When the managing member of three real estate LLCs sought to refinance the existing senior debt, Adam Leitman Bailey, P.C.’s client made loans totaling approximately six million dollars. There was also a mezzanine lender, whose agreement with the holding company for the LLCs, required its written permission for an activity such as a refinance. None was provided. Once the LLCs received and distributed the loan proceeds, the existing debt was retired, but the remainder, approximately 1.6 million dollars, went missing.
Through a series of transactions, the LLCs, which were actually controlled by the mezzanine lender, sued the managing member and others to recover the missing proceeds. While at it, the LLCs also claimed that because the loans were allegedly entered into without the requisite authorization, they were invalid and, consequently, they owed no money and the lender had no security interest in the properties.
Adam Leitman Bailey, P.C. moved to dismiss the claim against its lender client, which, if unsuccessful, could have resulted in the loss of six million dollars and its security interest. At the trial level, the firm demonstrated that the lender received adequate documentation from the managing member that the LLCs were authorized to enter into the loans and, more importantly, that after having accepted the proceeds, the LLCs could not then turn around and disclaim any obligation under the loans.
In other words, the LLCs wanted to have it both ways while leaving the lender” holding the bag”. The trial court refused to dismiss the claim against the lender.
The firm then appealed to the Appellate Division, First Department which reversed the trial court on the law and dismissed the case against the lender, finding that the firm produced the necessary documentary evidence to show that the proceeds had been received and distributed. Further, the Court adopted the firm’s equitable estoppel argument, writing:
Having received the benefits of the loans, the [Borrower Entities] are estopped from contesting the validity of the mortgages, because otherwise they would obtain an “unconscientious advantage” (see Bernard v. Citibank, N.A., 195 AD3d 783, 787-788 [2d Dept 2021]). Further the [Borrower Entities] have not offered to return any part of the loan proceeds; thus, they are deemed to have assented to the transactions and are equitably estopped from impeaching them (see id. at 788, citing Rothschild v. Title Guar. & Trust Co., 204 NY 458, 464 ).
Thus, the lender now has enforceable mortgages and no longer needs to participate in the lawsuit regarding the missing proceeds.
Jeffrey R. Metz, Esq. represented the client before the Appellate Division First Department. Courtney J. Lerias, Esq. and Jackie Halpern Weinstein, Esq. represented the client before the Supreme Court.