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.Continue Reading “Nobody Fell Off the Turnip Truck Yesterday”: What’s at Stake for Commercial Real Estate Lenders in Sutton 58?