Note: This was republished on June 6, 2019 to reflect factual updates.
Sutton 58 Associates LLC v. Pilevsky et al., is a New York case which gets to the heart of the enforceability of classic single-purpose entity restrictions in commercial real estate lending. At issue is how far a third-party may go to cause a violation of a borrower’s SPE covenants, and whether those covenants are enforceable at all.
A Defaulted Construction Loan and Frustrated Attempts to Foreclose:
Sutton 58 is a case involving a defaulted New York City construction loan consisting of mortgage and mezzanine debt provided by Gamma Real Estate. After a maturity default, Gamma’s attempt to foreclose on its equity collateral through a UCC foreclosure sale was hindered by the bankruptcy filings of the mortgage borrower and mezzanine borrower.
The borrowers were established as single-purpose bankruptcy-remote vehicles but subsequently acquired additional assets from one of the defendants (Sutton Opportunity), and took on debt from Prime Alliance (another one of the defendants – both controlled by the individual Pilevsky family defendants). Sutton Opportunity obtained a 49% indirect stake in each borrower as a result of the asset transfer. The additional assets and debt destroyed each borrower’s status as a “Single Asset Real Estate” entity under the Bankruptcy Code (or “SPE”), and allowed both entities to file a petition for bankruptcy. Both the transfer of assets and the transfer of indirect equity interests in each borrower violated separateness covenants in the mortgage and mezzanine loan documents.