In the world of big-time real estate development, large sums of money can turn on the tiniest details buried in contracts running hundreds of pages, as New York City investors Eitan Wertheimer and Ezra Dagmi learned the hard way last week when an appeals court overturned a ruling worth $20 million over a difference regarding the meaning of a single “i”.

The case of Shahab Karmely et al. v. Eitan Wertheimer et al. arose from a big deal gone bad.

In 2005, Wertheimer and Dagmi, who are friends, partners and Israeli citizens, asked New York City developer Shahab Karmely, also a friend of 35 years, to work with them in developing a major portfolio of properties.

“Karmely agreed to act as a developer for this venture, and instead of requiring a customary development fee, agreed to accept a percentage of the profits on each development as compensation for his services,” explains the opinion by U.S. Circuit Judge Jon Newman.

Entities created by the parties financed the development of a building at 443-53 Greenwich Street via two loans: a primary $85 million Anglo Irish Bank mortgage loan obtained by Wertheimer and Dagmi and a subordinate $20 million “mezzanine loan”( a sort of second mortgage secured by stock rather than real estate) obtained by Karmely. The maturity date of the first loan, October 1, 2008, was originally one year prior to the maturity date of the mezzanine loan, October 1, 2009, but in 2008 Wertheimer and Dagmi obtained an extension on the first loan to December 31, 2009.

Subsection 4(d) of the parties’ Intercreditor Agreement stated that “no payment whatsoever” was required on the mezzanine loan until the mortgage loan was repaid “in full,” according to the opinion, and in October 2009 Karmely relied on this language in arguing that he did not have to pay it back yet since the mortgage loan was not repaid.

Wertheimer and Dagmi, via their limited partnership W-D Group that made the mezzanine loan, responded by declaring Karmely in default and foreclosed on his collateral, leading Karmely to sue them in federal district court for a false foreclosure.

In ruling against Karmely, U.S. District Judge Robert Patterson relied on a subsection of the Intercreditor Agreement that he identified as “8(h)(i),” which states that regardless of the “foregoing provisions…nothing herein shall impair, as between the Mezzanine Borrower and Mezzanine Lender, the obligation of the Mezzanine Borrower, which is unconditional and absolute, to pay the Mezzanine Loan in accordance with its terms.” Patterson interpreted the “i” to denote a lower case Roman numeral “I,” also known as a romanette, meaning that the text following was the first subparagraph of paragraph “(h)”.

The Second Circuit Court of Appeals disagreed, ruling the paragraph he called “8(h)(i)” was really just a badly indented “8(i),” interpreting the “(i)” as a lower case letter “I”. “The printer simply made mistakes in the indentation of the two subparagraphs placed within paragraph 8(h), which the lawyers who proof-read the documents overlooked,” the court concluded. As a result,

the language relied on by Wertheimer and Dagmi was intended to “apply only to all of the paragraphs of section 8, and not to the entirety of the document.”

Although the opinion has its humorous side, including Judge Newman’s background discussion of the term romanette, the moral of this tale is clearly that the devil really is in the details.

-Matt Bewig

To Learn More:

Appellate Court Grapples Over the Meaning of "i" (by Adam Klasfeld, Courthouse News)

Karmely v. Wertheimer et al. (Second Circuit) (pdf)