• Destiny USA v. Citigroup: A Broad Precedent or a Sign of the Times?
  • March 17, 2010 | Author: Michael J. Feinman
  • Law Firm: Blank Rome LLP - New York Office
  • The Destiny USA v. Citigroup case has thus far been a setback for Citigroup, among many for the troubled banking giant. An initial decision was rendered on July 20, 2009 by the Supreme Court, Onondaga County, and a 3-2 decision was rendered on November 13, 2009 by the Appellate Division, Fourth Department. The trial court ordered preliminary injunctive relief against Citigroup as construction lender and the Appellate Division upheld the injunction, although it narrowed the trial court’s ruling. Citigroup has requested ­permission to appeal to the New York Court of Appeals, New York’s highest state court, but it is not clear whether the Court will hear this discretionary appeal.

    Destiny USA (“Destiny”) and Citigroup entered into an “Amended and Restated Building Loan, Project Loan and Security Agreement” dated February 15, 2007 (the “Loan Agreement”). The loan was to provide $155 million of construction funds for the development of Destiny, an 850,000 square foot extension to the giant Carousel Center Mall in Syracuse, NY. The project was hailed as a major public-private partnership with significant public incentives, including $170 million from the City of Syracuse Industrial Development Agency (SIDA). The terms of the Loan Agreement provided that the SIDA funds, as well as $40 million of developer equity, would first have to be invested in the project before Citigroup’s funds could be drawn.

    The Destiny project was highly publicized and continues to be of great importance to the depressed upstate New York economy. It was promoted as a project that would showcase green technology and sustainable design, and was expected to be a source of employment, entertainment and tourism for the area.

    In the summer of 2008, after the SIDA funds, the developer equity, and a portion of the loan funds were invested, Citigroup claimed that a “Deficiency” existed under the terms of the Loan Agreement. (In other words, the loan was “out of balance.”) Citigroup alleged that the “Deficiency” existed because the remaining unfunded loan and other committed sources were not sufficient to pay (i) the remaining construction costs and (ii) the anticipated tenant improvement costs (“TI Costs”) necessary to build out the improvements for prospective tenants. Because of this claimed “Deficiency,” Citigroup alleged that it had no obligation to advance loan proceeds to cover construction costs (including interest payments) unless Destiny provided funds to cover the estimated shortfall. Destiny objected, claiming that TI Costs were not part of the required calculus under the Loan Agreement. After Destiny failed to provide funds to cover the alleged Deficiency within 15 business days after Citigroup’s “Deficiency” notice, Citigroup declared a default.

    In June 2009, after several attempts to settle the dispute, Destiny filed an action alleging irreparable harm due to Citigroup’s failure to continue funding the project, and sought a preliminary injunction ordering Citigroup to fund the advances under the Loan Agreement.

    The trial court acknowledged that the relief sought by Destiny—a “mandatory injunction” ordering a party to perform a specific act, as opposed to a “prohibitory injunction” preventing a party from taking action—was extraordinary. In response to Citigroup’s argument that injunctive relief was improper because monetary damages would be an adequate remedy, the court also considered the question of whether injunctive relief was appropriate in a contract dispute.

    The trial court found for Destiny, issuing a mandatory injunction ordering Citigroup to withdraw its Notice of Default and to not include TI Costs in any “Deficiency” computations. It determined that Destiny satisfied the three-prong test for the issuance of an injunction: (i) likelihood of success on the merits, (ii) a danger of irreparable harm if an injunction was not issued, and (iii) a balancing of the equities in favor of the party seeking an injunction. The trial court concluded that Destiny had proven its “likelihood of success” by clear and convincing evidence based on the unambiguous language in the Loan Agreement, holding that, as written, the term “Deficiency” only required consideration of expenses for “Required Improvements” as set forth in the “Plans and Specifications.” Given that the definition of “Required Improvements” did not specify the inclusion of tenant work and the parties acknowledged that there were no “Plans and Specifications” that existed for tenant work at that time, the court determined that it was irrelevant whether the overall project “Budget”—which did include TI Costs—was or was not in balance, since “Budget”-based costs and expenses were not a factor in the “Deficiency” calculation. As to the second prong of the test, the trial court determined that “irreparable harm” would be suffered by Destiny if the injunction were not granted, based on the uniqueness of the project and its importance to the community’s economy. The trial court noted that due to the financial crisis it would be impossible for Destiny to be able to find a replacement loan and the project would be forced to shut down, with 90% of the project complete. As to the final prong, the court concluded that the “balancing of the equities” favored Destiny, not Citigroup. Although the court discussed Citigroup’s liquidity problems as a possible contributing factor, Citigroup’s extrinsic influences were not cited as controlling.

    The Appellate Division agreed that Destiny had submitted clear and convincing evidence that TI Costs were not included as “Required Improvements” in the “Plans and Specifications,” and should not have been included in the “Deficiency” calculation. The Appellate Division also agreed with the trial court that an injunction was appropriate in this case because the unique character of the project made it difficult to calculate any damages sustained by Destiny. The Appellate Division accepted the probability that replacement funds were not available in the financing marketplace. The two-judge dissent challenged the majority’s determination, arguing that Destiny could borrow funds elsewhere and recover damages based on the higher cost of the replacement loan, and therefore an injunction was improper in this contract dispute.

    The Destiny case was hard fought and the injunction ­ruling may or may not be overturned by the Court of Appeals; however, there were emotional and subjective factors surrounding the case that could be claimed to have influenced the outcome. On the plaintiff’s side, the case was heard in Onondaga County, the site of the Destiny project, where the project is of major importance to the depressed economy, and public funds were already invested in the project when the bank ceased funding. On the defendant’s side stood Citigroup, the largest of the big banks blamed for the financial crisis and the recipient of massive taxpayer infusions to keep it afloat, allegedly refusing to support a project by reason of its own liquidity and other problems.

    Despite this high-profile project and its players, as well as the emotional overlay of the situation, one determination was made consistently by the trial and appellate courts that was not challenged by the dissent: Destiny’s interpretation of the Loan Agreement provisions dealing with a “Deficiency” had a “likelihood of success.” Although Citigroup argued that the Loan Agreement intended a “Deficiency” to include TI Costs, which were clearly necessary to be expended in order for the project to function successfully, Citigroup’s interpretation was not made explicit in the documents, and the courts were able to conclude—preliminarily, in view of the fact that the ultimate merits of the case have not been decided—that the documents were at odds with what Citigroup wanted them to say.

    The Destiny case and its mandatory injunction ordering a lender to advance loan funds may have broad implications for lenders who seek to claim that loans are “out of balance.” As the Appellate Division’s dissent notes, it is unusual for New York courts to issue injunctions ordering lenders to continue funding a project. Nevertheless, if the ruling is followed, there may be many projects that are capable of being characterized as sufficiently unique that failure to fund them would cause irreparable harm if (a very important “if” as the Destiny Loan Agreement shows) the failure to fund violates the terms of the loan documents.