Kramer Levin Obtains Appellate Victory in Lender Liability Dispute Over Multibillion-Dollar Real Estate Development

On June 17, 2024, the U.S. Court of Appeals for the Second Circuit unanimously affirmed the dismissal of lender liability claims against Kramer Levin’s clients Gamma Real Estate Capital and its affiliates.

In 2017, Gamma made a four-month, $82.75 million bridge loan to two of the plaintiffs, affiliates of Stanley Thomas, a commercial real estate developer. The plaintiffs said they wanted to build a multibillion-dollar development on a 176-acre parcel outside of Dallas known as Wade Park. The plaintiffs did not repay the bridge loan or another $48 million loan one of Gamma’s affiliates acquired in 2018. After numerous extensions, forbearance agreements and a deed-in-lieu of foreclosure agreement, an affiliate of Gamma took title to the property when the plaintiffs again defaulted in February 2019.

In 2020, the plaintiffs filed for bankruptcy protection in the U.S. District Court for the Northern District of Georgia. They brought an adversary proceeding there asserting 17 claims against Gamma and its affiliates, including for Racketeer Influenced and Corrupt Organizations Act violations, fraud, tortious interference with business relations, breach of contract and fraudulent transfer, and a declaratory judgment that certain agreements and the deed transfers were ultra vires.

After reference to the bankruptcy court was withdrawn, the Northern District of Georgia granted the defendants’ motion to transfer the action to the U.S. District Court for the Southern District of New York based on forum selection clauses in the parties’ agreements.

In March 2022, Judge Lewis J. Liman of the Southern District of New York issued a 90-page decision dismissing all 17 claims. However, the plaintiffs were permitted to amend their fraudulent transfer claim. Relying on two pre-litigation appraisals valuing the property at $466.8 million in 2016 and $565 million in 2018, the plaintiffs’ second amended complaint alleged that their transfer of the property to one of Gamma’s affiliates in lieu of repaying the $140 million they owed at the time was a constructive fraudulent transfer. In March 2023, Liman issued a 44-page decision dismissing the fraudulent transfer claim because the plaintiffs’ valuation allegations were “utterly implausible.”

On June 17, 2024, the Second Circuit affirmed dismissal in an order that focused on the constructive fraudulent transfer and declaratory judgment claims. The plaintiffs argued that they plausibly alleged the property transfer was for less than reasonably equivalent value — a necessary element for constructive fraudulent transfer — based on the pre-litigation appraisals. The Second Circuit rejected this argument on three independent grounds.

First, the Second Circuit held that the appraisals were not plausible in light of other allegations in the complaint detailing the parties’ conduct and the plaintiffs’ inability to refinance.

• When Thomas initially sought a bridge loan, he was “able to secure only $83 million in financing — on lender-favorable terms — for a property that was carrying approximately $93 million in debt, $45 million of which would be paid off with the new loan.”
• In the two years after Gamma’s bridge loan, and despite his extensive efforts, Thomas was unable to refinance the property when it was encumbered by less than $150 million in debt. According to the Second Circuit, “If the property were worth anything close to what the plaintiffs claim — or, indeed, significantly more than the debt that it was already carrying — it is not plausible that Thomas would have been unable to refinance.”
• After Gamma acquired title to the property under the deed-in-lieu agreement, “it nonetheless offered Thomas the option to buy the property back for $140 million” and that was “inconsistent with the plaintiffs’ contention that Gamma knew the true value of Wade Park and schemed to take the property for itself.”

Second, the Second Circuit held that “[e]ven when considered apart from the parties’ conduct, there were good reasons for the district court not to rely on” the appraisals: “The methodology and assumptions of the [appraisals] are questionable. Many of the inputs to the models used to generate the appraisals were provided by Thomas himself, and there are no independent factual allegations establishing that those inputs were accurate.” Moreover, the 2016 appraisal was provided “more than two years prior to the transfer,” while reasonably equivalent value is determined by the value of the consideration exchanged “at the time of the conveyance.”

Third, the Second Circuit held that the transfer was for reasonably equivalent value because the alternative to the deed-in-lieu agreement was foreclosure and that agreement gave the plaintiffs “an accommodation that offered [Thomas] the chance to retain title to [the property] by paying off the debt.” “[W]hen Gamma accommodated Thomas by offering the [deed-in-lieu agreement] instead of foreclosing,” Gamma “gave him reasonably equivalent value in the form of the opportunity to retain ownership of Wade Park.”

As for the declaratory judgment claim, the Second Circuit held that the challenged transactions were “voidable, rather than void” and were ratified when the plaintiffs signed and accepted the benefits of the parties’ agreements.

The decision is Wade Park Land Holdings, LLC v. Kalikow, 2024 WL 3024648 (2d Cir. June 17, 2024).

New York Law Journal reported on the case.