170 Mercer LLC v. Rialto Capital Advisors, LLC

Background

170 Mercer LLC, the mortgagor of a commercial condominium unit, sued its lender and the lender’s loan servicer. Mercer alleged that they unreasonably withheld consent to transfer its loan to Prosperous View LLC, which had agreed to purchase the unit for $6.7 million subject to approval of its assumption of the loan.

The loan agreement stated that Mercer could transfer the loan with the defendants’ consent, which could not be unreasonably withheld. It also required a proposed transferee to meet several standards, including reasonable creditworthiness, reputation, qualifications, net worth, and liquidity. Another provision gave the defendants final and conclusive discretion when deciding whether arrangements or terms were satisfactory, except where the agreement specifically provided otherwise. The agreement also limited remedies for unreasonable conduct to injunctive or declaratory relief and stated that the defendants would not be liable for monetary damages.

Mercer alleged that Prosperous View’s principal had real-estate-management experience, a net worth of about $8 million, and offered various forms of financial support for the transaction. Mercer further alleged that the defendants demanded increased fees and additional collateral, including an additional cash deposit of up to $1 million, and ultimately did not approve the transfer.

The pre-negotiation letter

The defendants relied on a pre-negotiation letter that included releases for claims arising from the negotiations. Mercer’s complaint did not mention or quote that letter, and Mercer disputed whether it had been properly executed.

On a motion to dismiss, courts ordinarily consider the complaint and certain documents incorporated into it or integral to it. Judge Nathan held that the letter was not integral because Mercer’s claims arose from the loan agreement, not the letter, and Mercer did not rely on the letter’s terms or effect. The court also found that the letter’s execution and the parties’ agreement to it were disputed. The court therefore would not consider the letter on the motion to dismiss.

The court additionally expressed skepticism that the letter would require dismissal even if it were considered. The letter stated that it did not supersede the loan documents. In the court’s view, the more natural reading was that the letter might bar claims based on statements made during negotiations but would leave intact the loan agreement’s requirement that consent to a transfer not be unreasonably withheld.

Interpretation of the loan agreement

The defendants argued that the provision granting them final and conclusive discretion meant they could never be liable for withholding consent to a transfer. The court rejected that reading. Under New York law, the agreement had to be read as a whole and its provisions had to be harmonized.

The court held that the provision requiring consent to a transfer that was not unreasonably withheld was a specific exception to the broader discretion provision. The references to the defendants’ “reasonable satisfaction” likewise required their satisfaction to be reasonable. The court also noted that the agreement’s remedy provision referred to claims that the defendants had acted unreasonably, which would make little sense if such claims could never be brought.

The court concluded that Mercer plausibly alleged that Prosperous View was qualified and that the defendants acted unreasonably. Whether Prosperous View actually met the agreement’s requirements and whether the defendants acted unreasonably were factual questions for later proof, not grounds for dismissal at this stage.

Remedies

The court declined to decide whether Mercer could recover monetary damages. Although the agreement limited Mercer’s remedies to equitable relief, New York law may allow a monetary award when the promised equitable remedy is impossible or impracticable. The court stated that this issue could depend on development of the factual record and therefore would not limit Mercer’s available remedies at this stage.

Disposition

Judge Alison J. Nathan denied Rialto’s motion to dismiss, Docket Number 15. The court denied as moot Rialto’s earlier motion to dismiss, Docket Number 7, because it was filed before Mercer amended its complaint. The court also denied as moot Rialto’s letter motion for oral argument, Docket Number 20. The existing discovery schedule remained in effect.