Green Banking, Borrower Reputational Risk and Breach of Contract
[February 16, 2010]

A New York Appeals court upheld a lower court preliminary injunction and ordered Citigroup to resume lending to developer Robert Congel's expansion of the Carousel Center shopping mall. However, the appeals court said the lower court should have ordered the Destiny USA Holdings to post a bond after it won its preliminary injunction. It ordered Destiny to post a $15 million bond.

Construction of the three-story, 1.3-million-square-foot mall expansion came to a halt in June after Citigroup Global Markets Realty Corp. refused to loan any more money to Congel. The bank said Congel's project was at least $15 million over budget and a year over schedule, and had no tenants signed up, despite millions of dollars spent on marketing. It demanded that Congel put up $15 million of his own money before the bank would resume lending to the project. The purpose of the bond is to ensure that if it is later determined that Destiny was not entitled to the preliminary injunction, then at least $15 million would be salvaged by Citigroup.

In July of 2009, a trial court ruled that Citigroup breached its loan agreement with Destiny and ordered it to resume lending the remaining $68.4 million of the $155 million construction loan, starting with an immediate payment of $29 million. As reported by Larry Schnapf of the Law Office of Lawrence Schnapf, that the bank had said Destiny would not have enough money to pay for $15 million in tenant improvements even if it received the balance of the $155 million loan, and it used that as its main justification for refusing further advances on the loan. Destiny's position was that the cost of "tenant improvements" - the build-out of store spaces or periods of free rent for tenants - were not part of the required improvements that the Destiny had to fund through the construction loan.

From a green building perspective, the case is interesting because the court specifically identified the Destiny project’s sustainable design features and construction financing, which used federally-backed Green Bonds,as so “unique” and “revolutionary” that money damages alone would not be sufficient to compensate Destiny if the injunction were denied. As a result, the court found that there was a potential that Destiny would suffer irreparable harm if the project did not move forward while Destiny’s suit against Citigroup for breach of contract was pending. The court said, “The Project’s unique character renders it difficult to calculate any damages sustained by Destiny Holdings. Citigroup stated through its managing director at a U.S. Green Building Council Presentation on November 8, 2007 that the Project is a ‘visionary project’ that has created a ‘new financing paradigm for green economic development’ that is ‘revolutionary.’ Then Citigroup Chairman and Chief Executive Officer Charles Prince called the use of newly-created Federal Green Bonds….. in financing the Project ‘groundbreaking [and] a step forward in addressing climate change in the U.S. because the Project incorporates sustainable design, energy conservation, and renewable energy sources on a large scale. He further commented that the Project ‘is good for economic development and good for the environment.’ Thus, the unprecedented nature and scope of the Project makes it unique, so that it has no established market value and any damages sustained could not be calculated with reasonable precision.”

The court also found that “Destiny Holdings has established the enormous potential for harm to its reputation and the reputation of the entire ‘Destiny USA’ project. Harm to business reputation is harm for which money damages are insufficient and for which injunctive relief may be appropriate."

The appeals court said the lower court exceeded the bounds of the relief requested by Destiny by ordering the bank to pay future draws on the loan, not just pending draws, which amount to about $29 million. So it appears that the appeals court did not order the bank to give the developer all of the $68.4 yet to be advanced on the loan.

A preliminary injunction is granted to maintain the "status quo" until the lower court could hold a trial on the developer's lawsuit against the bank. While the appeals’ ruling is not on the merits, Destiny had to establish a likelihood of ultimate success on the merits of its lawsuit to prevail on the preliminary injunction. Two dissenting judges said there was no authority under state law that entitles a party to a preliminary injunction requiring a lending institution to loan money.