Gaia House Mezz LLC v. State Street Bank & Trust Co., 2013 U.S. App. LEXIS 11780

Gaia House Mezz LLC and State Street were bound by a mezzanine loan agreement for constructing a Manhattan residential building; State Street assumed Gaia’s loan after Lehman Brothers’ bankruptcy.
Gaia failed to achieve Substantial Completion or obtain a Temporary Certificate of Occupancy by deadlines, triggering events of default under the Agreement.
The Second Modification waived prior Defaults and set new deadlines; it also included an Accrued Interest Waiver and other provisions governing waivers.
After successive modifications (Second and Third), Gaia again failed to meet deadlines, but the parties continued performing under the Agreement.
In 2011 Gaia paid approximately $4.5 million in Accrued Interest and $370,000 in Professional Fees, funded in part by a $4.1 million principal payoff and additional financing; Gaia then sued alleging it was entitled to recover the Accrued Interest and Fees and that State Street was liable for damages incurred to obtain financing.
The district court awarded Gaia, finding State Street’s demand for Accrued Interest unlawful; this appeal reverses those rulings and awards against Gaia

Issue	Plaintiff's Argument	Defendant's Argument	Held
Equitable estoppel prevents accrual recovery	Gaia contends State Street concealed defaults, inducing reliance	State Street had no duty to disclose defaults; waiver rights preserved	Equitable estoppel does not apply; silence not a duty to speak under contract
Good faith and fair dealing obligates state Street to forgo collection	State Street acted to extract profits contrary to reasonable expectations	No implied obligation conflicting with express contract; motives irrelevant	No breach of the implied covenant; actions consistent with contract
General equity does not excuse payment or constitute forfeiture avoidance	Equity should prevent forfeiture of $4+ million for technical/default issues	Waivers and time-is-of-the-essence clauses show contract governs final results	Accrued Interest not forfeited; no equitable remedy to excuse payment; not a forfeiture under equity
Professional Fees entitlement under the Agreement			Professional Fee provision applies; Gaia owes State Street fees incurred defending this litigation

Nassau Trust Co. v. Montrose Concrete Prods. Corp., 436 N.E.2d 1265 (N.Y. 1982) (equitable estoppel elements and reliance in contract)
Gen. Elec. Capital Corp. v. Armadora, S.A., 37 F.3d 41 (2d Cir. 1994) (contractual waivers and course of performance can modify terms)
Babitt v. Vebeliunas (In re Vebeliunas), 332 F.3d 85 (2d Cir. 2003) (silence generally not a basis for estoppel absent duty to speak)
Kosakow v. New Rochelle Radiology Assocs., P.C., 274 F.3d 706 (2d Cir. 2001) (justifiable reliance undermined by conflict with written terms)
Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729 (2d Cir. 1984) (reliance and conflicts with contract terms limited by explicit language)
N.Y. State Mortg. Loan Enforcement & Admin. Corp. v. Coney Island Site Five Houses, Inc., 491 N.Y.S.2d 671 (App. Div. 1985) (reliance and equity considerations in mortgage enforcement)
Harold J. Rosen Trust v. Rosen, 386 N.Y.S.2d 491 (App. Div. 1976) (course of performance can modify a contract when expressly waived)
John Doris, Inc. v. Solomon R. Guggenheim Found., 618 N.Y.S.2d 99 (App. Div. 1994) (enforcement of contract terms as agreed; no re-writing by court)
Fasolino Foods Co. v. Banca Nazionale del Lavoro, 961 F.2d 1052 (2d Cir. 1992) (good faith does not require altruistic performance at others’ expense)
Metro. Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884 (2d Cir. 1990) (contract terms govern, courts do not rewrite agreements)