Former Vornado CEO Accuses CIM Of Exploiting Lawyer's Error To Come After $43M Personal Guarantee

Eric Birnbaum, CEO of Dreamscape Hospitality, and Michael Fascitelli, former CEO of Vornado Realty Trust, are personally on the hook for more than $40M tied to a South Beach hotel they developed. Now, they're asking a judge for a way out.

The business partners claim that a drafting error made its way into the final loan documents they signed with their lender, CIM Group, that effectively stuck them with "potentially unlimited" personal liability after they defaulted on a mortgage tied to The Goodtime Hotel at 601 Washington Ave. in Miami Beach.

CIM sued Birnbaum and Fascitelli in New York County Supreme Court in July, then amended its lawsuit in October, seeking to collect on at least $43.7M in personal guarantees, plus interest and attorneys fees. 

In a counterclaim filed by the developers against CIM on Dec. 14, Birnbaum and Fascitelli allege that CIM is exploiting the error, using "unlawful" means to push the developers into default and put them on the hook for payments potentially three years or more into the future.

"CIM’s conduct smacks of dishonesty, unclean hands, and bad faith," the countersuit states.

CIM didn't respond to Bisnow's request for comment.

The Goodtime Hotel, developed by Birnbaum and Fascitelli and co-owned by musician Pharrell Williams and hospitality investor David Grutman, opened in 2021, when the hospitality industry was hurting.

CIM Group provided a $152M loan in 2021 to refinance the hotel's construction loan, but the hotel never achieved its financial projections. CIM claims the developers defaulted on the loan in 2023, after which Fascitelli and Birnbaum were considering modifying the loan or transferring the property to CIM, they said.

But they found out that wouldn't be as easy as they expected.

Birnbaum and Fascitelli claim they signed a term sheet for the loan with JPMorgan Chase in April 2021 that included a carrying cost guarantee — which requires them to cover the gap in cash flow between the asset's income and its operating costs — of three months after giving up the property or a foreclosure.

But when CIM stepped in as the ultimate lender and presented the final loan documents to sign, the borrowers' attorneys at Latham & Watkins didn't notice that the carrying cost guarantee had been changed to terminate three months after the hotel's stabilization date, regardless of whether it had been foreclosed upon.

"No lender in the commercial mortgage industry would request such a guaranty and no commercial mortgage borrower would agree to such a guaranty," Birnbaum and Fascitelli's new lawyers from King & Spalding wrote in the counterclaim. 

Latham partner Gary Axelrod admitted the mistake, according to the filings, and sent an email to CIM asking for them to correct it. But CIM enforced the signed documents, keeping Birnbaum and Fascitelli on the hook to cover potentially years of operating shortfalls, according to the counterclaim.

Latham & Watkins didn't respond to a request for comment.

Birnbaum and Fascitelli offered to pay $15M and hand the property to CIM to terminate the carry guaranty agreement, but they claim the lender refused. So they agreed in July 2023 to a forbearance agreement that tacked on additional personal guarantees and tried to stabilize the property.

Birnbaum and Fascitelli claimed they signed the agreement in hopes of reaching stabilization by entering into a franchise agreement with an affiliate of Marriott International.

In the cooperation agreement to get Marriott Franchises on board, signed in October 2023, Birnbaum and Fascitelli had to personally guarantee another $10M, which would be waived with a deed-in-lieu-of-foreclosure, but required that they sign the same agreement to pay carry costs through stabilization, according to the counterclaim.

"These predatory tactics suggest that CIM did not really want the loan to perform or the property to stabilize because it wanted to squeeze guarantors for millions it was not entitled to under the parties' mutual agreement," the counterclaim says.

In January 2024, Birnbaum and Fascitelli defaulted on a forbearance payment, stopped making interest payments on the loan in July 2024 and didn't pay off the debt when it matured in September last year.

CIM, which controls roughly $30B of real estate assets, filed its lawsuit on July 14 this year in an attempt to receive the payment of $10M that Birnbaum and Fascitelli guaranteed.

In October, the California-based lender and investor amended the complaint to widen it beyond the $10M to include $2M owed from the first forbearance deal and $31.6M in accrued and unpaid carry costs.

Birnbaum and Fascitelli claim that none of the agreements would have been executed and they would have given up the property if it weren't for the drafting error.

They are asking the court to lawfully change the language in the original agreement from "stabilization date" to "cut off date," which would only keep them on the hook for three months after handing over the property. They also asked the judge to waive the fees the lenders are trying to collect by deeming them unenforceable.

King & Spalding LLP partner Jennider Recine, who represents Birnbaum and Fascitelli, declined to comment.