankruptcy in September 2008, State Street assumed Gaia's loan. Gaia failed to pay off any of its debt to State Street by the initial Maturity Date of July 1, 2009 and committed several other Defaults.
In September 2009, State Street and Gaia modified the Agreement with the Second Loan Modification Agreement ("Second Modification"), which expressly waived Gaia's prior Defaults, including its failure to achieve Substantial Completion by the date specified in the Agreement. The Second Modification established a new Maturity Date of January 2010, with the option to extend the Maturity Date four times up
In addition to new deadlines, the Second Modification created several new provisions relevant here, including the Accrued Interest Waiver, the Affiliate Purchase Right, and the Lockbox Agreement. The Accrued Interest Waiver provides:
J.A. 802-03 (Second Modification). This had the effect of freezing interest at $10.1 million and providing an interest-free loan on the $20.7 million in principal, provided there were no future Events of Default. Gaia's monthly statements reflected the calculation of the monthly interest and tracked the total amount of interest accrued since the initial Maturity Date (the "Accrued Interest").
The Affiliate Purchase Right provision states that "Borrower or an Affiliate of Borrower shall be allowed to purchase any of Residential Units ... 8N, ... 11S, [or] PH1 ... in order to satisfy the Loan and Senior Loan reduction covenants described above at the applicable `Minimum Unit Sales Price.'" J.A. 809 (Second Modification). This provision enabled Gaia, or its affiliates, to purchase the specified units in order to avoid a default and a quick foreclosure. The Second Modification also incorporated the Amended and Restated Mezzanine Lockbox Agreement ("Lockbox Agreement"), which provided a mechanism for the distribution of proceeds from the sale of units. Proceeds would be distributed in a specified priority such that State Street's loan would be paid in full, then Gaia could recoup its equity investments, and any remaining proceeds would be split 50/50 between Gaia and State Street until all units were sold.
After the Second Modification, Gaia committed several Events of Default, including the failure to obtain a TCO for PH2 by April 15, 2010. In May 2010, the parties agreed to the Third Loan Modification Agreement ("Third Modification"). The Third Modification expressly waived the previous Event of Defaults, including the failure to obtain TCOs. The Third Modification also extended the deadline to obtain a TCO for PH2 and attain Substantial Completion to July 15, 2010 and extended the Maturity Date to January 15, 2011 pursuant to the Third Extension option. The Third Modification repeated relevant provisions of the Second Modification, including the Accrued Interest Waiver and the Affiliate Purchase Right.
Gaia failed to obtain a TCO for PH2 and failed to achieve Substantial Completion by the specified deadline of July 15, 2010. Despite these Events of Default, the parties took action otherwise required by the Agreement, Gaia closed on several apartments during the summer of 2010, and Gaia made its final payment to iStar in August 2010.
On December 2, 2010, State Street provided written notice that Gaia's failure to achieve Substantial Completion and obtain a TCO for PH2 by July 15, 2010 constituted Events of Default. On December 13, 2010, Gaia obtained the TCO for PH2. On January 7, 2011, State Street notified Gaia in writing that, because of the Events of Default, State Street was not required to waive the Accrued Interest. The letter also
J.A. 1699 (State Street Jan. 7, 2011 Letter to Gaia).
In February 2011, Gaia obtained a loan from Doral Bank in order to purchase the remaining three unsold units and replace State Street as the lender. On March 15, 2011, Gaia notified State Street of its intention to exercise the Affiliate Purchase Right and purchase the remaining three units for the minimum contract price. On March 24, State Street responded that it did not object to Gaia's use of the Affiliate Purchase Right. State Street again observed that two Events of Default had occurred and declared that it was "not required to waive, and will not waive, the payment of Accrued Interest." J.A. 1741 (State Street Mar. 24, 2011 Letter to Gaia). Gaia's affiliates purchased the remaining three units for the minimum contract price. The resulting proceeds did not cover all of Gaia's equity, and thus, State Street did not receive profits under the 50/50 profit sharing provision of the Lockbox Agreement.
In July 2011, Gaia paid off the remaining $4.1 million in principal. Under protest, Gaia also paid approximately $4.5 million in Accrued Interest and $370,000 in Professional Fees. Because Gaia had not planned to pay the Accrued Interest, it was forced to obtain $328,097 in additional financing from Doral Bank (the "Doral damages") in order to make the final payment.
Gaia then initiated this litigation, alleging it was entitled to a return of the Accrued Interest and Professional Fees and that State Street was liable for the Doral damages. State Street counterclaimed for a declaratory judgment that it was entitled to the Accrued Interest and that it was not liable for the Doral damages. State Street also requested attorney fees incurred in this litigation pursuant to the Agreement's Professional Fee provision. Following a bench trial, the district court found equity required State Street to return the Accrued Interest and Professional Fees paid by Gaia and that State Street was liable for the Doral damages. State Street now appeals.
The district court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291. "Under New York law ... if a contract is unambiguous on its face, its proper construction is a question of law." Metro. Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889 (2d Cir.1990) (citation omitted). Mixed questions of law and fact are reviewed de novo; factual findings are reviewed for clear error. Diesel Props S.R.L. v. Greystone. Bus. Credit II LLC, 631 F.3d 42, 51-52 (2d Cir.2011).
It is undisputed that State Street did not violate any terms of the Agreement
Under New York Law, a claim for equitable estoppel "rests upon the word or deed of one party upon which another rightfully relies and so relying changes his position to his injury." Nassau Trust Co. v. Montrose Concrete Prods. Corp., 56 N.Y.2d 175, 451 N.Y.S.2d 663, 436 N.E.2d 1265, 1269 (1982) (citation and internal quotation marks omitted). The party alleging equitable estoppel must demonstrate:
Gen. Elec. Capital Corp. v. Armadora, S.A., 37 F.3d 41, 45 (2d Cir.1994).
The district court found that State Street committed an act of concealment by not providing immediate notice that two Events of Default had occurred and instead waiting nine months before informing Gaia that payment of the Accrued Interest was required. It found that State Street's silence was intended to perpetuate the idea that Gaia was entitled to a waiver of the Accrued Interest and to induce Gaia into continuing with the project.
The district court's finding fails as a matter of law, because a party's silence does not give rise to a claim of equitable estoppel when the party has no duty to speak. Compare Babitt v. Vebeliunas (In re Vebeliunas), 332 F.3d 85, 94 (2d Cir. 2003) (finding defendant's silence could not give rise to equitable estoppel because defendant had no duty to speak), with Kosakow v. New Rochelle Radiology Assocs., P.C., 274 F.3d 706, 725-26 (2d Cir.2001) (finding silence constituted an act of concealment when employer had legal obligation to provide notice). Here, Gaia agreed, per the terms of the Agreement, that once a described default occurred, "then an `Event of Default' ... shall automatically exist"; that State Street had no obligation to accept any cures; and that, in response to such Events of Default, State Street could "take such action, without notice or demand, as Lender deems advisable." J.A.2027, 2030-32 (Compilation of Key Contract Terms). Thus, State Street did not have a duty to provide Gaia notice of the Events of Default or of its intention to collect interest, and its silence cannot give rise to a claim of equitable estoppel.
The district court disregarded the above provisions of the Agreement because it found that State Street routinely disregarded the Agreement when it suited State Street's interests. Specifically, the district court noted that State Street granted the Fourth Extension option, even though under the Agreement the extension was not available in the Event of a Default, and State Street consistently ignored the definition of Substantial Completion.
In addressing this reasoning, we first acknowledge that "any written agreement, even one which provides that it cannot be modified except by a writing signed by the parties, can be effectively modified by a course of actual performance." Harold J. Rosen Trust v. Rosen, 53 A.D.2d 342, 386 N.Y.S.2d 491, 499 (1976), aff'd, 43 N.Y.2d 693,
Turning to State Street's course of performance, the record demonstrates that when State Street waived provisions of the Agreement, including the requirement to obtain Substantial Completion, it did so expressly and in writing, while reserving all other rights. When State Street waived the Events of Default for purposes of the Fourth Extension option, it did so expressly and in writing, as required by the Agreement. State Street also expressly stated in writing that the waiver of the Events of Default for purposes of the Fourth Extension option had no effect on State Street's ability to require payment of the Accrued Interest, consistent with the Agreement provision that a waiver in one instance should not be considered a waiver in any other circumstances. Additionally, even if State Street did not insist on Gaia's strict performance of its obligation to obtain Substantial Completion prior to its final payment to iStar, Gaia agreed that State Street's failure to insist on strict performance of a particular term "shall not be deemed to be a waiver of such term." Id. Thus, State Street's course of performance, including its disregard of particular contractual obligations on Gaia's part from time to time, was consistent with the Agreement, and the Agreement remains enforceable. See John Doris, Inc. v. Solomon R. Guggenheim Found., 209 A.D.2d 380, 618 N.Y.S.2d 99, 100 (1994) (reaffirming the obligation of the courts to enforce the terms as agreed to by the parties).
Returning to whether there was a misrepresentation or omission, Gaia argues that emails and the monthly account statements from Trimont Real Estate Advisors, Inc. ("Trimont"), the company contracted to service State Street's accounts, indicated that State Street would not collect the Accrued Interest. The Trimont statements tracked the total amount of Accrued Interest in an "Uncapitalized Deferred Interest Balance" line item but did not specifically state that the interest was due or add the interest to the loan's total balance.
Even if the monthly statements or emails are misleading in that they do not state that an Event of Default had occurred or that the Accrued Interest would come due, Gaia's reliance on them is unreasonable. Gaia does not dispute that it failed to obtain a TCO for PH2 by July 15, 2010 or that the Agreement defines such a failure as an Event of Default. As a sophisticated real estate developer who negotiated the Agreement with counsel, Gaia had to look no further than to the plain language of the Agreement to know that an Event of Default had occurred and that the Accrued Interest would come due on the Date of Maturity, without further action by State Street. Gaia cannot allege that the representations from Trimont demonstrated that an Event of Default did not occur or that State Street had no intention to collect the Accrued Interest in light of the contractual terms stating otherwise. See Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir.1984) (finding no justifiable reliance when party has access to all of the material facts and the expertise necessary to understand the facts); N.Y. State Mortg. Loan Enforcement & Admin. Corp. v. Coney Island Site Five Houses, Inc., 109 A.D.2d 311, 491 N.Y.S.2d 671, 676 (1985) (finding a party cannot claim justifiable reliance in the face of a conflict between the alleged misrepresentations and the written terms of the agreements).
Even if Gaia had been able to demonstrate reasonable reliance on a misrepresentation or omission by State Street, its claim still fails because it did not demonstrate that the alleged misrepresentations caused it to change its position to its substantial detriment. The district court found that State Street's silence induced Gaia to expend significant effort in completing construction and selling units during difficult economic conditions. Gaia argues it detrimentally changed its positions as a result of State Street's concealment by: (a) executing the Second and Third Modifications and (b) expending significant time and money to finish the project.
The district court's conclusion that Gaia suffered detrimental reliance by continuing with the project fails as a matter of law. A party cannot establish justifiable reliance by alleging it was induced to perform an existing legal obligation. Organ v. Stewart, 60 N.Y. 413, 420 (1875) (finding no estoppel when "the party claiming the benefit of it has been induced to do only that which he might have been compelled to do"); Am. Prescription Plan, Inc. v. Am. Postal Workers Union, 170 A.D.2d 471, 565 N.Y.S.2d 830, 832 (1991) (rejecting equitable estoppel claim when plaintiff alleged reliance based on conduct that was consistent with its contractual obligations).
Gaia argues it had no existing obligation to agree to the Second and Third Modifications, but it was induced to do so based on State Street's representation that the Accrued Interest would not be collected. The district court found, and Gaia argues, that the alleged concealment and misrepresentations occurred between July 2010 and March 2011. The Second and Third Modifications were agreed to in September 2009 and May 2010, respectively. Gaia's agreement to the Second and Third Modifications, therefore, could not have been in reliance on any alleged concealment because the Modifications were agreed to
Gaia did not demonstrate an omission or misrepresentation by State Street on which Gaia reasonably relied to its substantial detriment. Accordingly, Gaia cannot rely on equitable estoppel to recover the Accrued Interest.
The implied covenant of good faith and fair dealing prevents any party from doing "anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389, 639 N.Y.S.2d 977, 663 N.E.2d 289 (1995) (quotation marks omitted). The doctrine is employed when necessary to "effectuate the intentions of the parties, or to protect their reasonable expectations." M/A-COM Sec. Corp. v. Galesi, 904 F.2d 134, 136 (2d Cir. 1990) (quotation marks omitted). In order to find a breach of the implied covenant, a party's action must "directly violate an obligation that may be presumed to have been intended by the parties." Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 407-08 (2d Cir.2006) (quotation marks omitted). The covenant cannot be used, however, to imply an obligation inconsistent with other terms of a contractual relationship. Dalton, 87 N.Y.2d at 389, 639 N.Y.S.2d 977, 663 N.E.2d 289.
Here, the district court noted that in the Spring of 2011, State Street could expect to receive $1 million under the profit sharing provision, but would receive over $4 million by declaring the Accrued Interest due. The district court found that State Street violated the principles of good faith and fair dealing because it did not provide a credible and satisfactory explanation for its decision to require Gaia to pay the approximately $4 million in Accrued Interest.
The district court's conclusions fail as a matter of law because Gaia did not demonstrate that State Street violated an expected obligation. See Thyroff, 460 F.3d at 407-08. We cannot presume that the parties intended Gaia to obtain a waiver of the Accrued Interest upon an Event of Default or receive specific notice because these obligations conflict with the express language of the Agreement. See Dalton, 87 N.Y.2d at 389, 639 N.Y.S.2d 977, 663 N.E.2d 289. Additionally, given the terms of the Accrued Interest Waiver, State Street's previous waivers in writing, and the various contractual terms limiting the effect of waivers and estoppel, Gaia did not have a reasonable expectation that State Street would forgo its right to collect the Accrued Interest when State Street had never waived expressly its right to do so.
Because State Street acted consistently with the contract and did not violate a presumed obligation or Gaia's reasonable expectations, it was entitled to act in its own self-interest and require payment of the Accrued Interest, even if such action lessened Gaia's anticipated profits. See M/A-COM Sec. Corp., 904 F.2d at 136 (noting the implied covenant of good faith is not implicated merely because a party acts in its "own interests in a way that may incidentally lessen the other party's anticipated fruits from the contract" (quotation marks omitted)). This is true regardless of the difficult economic conditions facing Gaia. See Fasolino Foods Co. v. Banca Nazionale del Lavoro, 961 F.2d 1052,
Equity may intervene to "prevent a substantial forfeiture occasioned by a trivial or technical breach." Fifty States Mgmt. Corp. v. Pioneer Auto Parks, 46 N.Y.2d 573, 576-77, 415 N.Y.S.2d 800, 389 N.E.2d 113 (1979) (enforcing rent acceleration clause after failure to timely pay rent and noting that the increased burden imposed on tenant after its willful failure to comply with contract's deadlines did not amount to a forfeiture). The "contracted-for financial consequence of the [parties'] own failure to do that which they promised to do" is not a forfeiture. 1029 Sixth, LLC v. Riniv Corp., 9 A.D.3d 142, 777 N.Y.S.2d 122, 128 (2004) (finding tenants' failure to comply with strict vacate date in lease, thereby losing their right under the lease to receive a cash bonus, was not a forfeiture).
The district court found that, by the time State Street demanded the Accrued Interest in March 2011, any Events of Default had been cured and were only technical in nature. Accordingly, the district court found that equity would intervene in order to prevent the forfeiture of over $4 million in Accrued Interest occasioned by such trivial and technical breaches. Gaia further argues that the Events of Default are not material because State Street did not suffer any harm as a result.
The district court erred as a matter of law in concluding that Gaia's obligation to pay the Accrued Interest constituted a forfeiture. The parties agreed that Gaia could earn a waiver of the Accrued Interest by meeting the deadlines specified in the Agreement. Gaia failed to meet the deadlines, and as a result, it failed to earn the waiver. Thus, Gaia's obligation to pay the Accrued Interest is merely the contracted-for financial consequence of its own failure to do that which it promised to do, and is not a forfeiture. See id.
Additionally, the district court erred in defining the Events of Default as trivial or technical breaches when the parties expressly agreed to designate the Events of Default as material. The Agreement included a time-is-of-the-essence clause, which rendered the deadlines material. See New Colony Homes, Inc. v. Long Island Prop. Grp., LLC, 21 A.D.3d 1072, 803 N.Y.S.2d 615, 616 (2005) ("[W]here time is of the essence, performance on the specified date is a material element of the contract, and failure to perform on that date constitutes, therefore, a material breach of the contract.").
In sum, the Agreement authorized State Street to collect the Accrued Interest, and Gaia failed to prove an equitable remedy excusing it from paying. Accordingly, State Street did not unlawfully demand payment of the Accrued Interest, and it is not liable for the Doral damages.
The Professional Fee provision provides:
J.A. 444-45 (Agreement). The district court found that this provision did not apply because this action was not "in connection with or as a consequence of" an Event of Default, the collection of Debt, or the enforcement of State Street's rights under the Loan Documents. This was incorrect. Interest is included within the Agreement's definition of "Debt," and thus, State Street's counterclaim for the Accrued Interest is in connection with or a consequence of State Street's collection of Debt. Additionally, State Street's counterclaim is connected to the enforcement of State Streets rights and remedies under the Loan Documents, and the attorney fees have been incurred as a consequence of defending an action affecting the Loan Parties and Loan Documents. Accordingly, the Professional Fee provision applies to this action, and State Street is entitled to Professional Fees incurred as a result of this litigation.
For the reasons discussed above, the decision of the district court is REVERSED and judgment shall enter for State Street on the Accrued Interest, Doral damages, and Professional Fee claims. This matter is REMANDED to the district court for further proceedings to determine the amount of Professional Fees that Gaia owes State Street due to this litigation. Such fees and costs will include the monies expended in the initial trial, the appeal, and in any subsequent proceedings, minus any amount Gaia has already paid. The clerk is directed to refer any further appeal following remand to this panel.
