September 7, 2009
Kimberly Mauer

 

Destiny USA Holdings, LLC vs. Citigroup Global Markets Realty Corp. is a reminder of the difficult economic times that we have all been in lately. In February of 2007 Destiny entered into a construction loan agreement with Citigroup, pursuant to which Destiny was going to build phase II of a mall in an economically depressed area of Syracuse, New York. In addition to providing numerous jobs and attracting tourists to a region that would clearly benefit, the extension was going to showcase state of the art green technology. The financing provided under the Loan Agreement consisted of a blend of federal, state, municipal financing (approximately $170,000,000), over $40,000,000 in equity, and finally $155,000,000 of Citigroup’s money, all of which was disbursed by Citigroup.

Citigroup met the project with enthusiasm originally, but its ardor cooled as the economy worsened. By May of 2009, Citigroup had received the April draw request from Destiny under the construction loan. Twenty six prior draws had been paid, but on this occasion, Citigroup refused to pay the draw and sent Destiny a Notice of Deficiency alleging that the loan was over $15,000,000 out of balance under the loan agreement. When Destiny was unable to pay the alleged $15,000,000 as demanded by Citigroup, Citigroup sent a Note of Default and Acceleration and refused to make additional payments to Destiny under the loan.

Citigroup alleged that Destiny had defaulted because the loan was out of balance since there were not sufficient loan funds remaining to complete the anticipated construction of the project and provide the funds to provide tenant improvements to the property. In addition, Citigroup alleged that Destiny had failed to make its interest payments due under the loan.

Destiny brought an action seeking to compel Citigroup to pay Destiny the remaining loan funds in order to permit it to complete the construction. This case was in the nature of a preliminary injunction, and, therefore, the court had to determine whether: (1) Destiny would probably succeed on the merits of its claims at trial; (2) Destiny would be irreparably harmed by Citigroup’s failure to fund; and (3) whether it was more fair to grant Destiny’s request or to deny it.

The court found that Destiny had a reasonable likelihood of prevailing at trial. After reviewing the documents, the court concluded that the loan documents clearly stated that tenant improvement costs were not to be included when determining whether the loan was in balance. Furthermore, these same loan documents also clearly indicated that interest payments on the loan were to be included. This was also borne out by the prior practice of the parties. Indeed, Citigroup had on 26 prior occasions authorized draws that included the payment of interest on the loan.

Having satisfied the first requirement, the court moved onto the second and the third: Would Destiny be irreparably harmed by Citigroup’s failure to fund? And does it seem fair to Destiny to permit Citigroup to continue to withhold the balance of the loan proceeds. Destiny pointed out the Citigroup’s own loan agreement provided that if Citigroup did not agree with something that Destiny had requested, then Destiny could not seek money damages. In fact, according to the loan agreement, Destiny’s only option was to seek an injunction.

Furthermore, the court found that without Citigroup’s money, there was no way for the project to be completed. As a result, Destiny would be unable to collect a number of incentives offered by governmental entities upon the completion of construction. In addition, since the construction would not be completed, two series of municipal bonds that had been issued to support the project would likely default. In all the court listed 17 significant negative effects of Citigroup’s failure to fund the balance of the loan proceeds.

Finally, the court granted Destiny’s request and required Citigroup to pay.

What is the moral of this story? The words in those loan documents really do matter.