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Katten Obtains Complete Defense Verdict for Square Mile Capital Management LLC

Firm News | April 11, 2014

Katten Muchin Rosenman LLP won a major trial victory in a bet-the-company lawsuit on April 8, 2014, obtaining a complete defense verdict for its client, Square Mile Capital Management LLC, a New York private equity firm. The Orange County Superior Court appointed Judge Richard Neal (Ret.) to try the matter.

The case stems from a construction loan for $29 million from Bank of America to a prominent developer in Southern California, who used the funds in order to build a four-star hotel in Orange County.

As the maturity date of the loan approached, the developer realized that the hotel did not have the net income needed to meet an extension condition—the Debt Service Coverage Ratio (DSCR).

In order to create the appearance that the hotel qualified for the DSCR condition, the developer’s accounting staff entered a series of dubious transactions into the financial statements. These transactions caused the DSCR to reach 1:1—precisely the ratio needed to qualify for the extension. Square Mile rejected the financial statements as untrustworthy.

In response, the developer threatened a tort lawsuit for interference if Square Mile foreclosed. Square Mile nonetheless initiated non-judicial foreclosure in consultation with Katten's Real Estate team.

Developer then sued Square Mile claiming that the notice of default caused him to lose over $80 million worth of business. Plaintiff sought to recover those damages, plus a preliminary injunction and a refund of all default interest.  Katten represented Square Mile through litigation and trial. 

Katten first defeated a preliminary injunction motion, which required plaintiff to pay off the loan.

Katten next proved that plaintiff’s financial statements contained material inaccuracies. After compelling disclosure of the hotel's general ledgers, Katten took depositions of the hotel employees, which proved that plaintiff’s owner manipulated the hotel’s financial statements. Specifically, the owner booked "events" supposedly held by affiliated entities in the final days before sending out the extension application.  The owner and accounting staff also deferred certain expenses which had already been incurred and paid by the hotel.

In his Statement of Decision, Judge Neal found that the plaintiff "made last minute additions of hundreds of thousands of dollars of revenues" which "are fairly characterized as bogus." The judge thus found that plaintiff failed the extension condition.

The judge further found that plaintiff’s financial statements "bore numerous hallmarks of fraud." As a result, the judge ruled that the developer and his company both had "unclean hands" which also barred further recovery.

The judge awarded Square Mile a full refund of its attorneys' fees and costs finding that the work of the Katten attorneys was "high quality and efficient."

Katten's trial team was led by Steve Cochran and Yoni Rosenzweig with support from paralegal Carol Winter and litigation support analyst Benjamin Jones, and regular counseling from Managing Partner Joshua Wayser. Real Estate attorney Doug Pyle provided support and advice on litigation and in the foreclosure process.

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