PAF-PAR LLC, Appellant,v.Michael Silberberg, et al., Respondents.

Brief

N.Y.Feb 18, 2016

To be Argued by: WILLIAM CHARRON (Time Requested: 15 Minutes) APL-2014-00309 New York County Clerk’s Index No. 652243/12 Court of Appeals of the State of New York   PAF-PAR LLC, Plaintiff-Appellant, – against – MICHAEL SILBERBERG and BEREL KARNIOL, Defendants-Respondents. BRIEF FOR PLAINTIFF-APPELLANT PRYOR CASHMAN LLP Attorneys for Plaintiff-Appellant 7 Times Square New York, New York 10036 Tel.: (212) 421-4100 Fax: (212) 326-0806 Date Completed: February 12, 2015 Disclosure Statement Pursuant to Rules 500.l(t) and 500.13(a) of the New York Court of Appeals Rules of Practice, PAF-PAR is wholly owned by PAF-PAR, LLC, which is wholly owned by David Lichtenstein. PAF-PAR has no subsidiaries. PAF-PAR is affiliated with various lending and related entities under the same common control. TABLE OF CONTENTS TABLE OF AUTHORITIES .................................................................................... iii QUESTION PRESENTED ON APPEAL ................................................................. 1 JURISDICTIONAL STATEMENT .......................................................................... 1 PRELIMINARY STATEMENT ............................................................................... 2 STATEMENT OF THE CASE ................................................................................. 6 A. Background ...................................................................................................... 6 The Action ....................................................................................................... 9 The I.A.S. Court's Decision ............................................................................ 9 The Appellate Division's Decision ............................................................... 11 This Appeal ................................................................................................... 13 SUMMARY OF THE RELEVANT EVIDENCE .................................................. 14 A. The Note ........................................................................................................ 14 B. The Guaranty ................................................................................................. 14 1. The Independent, Unconditional Nature Of The Guaranty .................... 15 C. The Repayment Of $1 Million By The Borrower, And CAD's Assignment Of The Loan Documents And Guaranty To PAF-PAR ............ 20 D. PAF-PAR Reduces The Borrower's Repayment Obligation By $2 Million, Without Modifying The Guaranty ...................... 21 1. The Loan Modification And Extension Agreement ............................... 23 TABLE OF CONTENTS (continued) 2. The Borrower's Repayment Of $10 Million, And PAF-PAR's Issuance Of A Payoff Letter And Release Of The Borrower's Collateral.. .......................................... 25 ARGUMENT ........................................................................................................... 27 I. IN DISREGARD OF PRINCIPLES OF CONTRACT LAW, AND IN CONFLICT WITH A MORE RECENT DECISION FROM A DIFFERENT FIRST DEPARTMENT PANEL, THE DECISION ERRONEOUSLY CONVERTS A "PRIMARY" AND "ABSOLUTE AND UNCONDITIONAL" LOAN GUARANTY INTO A "CONTRACT OF SECONDARY LIABILITY" ........................ 27 A. As A Conflicting First Department Panel More Recently Held, "Absolute And Unconditional" Guarantees Can Be Joint And Several "Primary Obligations And Not Just Secondary Liabilities Under New York Law ................. 28 B. The Decision Conflicts With Well Established New York Law That All Provisions Of Sophisticated Agreements Should Be Given Effect And Reconciled, And That No Provision Should Be Nullified ........... 36 CONCLUSION ........................................................................................................ 40 11 TABLE OF AUTHORITIES CASES PAGE(s) 4 USS LLC v. DSW MS LLC, 120 A.D.3d 1049 (1st Dep't 2014) ......................................................... passim 815 Park Avenue Owners, Inc. v. Fireman's Insurance Co., 225 A.D.2d 350 (1st Dep't 1996) .................................................................. 37 Bank of America, N.A. v. Solow, 59 A.D.3d 304 (1st Dep't 2009) .................................................................... 34 Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 92 (1985) ................................................................................ 32 Citicorp USA, Inc. v. PM Holdings, LLC, 29 A.D.3d 363 (1st Dep't 2006) .................................................................... 32 Compagnie Financiere de Cic et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 188 F.3d 31 (2d Cir. 1999) ................................................................ 30, 31,33 Davimos v. Halle, 60 A.D.3d 576 (1st Dep't 2009) .................................................................... 30 First America Bank v. Builders Funding Corp., 200 A.D.2d 946 (3d Dep't 1994) .................................................................. 32 Flag Wharf, Inc. v. Merrill Lynch Capital Corp., 40 A.D.3d 506 (1st Dep't 2007) .................................................................... 37 Indianapolis Morris Plan v. Karlen, 28 N.Y.2d 30 (1971) .......................................................................... 28, 34, 35 Inland Credit Corp. v. Weiss, 63 A.D.2d 640 (1st Dep't 1978) .............................................................. 28, 33 111 CASES PAGE(s) Laba v. Carey, 29 N.Y.2d 302 (1971) .................................................................................... 37 Red Tulip, LLC v. Neiva, 44 A.D.3d 204 (1st Dep't 2007) .................................................................... 31 Sterling National Bank v. Biaggi, No. 604015/04, 2006 N.Y. Misc. LEXIS 9404 (Sup. Ct. Oct. 5, 2006), aff'd, 47 A.D.3d 436 (1st Dep't 2008) .......................................................... 33 United Orient Bank v. Lee, 223 A.D.2d 500 (1st Dep't 1996) ............................................................ 32, 38 Wallace v. 600 Partners Co., 86 N.Y.2d 543,548 (1995) ............................................................................ 37 Weissman v. Sinorm Deli, 88 N.Y.2d 437 (1996) .................................................................................... 35 STATUTES CPLR § 3213 ......................................................................................................... 6, 9 CPLR § 5602(a)(l)(i) ................................................................................................ 1 REFERENCE Black's Law Dictionary (6th ed. 1990) ................................................................... 36 IV Plaintiff-appellant PAF-PAR, LLC ("PAF-PAR") 1, by its attorneys Pryor Cashman LLP, respectfully submits this brief in support of its appeal from the Decision and Order entered June 5, 2014 (with Notice of Entry served on September 22, 2014) of the Appellate Division, First Department (the "Decision"). QUESTION PRESENTED ON APPEAL The following question is presented for review by this Court: Whether lenders and third-party guarantors should remain able under New York law to opt out of the general rule that guaranty ·agreements are contracts of "secondary liability" that are automatically reduced in accord with borrower note modifications, and to enter instead into guarantees that are "primary" obligations for the ')oint and several" repayment of amounts that are actually loaned to borrowers, regardless of any later note modifications that may be designed to " benefit borrowers as loan workouts? The Appellate Division answered: "No." It is respectfully submitted that this Court should answer: "Yes." Preserved: Point I of PAP-PAR's Brief (pp. 20-30, 33) and Points I and II ofPAF-PAR's Reply Brief (pp. 5-16). JURISDICTIONAL STATEMENT This Court has jurisdiction over this appeal, which is taken by permission of this Court granted on December 16, 2014. All of the requirements set forth in CPLR 5602(a)(1)(i) for taking an appeal by permission of this Court have been met. The June 5, 2014 Decision and Order of the Appellate Division, First Department, 1 PAF-PAR is wholly owned by PAF-PAR, LLC, which is wholly owned by David Lichtenstein. P AF-P AR has no subsidiaries. P AF-P AR is affiliated with various lending and related entities under the same common control. which affirmed the Order of the Supreme Court, New York County (the originating court) denying PAP-PAR's motion for summary judgment in lieu of complaint and granting defendants-respondents Michael Silberberg and Bemel Kamiol (collectively, "Respondents") cross-motion to dismiss PAP-PAR's action with prejudice, finally determined the action and was not appealable as of right. The portions of the Record in which the question to be reviewed is preserved are set forth above. PRELIMINARY STATEMENT This case is about two independent contracts: (i) a note between a borrower <> and a lender for $13 million; and (ii) a guaranty between the lender and a third- party guarantor that is supported by its own consideration and that promises, as a stand-alone "primary" obligation, to "jointly and severally" and "absolutely and unconditionally" repay the lender's $13 million in loaned funds, regardless of any later note modifications or loan forbearance as between the borrower and the lender. PAP-PAR sought this appeal because the Appellate Division erroneously concluded that New York law could operate to convert the independent loan guaranty from a primary obligation into "a contract of secondary liability" that necessarily follows later modifications to the note. The Appellate Division misapplied the general New York rule regarding guaranty agreements (which 2 generally recogmzes guarantees as contracts of secondary liability), and overlooked a fundamental New York rule of contract interpretation (which requires courts to give effect to the parties' terms, including terms that elevate a guaranty to its own, "primary" obligation). By its Decision the Appellate Division unsettled both contract law as well as lender financing law - a critical area of commercial law in this State - and created a disincentive for lenders to engage in loan workouts or to settle borrower defaults. The Decision should be vacated. The Appellate Division's Decision (by a four-judge panel consisting of Tom, J.P., Acosta, Freedman, Kapnick, JJ.) also conflicts with a later decision by a 0 different, five-judge panel of the Appellate Division, First Department (Saxe, J.P., Moskowitz, DeGrasse, Feinman, Clark, JJ.), which more recently (and, PAF-PAR respectfully contends, correctly) found that liability under an "absolute and unconditional guaranty" (like the guaranty at issue here) is not affected by a subsequent borrower modification because the guaranty and the underlying note are independent agreements. 4 USS LLC v. DSW MS LLC, 120 A.D.3d 1049, 1049 (1st Dep't 2014) (quotations omitted). The internal First Department split should be reconciled by this Court's vacatur of the Decision. The economic purpose of an "absolute and unconditional" guaranty is to enable a lender to work with a defaulting borrower without having to sue and without having to foreclose upon and monetize supporting collateral - and, just as 3 importantly, without having to suffer a sunk cost. The "absolute and unconditional" guarantor exists as a 'joint and several" backstop against any repayment shortfall by the borrower, including any shortfall occasioned by loan forgiveness and modification exclusively between the borrower and the lender. This brand of guaranty, which is a primary obligation rather than a secondary liability, provides comfort and a promise to the lender that if the borrower defaults on its initial obligation, the lender may proceed against the guarantor for full repayment instead. Or, as was the case here, a lender may accept some lesser repayment from the borrower and may recover the difference from the guarantor. The consideration to <> the guarantor of this arrangement is the extension of a loan - the full amount of a loan - to the borrower in the first place. In this case, PAP-PAR's borrowers defaulted on a $13 million note. That note was guaranteed, in full and upon a waiver of the defenses of borrower forgiveness and release, by Respondents herein, who are the borrowers' owners. Following default, P AF-PAR modified the note to permit the borrowers to repay only $11 of the $13 million loan by an extended due date, with $2 million of the unpaid debt being "forgiven" with respect to the borrowers. PAF-PAR and the borrowers "expressly denied" that this modification constituted a "novation" between the parties. Moreover, PAP-PAR and Respondents did not modify the guaranty agreement between them. 4 Respondents, like their companies (i.e., the borrowers), were represented at all times by counsel. Because of PAF-PAR's willingness to modify the note- with the guaranty standing firmly in place - the borrowers were able to recover and re- pledge the property that had been serving as collateral for P AF-PAR in order to secure another loan from another lender. Accordingly, the commercial dynamics of this transaction and borrower default workout were clear and in line with the independence principle: the borrowers' repayment shortfall and default was forgiven by P AF-PAR, while Respondents' duty under the guaranty remained "absolute and unconditional" in its promise to repay the full amount of what had ., been loaned to the borrowers (i.e., the Respondents' companies) in the first place. The Decision mistakenly treats PAF-PAR's $2 million loan forgiveness toward the borrowers as a loss to PAF-PAR, and thus finds the guaranty to have been derivatively and fully discharged by "the borrower's full payment of the modified loan amount". The guaranty, however, expressly declares any note modifications to be immaterial, thereby making the guaranty's independent character clear. The Decision ignores those terms and rewrites the language of the guaranty, transforming it into a contract of secondary liability only. The guaranty and note modification are separate agreements. The Decision mistakenly conflates these agreements. Such a conclusion is reinforced by the later, conflicting Appellate Division ruling in 4 USS, which correctly observes that 5 subsequent loan modifications are immaterial to "absolute and unconditional" guarantees. Unless vacated, the Decision will have a profound chilling effect upon lenders' willingness to work with defaulting borrowers. This Court should vacate the Decision and hold that the independence principle with respect to guaranty agreements is secure in New York. 2 STATEMENT OF THE CASE A. Background This case is about how sophisticated and represented parties may structure lending agreements to ensure the full repayment of a loan through the use of a guaranty. 2 The Decision finds that an "additional reason for denying [PAP-PAR's] summary judgment [in lieu of complaint] motion is that [PAP-PAR] failed to establish standing- it merely submitted an affidavit saying that the original lender had assigned it the note, mortgage, and guaranty, and its assertions were contradicted by documentary evidence submitted by [Respondents]." Thus, the Appellate Division found a disputed issue of material fact that precluded summary judgment in lieu of complaint and would have required discovery (had the Appellate Division not affirmed dismissal of PAP-PAR's action based upon its finding that the guaranty had been fully discharged). The I.A.S. court never addressed Respondents' contention about standing or received additional evidence. Moreover, the Appellate Division misapprehended the record when it found that Respondents had submitted contradictory documentary evidence, as Respondents had merely contended that PAP-PAR's testimony regarding the original lender's assignment was insufficient without supporting documents. (Resps.' 12/30/13 Br. at 34.) This issue - which is peculiar to the parties and not necessarily one of profound public importance worthy of this Court's attention - can and would readily be supported by PAP-PAR with documentary proof and resolved through brief discovery and summary judgment on remand. See CPLR § 3213 ("If the motion [for summary judgment in lieu of complaint] is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, .... "). 6 The loan in this case from PAF-PAR (through its predecessor-in-interest) to a collection of borrowers was in the amount of "THIRTEEN MILLION AND N0/100 DOLLARS ($13,000,000.00)". (R.47, 65, 88, 270.) The borrowers' principals personally guaranteed repayment of that amount as an "absolute," ''unconditional," "primary," and ')oint and several" obligation, irrespective of any note modifications or repayment forbearance exercised by the lender in favor of the borrowers. (R.47-48, 50-52.) P AF-PAR did later modify the borrowers' repayment obligation, after the borrowers had defaulted, to require repayment of only $11 million rather than $13 million by an extended date, with the remaining $2 million in unpaid indebtedness being "forgiven" by PAF-PAR. (R.65-67.) The modification agreement between P AF-P AR and the borrowers makes explicit that such modification and forgiveness was not a "novation," and thus a new debt of $11 million was not deemed to have replaced the original debt of $13 million. (R.67.) Moreover, the guaranty agreement between PAF-PAR and Respondents allowed PAF-PAR to exercise such loan "forbearance" in favor of the borrowers without "diminish[ing]" or "reduc[ing]" Respondents' independent obligation to ensure repayment of the full loan amount of $13 million. (R.50-51.) Accordingly, this case presents a factual scenario involving: (a) borrower default; (b) lender and borrower modification of the note without novation of the 7 loan amount; (c) ultimate non-payment of the full loan amount by the borrowers; and (d) forgiveness of such borrower default by PAF-PAR. PAF-PAR's rights against Respondents under the guaranty vested upon the borrowers' initial default, and continue today because the full loan amount remains unpaid. Under the express terms of "Article II" of the guaranty, PAF-PAR's and the borrowers' subsequent modification of the note is immaterial to Respondents' obligation under the guaranty to ensure complete repayment of the $13 million loan. Indeed, the guaranty provides that Respondents were not even entitled to notice of any later note modifications by PAF-PAR. PAF-PAR was entitled to restructure the borrowers' repayment obligations however P AF-PAR saw fit; such restructuring meant nothing to the guaranty unless the guaranty itself was modified. Respondents nonetheless contend, and the Appellate Division concurred, that, notwithstanding Article II of the guaranty, PAF-PAR's modification agreement with the borrowers constituted a complete reset of the transaction that effectively redefined and reduced the loan ab initio to mean only $11 million (the amount that the borrowers ultimately repaid), such that Respondents have no further repayment obligation under their guaranty. The Decision finds that the guaranty was never triggered because, supposedly, there was no borrower default- but that is only because of the borrower's modification agreement, which the guaranty declares irrelevant. The Decision, which conflates Respondents' 8 guaranty agreement with the borrowers' modification agreement and disregards and rewrites Article II of the guaranty, cannot be squared with New York's rules of contract interpretation. Article II of the guaranty deserved the Appellate Division's full respect under New York law. The Decision is deeply unsettling to the right of lenders to structure loan workouts with borrowers under New York law without having to forfeit the protection of independent, absolute and unconditional guarantees. The Decision should be vacated. The Action ~ P AF-PAR commenced this action by serving and filing a motion for summary judgment in lieu of complaint, pursuant to CPLR § 3213, on or about June 26, 2012. (R.38-39.) Respondents cross-moved to dismiss the action, pursuant to CPLR 3211(a)(l), (3) and (7), on or about September 5, 2012. (R.72- 73.) The I.A.S. Court's Decision At the conclusion of a hearing held on February 6, 2013, the I.A.S. court read a ruling from the bench denying PAF-PAR's motion for summary judgment in lieu of complaint and granting Respondents' cross-motion to dismiss. (R.30-33 (at Tr. 25: 18-28:20).) 9 The I.A.S. court initially acknowledged that "the release of the borrower doesn't necessarily release the guarantor." (R.15 (at Tr. 10:9-11).) The I.A.S. court then inconsistently found the guaranty in this case to have been released because "there was an exchange of cash" to P AF-PAR that accompanied P AF- PAR's release of the borrowers. (/d. (at Tr. 10:11-20).) Whether or not PAF-PAR released the borrowers in exchange for any money is legally irrelevant to the guaranty agreement's independent and "primary" obligation to ensure the full repayment of the $13 million loan. The I.A.S. court misconstrued PAP-PAR's forgiveness of $2 million in favor of the borrowers as a "discharge" of the <;> "principal obligation" itself, thereby necessarily discharging the guaranty as well. (R.25 (at Tr. 20:16-22); R.31 (at Tr. 26:5-8).)3 P AF-PAR agreed to modify the note after the borrowers had already defaulted. PAF-PAR could have foreclosed immediately on the borrowers' collateral, and/or could have demanded immediate and full repayment from Respondents under their guaranty. Instead, PAF-PAR agreed to work with the borrowers (which had expressed financial difficulties) to restructure the manner and schedule in which PAF-PAR would ultimately recover the $13 million loan: 3 The lower court's error was possibly fed by Respondents' mischaracterization of the note modification as an agreement by P AF-P AR to write off $2 million of the loan amount in exchange for a "quick pay as opposed to extending this [the borrowers' repayment] forever .... " (R.26 (at Tr. 21:12-17).) The I.A.S. court mistakenly accepted Respondents' flawed premise: i.e., that PAF-PAR was supposedly obligated to wait "forever" to have the $13 million loan repaid. That is not the reality of what occurred. 10 i.e., by (a) collecting $11 million from the borrowers by an extended date; (b) forgiving the borrowers' $2 million repayment default; and (c) under the terms of the separate guaranty, collecting the remaining $2 million from Respondents as "primary obligors." This loan workout directly benefited Respondents, dollar-for-dollar, by reducing their exposure as independent guarantors. The workout further benefited Respondents by allowing their companies (the borrowers) to reclaim their collateral from PAF-PAR and re-pledge same to another lender in connection with another loan. (See R.241-251.) PAF-PAR has not sought any kind of double- ~ recovery or windfall from Respondents; it has simply tried to complete the repayment of $13 million in actually loaned funds. According to the I.A.S. court, the modification agreement between PAF- PAR and the borrowers "remedied the [earlier] default" by the borrowers, "so essentially there was no default." (R.33 (at Tr. 28:3-12).) This finding was in error and shows that the I.A.S. court failed to appreciate the economic and legal significance of the loan workout that had occurred. The Appellate Division's Decision Notice of Entry of the I.A.S. court's decision was served by Respondents on or about March 26, 2013. (R.36-37.) PAF-PAR timely noticed an appeal to the Appellate Division, First Department on or about April16, 2013. (R.34.) 11 Following oral argument on March 25, 2014, the Appellate Division entered its Decision on or about June 5, 2014. The Decision affirms the I.A.S. court's decision, finding (in material part): It is well settled that since a guaranty "is a contract of secondary liability . . . a guarantor will be required to make payment only when the primary obligor has first defaulted."... Here, there is no dispute that defendants guaranteed the payment of the borrower's obligations under a promissory note, and that the borrower satisfied its obligations under the note, as modified by the Loan Modification and Extension Agreement signed by plaintiff. Nevertheless, plaintiff argues that despite the borrower' s· full payment of the modified loan amount, the guaranty for the original loan amount is still enforceable because Article II of the guaranty states that it cannot be " ... diminished, impaired, reduced or adversely affected by ... [,]" inter alia, modifications. However, as the Court below held, this language Q cannot operate to make the guarantor liable for more than what the primary obligor was obligated to pay and did pay. Hence, plaintiff did not make out a prima facie case, since it did not show that the guarantors failed to make a payment called for by the terms of their guaranty .... While, as plaintiff points out, the guaranty waives many defenses, plaintiffs failure to establish its prima facie case obviates the need for defendants to raise a triable issue of fact as to defenses .... " (R.267-68.) The Decision's fmding that "the borrower satisfied its obligations under the note, as modified" - which is essential to the Decision's later finding that the guaranty agreement is a mere "contract of secondary liability" that was discharged when the borrowers repaid only $11 million of the $13 million loaned to them- is 12 erroneous where: (a) the guaranty defines itself to be a "primary" obligation to repay the loaned amount in full; and (b) the guaranty declares all later note modifications and releases to be immaterial. Both lower courts made the same fundamental error in finding that "essentially there was no default": they inappropriately tethered the guaranty agreement to the note modification agreement, notwithstanding specific language in both agreements that eschew any such construction. The Decision eliminates the security that independent guarantees should offer lenders as "primary" obligations of indebtedness. Unless vacated, the Decision will unavoidably chill "' lenders' willingness to enter into loan modifications and workouts. This Appeal PAF-PAR served Notice of Entry of the Decision on September 22, 2014 and timely moved this Court for leave to appeal on October 10, 2014. Respondents filed a Memorandum in Opposition to Motion for Leave to Appeal on October 14, 2014. This Court granted PAF-PAR's motion for leave to appeal by Order dated December 16, 2014. PAF-PAR filed its Preliminary Appeal Statement on or about December 22, 2014. This Court directed the appeal to proceed in the normal course of briefing and argument by notice dated December 30, 2014. 13 SUMMARY OF THE RELEVANT EVIDENCE A. TheNote In July 2006, seven limited liability companies (collectively, the "Borrower") borrowed $13 million from PAP-PAR's predecessor-in-interest: a company called CAD Funding LLC ("CAD"). (R.88-103.) This loan, memorialized by a Promissory Note dated as of July 14, 2006 (the "Note"), was secured by mortgage liens on several properties in and around Syracuse, New York that were owned by the Borrower. (R.104-228.) B. The Guaranty "' As joint and several security, and as a condition to extending the $13 million loan, CAD also required the Borrower's principals, Respondents herein, to execute a Guaranty dated as of July 14, 2006 (the "Guaranty"). (R.47-61.) The Guaranty recites up front: Lender [CAD] is not willing to make the Loan [of $13 million], or otherwise extend credit, to Borrower unless Guarantor [Respondents] unconditionally guarantees payment and performance to Lender of the Guaranteed Obligations (as hereinafter defined). (R.47 (underscoring supplied).) The Guaranty further recites the consideration that "Guarantor will directly benefit from Lender's making the Loan to Borrower." (/d.) "Guaranteed Obligations" are defined in Section 1.2 of the Guaranty to mean "all of Borrower's obligations under the Loan Documents." (R.48.) 14 The term "Loan Documents" is defined by the Note's accompanymg Mortgage, Security Agreement, Assignment of Rents and Fixture Filing dated July 14, 2006 (the "Security Agreement") to mean: "this Security Instrument, the Note, the Assignment [of Leases and Rents and Security Deposits dated July 14, 2006], and any and all other agreements, instruments, certificates or documents executed and delivered by Borrower or any Affiliate of Borrower in connection with the Loan." (R.l24.) The "Loan" is defined by the Note's "Recitals" to be evidenced by the Note and to mean "THIRTEEN MILLION AND N0/100 DOLLARS ($13,000,000.00)" ~ (also defined as the "Loan Amount"). (R.88; accord, e.g., R.270.) Accordingly, the Guaranty provides a joint and several pronuse by Respondents to repay CAD the "Guaranteed Obligations" of $13 million. Respondents also agreed "to pay any and all costs and expenses (including, without limitation, all reasonable fees and disbursements of counsel) which may be paid or incurred by Lender in connection with the enforcement of this Guarantee." (R.48 (at § 1.2).) 1. The Independent, Unconditional Nature Of The Guaranty It is abundantly clear, in section after section of the Guaranty, that the Guaranty is a "primary" and separate obligation by Respondents to repay the 15 "Guaranteed Obligations" of $13 million (loaned collectively to the Respondents' seven companies). Section 1.1 of Article I of the Guaranty states that Respondents: absolutely, irrevocably and unconditionally guarantee[d] to Lender (and its successors and assigns), jointly and severally, the payment and performance of the Guaranteed Obligations as and when the same shall be due and payable, whether upon demand by Lender or by lapse of time, by acceleration of maturity or otherwise. Guarantor hereby absolutely, irrevocably and unconditionally covenants and agrees that it is liable, jointly and severally, for the Guaranteed Obligations as a primary obligor, and that each Guarantor shall fully perform, jointly and severally, each and every term and provision hereof. (R.47 (at§ 1.1).) Section 1.3, titled "Nature of Guaranty," reiterates: This Guaranty is an irrevocable, absolute, continuing guaranty of payment and performance, is joint and several and is not a guaranty of collection. (R.48 (at§ 1.3).) Section 1.6, titled "No Duty to Pursue Others," provides: It shall not be necessary for Lender (and Guarantor hereby waives any rights which Guarantor may have to require Lender), in order to enforce this Guaranty against Guarantor, first to .. .institute suit or exhaust its remedies against Borrower or others liable on the Loan or the Guaranteed Obligations or any other Person. (R.49 (at§ 1.6).) Article II of the Guaranty specifically directs those "EVENTS AND CIRCUMSTANCES" that would "NOT REDUC[E] OR DISCHARG[E] 16 GUARANTOR'S OBLIGATIONS." (R.50. (emphasis m original)). By that article, Respondents: agree[d] that [their] obligations under this Guaranty shall not be released, diminished, impaired, reduced or adversely affected by [a number of potential events]," and Respondents "waive[d] any common law, equitable, statutory or other rights (including without limitation rights to notice) which Guarantor might otherwise have as a result of or in connection with any of [such potential events]. (R.50.) Section 2.1, entitled "Modifications," states that Respondents' obligations under the Guaranty would not be affected by: [a]ny renewal, extension, increase, modification, alteration or rearrangement of all or any part of the Guaranteed Obligations, Note, Loan Documents, or other document, instrument, contract or understanding between Borrower and Lender, or any other parties, pertaining to the Guaranteed Obligations or any failure of Lender to notify Guarantor of any such action. (R.51.) Section 2.2, entitled "Adjustment," states that Respondents' obligations under the Guaranty would not be affected by: [a]ny adjustment, indulgence, forbearance or compromise that might be granted or given by Lender to Borrower or any Guarantor. (R.51.) Under Section 2.4 of the Guaranty, entitled "Invalidity of Guaranteed Obligations," Respondents further agreed that if the Note were found to be invalid for some reason thereby excusing the Borrower's liability to repay CAD, either in 17 full or in part, Respondents would nonetheless remain liable to repay CAD the Guaranteed Obligations up to $13 million. (R.51.) Under Section 2.5 of the Guaranty, entitled "Release of Obligors," Respondents additionally agreed that "[a]ny full or partial release of the liability of Borrower on the Guaranteed Obligations, or any part thereof," would not affect Respondents' promise to guaranty full repayment to CAD of the Guaranteed Obligations of $13 million, "it being recognized, acknowledged and agreed by Guarantor that Guarantor may be required to pay the Guaranteed Obligations in full without assistance or support of any other Person, .... " (R.51.) Respondents made the same agreement with regard to the release of any collateral securing the Loan. (R.52 (at§ 2.7).) that: Under Section 2.10 of the Guaranty, entitled "Offset," Respondents agreed The Note, the Guaranteed Obligations and the liabilities and obligations of Guarantor to Lender hereunder, shall not be reduced, discharged or released because of or by reason of any existing or future right of offset, claim or defense of Borrower against Lender, or any other Person, or against payment of the Guaranteed Obligations, .... (R.52; accord R.48 (at§ 1.4).) The final section of Article II of the Guaranty, Section 2.13 (entitled "Other Actions Taken or Omitted"), provides: 18 Any other action taken or omitted to be taken with respect to the Loan Documents, the Guaranteed Obligations, or the security and collateral therefor, whether or not such action or omission prejudices Guarantor or increases the likelihood that Guarantor will be required to pay the Guaranteed Obligations pursuant to the terms hereof, it is the unambiguous and unequivocal intention of Guarantor that Guarantor shall be obligated to pay the Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether or not contemplated, and whether or not otherwise or particularly described herein, which obligation shall be deemed satisfied only upon the full and final payment and satisfaction of the Guaranteed Obligations. (R.52-53 (emphasis supplied).) Consistent with the foregoing, under Section 1. 7 of the Guaranty, entitled "Waivers," Respondents expressly waived notice of "any amendment or extensign of the Note or of any other Loan Documents," or of any other event that might impact the Borrower directly, because such events would have no impact on Respondents' obligation to ensure the repayment of $13 million to CAD: i.e., the amount that CAD loaned to the Borrower, at Respondents' specific inducement, in the first place. (R.49.) Accordingly, Respondents' potential liability under the Guaranty is independent of the Note, is a self-described "primary" obligation, and is "jointly and severally" fixed at $13 million unless the Guaranty itself is modified. (R.56 (at§ 5.5).) It is undisputed that the Guaranty was never amended or modified "by an agreement in writing" (as required under Section 5.5 of the Guaranty) between 19 PAF-PAR and Respondents, and it is also undisputed that the parties to this lending transaction were represented at all relevant times by counsel. The consideration to Respondents of this arrangement was the benefit of the Borrower receiving $13 million at a time when Respondents wanted the Borrower to be loaned $13 million. C. The Repayment Of $1 Million By The Borrower, And CAD's Assignment Of The Loan Documents And Guaranty To PAF-PAR In or about December 2008, CAD gave the Borrower permission to sell one of the properties that had been securing the Note in exchange for the Borrower's immediate repayment of $1 million of the loan. (See R.229; R.41 (at 1 8).) The "' parties executed a Partial Release of Lien of Mortgage dated December_, [sic.] 2008. (ld.) The Guaranty was not modified and remained in full effect. (/d.) Thus, $1 million of the $13 million owed to CAD had been repaid by December 2008, seven months before the July 15, 2009 maturity date. As such, $12 million remained due to CAD. (R.41 (at 19).) In or about July 2008, CAD assigned all of the Loan Documents and the Guaranty to its affiliate, PAF-PAR. (R.41 (at 18).)4 4 The Appellate Division found an issue of fact as to PAP-PAR's standing because documentary proof of the assignment from CAD to PAF-PAR was not appended to PAF-PAR's motion for summary judgment in lieu of complaint, which relied on testimony from a PAF-PAR representative. (R.275-76.) Such incontestable documentary proof would readily be produced on remand. 20 D. PAF-PAR Reduces The Borrower's Repayment Obligation By $2 Million, Without Modifying The Guaranty In or about April and May 2009, the Borrower asked P AF-PAR to extend the maturity date of the Note, citing financial difficulties. (R.230-231.) The Borrower subsequently defaulted and failed to repay the $12 million due to PAF- PAR by the Note's maturity date of July 15, 2009. (R.41 (at 19).) PAF-PAR, by the explicit terms of the Guaranty, was under no obligation ''to mitigate damages or take any other action to reduce, collect or enforce the Guaranteed Obligations." (R.49 (at § 1.6).) Nevertheless, PAF-PAR negotiated for as much prompt repayment from the Borrower a§ the Borrower claimed was possible. This negotiation was done for a reason: the Borrower (and Respondents) wanted the Borrower's collateral released so that it could be immediately re- pledged, and P AF-PAR wanted the benefit of receiving the bulk of the cash that was due as quickly as possible without having to foreclose upon and monetize the collateral, and without having to immediately litigate or chase anyone down. (See R.230-231.) That is exactly what eventually occurred. (R.246-262.)5 5 PAF-PAR's decision to work with the Borrower did not constitute a waiver of any provision of the Guaranty. (R.55 at § 5.1: "No failure or delay on the part of the Lender in exercising any right, remedy, power or privilege hereunder ... shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder ... preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege hereunder or thereunder. The rights and remedies provided herein and in the other Loan Documents are cumulative and not exclusive of any rights or remedies provided by law."). 21 On July 17, 2009, PAF-PAR proposed two alternative options for the Borrower: (a) The Borrower could extend the Note's maturity date to August 30, 2009 by immediately repaying another $1 million, and could later further extend the maturity date to September 30, 2009 by repaying an additional $1 million by August 25, 2009, leaving a remaining balance of $10 million due by September 30, 2009. This option would forestall the "due and payable" deadline for the Borrower, and would concomitantly reduce Respondents' potential liability under the Guaranty (in the event of Borrower default and non-monetization of the Borrower's collateral) from $12 million to perhaps $10 million. Or: (b) The Borrower could extend the Note's maturity date to August 30, 2009 by immediately repaying another $1 million, leaving a repayment balance of $11 million, and could further "short pay" the loan and free up all of the Borrower's collateral by paying only $10 million of the $11 million balance, leaving Respondents with only a $1 million joint and several differential liability under the Guaranty instead of the $12 million liability that Respondents already faced. (See R.232.) The parties did not reach an immediate agreement as to these options, and PAF-PAR sent a default notice to the Borrower on July 21, 2009 in connection with the $12 million unpaid debt (which by then had also accrued $11,942 in interest and fees). (R.62-63.) The default notice recited Respondents' ongoing joint and several liability for such debt. (/d.) 22 1. The Loan Modification And Extension Agreement Three days later, on July 24, 2009, PAF-PAR and the Borrower entered into a Loan Modification and Extension Agreement (the "Borrower Modification"). (R.65-71.) Pursuant to the Borrower Modification (in material part): 1) the Borrower immediately repaid another $1 million, thereby reducing the Guaranteed Obligations to $11 million; 2) the maturity date of the Note was extended to August 31, 2009, with the right of the Borrower to further extend the maturity date to September 30, 2009 · upon the repayment of another $1 million by August25,2009;and 3) PAF-PAR agreed to "forgive the indebtedness under the Note in the amount of $~,000,000" provided that the Borrower did not otherwise default - meaning that if the Borrower elected to pay the remaining balance on August 31, 2009, then that balance would be $9 million to the Borrower instead of $11 million, leaving a $2 million forgiven default; and if the Borrower instead elected to pay $1 million on August 25, 2009 to buy more time and further extend the maturity date to September 30, then the remaining balance to the Borrower on that date would be $8 million instead of $10 million, leaving a $2 million forgiven default. (R.65-71.) Either way, if the Borrower could overcome its financial difficulties, then the Borrower could repay only $9 million of the $11 million in remaining Guaranteed Obligations and, in tum, could free up its collateral; and Respondents would jointly and severally be left to repay the remaining $2 million in defaulted Guaranteed Obligations that had been forgiven by P AF-PAR with respect to the 23 Borrower. Regardless of the Borrower's modified repayment path, the entire $13 million loan would be repaid and no portion of that loan would be written off. Critically, the Borrower Modification did not extinguish the "Guaranteed Obligations" of the $13 million "Loan Amount" and replace them ab initio with a new and lesser "Loan Amount" of only $11 million. To the contrary, the Borrower Modification states: Lender and Borrower agree that a novation is expressly denied and is not intended to be effected, and except as amended or modified by this [Borrower Modification], the terms, provisions, conditions, rights, duties and obligations contained in the Loan Documents [including the Note] shall remain unchanged and unimpaired by this Agreement and are jn full force and effect. (R.67 (at 16) (emphasis supplied).) Thus, the Borrower Modification left the $13 million "Loan Amount" under the Note "in full force and effect" but promised to "forgive" the Borrower's default and failure to repay $2 million of the $13 million by the extended maturity date. (R.66 (at 15).) Similarly, the Guaranty was not modified in any respect and it remained in full effect. (R.42 (at 1 11).) Although Respondents are sophisticated and were represented by counsel, they did not ask to modify the Guaranty (they were satisfied by P AF-P AR' s willingness to release the Borrower's collateral). 24 2. The Borrower's Repayment Of $10 Million, And PAF-PAR's Issuance Of A Payoff Letter And Release Of The Borrower's Collateral The Borrower repaid $1 million at execution of the Borrower Modification on or about July 24, 2009, thereby reducing the Guaranteed Obligations to $11 million. (R.41 (at 'li 10).) The Borrower repaid another $1 million in or about late August 2009, thereby further extending the Note's maturity date to September 30, 2009 and reducing the Guaranteed Obligations to $10 million. (R.42 (at 'li 12).) In or about late September 2009, the Borrower repaid another $8 million, "" thereby triggering the $2 million Borrower default forgiveness provision of the Borrower Modification. (R.42 (at 'li 13).) At the Borrower's request, PAF-PAR (through an affiliate known as CapitalSource Finance LLC) released the Borrower's collateral in or about late September 2009 by assigning the mortgage lien to an entity called Syracuse Retail Funding, LLC ("Syracuse"), which was another lender making another loan to the Borrower. (/d.; R.241-251.) The Guaranty, however, was not released by PAF-PAR or modified in any way. (R.42 (at 'li 14).)6 6 Relying on an extraneous attorney communication confirming that the "underlying collateral documents" would be assigned to Syracuse following the Borrower's performance under the Borrower Modification, (R.259), Respondents argued below, upon nothing more than ipse dixit, that the Guaranty should be deemed to have been included in such assignment (and Respondents intentionally omitted the term "underlying" from their argument below). The term "underlying collateral documents" cannot be taken out of context: PAF-PAR was assigning the collateral to 25 Further to the Borrower Modification, PAF-PAR also issued a "Payoff Letter" to the Borrower. (R.243-44.) The Payoff Letter did not inure to Respondents' personal benefit under the Guaranty as nowhere did the Borrower Modification purport to reduce ab initio the "Loan Amount" of $13 million under the Note and applicable to the Guaranty down to $11 million (i.e., indisputably the only amount of principal that the Borrower ever repaid). The Guaranty was never "paid off." Nevertheless, Respondents refused to repay P AF-P AR the rematmng $2 million still owed to PAF-PAR, claiming that the Borrower Modification should be interpreted as PAF-PAR's decision to accept a $2 million write-off with respect to the initial $13 million loan. (R.42 (at '][15).) Syracuse at the Borrower's request pursuant to an apparent new lending relationship. PAF-PAR was not purporting to make Syracuse the new "Lender" under the Note or the Borrower Modification, as Respondents disingenuously argued below. (Resps.' 12/30/13 Br. at 32.) To the contrary, the only way Syracuse stood to acquire the collateral from PAF-PAR was if the Borrower performed under the Borrower Modification and was thereby "forgiven" of any further indebtedness to PAF-PAR. Syracuse did not become a resurrected "Lender" to the Borrower under PAF-PAR's instruments simply because PAF-PAR released and assigned the Borrower's collateral to Syracuse. Respondents offered no law to the contrary. This issue can and would further be addressed on remand, if necessary. Respondents also argued below - again without authority - that the Guaranty should be deemed "automatically assigned" to Syracuse because it is supposedly "inextricably intertwined with the primary obligation (i.e., the underlying debt that is guaranteed)." (/d. at 33.) Respondents' argument ignored that the Guaranty is itself a "primary obligation." (R.47 (at § 1.1).) As PAF-PAR contends in this appeal, there is and should be nothing in New York law that requires guarantees to be deemed secondary liabilities in all cases as a matter of law. 26 ARGUMENT I. IN DISREGARD OF PRINCIPLES OF CONTRACT LAW, AND IN CONFLICT WITH A MORE RECENT DECISION FROM A DIFFERENT FIRST DEPARTMENT PANEL, THE DECISION ERRONEOUSLY CONVERTS A "PRIMARY" AND "ABSOLUTE AND UNCONDITIONAL" LOAN GUARANTY INTO A "CONTRACT OF SECONDARY LIABILITY" The Decision finds that the Guaranty by Respondents was discharged because "the [B ]orrower satisfied its obligations under the note, as modified by the Loan Modification and Extension Agreement signed by [PAF-PAR]." (R. 267-68.) The Decision reasons that the Guaranty was effectively discharged by the Borrower's performance under the Borrower Modification because a guaranty "cannot operate to make the guarantor liable for more than what the primary obligor was obligated to pay and did pay." (/d.) The Decision disregards the Guaranty's language that Respondents are themselves "primary obligor[s]". (R.47 (at § 1.1).) The Decision also fails to give any effect to - and refuses even to consider- Article II of the Guaranty, which declares all loan modifications to be immaterial to the Guaranty. (R.267-68.) The Decision's tethering of the Guaranty to the Borrower Modification represents a would-be deeply unsettling change in New York contract and lender financing law. The Decision would eliminate the concept of "primary" obligation, "absolute and unconditional" guarantees, and would transform all such purported 27 guarantees into mere secondary liabilities of future loan workouts. Thus, the Decision should not be allowed to stand. A. As A Conflicting First Department Panel More Recently Held, "Absolute And Unconditional" Guarantees Can Be Joint And Several "Primary" Obligations And Not Just Secondary Liabilities Under New York Law The purpose of the Guaranty was to provide insurance against the possibility of default by the Borrower, and/or the possibility of later lender forgiveness or release extended in favor of the Borrower. See, e.g., Inland Credit Corp. v. Weiss, 63 A.D.2d 640, 640 (1st Dep't 1978) ("The guarantee contained a provision authorizing plaintiff, as lender, without notice or consent from the guarantor, to release the underlying debt and/or the collateral without in any way affecting or discharging defendant's liability as guarantor. Such a clause, by which a surety waives his discharge by the release of the principal debtor or the collateral, has been upheld by this court and the Court of Appeals.") (citing Indianapolis Morris Plan v. Karlen, 28 N.Y.2d 30, 32-36 (1971) (reversing denial of lender's summary judgment motion against guarantors, who were owners of a borrowing company, and finding that lender was able to release the borrower's collateral without discharging the guarantors)). Without the Guaranty, there would not have been a loan of $13 million to the Borrower in the first place. Respondents wanted a $13 million loan to occur, however, and for that reason they independently guaranteed full repayment of that 28 "Guaranteed Obligation." The Guaranty is thus a stand-alone agreement supported by its own consideration. The economic purpose of the Guaranty was to entice PAP-PAR's predecessor to lend $13 million without fear of suffering a write off of any portion of that amount in the event of future borrower default. Throughout the Guaranty, in section after section, Respondents agreed that their "joint and several" and "primary" obligation to repay $13 million withstood any modifications, discharges or forgiveness that might be extended to the Borrower, and that the defenses of borrower release and forbearance were specifically waived. (R.48 (§ 1.3); R.51 (§§ 2.1, 2.2, 2.4, 2.5); R.52 (§§ 2.10, ~ 2.13).) The Guaranty clearly and unambiguously exists independently of the Note and independently of any modifications to the Note and/or releases by PAF-PAR in favor of the Borrower. Moreover, it is undisputed that the Guaranty was never itself modified. Thus, the promises by Respondents to remain primarily liable for as much as $13 million, regardless of any modifications to the Note or forgiveness extended to the Borrower after its default, were never discharged by P AF-PAR. A different panel of the First Department reached a similar conclusion in 4 USS LLC v. DSW MS LLC, 120 A.D.3d 1049, 1051 (1st Dep't 2014). The court in that case found that an "absolute and unconditional guaranty" remained enforceable according to its clear terms notwithstanding a subsequent modification 29 that enhanced the underlying loan amount. /d. In rejecting the guarantor- defendant's argument that the guaranty had been "voided" by the modification, the court explained: Defendant's arguments miss the mark because they are entirely focused on the modification. The record discloses that the modification was entered into after [the borrower] defaulted under the lease and after the guarantor's liability had already been triggered. /d.; accord Davimos v. Halle, 60 A.D.3d 576, 577 (1st Dep't 2009) ("A guarantor is bound by an anticipatory agreement in his undertaking that he will not be relieved of liability by a modification of the principal contract") (citation omitted) (emphasis supplied). Another instructive decision was written by (then) Circuit Judge Sotomayor in Compagnie Financiere de Cic et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 188 F.3d 31 (2d Cir. 1999). In Compagnie, Judge Sotomayor explained: "The general rule in New York is that a creditor's release of a principal debtor operates to discharge parties, such as guarantors, who are only secondarily liable on a debt." /d. at 34 (citations omitted). However, Judge Sotomayor also explained: "[A] guarantor can consent in advance to remain liable even after such a release," such as when a guaranty waives "the defense of release in a subsequent creditor action." /d. at 34-35 (citations omitted). 30 The guaranty in Compagnie provided: [T]he Guarantors hereby agree that their obligations hereunder shall be unconditional and irrevocable, irrespective of the validity, legality or enforceability of the Loan Agreement, the absence of any action to enforce the [] same, the recovery of any judgment against the Borrower, . . . or any other circumstances which might otherwise constitute a legal or equitable discharge [or] defense [of] a guarantor[.] /d. at 36. The guarantors in that case expressly agreed that their guaranty agreement was an independent obligation that broadly waived the defense of borrower release, and was not merely a secondary liability to the lender that would otherwise necessarily be satisfied in accord with any borrower.,release. /d. at 37. ("Thus, while we agree with the district court that it 'would violate traditional notions of contract law [to] expose a guarantor to a risk beyond that for which he has received consideration,' we - unlike the district court - conclude that the Guarantee Agreement explicitly contemplated the risk that [the guarantors] might be 'put in the onerous position of both standing in for the debtor (to pay) and having to chase the debtor for recovery."') (citations omitted). The Guaranty in this case is even more strongly and comprehensively worded than the guaranty in Compagnie. Respondents here specifically agreed to waive all of their defenses, including but not limited to the defenses of partial or full borrower release. (R.48-51 (§§ 1.3, 2.1, 2.2, 2.5)). See also Red Tulip, LLC v. Neiva, 44 A.D.3d 204, 209 (1st Dep't 2007) (finding that guarantor's affirmative 31 defenses and counterclaims against enforcement "faced an insurmountable obstacle: the guaranty she signed in connection with the mortgage loan waived all defenses and counterclaims except 'actual payment,' which she has never alleged" and explaining that since Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 92 (1985), "New York courts have consistently upheld broadly worded waiver language of this type to preclude the assertion of defenses to a guaranty") (citations omitted); Citicorp USA, Inc. v. PM Holdings, LLC, 29 A.D.3d 363, 363-64 (1st Dep't 2006) ("Morton's guaranty is absolute and unconditional, and waives '[a]ny and all defenses to payment.' This precludes his argument that the [] amendment to the Q loan agreement impermissibly modified the guaranty [without the guarantor's consent]. Were we to reach that argument, we would uphold his advance consent in the guaranty to any modifications or amendments of the loan agreement.") (citations omitted); United Orient Bank v. Lee, 223 A.D.2d 500, 500 (1st Dep't 1996) ("As the guarantees contained waivers of all defenses other than payment, defendants were precluded from asserting claims of release.") (citation omitted); First Am. Bank v. Builders Funding Corp., 200 A.D.2d 946, 947 (3d Dep't 1994) (finding guarantor liable after principal debtor's release where guaranty stated that guarantor's obligation would remain unaffected by "any action by the Bank to amend, extend, renew, adjust, waive or release any of the [underlying] Liabilities") (citation & quotations omitted). 32 Respondents further agreed even to waive notice of any borrower release or forgiveness, in recognition of the reality that their Guaranty existed to supplement any possible loan forgiveness extended to the borrower (thus rendering notice to Respondents a pointless and unnecessary act). (R.49, 52-53 (§§ 1.7, 2.13).) See 4 USS, 120 A.D.3d at 1051 n.l ("We note parenthetically that it would not have availed defendant to argue that it was given late notice or even no notice of [the borrower's] default. The [provisions] of the guaranty provide that the guaranty is effective with respect to the relevant defaults whether or not notice thereof is given to the guarantor."); Compagnie, 188 F.3d at 36 (distinguishing case where Q> guaranty was found to be secondary liability where guarantor was required to receive notice and to consent to any borrower release); Inland, 63 A.D.2d at 640 ("Defendant is liable as guarantor regardless of whether plaintiff has discharged [the borrower] on the underlying debt. The guarantee contained a provision authorizing plaintiff, as lender, without notice or consent from the guarantor, to release the underlying debt and/or the collateral without in any way affecting or discharging defendant's liability as guarantor.") (emphasis supplied); Sterling Nat'l Bank v. Biaggi, No. 604015/04, 2006 N.Y. Misc. LEXIS 9404, at *18-19 (Sup. Ct. Oct. 5, 2006), aff'd, 47 A.D.3d 436 (1st Dep't 2008) ("Where, as here, the guaranty allows for changes in the terms of the underlying loan agreement, and expressly waives any right of the guarantor to receive notice or approve of any 33 modifications to the underlying loan agreement, an alleged modification of the loan agreement will not relieve the guarantor of his obligations.") (citations omitted). It is also immaterial that Respondents are the Borrower's owners. The "Borrowers" and the "Guarantors" are treated as different contracting parties with distinct obligations as a matter of law. E.g., Indianapolis Morris Plan, 28 N.Y.2d at 32-34 (finding in a case where the guarantors were the owners of the borrowing company that guarantors remained liable even after lender released the borrower's collateral because the right to the collateral "is solely a right between creditor and "' debtor .... It is different and distinct from the right of sureties not to have collateral security discharged or released without their consent . . . . The rights do not run between the same parties.") (citations omitted) (emphasis supplied). (See also R.52 (at§ 2.7) (providing that "[a]ny release ... of any collateral" by PAF-PAR is immaterial to the Guaranty).) The Guaranty in this case has never been a mere secondary liability. It has always been a liability imposed on Respondents "as a primary obligor," just as the Guaranty expressly and repeatedly recites in Sections 1.1, 1.3 and 1.6. (R.47-49.) See Bank of Am., N.A. v. Solow, 59 A.D.3d 304, 304-05 (1st Dep't 2009) ("The guaranty was absolute and unconditional, expressly waived demand or presentment and was expressly made a primary obligation of the defendant, so that no formal 34 demand, beyond the motion in lieu of complaint itself, was necessary to state a cause of action on the guaranty.") (citation omitted). Accordingly, the Decision misapplies the general rule that "[i]t is well settled that since a guaranty 'is a contract of secondary liability ... a guarantor will be required to make payment only when the primary obligor has first defaulted."' (R. 267 (quoting Weissman v. Sinorm Deli, 88 N.Y.2d 437, 446 (1996)).) The Decision overlooks the important exception that some sureties (like the Guaranty here) can continue to exist as independent contracts when guarantors waive the defense of borrower release (as Respondents did here). See Indianapolis Morris ~ Plan, 28 N.Y.2d at 32. This misapprehension of the relevant law afflicts the Decision and causes conflict with the First Department's later decision in 4 USS. Crucially, the Decision also undermines the commercial purpose of the independence principle, which is to provide market flexibility to borrowers by giving comfort to lenders that a debt will be repaid in full by the guarantor, should the lender grant concessions to the borrower. If allowed to stand, the Decision will unavoidably alter the behavior of future lenders - to the detriment of future borrowers and guarantors - who will simply not grant these types of concessions. The Decision should be vacated. 35 B. The Decision Conflicts With Well Established New York Law That All Provisions Of Sophisticated Agreements Should Be Given Effect And Reconciled, And That No Provision Should Be Nullified The Decision sets a disturbing precedent in its finding that P AF-PAR "did not make out a prima facie case, since it did not show that the guarantors failed to make a payment called for by the terms of their guaranty." (R.268.) That fmding impermissibly rewrites the parties' agreement by: (a) rendering Article II of the Guaranty a nullity (R.S0-51); (b) transforming the Guaranty into a secondary liability appurtenant to the Borrower Modification, instead of giving respect to the Guaranty's express language that it is a "primary" obligation appurtenant to the Loan Amount (R.47 (at § 1.1); and (c) further transforms the Borrower Modification into a novation of the Loan (from $13 million to $11 million), in disregard of the Borrower Modification's express language that a novation of the Loan is "expressly denied" (R.67 (at ')[6)). See, e.g., Black's Law Dictionary (6th ed. 1990) at 1064 (defining "novation" to mean "[s]ubstitution of a new contract, debt, or obligation for an existing one, between the same or different parties. . . . In the civil law, there are three kinds of novation: where the debtor and creditor remain the same, but a new debt takes the place of the old one; where the debt remains the same, but a new debtor is substituted; where the debt and debtor remain, but a new creditor is substituted."). 36 Thus, the Decision's finding that the Guaranty was discharged by the Borrower's performance under the Borrower Modification is at odds with basic principles of New York's contract interpretation law. E.g., 815 Park Ave. Owners, Inc. v. Fireman's Ins. Co., 225 A.D.2d 350, 352 (1st Dep't 1996) ("Finally, the construction of the limitations period proposed by plaintiff would effectively render the limitation clause nugatory in this case, in contravention of established principles of contract interpretation.") (citation omitted); Flag Whaif, Inc. v. Merrill Lynch Capital Corp., 40 A.D.3d 506, 507 (1st Dep't 2007) ("Courts will not rewrite contracts that have been negotiated between sophisticated, counseled commercial entities") (citing Wallace v. 600 Partners Co., 86 N.Y.2d 543, 548 (1995)); Laba v. Carey, 29 N.Y.2d 302, 308 (1971) ("Our conclusion is nothing more than an application of the 'rule of construction that a court should not "adopt an interpretation" which will operate to leave a "provision of a contract ... without force and effect". Stated differently, our concern is with the intent of the parties 'to the extent that they evidenced what they intended by what they wrote' and that intent must be gleaned from the several provisions of the contract. Although we do not fashion new contracts for the parties under the guise of contract construction, we are required to adjudicate their rights according to the unambiguous terms of the contract and therefore must give the words and phrases employed their plain meaning.") (citations omitted); see also 4 USS, 120 A.D.3d at 1051. 37 Respondents agreed that their independent obligation would "be deemed satisfied only upon the full and final payment and satisfaction of the Guaranteed Obligations." (R.52-53 (§ 2.13).) While the Borrower Modification permitted the Borrower to pay $2 million less than it had actually borrowed, with PAF-PAR "forgiv[ing] the indebtedness" that the Borrower failed to repay, (R.66 (<][ 5)), the Borrower Modification did not reduce the "Loan Amount" itself. That amount was always fixed at the $13 million that was actually loaned to the Borrower. See United Orient, 223 A.D.2d at 500 ("Nor was the [] guarantee a novation which discharged [the guarantor's] obligation, since the continuing guarantee expressly provided that it could not be modified or discharged without a writing and no such writing existed") (citations omitted). Equally, the Borrower Modification did not reduce the amount of "Guaranteed Obligations" below $13 million. (See R.51-53 (§§ 2.1, 2.2, 2.5, 2.13).) See also 4 USS, 120 A.D.3d at 1051. As explained above, "Guaranteed Obligations" are defined by Section 1.2 of the Guaranty to include "all of Borrower's obligations under the Loan Documents, ... " (R.48.) The "Loan Documents" are defined by the Security Agreement to include ''this Security Instrument, the Note, the Assignment, and any and all other agreements, instruments, certificates or documents executed and delivered by Borrower or any Mfiliate of Borrower in connection with the Loan." (R.124.) The "Loan" is 38 defined to mean the "Loan Amount" evidenced in the Note: "THIRTEEN MILLION AND N0/100 DOLLARS ($13,000,000.00)." (R.88.) Although the Borrower Modification is a "Loan Document" (i.e., it is an instrument delivered by the Borrower in connection with the Loan), the Borrower Modification did not reduce the Loan Amount itself or constitute a novation of the Loan Amount. Rather, the Borrower Modification expressly kept the obligations under the Note, including the Loan Amount, "in full force and effect." (R.67 .) Moreover, the Guaranty clearly and unambiguously states that Respondents' "obligations under this Guaranty shall not be released, diminished, impaired, reduced ... [or] waive[d]" "' by, inter alia, "[a]ny ... modification ... of all or any part of the Guaranteed Obligations, Note, Loan Documents, .... " (R.50-51.) Accordingly, PAF-PAR is still owed $2 million to make "the full and final payment and satisfaction of the Guaranteed Obligations" complete. That is the amount of money that was insured by Respondents at the time of the loan, and that surety was never reduced. The Decision is erroneous in treating the Borrower's performance under the Borrower Modification as a de jure discharge of the Guaranty. The Decision will chill future loan workouts as it injects uncertainty into basic rules of New York contract law. The Decision should be vacated. 39 CONCLUSION For the foregoing reasons, appellant P AF-P AR respectfully requests that the Court vacate the Decision appealed from, remand this action for further proceedings to establish PAF-PAR's standing with instructions to grant PAF- PAR's motion for summary judgment in lieu of complaint upon proof of same, and award PAF-PAR such other and further relief as the Court deems just and proper. Dated: New York, New York February 12, 2015 PRYOR CASHMAN LLP By: William L. Charron Vanessa Costantini (admission pending) 7 Times Square New York, New York 10036 (212) 421-4100 Attorneys for Plaintiff-Appellant PAF-PAR, LLC 40