Jade Realty LLC v. Citigroup Commercial Mortgage Trust 2005-EMG

980 N.E.2d 945, 20 N.Y.3d 881

Opinions

OPINION OF THE COURT

Memorandum.

The judgment appealed from and the order of the Appellate Division brought up for review should be affirmed, with costs.

On September 17, 2003, Jade Realty LLC, the owner and operator of a shopping center in Hartsdede, New York, closed on a mortgage loan with Emigrant Securities Corp. in the principal amount of $4 million as part of a refinancing of an earlier loan. The loan had a 10-year term with a maturity date of October 1, 2013 and had an interest rate of 5.48% per year (Note Rate).

Although the promissory note permitted Jade to voluntarily prepay the note before its maturity date “[p]rovided an Event of Default and an acceleration of the Maturity Date ha[d] not occurred and [was] continuing,” it also called for Jade to pay a “yield maintenance amount”

Footnotes

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* that varied as the note matured. As relevant here, if the note was paid within the first six loan years, the “yield maintenance amount” was to be computed “by taking the positive difference (if any) between the Note Rate . . . minus the current yield, on the actual date of default under the loan ... of U.S. Treasury Securities having the closest longer maturity to the remaining total term of this Note,” with such calculation being “made as of the actual date of default under the loan” (emphasis supplied). The note does not define the word “default,” although the mortgage agreement contains 15 “Events of Default,” none of which includes voluntary prepayment.

In 2005, Jade’s loan was sold to Citigroup Commercial Mortgage Trust 2005-EMG, with LaSalle Bank National Association serving as trustee (collectively, Citigroup defendants). During the fourth year of the loan, Jade notified the loan servicer, Capmark Finance, Inc., that Jade intended to refinance the loan with another bank and that, because it had not defaulted on its loan, Jade did not owe a yield maintenance amount. Capmark disagreed and demanded Jade pay yield maintenance in the amount of $146,104.56.

Jade paid the amount under protest with a reservation of rights and, as relevant here, commenced this action against Citigroup defendants for breach of contract when Capmark refused to issue Jade a refund. After discovery, the parties brought their respective motions for summary judgment. Supreme Court granted the Citigroup defendants’ motion to dismiss the complaint, holding that it was “absurd and illogical” for Jade to take the position that, because it had not “defaulted,” it owed no yield maintenance amount (2009 NY Slip Op 32926[U], *10 [Sup Ct, NY County 2009]). Relying on this Court’s holding in Matter of Wallace v 600 Partners Co. (86 NY2d 543 [1995]), Supreme Court held that it was within the court’s purview to “transpose, reject or supply words to make the meaning of the . . . Note more clear so as to carry out the intention of the contract,” and it did so by adding the words “prepayment or” before the word “default” in the yield maintenance amount formula (2009 NY Slip Op 32926[U], *10, 12 [2009]).

The Appellate Division reversed and granted Jade’s cross motion for summary judgment on its breach of contract claim, holding that Supreme Court erred in rejecting Jade’s argument that no yield maintenance amount was due because “[w]hile [Jade’s] interpretation of the note could possibly lead to the prepayment premium being lower in the early years rather than the later years of the prepayment period, that is the way Emigrant’s counsel drafted the note” (83 AD3d 567, 568 [1st Dept 2011]). It acknowledged that Jade’s interpretation of the note was “technical and . . . apparently not what [Emigrant] intended,” but concluded that “it is not a court’s function to imply a term to save a defendant from the consequences of an agreement that it drafted” (id. [citation omitted]).

Citigroup defendants are not claiming that they are entitled to reformation. Absent such a claim, “courts may as a matter of interpretation carry out the intention of a contract by transposing, rejecting, or supplying words to make the meaning of the contract more clear,” but this approach is suitable “only in those limited instances where some absurdity has been identified or the contract would otherwise be unenforceable either in whole or in part” (Matter of Wallace, 86 NY2d at 547-548 [citations omitted]). We reject the Citigroup defendants’ argument that such an approach is warranted here.

Application of the note’s literal language relative to voluntary prepayment and the yield maintenance amount does not result in either absurdity or an unenforceable agreement. To be sure, Jade’s interpretation of the note results in a potentially lower prepayment premium in the first six years, instead of the potentially lower prepayment premiums in the seventh through tenth years. While these terms might be “novel or unconventional,” that, by itself, does not render the result here absurd (Matter of Wallace, 86 NY2d at 548). Citigroup received 5.48% interest for the time it held the loan and it did not lose its principal, so it could hardly be said that there is economic absurdity, as the Citigroup defendants charge (cf. Reape v New York News, 122 AD2d 29 [2d Dept 1986], lv denied 68 NY2d 610 [1986]). The note, as written, is enforceable according to its terms. A reasonable interpretation of the note is that, there having been no default on Jade’s part and acceleration of the maturity date by Citigroup, there could be no “positive difference (if any)” between the Note Rate and the relevant “current yield,” such that Jade owed no yield maintenance under the note.

The “yield maintenance amount” is the prepayment penalty a borrower pays a lender as a condition of prepaying a loan prior to its maturity date.