Southern District of New York Dismisses Claims Alleging “Loan-to-Own” Scheme | King & Spalding

On March 4, 2022, Judge Lewis Liman of the U.S. District Court for the Southern District of New York dismissed an 18-count complaint alleging a multi-year “loan-to-own” conspiracy—including claims of fraud, RICO and money laundering, tortious interference, and theft of trade secrets—against a bridge lender in connection with a multi-billion-dollar development in Frisco, Texas. The planned development was situated along a stretch of land known as the “$5 Billion Mile,” which is home to professional sports complexes, a major mixed-use development, and more. Affiliated entities of Georgia-based developer Stanley Thomas acquired 176 acres along that promising real estate tract using two acquisition mortgage loans of over $90 million that were set to mature in early 2017. As maturity approached, the developer sought further financing and investments from large financial intuitions to, among other things, refinance the existing mortgage loans. However, after one of the lenders informed the developer that it could not extend the maturity date, the developer turned to Gamma Real Estate Capital LLC, which provided a four-month bridge loan, with four six-month extension rights, to pay off that lender and buy time for new prospective lenders and investors to complete their diligence.

The developer alleged that Gamma (and certain affiliates) “improperly and tortiously” interfered with efforts to obtain permanent financing—including, for example, by refusing to consent to an extension of the outstanding mortgage loan (thus causing a default under that facility and the bridge loan), acquiring the mortgage loan as well as loans encumbering the developer’s unrelated projects in other states, and intimidating other prospective lenders and investors—all with the alleged fraudulent intent to perpetrate a “loan-to-own” scheme to take over the coveted property. Nonetheless, the court, in a 90-page opinion, focused on the eight post-default agreements under which Gamma agreed to delay exercise of remedies “to grant Plaintiffs further opportunities to pay the loan and retain control of Wade Park”—the antithesis of a “loan-to-own” scheme—including a loan modification agreement, six forbearance agreements, and a deed-in-lieu agreement under which Gamma agreed to hold deeds to the property in escrow pending a six-week buy-back period rather than immediately recording the deed. Moreover, while the court found that all but three of the counts were properly released under the forbearance agreements and that Gamma was well within its rights to correspond with potential lenders or investors with or without the developer’s permission as expressly allowed under the forbearance agreements, the court also provided separate, independent grounds to release each of the 18 counts.

The court dismissed all counts of the complaint with prejudice, meaning that the claims cannot be refiled because any amendment would be futile. On March 18, however, the plaintiffs filed a motion to amend the judgment seeking for the court to dismiss the complaint without prejudice, which motion is currently pending before the court.

The case is Wade Park Land Holdings, LLC v. Kalikow, No. 21-cv-1657 (S.D.N.Y. Mar. 4, 2022). The plaintiff-borrowers are represented by Caplan Cobb LLP and Stone & Baxter, LLP. Gamma and its affiliates are represented by Kramer Levin Naftalis & Frankel LLP. The order is available here.