Custom Homes By Via LLC v. Bank of Oklahoma NA et al
Filing
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ORDER that the Court finds in favor of Custom and against the Bank of Oklahoma in the amount of $2,404,193.58. The clerk shall enter final judgment in favor of plaintiffs in this amount. ORDERED denying all pending motions for directed verdict. Signed by Senior Judge Frederick J Martone on 12/23/2013.(LFIG)
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IN THE UNITED STATES DISTRICT COURT
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FOR THE DISTRICT OF ARIZONA
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Custom Homes by Via LLC et al,
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Plaintiffs,
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vs.
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Bank of Oklahoma,
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Defendant.
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No. CV 12-01017-PHX-FJM
ORDER
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This is an action by a borrower (Custom) against a lender (Bank of Oklahoma or
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Bank) for breach of a loan agreement and for breach of the implied covenant of good faith
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and fair dealing inherent in every contract. The case was tried to the court without a jury.
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These are the court’s findings and conclusions under Rule 52(a), Fed. R. Civ. P.
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I.
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In our Order of Oct. 25, 2013 (doc. 67) we granted summary judgment in favor of
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Custom on the liability portion of its claim for the failure of the Bank of Oklahoma to fund
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the May 27, 2008 draw request. All that remained of that claim was a determination of
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damages. The remaining claim to be tried included both liability and damages on Custom’s
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claim that the Bank of Oklahoma failed to extend the maturity date to January 2009 even
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though all conditions for the extension had been satisfied.
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From the very beginning of the contact between Custom and the Bank of Oklahoma,
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the Bank knew that the line of credit would extend to two years because it would take at least
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that long for the Enclave project to be completed. In the words of Exhibit 62, the additional
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12 months was to be “auto[matic].” An optimistic “quick estimate” of 19 months was given
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to the Bank. Exhibit 59. The Bank was interested in offering a line of credit of $4 million
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for 12 months plus one 12 month extension as long as Custom was not in default, paid a fee,
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and, if elected by the Bank, a reappraisal would reveal an 85% loan to value ratio. Exhibit
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63.
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On January 17, 2007, the parties entered into a binding loan agreement, Exhibit 28,
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and accompanying promissory note, Exhibit 29, in which the Bank would lend $1,908,250
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for 12 months with an automatic extension of an additional 12 months if four conditions were
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satisfied: (1) Custom gives the Bank written notice that it wants the extension, (2) Custom
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pays a fee, (3) Custom is not in default, and (4), the Bank approves an updated appraisal on
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the Enclave showing the 85% loan to value ratio. Exhibit 29 at 2. The appraisal is “as
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defined in the Loan Agreement,” id., which is defined as an appraisal “ordered by the Bank.”
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Exhibit 28 at 1. The collateral, however, was Gateway Norte, not the Enclave.
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On September 28, 2007, 9 months into the first 12 month period, the parties amended
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their contract to increase the loan amount to $3,973,750, to provide working capital as well
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as to fund infrastructure. Exhibit 27 at 5. The note was not modified to extend its term.
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Either the Bank expected all $3.9 million to be disbursed in 3 months or the Bank fully
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expected to extend the term of the note at some point in the next 3 months. Obviously, the
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Bank fully expected to extend the term. The funds were not limited to infrastructure. They
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could be used for working capital.
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The Bank knew all along that Custom wanted and needed the second year. The whole
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course of dealings between the parties showed from beginning to end that the expectation
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was for the second year. Why else did the Bank double the loan amount 9 months into the
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first 12 months? Indeed, the Bank expected to do “the extension in Jan.,” Exhibit 136.
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Custom asked for a second year and the Bank knew it. Exhibit 106.
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On January 17, 2008, upon completion of the first year, the parties modified their
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agreement to extend the term of the note to April 17, 2008. Exhibit 26. Both sides knew that
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the project would not be completed in 3 months. Why such a piecemeal, short-sighted
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approach? If the conditions had been satisfied to justify an extension at all, why for a period
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that the Bank knew was insufficient to complete the project? Incredibly, the Bank did it
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again on April 17, 2008, extending the loan term to June 1, 2008, for yet another piecemeal
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45 days! Exhibit 25. It knew all along, in writing and otherwise, that Custom wanted the
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second year. See, for example, Exhibit 106. The Bank failed to order an appraisal of the
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correct property in time to satisfy itself, and yet claimed that the conditions for extension
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under the note were not satisfied. The condition for an appraisal in the note referred to the
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“Real Property,” defined in the Loan Agreement as not the “Secured Property.” Exhibit 28
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at 2. And yet the Bank extended the term of the note by 45 days to get an appraisal on the
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“Secured Property.” Exhibit 75. This was not even a condition of the extension. The Real
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Property was the Enclave. The Secured Property was Gateway Norte. Even if an appraisal
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on the Secured Property was a condition for the extension, the Bank did not even ask for an
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appraisal until May 27, 2008, four days before the last extension was to expire. Exhibit 83.
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The appraisal was at the Bank’s option. It can’t blame Custom for not satisfying the
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condition.
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To add insult to injury, the Bank was willing to extend the term for yet another 45
days, but at half the then existing loan amount. Exhibit 127.
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II.
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The Bank had a contractual obligation to fund the loan for working capital. It had a
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contractual obligation to extend the loan for a second year as long as the conditions were
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satisfied. All conditions were satisfied. The Bank had written and oral notice all along.
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Custom was ready, willing and able to pay the fee, if only the Bank identified the amount.
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And the Bank had no right to condition the extension on an appraisal of anything other than
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the Enclave. Even if the Bank had a right to condition the appraisal on Gateway Norte, the
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Bank failed to exercise that right in a timely fashion. In essence, it waived its right. And,
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of course, Custom was not in default.
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The testimony was overwhelming that all along the Bank was more interested in its
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collateral in Gateway Norte than whether the Enclave project would succeed. See, e.g.,
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Transcript of Nov. 20, 2013 at 64-65. But once it entered into its loan agreement, the Bank
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had a legal obligation to exercise good faith and deal fairly with Custom. It failed to do so.
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The Bank acted like an adversary, considering only its own interests, while ignoring the
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interests of Custom. Under Arizona law, a party to a contract has an obligation to refrain
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from doing anything that will impair the other party’s contractual rights. Indeed, a party can
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breach the covenant of good faith and fair dealing even if it strictly complies with its
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contract. Zilisch v. State Farm Mutual Auto Ins. Co., 196 Ariz. 234, 237-38, 995 P. 2d 276,
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279-80 (2000). This is true whether the action lies in contract (as here) or in tort.
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We conclude that the Bank breached its express contract with Custom in failing to
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extend the loan for the second year. We also conclude that the Bank breached the covenant
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of good faith and fair dealing inherent in its contact with Custom. It dealt shabbily with its
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borrower. The borrower was over a barrel and the Bank failed to do what it was required to
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do under the contract and in good faith.
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III.
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We also find and conclude that the Bank’s breaches caused Custom damages. The
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failure to fund the May 28, 2008 draw request and the failure to extend the term of the loan
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for the second year were substantial contributing factors in the failure of the Enclave project.
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Given the difficulty in determining the damages proximately caused by the Bank’s breaches,
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Custom has elected to be put in the position it would have been in had it never contracted
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with the Bank. It seeks the value of the collateral foreclosed on, the amount of interest it paid
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the Bank and the fees it paid the Bank. The parties have stipulated that the interest was
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$289,881.58 and that the loan fees were $14,312.00. Thus, all that remains is a determination
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of the value of the collateral. The measure of damages for breach of contract to loan money
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includes the loss of equity if the breach of the loan agreement caused the borrower to lose
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ownership of its assets. United Cal. Bank v. Prudential Ins. Co., 140 Ariz. 238, 296, 681
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P.2d 390, 448 (Ct. App. 1984). The value of the equity is established at the time the title is
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lost—here, on the date of foreclosure. Id. (citation omitted). Given the rapidly falling
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market, given the lack of confidence we have in any of the appraisals, we find the fairest
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value to be that at which the Bank bid at foreclosure, $2.1 million. And where, as here, the
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breach causes the loan proceeds to be useless, no offset is warranted.
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Accordingly, we find in favor of Custom and against the Bank of Oklahoma in the
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amount of $2,404,193.58. The clerk shall enter final judgment in favor of plaintiffs in this
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amount. It is further ORDERED DENYING all pending motions for directed verdict.
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DATED this 23rd day of December, 2013.
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