Alden Global Value Recovery Master Fund, L.P. v. KeyBank N.A.

Citation: 2018 NY Slip Op 2241Docket: 650928/16 5203A 5203

Court: Appellate Division of the Supreme Court of the State of New York; March 29, 2018; New York; State Appellate Court

Original Court Document: View Document

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Alden Global Value Recovery Master Fund, L.P. successfully appealed a decision from the Supreme Court of New York County that dismissed its claims against KeyBank National Association and Berkadia Commercial Mortgage LLC regarding a breach of an Amended and Restated Pooling and Servicing Agreement (PSA). The core issue was whether the Supreme Court had correctly interpreted the term "default" in the PSA as equivalent to "Event of Default." The Appellate Division affirmed the lower court's ruling, confirming the interpretation was accurate. The case arose from a loan transaction involving the Bryant Park Hotel, which had borrowed funds from a trust established under the PSA. KeyBank served as the Special Servicer, Berkadia as the Master Servicer, and Wells Fargo Bank as the Trustee. The PSA's Section 6.03 limited liability claims against servicers to instances of willful misfeasance, bad faith, or negligence, while providing indemnification for expenses incurred unless due to bad faith or misconduct. Article VII defined "Event of Default" and specified conditions under which a failure by the Master Servicer or Special Servicer would be recognized, particularly requiring a 30-day remediation notice from Certificate holders.

Section 12.03(c) of the Pooling and Servicing Agreement (PSA) establishes a "no-action" clause that limits when a certificateholder can initiate legal proceedings concerning the agreement or any Mortgage Loan. Specifically, a certificateholder must provide written notice of default to the Trustee and Paying Agent, and at least 25% of the holders of Certificates in the relevant class must request the Trustee to take action and provide indemnity for costs. The PSA does not define "default." In October 2011, the borrower defaulted on the loan, leading to a transfer of servicing responsibilities from Berkadia to KeyBank. KeyBank was responsible for assessing the loan's "fair value," which Berkadia later reviewed.

In February 2012, the PSA was amended and restated. By April 2014, KeyBank appraised the property at $71 million and valued the loan at $65,058,844, despite an owed amount of $85.5 million. The nonparty Controlling Class Option Holder (CCOH) chose to purchase the loan, and although the Trust was expected to receive $65 million, it only received about $59 million. Subsequently, the loan was refinanced for over $100 million.

On May 18, 2015, Alden Global Recovery Master Fund, L.P., a holder of at least 25% of Class C certificates, notified Wells Fargo as Trustee of defaults by KeyBank and Berkadia, detailing the appraisal history and requesting legal action. Wells Fargo's counsel later indicated it would not pursue a lawsuit. On February 23, 2016, Alden initiated legal action against KeyBank and Berkadia, alleging breaches of duty under the PSA related to the valuation process and claiming that KeyBank relied on a single appraisal, leading to an undervaluation of the loan. Alden also asserted that Berkadia failed to adequately review KeyBank's valuation and that neither party was entitled to indemnification, with allegations of bad faith against KeyBank.

Berkadia and KeyBank filed motions to dismiss a complaint, which the Supreme Court granted on grounds of CPLR 3211(a)(1) and (7). The plaintiff argues that the court misinterpreted the term "default" in section 12.03(c) of the PSA, equating it with "Event of Default" as defined in section 7.01(a)(iii). The plaintiff claims the case law cited by the court is not applicable and asserts that "Event of Default" should only pertain to servicer removal, not certificateholder litigation initiation. The plaintiff further contends that section 12.03(c) is ambiguous and that undefined, uncapitalized terms should not be interpreted as having the same meaning as defined capitalized terms within the contract.

Defendants argue that precedent supports the court's interpretation of the two terms as synonymous, and that the plaintiff cannot raise the ambiguity argument on appeal since it was not presented before the motion court. Additionally, they assert that the language in section 12.03(c) clearly refers to prior default provisions of the PSA. The legal standards for dismissals under CPLR 3211(a)(1) and (7) emphasize that documentary evidence must conclusively establish a defense and that complaints must be viewed favorably towards the plaintiff. 

The discussion references a precedent case, ACE Sec. Corp. v DB Structured Prods. Inc., where similar contractual language was analyzed. Although the ACE case was dismissed on statute of limitations grounds, it noted that certificate holders must notify the trustee of defaults related specifically to servicer performance under the "no-action" clause in section 12.03, implying the term "default" pertains to servicer actions only.

Article VIII of the pooling and servicing agreement in ACE, titled "Default," outlines the conditions that constitute a "Servicer Event of Default." The conclusion reached in ACE was that certificateholders could not issue a notice of default regarding the sponsor's alleged breach of representations, as "default" in section 12.03 of the agreement was interpreted to refer strictly to the defined "Servicer Event of Default." This reasoning aligns with the earlier case of Walnut Place LLC v Countrywide Home Loans, Inc., where it was determined that the certificateholders' right to sue was limited to an "Event of Default," which involved only the master servicer. The court rejected the plaintiff's interpretation that would have excluded the "Event of Default" provision from the "no-action" clause, reinforcing that these terms should be read together.

In this current case, similar reasoning from Walnut Place applies, even though the term "default" is used in the "no-action" clause instead of "Event of Default." Section 12.03 of the PSA requires written notice of default to be provided in accordance with section 7.01(a)(iii), which necessitates notifying the Special and Master Servicers and all parties involved. Previous case law supports that the phrase "as herein before provided" refers back to prior provisions of the agreement. Additionally, section 8.02(vii) uses "default" and "Event of Default" interchangeably, further solidifying the interpretation of "default" in section 12.03 as synonymous with "Event of Default."

The plaintiff's reliance on Teachers Ins. Annuity Assn. of Am. v CRIIMI Mae Servs. Ltd. Partnership is deemed misplaced, as that case's conclusions pertained solely to conditions for the removal of a Special Servicer, not to initiating litigation by certificateholders.

The agreement in question distinguishes between "Event of Default" and the removal of a servicer. Specifically, sections 7.01(a)(i)-(x) of the PSA outline ten events that qualify as "Event of Default," with section 7.01(a)(iii) detailing the Master Servicer's or Special Servicer's default and its related notice requirements. Removal of a defaulting servicer is addressed separately in section 7.01(b), which allows for such action by the Trustee or the Depositor, but does not state that removal is the exclusive remedy for defaults. The phrase "as herein before provided" in the "no-action" clause (section 12.03(c)) is linked to the notice requirements of section 7.01(a)(iii), necessitating a combined reading of these provisions. 

The court clarifies that "default" in the "no-action" clause should be understood as "Event of Default," consistent with its usage in the PSA. The appeal raises a legal question regarding the contract's interpretation, asserting that a contract is ambiguous if it allows for multiple reasonable interpretations. The determination of ambiguity requires a comprehensive review of the entire contract, the parties' relationships, and the context of its execution. Upon review, the court concludes that the "no-action" clause has only one reasonable interpretation: it underscores the definition of "Event of Default" as stated in section 7.01(a)(iii).

The language of sections 7.01(a)(iii) and 12.03(c) is clear and unambiguous regarding the "no-action clause." The plaintiff's assertion that "default" in section 12.03(c) does not equate to "Event of Default" as defined in section 7.01(a)(iii) lacks a reasonable interpretation. The plaintiff fails to provide an alternative understanding of "default" within the context of "written notice of default as herein before provided," making any other interpretation meaningless. The analysis concludes that "default" in section 12.03(c) should be interpreted as synonymous with "Event of Default" in section 7.01(a)(iii), rendering the plaintiff's argument ineffective. While the plaintiff cites relevant case law emphasizing the necessity of adhering to defined language in contractual clauses, those cases do not pertain to similar circumstances as this case. 

To establish standing to sue, the plaintiff must meet specific conditions set out in both sections 12.03(c) and 7.01(a)(iii). Section 12.03(c) outlines four requirements: (1) the plaintiff must provide written notice of default to the Trustee and Paying Agent; (2) the plaintiff must hold at least 25% of a class of certificates; (3) the plaintiff must request the Trustee to initiate an action and provide indemnity for costs; and (4) sixty days must pass after the Trustee's refusal to act before the plaintiff can file suit. The plaintiff has met the first condition by sending a written notice of default to Wells Fargo, the Trustee and Paying Agent, on May 18, 2015, regarding defaults by KeyBank and Berkadia.

Plaintiff, as the holder of over 25% of Class C Percentage Interests, met the second requirement for standing as outlined in section 12.03(c) of the PSA. In a May 18, 2015 letter, plaintiff requested the Trustee to take legal action against KeyBank and Berkadia for default and offered to indemnify the Trustee for associated costs, fulfilling the third requirement. However, the Trustee refused to initiate the suit in mid-July 2015, and plaintiff did not file the action until February 23, 2016, exceeding the sixty-day limit post-refusal.

To establish standing, plaintiff also needed to demonstrate an actionable default under the PSA, which requires written notice of default per section 7.01(a)(iii). This section defines an Event of Default as any failure by the Master Servicer or Special Servicer to perform obligations, continuing for 30 days after written notice has been given. The record shows no evidence that plaintiff provided such written notice to the Master Servicer or Special Servicer, nor does the May 18 letter indicate it was sent to anyone other than the Trustee. As a result, plaintiff did not meet the criteria for an Event of Default, which undermines its compliance with section 12.03(c) and its standing to sue. 

Consequently, KeyBank and Berkadia successfully established a legal defense against plaintiff's claims, leading the motion court to appropriately grant their CPLR 3211(a)(1) motions to dismiss. Furthermore, the complaint, while detailing how plaintiff met the first three conditions of section 12.03(c) and noting the Trustee's refusal, lacked any allegations that would demonstrate proper notification of default to the relevant parties. Hence, even when accepting plaintiff's claims as true and granting them the benefit of all reasonable inferences, the court found that plaintiff failed to adequately plead standing to sue and did not state any valid causes of action, affirming the dismissal under CPLR 3211(a)(7). The court deemed it unnecessary to address the defendants' alternative arguments for affirmance.

The decision from the Supreme Court, Appellate Division, First Department, dated March 29, 2018, addresses the no-action clauses within pooling and servicing agreements relevant to the Walnut Place case. These clauses stipulate that a Certificateholder cannot initiate legal proceedings unless they first provide the Trustee with written notice of an Event of Default and its continuation. The document emphasizes that the term "default" in the no-action clause is equivalent to "Event of Default" as defined earlier in the agreement. It highlights that despite differences in wording between the clauses in Walnut Place and the current case, the reasoning from Walnut Place remains applicable and relevant. The reference to the statute of limitations in ACE does not undermine the validity of this interpretation.