101 A.D.3d 37
N.Y. App. Div.2012Background
- Lender G3-Purves Street LLC financed borrower Thomson Purves LLC with a mortgage-backed loan secured by real property and a Guaranty of Recourse Obligations by Singer and Weiss.
- Loan generally nonrecourse but included carve-out “springing recourse events” triggering personal liability for guarantors.
- Carve-outs include failure to pay taxes, allowing liens, or failing to pay debts as due, which can trigger acceleration.
- Guaranty stated guarantors would pay all debt “absolutely and unconditionally” from the date any Springing Recourse Event occurs.
- Approximately 16 months later the lender accelerated due to tax nonpayment; lender sued for foreclosure and deficiency against guarantors; dispute centers on whether guaranty’s springing provision is a liquidated damages penalty.
- Guarantors argued the springing provision imposes liability only for certain violations and is a liquidated damages penalty; the court held it is a liability-defining provision, not a penalty.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the springing recourse clause a liquidated damages provision? | Guarantors: clause is a liquidated damages provision. | Lender: clause is not liquidated damages; it's a liability mechanism. | Not a liquidated damages provision. |
| Does guaranty create personal liability upon springing events? | Guaranty liability arises only for acts interfering with recovery. | Guaranty imposes personal liability after springing events. | Guaranty creates personal liability under the terms. |
| Are terms of guaranty read in context with loan agreement unambiguous and enforceable? | Terms reflect bargained-for liability for springing events. | Terms are clear and unambiguous, enforceable as written. | Terms are unambiguous; enforceable; not a penalty. |
Key Cases Cited
- Greenfield v Philles Records, 98 NY2d 562 (NY 2002) (Contracts interpreted by plain meaning of terms)
- Etzion v Etzion, 84 AD3d 1015 (1st Dep’t 2011) (Unambiguous contract interpretation; strict reading of guaranties)
- Aivaliotis v Continental Broker-Dealer Corp., 30 AD3d 446 (1st Dep’t 2006) (Guaranty interpreted in light of contemporaneous loan)
- Louis Dreyfus Energy Corp. v MG Ref. & Mktg., Inc., 2 NY3d 495 (2004) (Guaranty construed in context of loan; strict obligation)
- 665-75 Eleventh Ave. Realty Corp. v Schlanger, 265 AD2d 270 (1st Dep’t 1999) (Guarantor bound to express terms of written guaranty)
- CSFB 2001-CP-4 Princeton Park Corporate Ctr., LLC v SB Rental I, LLC, 410 NJ Super. 114 (N.J. Super. 2010) (Carve-out provisions affect collateral value; not a penalty)
- Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420 (NY 1977) (Liquidated damages test: reasonable proportionality to probable loss)