Kramer Levin Obtains Dismissal of Lender Liability Dispute Over Multibillion-Dollar Development

 On March 23, 2023, Kramer Levin obtained the dismissal with prejudice of the remaining lender liability claims against its clients Gamma Real Estate Capital and its affiliates in the U.S. District Court for the Southern District of New York. The decision is an important victory for lenders.

In January 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 say they wanted to build a multibillion-dollar development on a 176-acre parcel on the “$5 Billion Mile” outside Dallas. That Mile includes the Dallas Cowboys’ headquarters and training center, Toyota Stadium, and high-end mixed-use developments such as Frisco Station and The Gate. Plaintiffs say their development would add two office towers with more than 5 million square feet of office space, 1 million square feet of high-end retail space, approximately 2,400 luxury residential housing units, five hotels and entertainment.

According to the plaintiffs, their land, known as Wade Park, was “some of the most valuable commercial real estate in the United States.” They say it was worth more than $565 million and would be worth more than $2 billion when they developed it. But plaintiffs did not repay the bridge loan or another $48 million loan Gamma’s affiliate acquired from another lender in July 2018. After three extensions, the lender entered into six forbearance agreements and a deed in lieu agreement with plaintiffs that further extended their time to repay. In February 2019, when plaintiffs defaulted again, an affiliate of the lender took title to the property.

In August 2020, plaintiffs filed for bankruptcy protection in the Northern District of Georgia. They brought an adversary proceeding there against Gamma and its affiliates, alleging they “committed a wide variety of crimes — all with the goal and intent of defrauding Plaintiffs and taking the Wade Park property for themselves.” Plaintiffs asserted 17 causes of action, including claims for violations of federal and Georgia RICO statutes, conspiracy to violate those statutes, fraud, tortious interference with business relations, breach of contract, conspiracy to breach fiduciary duties, fraudulent transfer, misappropriation of trade secrets, unjust enrichment, usury, other statutory and common law claims, and a declaratory judgment that certain agreements and the deed transfers were ultra vires.

Plaintiffs moved to withdraw the reference to the bankruptcy court, defendants consented and the U.S. District Court for the Northern District of Georgia granted the motion. Defendants then moved to transfer the action to the Southern District of New York, based on the forum selection clauses in the parties’ agreements, and to dismiss. The Georgia court granted defendants’ motion to transfer.

In March 2022, Judge Lewis J. Liman of the Southern District of New York issued a 90-page decision dismissing all 17 claims. The court found that most of the claims were barred by plaintiffs’ releases and that “even if the claims were not released, the claims would fail” for additional reasons.

However, plaintiffs were permitted to amend their two fraudulent transfer claims, and they did so in July 2022. Their second amended complaint, relying in part on an appraisal, alleged their transfer of the property to Gamma’s affiliate in lieu of repaying the $140 million they then owed was a fraudulent transfer because the property was worth more than $565 million.

Kramer Levin argued the “allegation of a value in excess of $565 million” was “wholly implausible” because it is “completely inconsistent with Plaintiffs’ detailed factual allegations that they were unable — for more than two years — to find any other lender to assume the loan” and their “detailed factual allegations that Defendants gave them opportunity after opportunity to repay the loan and retain the Property.” “It defies common sense and is wholly implausible for Plaintiffs to allege that Thomas … could not raise $150 million to exercise an exclusive option to purchase the Property, or $140 million or smaller amounts to pay back the loan before that, if the Property was worth $565 million.”

In a 44-page opinion, Judge Liman rejected as “utterly implausible” plaintiffs’ allegation that the property was worth $565 million. The court found the appraisal does not create a plausible inference of that value: “The value of an item of property is best measured by what it will fetch in the open market, in a transaction between willing buyers and sellers, and not on what an idiosyncratic person — who is not in the market and has not expressed a willingness to purchase the property — concludes that the property is worth.” The judge also explained that the appraiser’s valuation “is made up of several components and the assumptions or explanations underlying those components are either absent or informed by the developer itself.”

The decision is Wade Park Land Holdings, LLC, et al. v. Jonathan Kalikow, et al., 2023 WL 2614243 (S.D.N.Y. March 23, 2023). The court’s order can be found here. A New York Law Journal article about the decision can be found here, and another article about last year’s decision can be found here.