CP III Rincon Towers, LLC. v. Cohen

Background

The case concerned a $110 million loan used to purchase a residential apartment complex in San Francisco. Entities controlled by Richard D. Cohen borrowed the money, and Cohen personally signed a guaranty. CP III Rincon Towers, LLC. later acquired the loan and the property through a non-judicial foreclosure sale.

The guaranty contained provisions that could make Cohen personally responsible for the entire debt if the borrower incurred certain unapproved indebtedness or made an unapproved transfer. CP III argued that three types of liens—the REOA lien, mechanic’s liens, and an Angotti judgment lien—triggered those provisions. Cohen argued that they did not.

An earlier summary-judgment ruling favored Cohen, but the Second Circuit vacated that ruling and sent the case back for a trial. The appellate court concluded that the guaranty was ambiguous and that factual questions remained about the meaning of the Indebtedness and Transfer provisions. The district court held a bench trial in December 2021.

Indebtedness Provision

The court found the Indebtedness Provision ambiguous because the parties offered different reasonable readings of it. CP III argued that the provision covered unpaid obligations that led to liens and that the loan documents required the borrower to obtain consent before failing to pay those obligations. Cohen argued that the provision concerned the underlying payment obligations and that the loan documents either did not require prior consent for those obligations or had already provided consent.

The court adopted Cohen’s interpretation after considering the contract language, the negotiation history, contemporaneous documents, and the parties’ conduct. The loan agreement contemplated the REOA charges and property renovations that led to some of the liens. It also allowed the borrower to contest certain REOA and labor-and-material charges. The court concluded that the borrower was not required to obtain prior written consent before incurring the obligations underlying the liens. The court further reasoned that treating failures to pay those obligations as full-recourse events would conflict with the separate provision addressing failures to maintain the borrower’s special-purpose-entity status, which provided only loss recourse.

The court therefore held that the Indebtedness Provision was not triggered.

Transfer Provision

The court also found the Transfer Provision ambiguous. CP III argued that the provision’s broad definition of “Transfer” included every lien because a lien encumbers property. Cohen argued that this interpretation would make the separate Voluntary Lien Provision largely meaningless and would improperly convert a limited-recourse loan into a nearly full-recourse loan.

The court ruled for Cohen. CP III conceded at trial that it had no extrinsic evidence—evidence outside the contract’s text—supporting its interpretation of the Transfer Provision. The evidence that did exist supported Cohen’s reading. The court relied on the separate treatment of voluntary liens, the contract’s references to liens and encumbrances, the parties’ decision to remove a failure-to-pay provision, the loan documents’ stated nonrecourse structure, and the lender’s failure to assert that the liens had triggered the guaranty until shortly before CP III acquired the loan.

The court concluded that the parties did not intend the liens at issue to constitute Transfers triggering full recourse. It held that Cohen did not breach the Transfer Provision either.

Disposition

The court concluded that the parties agreed to a nonrecourse loan with limited carveouts and that the liens did not trigger Cohen’s full recourse liability. The Clerk of Court was directed to enter judgment in favor of Cohen and close the case.