Banks in New York state may have some new worries about lending to projects they think are having difficulties. A state appeals court has ordered Citigroup Global Markets Realty Corp. to resume funding on the $330-million Destiny USA project, near Syracuse. The court said the developer is entitled to a preliminary injunction in its breach-of contract suit against the bank because the project is “unique.”

The $155-million Citigroup loan is one of three funding sources for the first phase of the project, which involves construction of an 800,000-sq-ft shopping center/tourist destination and related facilities. The other funding sources are Destiny Holdings LLC and proceeds from bonds issued by the City of Syracuse Industrial Development Agency. Under the funding agreement reached in early 2007, Citigroup was to act as agent for all funding sources and review advance requests. It could deny an advance if it determined a “deficiency” existed, as defined in the contract. It determined there were deficiencies with respect to tenant improvement costs amounting to $15 million and declared the loan in default even though the project was 90% completed.

On June 9, 2009, Destiny Holdings sued Citigroup in state Supreme Court, alleging breach of contract and seeking an order to compel Citigroup to comply with the requirements of the construction loan. The court ruled in favor of Destiny.

Upon review, the Appellate Division explained the project falls in an exception to the general rule that a party seeking enforcement of a loan agreement would be expected to borrow the money from another source and recover damages based on any higher costs. But the court said the plaintiff clearly had shown tenant improvements should not have been used to determine a deficiency under the pact. It also said “the project’s unique character renders it difficult to calculate damages,” and the plaintiff “has established the enormous potential for harm to its reputation.” The court added, “Harm to business reputation is harm for which money damages are insufficient and for which injunctive relief may be appropriate.” Destiny USA Holdings LLC v. Citigroup Global Markets Realty Corp., N.Y. Sup. Ct., App. Div., Case No. 091520, Nov. 13, 2009.