Court overturns ruling that would have upended “the whole land development industry”

Philip Pilevsky nearly blew up the way mortgage contracts are written when he meddled in lender Kalikow’s fight with Joseph Beninati in Sutton Place

Jonathan Kalikow and a rendering of 3 Sutton Place
Jonathan Kalikow and a rendering of 3 Sutton Place

On the verge of losing his Sutton Place condo project, upstart developer Joseph Beninati struck a deal with big-time real estate investor Philip Pilevsky to use the bankruptcy system to thwart a foreclosure by his lender. And in the process, the two nearly blew up the way real estate developments are financed in New York.

But now, the state’s highest court has ruled that Beninati’s lender, the Kalikow family’s Gamma Real Estate, can move forward with a lawsuit. Much to the delight of lenders everywhere, the decision said Pilevsky’s deal undermined the protections Gamma put in place to prevent Beninati from using bankruptcy to stall a foreclosure.

The appeals court ruling is a victory “both for our client and for real estate financing in New York,” said Kramer Levin’s Ron Greenberg, who argued the case for Gamma.

Attorneys for Pilevsky said they were exploring their legal options.

The saga began back in 2015, when Gamma lent Beninati’s Bauhouse Group $147 million to develop his planned 68-story condo tower at 3 Sutton Place. The terms of the loan required the entity owning the property to remain what’s known as a single-asset real estate company, which is a common provision in commercial mortgages designed to protect the lender’s right to foreclose on a property.

The logic behind the structure is this: If a company owns more than one real estate asset, when it gets underwater it can file for bankruptcy and use the bankruptcy system to reorganize its affairs. In a contentious real estate tug-of-war, the federal bankruptcy process can be used to hinder a state-level foreclosure action.

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But if the borrower is limited to just one asset, there’s no reorganizing to be done, and the courts will throw out the bankruptcy case. By preventing borrowers from throwing properties into bankruptcy when things go bad, lenders argue it gives them the protection they need to keep debt flowing at reasonable terms.

When Beninati was facing foreclosure, he struck a deal with Pilevksy and his family, who handed over three small co-op apartments on Long Island to Beninati’s LLC, giving it multiple real estate assets and thus a bankruptcy case to pursue.

Gamma, effectively locked out of its foreclosure attempt, eventually bought the property in bankruptcy for $86 million in 2016, but filed a lawsuit against the Pilevksys seeking about $100 million in damages. The suit argued the Pilevskys compelled Beninati to breach his agreement and caused the property to lose value as the bankruptcy process lingered on and public sentiment against the controversial tall tower grew louder.

The Pilevskys countered in court that the federal bankruptcy laws preempted Gamma’s loan agreement with Beninati. But the judge wasn’t buying it, arguing if that were the case, it would turn normal real estate development on its head.

“What you are asking me to do is throw this out, upend the way contracts are written here in New York City and upend the whole land development industry,” Manhattan Supreme Court Judge Shirley Werner Kornreich said during a hearing in 2018.

Kornreich threw out the Pilevksys’ motion to dismiss and they went to an appeals court, which in a sparsely worded decision last year ruled in their favor on the motion to dismiss their case. Gamma appealed and last week the state’s highest court ruled in favor of the lender, arguing the Pilevskys “failed to meet their heavy burden” of proving that federal bankruptcy law preempts the contract’s single-purpose entity provision.

While the back-and-forth in forth in the courts so far has focused on this legal issue of preemption, Kramer Levin’s Greenberg said the recent decision has the practical effect of reaffirming the single-purpose entity clause that’s a central part to so much real estate financing.