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NEW YORK — Principals who guaranteed construction financing of up to $192 million for two 25-story condominium towers in Florida in 2005 have been ordered to pay back the lender, HSH Nordbank, an amount laid out in loan documents. In a 24-page opinion, Judge Denise Cote of The Southern District Court of New York found the guarantors owe $40 million from a principal guarantee and an undisclosed amount to cover the payment guarantee on the loan. These payment costs typically involve lender advances to cover property shortfalls, unpaid interest and attorney fees.

According to the opinion, the project ran into trouble in 2007 after a lawsuit alleging “material misrepresentations in promotional materials” was filed. The defendants had argued that the bank was at fault because it had refused to provide final funding for the development. The Holly Hill, Fla., property was to have comprised 486 units.

“As the court laid out … there were a variety of reasons why the banks, who had absolute full discretion to decide whether to advance any of the funds but nonetheless had excellent reasons why they elected not to,” says Michael Barr of New York-based Sonnenschein Nath & Rosenthal. Barr, along with Justin Kattan and Claire Wong Black, represented HSH Nordbank in the proceeding.

Cases where guarantors and borrowers have run into trouble with lenders are nothing new, and in the current market, they are becoming more common. However, few of these cases have made it to the federal level, so this opinion firmly sets a president for lenders and guarantors to follow, Barr says.

“A federal court was willing to carefully consider and adhere to the terms of the loan documents and not to be swayed by the typical lender liability/frustration of performance types of arguments that borrowers and guarantors may make,” he says. “[Borrowers and guarantors] have to recognize that the commitments that they make in their loan documents … have the potential to be enforced against them. They matter.”

— Jon Ross

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