The economy stalls, the stock market falls, big investment schemes become exposed, and huge real estate projects run into problems.  This weekend’sNY Times discussed how big name real estate players can run into problems, but it is the investors who lose the money.  Here, in GSO RE Onshore LLC v Sapir ;2010 NY Slip Op 52138(U) ;Decided on November 24, 2010 ;Supreme Court, New York County ; Fried, J.  we see how one of the big players got into some problems.
 

"On October 24, 2006, GSO, as lender, and SDS William Street Mezz LLC (SDS), as borrower, entered into an agreement under which GSO would loan SDS a principal amount of up to $65.5 million, at an interest rate of 18% per year. SDS sought the loan to fund the development and construction of a building of condominium apartments, with ancillary parking [*2]and retail, at 15 William Street, New York, New York (the Project). The loan was evidenced by an October 24, 2006 note made by SDS to the order of GSO, obligating SDS to pay GSO the principal sum of $58 million, plus interest. "

"As a condition for making the loan, GSO required that it be personally guaranteed by someone with the ability to repay it in the event of SDS’s default. SDS offered Sapir, an investor in the Project, as the guarantor. On October 24, 2006, Sapir and GSO entered into a guaranty (the Guaranty) in which Sapir personally and unconditionally guaranteed payment and performance of all of SDS’s obligations under the Loan Documents. In paragraphs 3 and 10 of the Guaranty, Sapir agreed to waive any defenses that he might have to an action against him under the Guaranty, except for the defense of actual timely performance of his obligations under the Guaranty. Sapir further agreed to waive any right to notice of default or demand for payment. "

"In opposition to the motion and in support of the cross motion, Sapir’s son, Alex Sapir (A. Sapir) submits an affidavit in which he explains that he is the president of the Sapir Organization and a member of The Sapir Group LLC (the Sapir Group), a privately held, New York-based real estate holding and development firm. Sapir is the chairman of the Sapir [*3]Organization. A. Sapir states that he ran the Sapir Group’s day-to-day negotiations of the loan transactions underlying this action.A. Sapir explains that, in 2005, the Sapir Group started to develop the Project. In connection therewith, the Sapir Group partnered with an entity controlled by S. Lawrence Davis and an entity controlled by the Sapir Group’s attorney in connection with the Project, Robert J. Ivanhoe (Ivanhoe) of the law firm Greenberg Traurig LLP. Ivanhoe formed Strategic William Street LLC, the entity through which he was a partner in the Project, with a 5% interest therein. A. Sapir states that Ivanhoe continued to represent SDS, including the Sapir Group (which holds a 90% interest in the Project) in the negotiation of the terms of the loan, including the Guaranty.

A. Sapir contends that GSO knew from the beginning that Ivanhoe was representing the Sapir Group in connection with the loan as well as Sapir in connection with the Guaranty. According to A. Sapir, GSO realized that Ivanhoe, as a partner in the Project, had a conflict of interest. A. Sapir explains that, in the stronger economic times of 2006, the parties predicted profits in the Project that would have netted Ivanhoe’s company $15 million, such that GSO knew that Ivanhoe had a strong incentive to complete the deal. According to A. Sapir, because of this knowledge, GSO presented the one-sided Guaranty to Ivanhoe, who then presented it to Sapir. A. Sapir asserts that GSO was aware that a disinterested lawyer without a conflict of interest would not advise Sapir to sign the Guaranty. In his affirmation, Sapir’s attorney, Stephen B. Meister, states that it is unheard of for investors such as GSO to earn such high rates of return when there is no risk involved because the returns are guaranteed by a net worth guarantor."

"GSO has established its prima facie entitlement to judgment as a matter of law because the undisputed facts establish GSO’s underlying loan to SDS, Sapir’s personal guaranty thereof and the failure to make payment in accordance with their terms. E.D.S. Sec. Sys. v Allyn, 262 AD2d 351, 351 (2d Dept 1999); see also Hotel 71 Mezz Lender LLC v Mitchell, 63 AD3d 447, 448 (1st Dept 2009).

Sapir has not established the existence of any defense to GSO’s prima facie case, because the Guaranty contains a waiver-of-defenses provision. Such a provision in a guaranty is valid and enforceable, and bars, as a matter of law, any defenses a guarantor might otherwise assert in an action to recover under its guaranty. Citibank v Plapinger, 66 NY2d 90 (1985); Red Tulip LLC v Neiva, 44 AD3d 204, 209-10 (1st Dept 2007).

"I stated at oral argument, without opining on the merits, that Sapir may have a claim against Ivanhoe. GSO also notes in its papers that Sapir, if he can prove his claims, may seek to bring a separate damages action against Ivanhoe for alleged breach of fiduciary duty and/or legal malpractice, and against GSO for allegedly aiding and abetting Ivanhoe’s alleged breach. Any such possible claims, however, can not be asserted as defenses to an unconditional guarantee. "