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With echoes of the lender liability claims of the early 1990s, a borrower’s effort to repudiate a release on the ground of economic duress, given as a condition to a mortgage assignment to a new lender, has been thwarted by a New York federal court. See 2 Broadway LLC v. Credit Suisse First Boston Mortgage Capital LLC, No. 00-C5773, 2001 U.S. Dist. LEXIS 4875 (S.D.N.Y. Apr. 23, 2001). (The authors’ firm, Brown Raysman Millstein Felder & Steiner, represented Credit Suisse First Boston Mortgage Capital in the loan transactions with 2 Broadway, but did not represent CSFB in the litigation.) In a comprehensive ruling, the court analyzed the circumstances of the delivery of the release, and concluded that it was negotiated at arm’s length and supported by valuable consideration. The borrower was thus barred from bringing suit against its former lender for the alleged breach of a mortgage commitment. Before discussing the facts and legal conclusions of 2 Broadway in detail, an examination of the elements of economic duress will be helpful. ELEMENTS The principle of economic duress bars the enforcement of contracts where one party deprives the other of free will. Under New York law, a contract or release agreement made under duress is voidable. DiRose v. PK Management Corp., 691 F.2d 628, 633 (2d Cir. 1982). “A party seeking to avoid a contract because of economic duress ‘shoulders a heavy burden.’” VKK Corp. v. NFL, 244 F.3d 114, 122 (2d Cir. 2001). The rule in New York is that agreements are voidable because of economic duress only in “extreme and extraordinary cases.” Id. at 124. The reason behind limiting economic duress to extraordinary cases is that the courts seek to prevent the weaker party to the agreement from reaping the benefits of the contract before claiming the release agreement void due to economic duress. In addition, if economic duress were not limited to extraordinary cases, it would upset a party’s expectation of creating a binding agreement. Furthermore, if claims of duress were not limited to extraordinary cases, then the ability of a party to entrust the courts as the enforcer of valid contracts would be diminished. In order to meet the heavy burden of economic duress, it must be shown that the defendant affected the plaintiff’s ability to choose by placing the plaintiff in a “precarious economic condition.” U.S. West Fin. Servs. Inc., v. Tollman, 786 F. Supp. 333, 338 (S.D.N.Y. 1992). The plaintiff must show that the defendant “caused” the plaintiffs’ troubled economic conditions by making a threat that had harsh economic ramifications. The plaintiff must prove that “but for” the defendant’s actions, the plaintiff would not have been placed in economic despair. An example of a defendant’s action in threatening and actually causing another party’s precarious economic condition was seen in Austin Instrument Inc. v. Loral Corporation, 29 N.Y.2d 124 (1971). In that case the court held that the plaintiff was denied free will because had the plaintiff not adhered to the defendant’s threat, the plaintiff would have run the risk of losing current and future business. The plaintiff, in order to fulfill a contract with the Navy for radar equipment, entered into a subcontract with the defendant. The defendant was responsible for providing the plaintiff with the gear needed to produce the radar equipment. In the contract with the Navy, the plaintiff was subject to both a liquidated damages clause and a cancellation clause if there was a late delivery. While working on the contract, the Navy awarded the plaintiff with a second contract. When the plaintiff decided not to use the defendant for the second contract, the defendant refused to deliver the goods for the first contract. The only way the defendant would deliver was if the plaintiff paid more for the supplies needed to complete the first contract, and awarded the defendant with the second subcontract. The defendant knew that the plaintiff could not find additional parts at the last minute and that any delay on the contract could set off the liquidated damages or cancellation clause. The plaintiff signed the second subcontract over to the defendant and then immediately claimed the contract void due to economic duress. The plaintiff’s financial vulnerability and the defendant’s manipulation of the situation made for a classic economic duress case. A point worth mentioning is that when a party only threatens to enforce the rights given in a contract, that kind of threat will not be deemed to have caused economic duress. DiRose, 691 F.2d at 632. For example, if a party threatens to enforce a liquidated damage clause under the terms of the contract, the threat will not be deemed the cause of duress if the right to enforce the clause was expressly stated in the contract. Even if the plaintiff proves causation, there are still two big pitfalls that can destroy the plaintiff’s case. The first pitfall is time. If the plaintiff fails promptly to repudiate the agreement the right to claim economic duress is waived. When a plaintiff has delayed anywhere from six months up to two years, the delay equates to a forfeiture of the claim. DiRose, 691 F.2d at 634. For example, in VKK Corp. the plaintiffs, the owners of the New England Patriots, required a signed release agreement before the NFL would sign off on the plaintiffs’ sale of the Patriots to James Orthwien. After signing the agreement the plaintiffs waited thirty months before challenging the release. The court ruled that “it is well established under New York law that a party asserting duress must do so promptly.” VKK Corp., 244 F.3d at 124. The burden of proving duress increases proportionate to the plaintiffs’ delay. The reason for the rule was that the court sought to prevent a party to the contract from playing the game of “heads I win, tails you lose.” Id. at 124. The court also sought to deter the plaintiffs from waiting on the sidelines to see if the contract worked in their favor before filing a claim. The second pitfall is consideration. If the plaintiff accepts the benefits of the contract before commencing the cause of action, the right to claim economic duress is also waived. “A party may ratify a contract or release entered into under duress by intentionally accepting the benefits under the contract.” VKK Corp., 244 F.3d at 123. For example, in Capstone v. County of Westchester 262 A.D. 2d 343 (1999), the plaintiff settled with the county for a breach of contract claim. The county required the plaintiff to sign a release at the same time that the plaintiff accepted the settlement money. The plaintiff later attempted another suit against the county and made a claim that the release was void on the grounds of economic duress. The court held that the plaintiff forfeited the right to claim economic duress because the plaintiff accepted consideration, the settlement money, in exchange for signing the release. Finally, if the claim of economic duress fails, the plaintiff can claim that the release agreement was invalid because the agreement was unclear and ambiguous. However, this is an extremely difficult claim to make. Courts are scrupulous in holding the parties to their bargain when they determine that sophisticated business entities executed mutual releases in the course of negotiations. See, e.g., VKK Corp., 244 F.3d at 123. ’2 BROADWAY’ 2 Broadway is the owner of the office building located at 2 Broadway in Manhattan. In 1997, 2 Broadway borrowed $15.5 million from Credit Suisse First Boston Mortgage Capital (CSFB) and in 1998 borrowed an additional $21 million, bringing the total loan to $36 million, secured by a consolidated first mortgage on the building. Later that year, 2 Broadway borrowed an additional $86.6 million, as a “bridge loan” intended to serve as short term, interim credit payable March 31, 1999. CSFB, however, reserved the right to issue a binding commitment for a permanent loan, in which event CSFB would be entitled to a “break-up” fee if, among other things, the permanent loan did not close. On Feb. 1, 1999, CSFB issued 2 Broadway a permanent loan commitment for a $150 million first mortgage loan, which 2 Broadway declined to accept by the designated expiration date, Feb. 28, 1999. The issuance of the commitment triggered 2 Broadway’s liability for the break-up fee. On March 16, 1999, 2 Broadway applied to CSFB for a permanent loan in the amount of $225 million, subject to the approval of CSFB’s Investment Committee, which was not forthcoming. On May 10, 1999, 2 Broadway again applied to CSFB for a permanent loan of $225 million and again CSFB’s Investment Committee did not approve the application. In July 1999, 2 Broadway advised CSFB that another lender had agreed to provide financing for the development of the building through a private bond offering and requested CSFB to assign its mortgage to the new lender. CSFB then prepared a payoff statement setting forth the amounts due under the prior loans, including principal, interest, late charges, the break-up fee and related fees and charges. CSFB offered to waive the late charges and a substantial portion of the break-up fee if payment was made in full on or before Sept. 30, 1999. 2 Broadway did not close its new financing until after the deadline; nevertheless CSFB agreed to accept a reduced break-up fee. Upon payment of the reduced fee and other amounts due under the loans, CSFB assigned its mortgage and the parties exchanged releases. On Aug. 3, 2000, 2 Broadway filed suit against CSFB, alleging that CSFB had accepted 2 Broadway’s proposal for a permanent loan and that CSFB engaged in misrepresentation by orally promising to close the permanent loan if 2 Broadway settled the then-pending litigation with the net lessee of the building. The complaint also alleged that the release given by 2 Broadway was voidable because of economic duress. CSFB moved to dismiss on the strength of the release. The court first addressed the mutual releases and found them clear and unambiguous. “Moreover, the release agreements were executed at the close of arm’s length negotiations by exceedingly sophisticated commercial actors. It is plain on the face of the Complaint and its appended documents that plaintiffs routinely engage in the development of commercial real estate projects involving substantial sums of money” 2 Broadway, 2001 U.S Dist. LEXIS 4875, at 20. The court concluded that unless the complaint alleges a claim to void the release on the grounds of economic duress, the release is enforceable. Addressing economic duress, the court found none. As the court ruled, the Complaint alleges that CSFB demanded only that which 2 Broadway owed under the loan documents and that CSFB did not cause 2 Broadway’s precarious economic condition. Under settled law, the “threatened exercise of a legal right cannot constitute economic duress” and that “mere hard bargaining positions, if lawful, and the press of financial circumstances, not caused by the defendant, will not be deemed duress.” 2 Broadway, 2001 U.S Dist. LEXIS 4875, at 24-25. Regarding CSFB’s demand for the break-up fee, the court noted that under the loan documents the fee became due upon CSFB’s issuance of its permanent loan commitment and the failure of the acceptance of the commitment by the designated date. In any event, 2 Broadway ultimately negotiated a reduced break-up fee, in exchange for which the mortgage was assigned and the parties delivered releases to each other. Finally, the court found that 2 Broadway ratified the release by failing promptly to repudiate it and by accepting valuable consideration. As noted by the court, the late charges first sought by CSFB were eliminated and the break-up fee was drastically reduced. 2 Broadway “did not initiate suit to repudiate the release agreements for nearly ten months after accepting such valuable consideration. On those undisputed facts, and absent any explanation in the Complaint as to what caused the ten-month delay, plaintiffs are precluded as a matter of law from challenging the validity of the release agreements on grounds of duress.” 2 Broadway, 2001 U.S Dist. LEXIS 4875, at 38. CONCLUSION 2 Broadway provides lenders with the assurance that carefully negotiated written agreements will be enforced by the courts. It also cautions borrowers and other potential litigants that releases cannot be overcome by untimely claims of economic duress. As with all other legal documents, parties should expect to be held to their express terms of their agreements. Kenneth M. Block and Jeffrey B. Steiner are members of Brown Raysman Millstein Felder & Steiner in New York. Jonathan Bernstein, a summer associate, assisted with the preparation of this article.

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