SMA Portfolio Owner LLC et al v. Corporex Realty & Investment, LLC et al
Filing
264
MEMORANDUM OPINION & ORDER: 1. Bank of America, N.A.'s Motion for Summary Judgment 232 on affirmative defenses is GRANTED . 3. Bank of America, N.A.'s Motion for Summary Judgment 232 on it's breach of guaranty claim (Count III) is GRANTED. 5. A Judgment in favor of Bank of America, N.A. shall be entered concurrently. Numbers 2 & 4 do not pertain to this case.. Signed by Judge David L. Bunning on 06/12/2015.(KRB)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON
CIVIL ACTION NO. 12-23-DLB-JGW
SMA PORTFOLIO OWNER, LLC, et al.
PLAINTIFFS
vs.
CORPOREX REALTY & INVESTMENT, LLC, et al.
DEFENDANTS
*** *** *** ***
CIVIL ACTION NO. 11-168-DLB-JGW
BANK OF AMERICA, N.A.
PLAINTIFF
vs.
CPX MADISON PLACE OFFICE, LLC
DEFENDANT
MEMORANDUM OPINION AND ORDER
In a series of cases, Plaintiff/Counterclaim Defendant Bank of America, N.A. (BOA)
has brought breach of contract and foreclosure claims against the borrowers of three
commercial real estate loans (CPX Tampa Gateway OPAG, LLC; CPX Olympic Building
II, LLC; and CPX Madison Place Office, LLC), as well as breach of guaranty claims against
the guarantor of those loans (Corporex Realty & Investment, LLC). The borrowers and
guarantor have in turn filed counterclaims based on failed loan modification negotiations.
BOA has filed motions for summary judgment on its breach of contract and
foreclosure claims against CPX Madison Place, LLC (Case No. 2:11-cv-168, Doc. # 234),
and on the Defendant/Counterclaim Plaintiffs’ counterclaims and affirmative defense (Case
No. 2:12-cv-23, Doc. # 232; Case No. 2:11-cv-168, Doc. # 234). The Court heard oral
1
argument on BOA’s motions on May 21, 2015. Tim Palmer appeared on behalf of BOA;
Earl Messer appeared on behalf of the Defendants/Counterclaim Plaintiffs.
At the
conclusion of the hearing, the motions were submitted for decision. (Case No. 2:12-cv-23,
Doc. # 261).
There is no genuine dispute that the loans are in default, no evidence BOA breached
a provision in the loan documents giving the borrowers a right of first refusal, and the
parties entered into binding pre-negotiation letters in which they waived all claims or
defenses arising from the negotiations. Therefore, BOA’s Motions for Summary Judgment
on all remaining claims in Cases No. 2:12-cv-23 and 2:11-cv-168 are granted.
I.
FACTUAL AND PROCEDURAL BACKGROUND
In Case No. 2:12-cv-23, BOA brings breach of guaranty claims against
Defendant/Counterclaim Plaintiff Corporex Realty & Investment, LLC (Realty) concerning
three commercial loans: the Tampa loan (Count I), the Olympic loan (Count II), and the
Madison loan (Count III). The Court granted permission to intervene to the borrowers of
the Olympic and Madison loans, Defendant/Counterclaim Plaintiffs CPX Olympic Building
II, LLC (Olympic) and CPX Madison Place Office, LLC (Madison). (Doc. # 10). Because
they were assigned the notes, SMA Portfolio Owner, LLC and SMA Issuer I, LLC were
substituted as Plaintiffs for BOA on Counts I and II (Docs. # 34, 162); those claims have
since been dismissed by agreed order (Docs. # 78, 206). In Case No. 2:11-cv-168, BOA
has filed for foreclosure and breach of contract against Madison.
Realty has brought counterclaims for breach of the implied covenant of good faith
and fair dealing and promissory estoppel; Madison has a counterclaim and affirmative
2
defense for breach of the implied covenant of good faith and fair dealing; and Olympic has
counterclaims for breach of the implied covenant of good faith and fair dealing, promissory
estoppel, and breach of contact (i.e., the right of first refusal). The Court consolidated
these two cases for discovery purposes. (Doc. # 63).1
A.
The Loans, Guarantee, and Default
In October 2006, Madison executed a $33.5 million promissory note to BOA2
secured by a mortgage on a Northern Kentucky office building known as CPX Madison
Place. (Doc. # 232-6, 7). Realty guaranteed the loan. (Id. Ex. 12). Pursuant to Section
12.1 of the note, Madison was required to meet a debt coverage ratio of 1.10 to 1.0 as of
August 31, 2010. (Id. Ex. 6). On October 25, 2010, BOA notified Madison that it had failed
the debt coverage test and that it had thirty days to pay down the principal, or the loan
would be in default. (Id. Ex. 16). Madison never cured the debt coverage default. (Docs.
# 232-2 at 5; 13 at ¶ 31). On November 30, 2010, BOA sent Madison and Realty a notice
of default, demanding immediate payment of all sums due under the note. (Doc. # 1 Ex.
I). The loan matured on October 31, 2011, Madison never repaid the balance, and
Madison has made no payments since April 2012. (Doc. # 232-5, 6).
In December 2005, Olympic executed a $11,250,000 promissory note to BOA
secured by a mortgage on a Northern Kentucky office building known as Olympic II. (Id.
Exs. 8, 9). Realty guaranteed payment of the loan. (Id. Ex. 13). The Olympic note
matured on February 1, 2011, Olympic never repaid the balance, and BOA declared the
1) Unless otherwise noted, all citations to the record refer to the lead case, No. 2:12-cv-23.
2) The Madison, Olympic, and Tampa notes were originally executed to LaSalle Bank, N.A. (Doc.
# 1). BOA is the successor by merger to LaSalle. Id.
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loan in default on March 1, 2011. (Id. Exs. 10, 23).
In January 2008, CPX Tampa Gateway OPAG, LLC (Tampa) (Realty, Madison,
Olympic, and Tampa collectively “Corporex”)3 executed a $9,740,00 promissory note to
BOA secured by a mortgage in a Florida hotel. (Id. Ex. 11). Like with the Madison and
Olympic notes, Realty guaranteed the Tampa loan. (Ex. 14). The Tampa note had a
February 1, 2011 maturity date, Tampa never repaid the balance, and BOA declared it in
default on March 1, 2011. (Id. Exs. 11, 23).4
Each of the loan agreements granted the respective borrower a right of first refusal:
Lender agrees that in the event that it determines to assign or sell the Note
or any portion thereof to any person or entity not affiliated with Lender,
Lender shall, provided Borrower is not then in default under this Note or any
of the Loan Documents, allow Borrower or Borrower's affiliates a right of first
refusal to purchase same, which right of refusal must be exercised and
completed within thirty (30) days of the date Lender provides Borrower with
written notice of the terms and conditions of a proposed assignment or sale.
(Id. Exs. 6, 8, 11).
B.
The Pre-Negotiation Agreements
On December 13, 2010, BOA sent Madison and Realty a Pre-Negotiation Letter
(PNL) for the Madison loan. The PNL stated that BOA would “discuss the Loan with
[Madison and Realty] representatives, provided that the following agreement and
3) When appropriate, the Court will refer to these parties collectively.
4) BOA filed for foreclosure on the Tampa loan in the Middle District of Florida. (Case No. 2:14-cv172). After the parties stipulated to a dismissal of the foreclosure claim (Doc. # 259), Judge Steven
D. Merryday denied BOA’s Motion for Summary Judgment on Tampa’s counterclaims for breach
of the implied covenant of good faith and fair dealing, promissory estoppel, and breach of the right
of first refusal (Doc. # 267). He then transferred the case to this Court on September 22, 2014.
(Doc. # 269). The Tampa loan is relevant in Case No. 2:12-cv-23 because Realty brings
counterclaims for breach of the implied covenant of good faith and fair dealing and promissory
estoppel based on its guaranty of the Tampa loan.
4
understandings govern.” (Id. Ex. 19). The agreement contained the following relevant
terms:
1. Negotiations. Any discussions . . . relating to the Loan and the Loan
documents that Borrower, Guarantor and/or their representative may have
previously had, or in the future may have, with representatives of Lender (any
and all such previous and future discussions, negotiations, correspondence
and other communications being hereinafter referred to as "Loan
Communications") are not binding upon any of Borrower, Guarantor or
Lender. Lender is not under any obligation to discuss, pursue or agree to any
modifications, consents or approvals or assumptions of the Loan. No party
hereto shall have any defense to any action by any other party, or assert any
waiver by such other party, based on any Loan Communications.
2. Releases. Each party hereto completely, irrevocably and
unconditionally releases . . . the other party from any and all . . . claims . . .
whatsoever, in law or in equity, which such releasing party now has or may
hereafter have against the other party . . . arising out of . . . any Loan
Communications.
3. No Reliance. No officer, employee or representative of any party is
authorized to commit such party orally to any agreement or to any
modification of the Loan Documents, and no party may rely on any Loan
Communication that may be construed to the contrary. While the parties may
reach agreement on one or more preliminary issues . . . the parties agree
that neither party shall be bound by any agreement on individual issues
unless and until (1) agreement is reached on all issues; and (2) the parties'
agreement on all issues has been reduced to a written agreement and signed
by authorized representatives of all of the parties.
*** *** *** ***
5. Discussions. Any party hereto may discontinue negotiations at any
time upon notice, written or oral, without any liability or obligation to the other
party.
Id.
William Butler, in his capacity as CEO (Butler is Chairman of the Corporex entities
(Doc. # 251-2 at ¶ 3)), signed the PNL on Madison’s and Realty’s behalf, while Leslie O.
Andren, in her capacity as Senior Vice President, signed on BOA’s behalf. (Doc. # 232-19).
On February 1, 2011, BOA sent Corporex similar PNLs for the Tampa and Olympic loans,
5
which Butler also signed. (Id. Exs. 20, 21).
C.
The Negotiations
The following description of the parties’ negotiations concerning the three loans is
taken from evidence in the record and draws all reasonable inferences in Corporex’s favor.
Slusher v. Carson, 540 F.3d 449, 453 (6th Cir. 2008).
In August 2009, Corporex contacted BOA regarding the August 31, 2010 debt
coverage test on the Madison loan. BOA informed Corporex that it wanted to “work” with
them on the loan, but that it was a bad time to take any action that would require an
appraisal due to the recession and resulting decline in commercial real estate values.
(Doc. # 251-5 at 86:15-89:10; Ex. 6 at 55:20-62:24). In May 2010, Corporex again met with
BOA to discuss the debt coverage test. At that time, BOA told Corporex that if the Madison
property appraised at an amount equal or greater to the outstanding balance, BOA could
“work around” the debt coverage issue. (Id. Ex. 5 at 97:2-21).
In August 2010, the parties held a conference call to discuss how they could reach
an agreement to extend or modify all three loans. During the call, Corporex told BOA that
it had received a refinancing offer for the Olympic loan. After asking Corporex about the
terms of the refinancing offer, BOA told Corporex not to accept it because it could arrange
a better deal. (Id. Ex. 5 at 106:10-20; Ex.6 at 62:9-63:20). BOA then instructed Corporex
to make a proposal to extend or modify all three loans. (Id. Ex. 5 at 106:17-20; Ex. 10 at
¶ 14). After the call, Corporex ceased discussions with the lender offering the alternative
refinancing option.
(Id. Ex. 5 at 109:5-110:13).
Corporex then submitted a loan
modification proposal to BOA on September 8, 2010. (Doc. # 232-15).
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As part of the debt coverage test, BOA had the Madison property appraised.
Although the appraisal value came back for more than the balance owed, it was not enough
to satisfy the debt covenant. (Docs. # 232-16; 251-7 at 83:5-85:6; 251-8 at 52:9-13). In
response, BOA sent Corporex a letter on October 25, 2010, informing them that it had
thirty days to make a $4.5 million principal payment in order to prevent the Madison loan
from going in default. (Doc. # 232-16). The parties then held a conference call, during
which BOA employee Phil Cole told Corporex that the letter was just a “matter of
procedure” and that BOA would respond to Corporex’s September loan modification
proposal. (Doc. # 251-5 at 140:9-142:21). After the call, it was Corporex’s and Cole’s
understanding that Corporex was not required to make the payment demanded in the letter.
(Id. Ex. 2; Ex. 7 at 146:15-19). In an affidavit, Butler states that Corporex had the financial
ability to cure the debt coverage default. (Doc. # 251-2 at ¶ 13). However, that statement
is directly contradicted by a December 22, 2010 letter to Andren, wherein Butler states: “the
maximum amount of cash we can muster within our resources for initial principal reductions
is $3,000,000.” (Doc. # 252-3).
On November 1, 2010, BOA sent its first counteroffer to Corporex’s September
modification proposal, which Corporex rejected by sending another proposal. (Docs. # 23217; 251-14). Shortly thereafter, BOA, Madison, and Realty signed the PNL. From that time
forward, the parties continued to exchange “term sheets” in an attempt to reach an
agreement. (Doc. # 232-23, 24, 25). Each offer from BOA contained the following
disclaimer:
The terms and conditions are provided for discussion purposes only
and this letter does not constitute an offer, agreement or commitment to lend
or renew at this time.
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The actual terms and provisions upon which the Bank may extend
credit to Borrower are subject to necessary credit committee approval,
satisfactory review of documentation and such other requirements as
determined by the Bank in its sole discretion.
(Id. Exs. 17, 23, 24, 25).
In a January 2011 conference call, Andren indicated that BOA could do a three-year
extension on the Madison loan in return for a $3 million principal payment. (Doc. # 251-5
at 165:8-15; 180:5-7). Corporex had originally asked for a four-year extension on the
Madison loan. (Doc. # 232-15). For Corporex, getting a long-term extension on the
Madison loan was a key part of the negotiations because it would have put Corporex in a
better position to negotiate a lease extension with the Madison property’s anchor tenant.
(Id. at 116:4-24; Ex. 6 at 29:20-33:25). On March 15, 2011, Andren informed Corporex that
BOA would not be able to grant a three-year extension on the Madison loan, but would only
be able to extend the loan to February 2013 (which would amount to approximately a
sixteen-month extension).5 (Doc. # 251-5 at 198:17-24).
In April 2011, the parties agreed on an outline to modify the three loans, which by
that time were all in default. (Id. Ex. 5 at 209:24-212:9). In mid-June, BOA sent over the
draft modification documents. (Doc. # 232-27). The documents contained different and
additional terms than Corporex had agreed to, which prompted the parties to hold a June
22, 2011 conference call. (Doc. # 251-5 at 230:1-20; Ex. 19). After that call, it was
Corporex’s position that the parties had reached an impasse, while it was BOA’s
5) As BOA noted at oral argument, even if it had granted a three-year extension on the
Madison loan’s October 31, 2011 maturity date, that extension would have expired by now,
meaning the Madison note would still be mature and the outstanding balance now due. (Doc. #
232-6).
8
understanding that Corporex would be providing a list of its objections. (Id. Ex. 5 at 232:67; Doc. # 232-28). The day after the conference call, Corporex sent BOA a letter rejecting
BOA’s offer, acknowledging that it was “aware of the potential implications of not executing
the documents [BOA] sent.” (Doc. # 232-29). BOA brought the breach of guaranty action
against Realty a week later. (Doc. # 1).
D.
BOA Internal Discussions and Procedures
During this negotiation process there were, of course, internal discussions and
procedures taking place at BOA with respect to the three loans. On August 26, 2010, Cole
told another BOA employee that he was informed by “DR” that BOA was to “get ours first
for [Corporex],” to which the other employee responded “[a]gree. We are first at table.”
(Doc. # 251-9). Corporex asserts that D.R. is a “high-ranking Bank officer.” (Doc. # 251
at 4). There is also evidence that some BOA employees did not expect Corporex to accept
BOA’s initial counter-proposal on the loan modifications.
(Id. Ex. 8 at 103:14-15).
Specifically, in a September 30, 2010 e-mail, Cole states: “I really don’t think this is a
solution, more a[n] attempt to show that we thought about it prior to starting the transfers.”
(Id. Ex. 11).
In November 2010, BOA began the process of downgrading Corporex’s loans, which
would ultimately lead to BOA transferring the loans to the Special Assets Group (SAG).
(Id. Ex. 3 at 108:5-110:20; Ex. 4 at 48:6-14).
BOA informed Corporex that it was
transferring the loans to the SAG before the parties signed the PNLs. (Id. Ex. 5 at 150:8151:20). BOA told Corporex that the SAG would have “more flexibility,” but did not explain
what that meant. Id.
9
In addition to preparing the loans for transfer to the SAG, a November 22, 2010 email chain shows that BOA was in the process of decreasing its “exposure strategy” for the
loans. (Id. Ex. 15). The conversation begins with Cole informing a group of co-workers
that he planned to recommend changing Corporex’s exposure strategy from “decrease” to
“out.” Id. Two employees responded that they agreed with the “out” designation. “Out” is
defined in the e-mail in the following manner:
Out - Credit exposure is unacceptable at any level. New requests should not
be entertained for existing loans renewed except as a means to
accomplishing a complete payout.
Id. BOA never informed Corporex that it had changed its exposure strategy on the loans
to “out.” (Doc. # 251-2, 10).
On November 30, 2010, the Corporex loans were formally transferred to the SAG.
(Doc. # 232-39 at 131:23-132:24). At that time, the Madison loan was in default due to the
debt coverage trip, while Tampa and Olympic were still performing. (Doc. # 251-2 at ¶ 9).
E.
The Sale of the Olympic and Tampa Loan
As discussed supra, BOA was required to give the respective borrower the right of
first refusal before it “determined” to sell the loan, so long as the borrower was not in
default. (Doc. # 234 at Exs. 6, 8, 11). In September 2011 (six months after they went into
default), BOA sold the Tampa and Olympic loans without offering them to the
corresponding borrower. (Doc. # 251-14 at 344:15-25).
BOA employee Gary Katunas (a SAG member assigned to the Corporex loans),
testified that he thought about the possibility of selling the loans in December 2010. (Doc.
# 251-16 at 211:3-212:13). Discussions concerning a possible sale of the loans then
heated up in June 2011, when BOA employees began determining which loans to include
10
in a bulk sale of commercial loans knows as the “Atlas Portfolio.” (Doc. # 232-31, 32, 33,
34, 35; Doc. # 251-21). At first, the Madison loan was the only Corporex loan included in
the proposed sale, with BOA adding the Tampa and Olympic loans to the portfolio on
August 2, 2011. (Doc. # 232-36; 38 at 377). Although originally included in the portfolio,
to date BOA has not sold the Madison loan. (Doc. # 232-2 at 9).
F.
Additional Evidence in the Record
1.
In an October 31, 2010 internal report accompanying the transfer of the
Corporex loans to the SAG, BOA indicated that an extension on the loans was not likely.
(Id. Ex. 39 at 134:14-20).
2.
In a December 1, 2010 email, Andren told Cole that if Corporex did not
respond to the Madison default letter, “BOA [would] go straight to litigation and foreclosure.”
(Id. Ex. 44 at 119:19-126:10).
3.
In a March 18, 2011 e-mail chain, Andren had a discussion with a hotel
receiver about the Tampa location, telling her “[t]he site does not know anything yet, so
mum’s the word for now.” (Doc. # 251-17).
4.
On June 10, 2011, just days prior to BOA sending over the final draft
modification agreement (which Corporex rejected), Andren told a BOA employee that she
had directed another party to “immediately start the suits of the guarantor.” (Id. Ex. 20).
III.
A.
ANALYSIS
Standard of Review
At summary judgment, a court views all evidence and draws all inferences in the
non-moving party’s favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 244 (1986).
11
Summary judgment is appropriate when there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). On the
other hand, summary judgment is improper when “the evidence is such that a reasonable
jury could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248. The
relevant inquiry is “whether the evidence presents a sufficient disagreement to require
submission to a jury or whether it is so one-sided that one party must prevail as a matter
of law.” Id. at 251-52. To defeat a properly supported motion for summary judgment, the
non-moving party must cite to evidence in the record. Fed. R. Civ. P. 56(c).
B.
Applicable Law
Under the choice-of-law provisions in the respective contracts, Ohio law governs the
loan documents, whereas Kentucky law governs the PNLs. (Doc. # 232-2 at 12; Exs. 6,
8, 11, 19, 20, 21). The parties disagree over which state’s law governs the promissory
estoppel claim: BOA asserts that Kentucky law applies; Corporex contends that Ohio law
governs.
However, Corporex suggests that because both states have adopted the
Restatement (Second) of Contracts’ definition of promissory estoppel, the result would be
the same under the law of either state. (Doc. # 251 at 29 n. 9). The Court agrees and will
therefore belabor the point no further. See Limbright v. Hofmeister, No. 5:09-cv-107, 2010
WL 3385346, at *4 (E.D. Ky. Aug. 25, 2010) (“If the laws of both states would produce the
same result, there is a ‘false conflict’ and no further [choice of laws] analysis is
necessary.”).
C.
The Madison Loan
Starting with the Madison loan, BOA moves for summary judgment on Madison’s
12
and Realty’s breach of the implied covenant of good faith and fair dealing counterclaim and
affirmative defense (Doc. # 85 at Count 1; Case No. 11-cv-168, Doc. # 16), its foreclosure
and breach of contract claims against Madison (Case No. 2:11-cv-168, Doc. # 1), and its
breach of guaranty action against Realty (Doc. # 1 at Count III). BOA contends that
Madison and Realty released the ability to raise breach of the implied covenant of good
faith and fair dealing by agreeing to the PNL. (Doc. # 232-2 at 17). The Court will first
address whether the PNL is enforceable,6 and then turn to the parties’ claims.
1.
The Madison PNL is supported by consideration and it was properly
executed
Like any contract, a release must be supported by consideration. Waddle v. Galen
of Kentucky, Inc., 131 S.W. 3d 361, 365 (Ky. Ct. App. 2004). “Mutual promises constitute
adequate consideration if a benefit is conferred to the promisor or a detriment is incurred
by the promisee.” Energy Home, Div. of S. Energy Homes, Inc. v. Peay, 406 S.W.3d 828,
835 (Ky. 2013).
Madison and Realty argue that the PNL is not supported by consideration because
it did not obligate BOA to discuss a loan modification nor require BOA to release a known
claim. (Doc. # 251 at 23-24). Judge Merryday concluded that BOA suffered a detriment
when it in entered into the PNL because by doing so it delayed foreclosing on the Madison
loan. SMA Portfolio Owner, LLC v. CPX Tampa Gateway OPAG, LLC, 2014 WL 4545804,
6) In adjudicating BOA’s motion to dismiss Corporex’s counterclaims, the Court held that it could
not consider the PNLs because Corporex did not refer to or rely upon the PNLs in its Complaint.
(Doc. # 84 at 14). The Court noted that Corporex “should be afforded an opportunity to take
discovery and present evidence concerning the validity and enforceability of the releases.” Id.
Corporex has had that opportunity, and because this matter is now at the summary judgment stage,
the PNLs are properly before the Court.
13
at *7 (M.D. Fl. September 12, 2014). This Court agrees.
Additionally, the parties mutually agreed that no prior Loan Communications were
binding upon them, that no party would have a defense based on Loan Communications,
and that they would release all claims they had or would thereafter have related to any
Loan Communications (except for Madison’s and Realty’s obligations under the loan
documents). (Doc. # 232-19 at § 1). Madison and Realty cite case law holding that a
release does not constitute consideration if the releasor does not have an existing claim
to waive. George v. First Am. Bank, No. 1973, 1991 WL 156532, at *6 (Ohio Ct. App. Aug.
14, 1991). However, unlike the releasor in George, 1991 WL 156532, at *6 n. 3, BOA also
released all future claims based on Loan Communications. As long as a party has a good
faith belief that it is giving up a claim, the relinquishment constitutes valid consideration.
Hall v. Fuller, 352 S.W.2d 559, 561 (Ky. 1961). This lawsuit is evidence enough that BOA
had a good faith belief it would potentially have future claims and defenses based on the
parties’ negotiations.
Taken together with the additional detriments and promises
discussed above, the release provides sufficient consideration to support the PNL.
In the alternative, Madison and Realty argue that the PNL is not enforceable
because Andren did not have authority to sign it on BOA’s behalf. (Doc. # 251 at 24).
Even assuming arguendo that Andren had no authority to sign the Madison PNL,
Madison’s and Realty’s argument ignores the doctrine of ratification, under which “a
principal may later approve the actions of an agent who acted without authority.” Kindred
Nursing Centers Ltd. P'ship v. Leffew, 398 S.W.3d 463, 467 (Ky. Ct. App. 2013) (quoting
3 Am. Jur. 2d Agency § 176 (2013)). A corporation can ratify an agent’s actions when it
receives the benefits or advantages of that action. American Convalescent Centers, Inc.
14
v. Daniel, 514 S.W.2d 192, 194 (Ky. 1974). BOA accepted the benefits of the PNL when
it began negotiating under the PNL’s terms and by seeking to enforce the PNL in this
action.
Moreover, Madison and Realty knew that BOA would not negotiate a loan
modification until the PNLs were in place. Therefore, once BOA sent over the proposed
term sheets and resumed negotiations, Madison and Realty were put on notice that BOA
had accepted the agreement. (Doc. # 251-5 at 150:25-151:5; Doc. # 232-22); Peay, 406
S.W.3d at 837 (stating that a party can except a contract by its actions, “particularly where
one has signed and both parties thereafter act as if they had a binding contract”).
2.
The Madison PNL was not fraudulently induced
Finally, Madison and Realty argue that BOA fraudulently induced them to enter into
the PNL. (Doc. # 251 at 22-24). In a related case dealing with the Tampa loan that has
since been transferred to this Court, the Honorable Steven D. Merryday ruled that there
was a question of fact whether the Tampa PNL was fraudulently induced. (Case No. 2:14cv-72, Doc. # 267); SMA Portfolio Owner, LLC, 2014 WL 4545804, at *7. In its Response
and at oral argument, Corporex has suggested that this Court should reach the same
conclusion with respect to the Madison and Olympic PNLs. (Doc. # 251 at 22).
For several reasons, however, the Court will conduct its own review of the
arguments, case law, and record. First, Federal Rule of Civil Procedure 56(a) directs that
courts “shall grant summary judgment if the movant shows there is no dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Although parties
can be precluded from relitigating certain issues, preclusion is an affirmative defense that
must be pled and proved. Taylor v. Sturgell, 553 U.S. 880, 907 (2008) (“[A] party asserting
preclusion must carry the burden of establishing all necessary elements.” (citing 18 Wright
15
& Miller § 4405, p. 83)). Corporex has never argued (much less proven) that BOA is
precluded from litigating the validity of the Madison PNL, neither in its briefing nor at oral
argument. Thus, it would be improper for this Court to rely solely on Judge Merryday’s
ruling without conducting its own analysis. See Neff v. Flagstar Bank, FSB, 520 F. App'x
323, 327-28 (6th Cir. 2013) (holding that a district court committed reversible error by
raising the issue of res judicata sua sponte with no arguments from the parties).
Second, some of the facts in this case are different. The PNLs were entered into
by different parties and they concern different loans. The parties agreed to the Tampa PNL
more than two months after the Madison PNL. And unlike Tampa, Madison has never
alleged that it passed up on a refinancing opportunity, a factual dispute that Judge
Merryday relied on in his ruling. SMA Portfolio Owner, LLC, 2014 WL 4545804, at *7.
Finally, in concluding that reasonable reliance (an essential element of fraudulent
inducement) could not be decided at summary judgment, Judge Merryday cited an Ohio
case. Id. However, Kentucky law governs the PNLs before this Court. (Doc. # 232-19 at
¶ 19; 20 at ¶ 11).
Like with issue preclusion, Madison and Realty did not plead fraudulent inducement
as an affirmative defense. In fact, the Court denied Madison and Realty leave to file a third
amended counterclaim to include fraud because Madison and Realty filed it on the eve of
the dispositive motion deadline and nearly twenty months after the deadline to amend the
pleadings had passed. (Docs. # 229, 248).
However, unlike with issue preclusion, the parties have fully briefed and argued the
fraudulent inducement issue. “The failure to raise an affirmative defense by responsive
pleading does not always result in waiver.” Moore, Owen, Thomas & Co. v. Coffey, 992
16
F.2d 1439, 1445 (6th Cir. 1993). This exception is particularly appropriate when the
opposing party has notice of the defense and therefore an opportunity to respond. Id.
Corporex attempted to add fraud as a counterclaim and raised the defense in its response
to BOA’s motion for summary judgment both here and in the Tampa action. Because BOA
has had an opportunity to formulate a response, the Court will entertain the merits of this
argument.
When a party relies on a fraudulent representation in entering into a contract, it can
rescind the agreement. Radioshack Corp v. Comsmart, Inc., 222 S.W.3d 256, 261 (Ky. Ct.
App. 2007). When the allegation is fraud in the inducement, the party seeking rescission
must prove the following by clear and convincing evidence: (1) a material representation,
(2) that is false, (3) was known to be false or made recklessly, (4) was made with
inducement to be acted upon, (5) was acted in reliance upon and (6) caused injury. Bear,
Inc. v. Smith, 303 S.W.3d 137, 142 (Ky. Ct. App. 2010); Coffey, 992 F.2d at 1444; ABM
Farms, Inc. v. Woods, 692 N.E.2d 574, 578 (Ohio 1998) (same elements under Ohio law).
Because fraud entails a heightened burden of proof, the party alleging fraud “must show
in opposition to the motion for summary judgment that he can produce evidence which, if
believed, will meet the higher standard.” Bassett v. Nat'l Collegiate Athletic Ass'n., 428
F.Supp. 2d 675, 682 (E.D. Ky. 2006) (citing White v. Turfway Park Racing Ass'n, 909 F.2d
941, 944 (6th Cir.1990)).
The false misrepresentation “must be made concerning a present or pre-existing
fact.” Filbeck v. Coomer, 182 S.W.2d 641, 643 (Ky. 1944). When the allegation concerns
representations about future intentions, the party alleging fraud must show that when the
other party made the representations “he had no intention of carrying them out[.]” Major
17
v. Christian Cnty. Livestock Market, 300 S.W.2d 246, 249 (Ky. 1957). Finally, “[i]t is well
established under Kentucky law that ‘equity will give no relief to a complaining party who
has means of knowledge of the truth or falsity of representations . . . .’” Coffey, 992 F.2d
at 1447 (quoting Mayo Arcade Corp. v. Bonded Floors Co., 41 S.W.2d 1104, 1008 (Ky.
1931)).
Madison and Realty allege that the Madison PNL was an integral part of BOA’s
scheme to lull them into false negotiations so that it could push all the loans into default and
sell them. (Doc. # 251 at 23) (Although BOA originally offered the Madison loan for sale,
it was never sold). BOA responds that Madison and Realty were unreasonable in relying
on BOA’s prior promise to negotiate because the PNL’s express language states that BOA
had no duty to negotiate.
As a threshold argument, Madison and Realty cite an Ohio Court of Appeals case
that states “[t]he Ohio Supreme Court has also held that ‘reasonable reliance’ . . . cannot
be resolved on a summary judgment motion.” Bunton v. Trucase Tool & Mold, Inc., No. 92L-140, 1993 WL 164648, at *2 (Ohio Ct. App. May 7, 1993) (citing Kelly v. Georgia-Pac.
Corp., 545 N.E.2d 1244, 1250 (Ohio 1989)). This argument is beside the point because
the parties agreed that Kentucky law would govern the Madison PNL. (Doc. # 232-19 at
¶ 19). In Kentucky, so long as there is no genuine dispute of material fact, reasonable
reliance can be decided as a matter of law at summary judgment. See Basset, 428
F.Supp.2d at 682 (granting summary judgment on a fraud claim because the plaintiff was
“unable to prove reasonable reliance”). Moreover, the whole “point of Civil Rule 56 is to
prevent claims from going to a jury when the court, after drawing all inferences in favor of
the non movant . . . determines that no reasonable jury could make such a finding.”
18
Newman v. Twp. of Hamburg, 773 F.3d 769, 773 (6th Cir. 2014).
Either way, the Ohio Supreme Court has never held that reasonable reliance cannot
be decided at summary judgment. In Kelly, the case the Bunton court cites, there were
simply questions of fact that precluded summary judgment. See Kelly, 545 N.E.2d at 124950. Ohio appellate courts have subsequently held that although reliance is a factual issue,
“a court may deem certain circumstances objectively unreasonable, as when it finds that
reasonable minds could come to but one conclusion.” Mansfield Square, Ltd. v. Big Lots,
Inc., No. 08AP-387, 2008 WL 5159930, at *4 (Ohio App. Ct. December 9, 2008). The
Court will now determine whether a reasonable juror could find, by clear and convincing
evidence, that Madison and Realty reasonably relied on BOA’s promise to negotiate.
When a party alleges that it relied on a fraudulent statement, that reliance must be
“reasonable . . . or ‘justifiable.’” Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544, 549 (Ky.
2009) (quoting Restatement (Second) of Torts § 537 (1977)). When the party alleging
fraud is a sophisticated entity and the statement concerns a business representation, “the
law imposes . . . a duty to exercise common sense.” Id.; see Bassett (“With respect to
reliance, [a party] must prove that his reliance on the misrepresentation was reasonable,
and in making this determination, the Court should consider [the party’s] knowledge and
experience.”).
Of particular relevance here, “parties may not base a fraud in the
inducement claim on their reliance on oral representations contrary to the terms of written
agreements or disclaimers that they have acknowledged in writing.” Fifth Third Bank v.
Waxman, 726 F.Supp. 2d 742, 752 (E.D. Ky. 2010) (citing Rivermont Inn., Inc. v. Bass
Hotels Resorts, Inc., 113 S.W.3d 636, 640 (Ky. Ct. App. 2003)); see also Govaerts v.
Suntec Indus. Inc., No. 1:09-CV-147-M, 2010 WL 2178517, at *7 (W.D. Ky. May 26, 2010)
19
(“As for reliance, it is true that where a contractual provision directly and unambiguously
contradicts the alleged misrepresentation, reliance on the misrepresentation is
unreasonable.”).
The following cases demonstrate the heavy burden a borrower asserting fraud faces
when a written agreement expressly contradicts the oral representations he claims he relied
on. In Branch Banking and Trust Co. v. Thompson, an appellate court reversed a jury’s
verdict that a forbearance agreement (which contained releases) was fraudulently induced
by a bank’s oral promise to re-amortize a loan. No. 06-CI-010885, 2011 WL 255149, at *22
(Ky. Ct. App. Jan. 28, 2011). The court held that the borrower’s reliance was unreasonable
because the forbearance agreement’s terms disavowed such a promise. Id. at *21-22.
The forbearance agreement contained similar language to the Madison PNL, stating that
the lender was “under no obligation” to agree to a future forbearance. Id. at *12.
In Helton v. American General Life Insurance Company, a group of borrowers
alleged that a lender fraudulently induced them to purchase life insurance policies. No.
4:09-CV-118-M, 2010 WL 2889666, at *1 (W.D. Ky. July 21, 2010). According to the
borrowers, the lender failed to follow through on his promise that he would continually
renew the loans as long as the borrowers needed them to pay the policies’ annual
premiums. Id. Yet, the loan documents stated that the lender was under no obligation to
renew the loans, so the court held that the borrowers “could not show that they justifiably
relied upon the alleged misrepresentations and their fraudulent inducement claim fails as
a matter of law.” Id. at 3.
And in Waxman, a guarantor argued that a lender should not be able to collect on
guarantees that she signed because the lender orally promised her that the guarantees
20
would not be enforced. 726 F. Supp.2d at 752. The court rejected the guarantor’s
argument and entered summary judgment for the lender because a “claim for fraud in the
inducement may not be based on alleged oral representations that are contrary to the
terms of the guaranties . . . .” Id. at 753; see also Robins v. Global Fitness Holdings, LLC,
838 F.Supp.2d 631, 647 (N.D. Ohio) (dismissing a fraudulent inducement claim because
the defendant did not engage in any conduct “inconsistent with the unambiguous terms of
the [parties’] written contracts”).
Madison and Realty argue that BOA fraudulently induced them into signing the PNL
in order to create the appearance that it was going to negotiate a modification, when in
reality it had already determined not to extend the loan. As the Court has previously
recognized, an oral promise to negotiate is not contradicted by any of the promissory note’s
terms.
(Doc. # 84 at 21).
But the Madison PNL directly addresses modification
negotiations. In the PNL, the parties agreed to the following:
•
The PNL constituted the entire agreement between them and superceded all
prior agreements. (Doc. # 232-19 at § 10).
•
BOA was “not under any obligation to discuss, pursue or agree to any
modifications . . . of the Loan.” (Id. at § 1).
•
All previous discussions they had relating to the loan were not binding upon
them. (Id.).
•
They could discontinue the negotiations at any time by providing notice. (Id.
at § 8).
In sum, the parties agreed that they were not bound by prior promises to negotiate
or modify the loan, that BOA had no duty to negotiate in the future or to agree to a
21
modification, and that if negotiations did commence, they could be broken off by either
party at any time. If after agreeing to these terms Madison and Realty relied on BOA’s prior
oral promises to negotiate, either by declining other refinancing opportunities7 or choosing
not to actively pursue alternative refinancing options, then their reliance was unreasonable
as a matter of law. Put another way, Madison and Realty cannot now assert that BOA
breached an amorphous “promise to negotiate in good faith,” when the parties agreed in
the PNL that BOA was under no obligation to discuss modifying the loan, and that if BOA
did decide to negotiate, it could end the negotiations at any time.
At oral argument, Corporex pointed out that the PNL contained the following
introductory paragraph:
Lender will discuss the Loan with Borrower’s and Guarantor’s
representatives, provided that the following agreements and understandings
govern. . . . We want to confirm our mutual understanding that all discussions
will be governed by the terms and conditions in this letter agreement . . . .
(Doc. # 232-19). This paragraph in no way aids Madison’s and Realty’s fraudulent
inducement defense. The statement says nothing about promising to negotiate and
provides no assurance that BOA will agree to a loan modification. It simply states that BOA
“will discuss the Loan” provided that the PNL’s terms govern. BOA did discuss the Madison
loan with Corporex.
And although the parties never reached an agreement on a
modification, neither party was obligated to do so according to the PNL. (Id. at § 1). In
perhaps the most damaging term in the PNL as far as Madison’s and Realty’s fraudulent
inducement defense, the parties agreed that they could “discontinue negotiations at any
7) Madison and Realty have never alleged that they passed up on a refinancing opportunity
based on BOA’s promise to negotiate.
22
time.”8 (Id. at § 8). This written term alone renders unreasonable Madison’s and Realty’s
reliance on BOA’s early promises to negotiate a loan modification.
Even assuming arguendo that Madison and Realty justifiably relied on BOA’s
promise to negotiate, no reasonable juror could conclude that there is clear and convincing
evidence BOA never intended not to agree to a modification. Madison and Realty rely
heavily on BOA’s decision to change its exposure strategy on the loans to “out,” and
without the aid of context, that argument may appear to have merit. However, BOA used
the word as a term of art to describe internal bank procedure, so its own definition of “out”
prevails over the word’s everyday meaning. In the e-mail discussing the change in
exposure strategy, BOA defines “out” as: “[n]ew requests should not be entertained for
existing loans renewed except as a means to accomplishing a complete payout.” (Doc. #
251-15) (emphasis added). Thus, the “out” designation still allowed BOA to modify the
loans.
In BOA employee Dave Betzold’s deposition, he confirmed that “out” still allowed
BOA to modify the loans: “My view of out was that we do not want to entertain any new
business opportunities . . . . We could continue to work through the existing portfolio,
modify and extend . . . .” (Doc. # 232-46 at 95-103). Despite conducting extensive
discovery, including deposing several BOA employees, Madison and Realty have offered
no evidence in rebuttal. Therefore, no reasonable juror could reach the conclusion that the
8) The full agreement states that negotiations could be discontinued “without any liability . . . to the
other party” “upon notice.” Before BOA filed suit, Corporex sent BOA a letter, stating that they
believed the parties were “at an impasse,” that they considered “the process regarding
implementation of the April 21, 2011 term sheets unsuccessful,” and that they were “aware of the
potential implications of not executing the documents [BOA] sent.” (Doc. # 232-29). Thus, notice
does not appear to be an issue, nor was it raised by the parties.
23
“out” designation meant BOA had no intention to modify the loans.
The remaining evidence is likewise insufficient to create a genuine dispute of
material fact whether BOA had no intention to modify the Madison loan when it entered into
the PNL. The evidence, viewed in the light most favorable to Madison and Realty, shows
that some BOA employees were skeptical whether Madison and Realty would accept its
offer (Cole’s statement that he did not “think” BOA’s offer was a solution); BOA drove a
hard bargain (the additional terms BOA added in the final modification documents); and
BOA had contingency plans in place–including foreclosure and a possible sale of the
loans–in case the parties did not reach an agreement (Andren’s order a few days before
BOA made its final offer to start the suits of the guarantor). As conceded by Corporex’s
counsel at oral argument, there is nothing nefarious or unusual about a commercial entity
having a backup plan in the event negotiations fail. As a publically-traded company, BOA
may have even had a duty to its shareholders to do so. BOA did not, however, have a duty
to share those plans with Corporex.9 BOA’s actions do not amount to fraud and do not
suggest that it had no intention to agree to a loan modification; rather, they are indicative
of two sophisticated parties negotiating, one in a stronger position than the other.
As a general matter, a mortgagee has no duty to reach an agreement on a loan
modification with a mortgagor in default. See Travelers Ins. Co. v. Realty Properties, Inc.,
798 F.Supp. 423, 424 (E.D. Ky. 1992); MDFC Loan Corp. v. First Shopping Ctr. P'ship, No.
93-C-4481, 1996 WL 99909, at *5 n. 4 (N.D. Ill. Mar. 1, 1996). And even if BOA did bind
itself to a duty to negotiate, it fulfilled its duty, and the following sequence of events took
9) Unless, of course, BOA determined to sell the Madison loan prior to default, of which there is
no evidence.
24
place: BOA sent an offer that contained terms Madison and Realty considered onerous and
that the parties had previously not agreed upon; Madison and Realty rejected BOA’s offer
and stated that they considered the negotiations “unsuccessful”; BOA filed suit. (Doc. #
232-27, 29).
Because no reasonable juror could conclude that there is clear and
convincing evidence BOA fraudulently induced Madison and Realty to enter into the
Madison PNL, the Court will enforce the parties’ agreement.
3.
The Madison PNL prevents Madison and Realty from raising
breach of the implied covenant of good faith as a counterclaim
and defense
A release is an agreement in which one party surrenders the right to prosecute a
cause of action against another. Frear v. P.T.A. Indus., Inc., 103. S.W.3d 99, 107 (Ky.
2003). Like with any other contract, a court looks at the language of a release to determine
the parties’ intentions, and when that intent is clear, will apply it as written.
Abney v.
Nationwide Mut. Ins. Co., 215 S.W.3d 699, 703 (Ky. 2006).
In the PNL, all parties agreed to:
completely, irrevocably and unconditionally releases and forever discharge[]
the other party from any and all liabilities, claims and demands whatsoever,
in law or in equity, which such releasing party now has or may hereafter have
against the other party caused by or arising out of or relating to all or any
Loan Communications.
(Doc. # 232-2 at § 2). The parties further agreed that “[n]o party hereto shall have any
defense to any action by any other party . . . based on any Loan Communication.” (Id. at
§ 1).
Loan Communications are defined as “[a]ny discussions, negotiations,
correspondence and other communications relating to the Loan and the Loan documents
that Borrower, Guarantor and/or their representative may have previously had, or in the
25
future may have, with representatives of Lender.” Id. at § 1.
Madison’s and Realty’s counterclaim and affirmative defense for breach of the
implied covenant of good faith and fair dealing is based on their allegation that BOA made
a false promise to negotiate modifying the Madison loan, and in doing so, interfered with
their ability to perform on the loan agreements. (See Doc. # 85 at Count I). Yet, in the
PNL, Madison and Realty unconditionally released BOA from all claims and defenses
arising out of loan discussions, which undoubtedly includes BOA’s previous promise to
negotiate a loan modification. Because Madison’s and Realty’s counterclaim and defense
for breach of the implied covenant of good faith and fair dealing depends on loan
communications, BOA is entitled to summary judgment.
Madison and Realty cite Forry, Inc. v. Neundorfer, 837 F.2d 259, 263 (6th Cir. 1988),
for the proposition that a party cannot release claims of which it is unaware. Madison and
Realty allege that they were unaware of BOA’s scheme to enter into false negotiations.
But as discussed supra, there is no evidence that BOA never intended to modify the loans.
Even when viewed in the light most favorable to Madison and Realty, the evidence at best
supports a finding that BOA was unwilling to reach an agreement to modify the loans
unless it was on its own terms–a position BOA was permitted to take. See Travelers Ins.
Co., 798 F. Supp. at 424.
Next, Realty argues that a guarantor cannot not waive the right to raise a breach of
the implied covenant of good faith and fair dealing as a defense, citing O’Brien v.
Ravenswood Apartments, Ltd., 862 N.E. 2d 549, 557 (Ohio Ct. App. 2006). (Doc. # 251
at 14).
O’Brien is of dubious significance, since Kentucky law governs the PNLs.
Nevertheless, in O’Brien, an intermediate Ohio appellate court held that a guarantor “did
26
not waive the right to raise the duty of good faith and fair dealing as a defense in the
guaranty, where the parties did not expressly adopt a freely negotiated provision providing
for such a waiver.” Id. at 557. In reaching this holding, the court cited no case law,
referencing only “strong public policy.” Id. Because this issue has not been addressed by
the Ohio Supreme Court, O’Brien is only persuasive authority. And even if O’Brien is the
law in Ohio, it does not apply to a situation like the one here, where two sophisticated
parties have freely negotiated and voluntarily agreed, for mutual consideration, to expressly
release any defense arising from specific conduct (i.e., loan communications).
To be clear, the Court is not stating that the parties could agree to negotiate in bad
faith. Rather, Madison and Realty released all claims that may have arisen prior to the
PNL, and then in the PNL, agreed to a structure for the negotiations going forward. BOA
acted within the framework set by the parties, and therefore Madison and Realty have no
claim or defense. See Warner Theatre Assoc. Ltd. P'ship v. Metro. Life Ins. Co., No. 97
CIV. 4914 (SS), 1997 WL 685334, at *5 (S.D.N.Y. Nov. 4, 1997) (Sotomayor, J.) (“Where
parties, particularly sophisticated ones . . . have undertaken certain obligations – and at the
same time expressly limited those obligations – the courts should not normally interfere with
those choices.”); DavCo Acquisition Holding, Inc. v. Wendy's Int'l, Inc., No. 2:07-CV-1064,
2008 WL 755283, at *6 (S.D. Ohio Mar. 19, 2008) (“The duty of good faith and fair dealing
may not be invoked to override express contract terms. When a written contract is plain
and unambiguous, it is not subject to attack based on standards of good faith and fair
dealing merely because its operation will work a hardship on one party and accord
advantage to the other.”)
27
4.
BOA is entitled to foreclosure on the Madison loan and a money
judgment against Realty
A plaintiff seeking foreclosure on a mortgage in Ohio must prove the following: (1)
execution and delivery of a valid note and mortgage held by the plaintiff at the time the
foreclosure is commenced; (2) a valid recording of the mortgage; (3) the debtor has
defaulted on the note and mortgage; and (4) an amount due. Citizens Bank v. Cinema
Park L.L.C., No. 1:08 CV 2174, 2010 WL 420019, at *3 (N.D. Ohio Jan. 29, 2010).
BOA has submitted evidence establishing each element of its money judgment,
foreclosure, and breach of guaranty claims: (1) the Madison note and mortgage are signed
by a Madison representative and currently held by BOA (Doc. # 232-6, 7; Case No. 11-cv168, Doc. # 1 at ¶ 10); (2) the mortgage is time-stamped as having been recorded on
October 23, 2006 (Doc. # 232-6); (3) Madison is in default for failing to meet the required
debt coverage test in § 12.1 of the promissory note and for not repaying the loan upon
maturity (Id. Exs. 5, 16); (4) the amount due is $32,464,218.18 as of September 2, 2014
(Id. Ex. 5); and (5) Realty guaranteed the loan (Id. Ex. I).
Madison and Realty argue that BOA should not be able to rely on Madison’s default
in seeking foreclosure and a money judgment, citing two cases in support. (Doc. # 251 at
13-14 citing Charter One Bank, F.S.B. v. Kobenald Corp., No. 01AP-886, 2002 WL 433621
(Ohio Ct. App. March 21, 2002), and Ky. Joint Stock Land Bank of Lexington v. Smith, 1932
WL 1933 (Ohio Com. Pl. May 19, 1932)). In Kobenald Corp., the appellate court reversed
the trial court’s ruling that a mortgagor was in default because the record was “confusing
and incomplete.” 2002 WL 433621, at *3. Specifically, the mortgagee did not submit
evidence establishing that the mortgagor had failed to make a monthly payment, the notice
28
of default referenced the wrong loan number, and the mortgagor stated in an affidavit that
he had made all payments on time. Id. Meanwhile, in Kentucky Joint Stock Land Bank of
Lexington, a mortgagee was estopped from foreclosing on a loan because it applied
insurance proceeds from a fire on the mortgaged property to the principal instead of
sending the proceeds to the mortgagor–in violation of Ohio law and against the mortgagor’s
wishes. 1932 WL 1933, at * 1-2. The mortgagor testified that if the mortgagee had
distributed the insurance proceeds to him, he would have made all payments timely and
thus stayed in compliance with the loan. Id.
The above cases involve circumstances not present here. Unlike the mortgagor in
Kobenald, Madison does not dispute that it failed to comply with the debt coverage
covenant and pay the loan upon maturity. And unlike the mortgagee in Kobenald, BOA has
submitted evidence that establishes the Madison loan is in default.
(Doc. #
232-5,6,7,12,16). Kentucky Joint Stock Land Bank of Lexington is completely dissimilar
because there the mortgagee misappropriated insurance proceeds belonging to the
mortgagor that the mortgagor could have used to stay in compliance with the loan. Both
cases stand for the proposition that a mortgagee who causes a default should not be able
to rely on that default in seeking foreclosure. Here, BOA may have initially told Madison
and Realty not to worry about the debt coverage default while the parties were attempting
to workout a loan modification. But that does not excuse Madison’s failure to cure the
default once negotiations ended nor its continued failure to repay the loan nearly four years
after it matured.
Madison hypothesizes that if BOA had followed through on its promise to negotiate,
it would have been able to avoid default by re-signing its anchor tenant to a lease
29
extension. (Doc. # 251 at 39). That theory is speculative at best and is rebutted by Butler’s
testimony that he did not inform the anchor tenant about the negotiations, as well as the
anchor tenant’s testimony that the move was based on logistics and location. (Doc. # 23242 at 36; Ex. 48 at 58). Beyond speculative, this theory is also groundless: BOA had no
duty to agree to a modification, so even if it breached a duty to negotiate, good-faith
negotiations alone would not have helped Madison obtain a new lease agreement.
Because Madison and Realty have no defense, BOA is entitled to summary judgment on
its foreclosure, money judgment, and breach of guaranty claims.
D.
Olympic Loan
Turning to the Olympic loan, BOA moves for summary judgment on Olympic’s and
Realty’s counterclaims for the breach of the implied covenant of good faith and fair dealing
and promissory estoppel, and Olympic’s counterclaim for breach of the right of first refusal.
(Doc. # 85 at Counts I, II, VI). The Court will once again turn to the parties’ PNL.
1.
The Olympic PNL is enforceable
The Court’s discussion of whether the Madison PNL is supported by consideration
applies with equal force to the Olympic PNL. The same can be said of the Court’s analysis
of whether the Madison PNL was fraudulently induced, with two caveats: different parties
entered into the agreements, and the agreements were reached over two months apart.
Corporex, however, has pointed to no evidence that suggests the difference in parties and
dates is material. As with the Madison PNL, Olympic’s and Realty’s decision to rely on
BOA’s oral promise to negotiate was unreasonable as a matter of law, and further, there
is no evidence that BOA never intended to negotiate modifying the Olympic loan as of
30
February 2011.
Olympic and Realty argue that the Olympic PNL is unenforceable for an additional
reason: it required a signature but was not properly executed. Although Andren eventually
signed the Olympic PNL, she does not know when. (Doc. # 251-3 at 193:16-194:21).
Because it is not dispositive, the Court will assume arguendo that BOA did not properly sign
the Olympic PNL. That fact is only significant, however, if the Olympic PNL required BOA’s
signature.
Parties must mutually agree to be bound by a contract for it to be enforceable, which
they can do through their words or conduct. Kellum v. Browning's Adm'r, 21 S.W.2d 459,
463 (Ky. 1929). So while parties can accept a contract by signing it, that is not the only
means. Cowden Mfg. Co. v. Sys. Equip. Lessors, Inc., 608 S.W.2d 58, 61 (Ky. Ct. App.
1980) (“[I]t is not always necessary for both parties to sign a contract, particularly where
one has signed and both parties thereafter act as if they had a binding contract.”); Polly v.
Affiliated Computer Servs., Inc., No. CIV.A. 10-135-ART, 2011 WL 93715, at *2 (E.D. Ky.
Jan. 11, 2011). Only when the parties agree that a contact shall not be binding unless
signed, or when a statute prescribes it, will a court require the parties’ signatures. Allen v.
Ford Motor Co., 8 F. Supp. 2d 702, 705 (N.D. Ohio 1998) (“Indeed, signature spaces in the
form contract do not in and of themselves require that signatures of the parties are a
condition precedent to the agreement's enforceability.”) (quotation marks and citations
omitted).
According to Olympic and Realty, it was the parties’ intent that BOA had to sign the
Olympic PNL in order for it to be effective. In support, they point to Section 5 of the PNL,
which states that “no compromise . . . [or] release . . . with respect to the Loan or the Loan
31
Documents shall constitute a legally binding agreement or have any force or effect
whatsoever unless . . . signed by the authorized representatives of all necessary parties
. . . .” (Doc. # 232-20). Because the PNL contained a release, and made reference to
“executing this letter agreement” and the “undersigned parties,” Olympic and Realty
suggest that the PNL itself had to be signed. (Id.).
Contrary to Madison and Realty’s argument, Section 5 does not apply to the PNL,
but rather has prospective application. As Judge Merryday recognized, the PNL is “an
instrument for the parties’ reaching” a future compromise. See SMA Portfolio Owner, 2014
WL 4545804, at *6.
With no express provision requiring the parties’ signatures, the
isolated references to “executing this letter agreement” and “the undersigned parties” does
not lead to a reasonable inference that the parties’ intended BOA to have to sign the PNL
in order for it to be effective. Therefore, the Court will apply common law contract
principles to determine whether BOA agreed to be bound. See id.
Olympic and Realty argue that assent is a question of fact inappropriate at summary
judgment, citing Auffarth v. Nationwide Mut. Ins. Co., No. WDQ-08-1399, 2011 WL
3897939, at *6 (D. Md. Aug. 30, 2011). While it is true that assent is a question of fact,
when a party’s actions leave no genuine dispute as to whether it accepted the contract, a
court can decide the issue as a matter of law. Fed. R. Civ. P. 56(a); see Sweeny v.
Theobald, 128 S.W.3d 498, 501 (Ky. Ct. App. 2004); GeoSunFuels, LLC v. Gorman, 493
F. App’x 713, 717-18 (6th Cir. 2012).
BOA manifested its assent to the PNL’s terms on at least two occasions. First, when
it made the offer to enter into the PNL. When a party makes an offer, it gives the offeree
the power of acceptance, and by doing so manifests its assent to be bound by the
32
contract’s terms. See Messick v. Powell, 236 S.W.2d 897, 899-900 (Ky. 1951); Jones v.
Bank of Harlan, No. CIV. 10-96-GFVT, 2012 WL 115586, at *3 (E.D. Ky. Jan. 12, 2012)
(citing 17A Am.Jur.2d Contracts § 45 (2011). The PNL BOA sent states that it “sets forth
the agreement of the parties,” and that BOA “will discuss the Loan . . . provided that the
following agreements and understandings govern.” (Doc. # 232-20). The terms and
conditions in the PNL are sufficiently clear and specific. Therefore, once Butler signed the
PNL on behalf of Olympic and Realty and sent it back to BOA, there was a meeting of the
minds and the contract became enforceable.
BOA also agreed to be bound by the PNL when it sent Olympic and Realty the term
sheet proposals. Andren told Olympic and Realty that she “would need to get those signed
[PNLs] back from you before I can send written updated term sheets on all three loans.”
(Doc. # 232-22). By following through on that promise and sending the term sheets after
Butler signed the PNLs, Andren clearly and unequivocally expressed BOA’s acceptance
of the PNL. All requirements for a valid contract having been meet, the Court will enforce
the Olympic PNL.
2.
The Olympic PNL prevents BOA from bringing counterclaims for
breach of the covenant of good faith and promissory estoppel
The Olympic PNL contained similar terms to the Madison PNL. Specifically, the
parties released any claims arising out of loan communications that took place before and
after the parties signed the PNL, and further agreed that they were not bound by any oral
promises to negotiate or modify the loan. (Doc. # 232-20). Therefore, as with the Madison
Loan, Olympic’s and Realty’s counterclaim for breach of the implied covenant of good faith
and fair dealing cannot stand.
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The same can be said for Olympic’s and Realty’s promissory estoppel counterclaim.
In support of promissory estoppel, Olympic and Realty argue that in “relying on [BOA]’s
August 2010 and November 2010 promises to negotiate and work with Olympic to extend
the terms of its loan, Olympic passed on other financing opportunities.” (Doc. # 251 at 29).
Because that allegation clearly depends on the parties’ loan communications, which took
place before they agreed upon a release in the February 2011 PNL, summary judgment
is granted.
3.
There is no evidence that BOA breached the right of first refusal
provision
The Olympic loan gave Olympic the following right of first refusal:
Lender agrees that in the event that it determines to . . . sell the Note . . .
Lender shall, provided Borrower is not then in default under this Note or any
of the Loan Documents, allow Borrower or Borrower's affiliates a right of first
refusal to purchase same . . . .
(Id. at Exs. 6, 8, 11) (emphasis added). There is no dispute that Olympic never repaid its
loan after it matured on February 1, 2011; that BOA declared the loan in default on March
1, 2011; and that BOA sold the loan in September 2011 without offering it to Olympic or
Realty. (Doc. # 232 Exs. 10, 23; Doc. # 251-14 at 344:15-25). The critical issue is whether
there is evidence that BOA “determined to” to sell the loan prior to default.
By prior Order, this Court gave “determines to” the following interpretation:
The plain meaning of the word “determines” is clear and unambiguous.
Merriam-Webster’s Dictionary defines “determine” as “to come to a decision.”
Merriam-Webster Dictionary, available online at http://www.merriamwebster.com/dictionary/determine. Clearly, BOA could first decide to sell the
CPX Olympic loan before any actual sale was agreed to or took place. The
situation is analogous to a homeowner who desires to sell his house. First,
the homeowner determines to sell the house, and then he will put the house
for sale on the market in order to find a buyer. Thus, the plain meaning of the
term “determines” in the CPX Olympic promissory note simply means
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whenever BOA made a decision to sell the note.
(Doc. # 84 at 32).
Olympic suggests that BOA’s change in its exposure strategy to “out,” coupled with
the remaining evidence, creates a genuine dispute whether BOA determined to sell the
Olympic loan prior to February 2011. Yet, as discussed supra, Olympic makes too much
of this one word. Nothing in the record supports Olympic’s theory that “out” meant sell; to
the contrary, the description accompanying the term, as well Betzold’s deposition, directly
contradicts such a conclusion.
BOA employee Gary Katunas states that he first learned about the right of first
refusal provision in December 2010 and that the provision influenced BOA’s decision
making process. (Doc. # 251-16 at 211:3-212:13). Contrary to Olympic’s argument, this
testimony does not lead to a reasonable inference that BOA decided to sell the loan at that
time. Based on the evidence in the record, the earliest a reasonable juror could conclude
that BOA decided to sell the Olympic loan was in June 2011, when BOA first began
discussing the portfolio sale that eventually included the Olympic loan. (Doc. # 232-31, 32,
33, 34, 35, 36, 38 at 370-72). Up until June 2011, BOA continued to discuss a potential
loan modification–even though Olympic no longer had the right of first refusal because the
Olympic loan, like all the Corporex loans, was in default. Because there is no evidence that
BOA decided to sell the Olympic loan prior to default, Olympic’s breach of the right of first
refusal counterclaim is dismissed.
E.
Realty’s Guaranty of the Tampa Loan
Last, the Court will address the Tampa loan. Specifically, Realty’s counterclaims for
breach of the implied covenant of good faith and fair dealing and promissory estoppel. In
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Case No. 2:14-cv-72, Judge Merryday denied BOA’s Motion for Summary Judgment on
Tampa’s counterclaims for breach of the implied covenant of good faith and fair dealing and
promissory estoppel.
However, BOA asserts that Realty waived the right to assert
counterclaims when it signed the guaranty.
A guaranty is interpreted like any other contract. U.S. Bank Natl. Assn. v. Green
Meadow SWS L.L.C., 9 N.E.3d 433, 441 (Ohio Ct. App. 2014). And like any other contract,
a guarantor can waive future claims and defenses as a term within the guaranty. See Gen.
Elec. Capital Corp. v. Steve Mox Trucking, Inc., No. 3:04CV7574, 2006 WL 2077038, at
*2 (N.D. Ohio July 24, 2006) (citing Buckeye Fed. Sav. & Loan Ass'n v. Guirlinger, 62 Ohio
St.3d 312, 316 (Ohio 1991)). Section Four of the Tampa guaranty contains the following
provision:
Continuing Guaranty. Guarantor agrees that performance of
Borrower’s Obligations by Guarantor shall be a primary obligation, shall not
be subject to any counterclaim, set-off, abatement, deferment or defense
based upon any claim that Guarantor may have against Lender . . . and shall
not be . . . affected in any way by . . . any failure, omission or delay on the
part of . . . Lender to conform or comply with any term of any of the Loan
Documents . . . [or] any action or inaction by Lender under or in respect of
any of the Loan Documents . . . .
(Doc. # 232-14).
As BOA correctly points out, Realty has no damages with respect to the Tampa
loan, and even if it did, it waived the right to bring counterclaims when it signed the
guaranty. (Doc. # 234-2 at 24-25, 35; Doc. # 252 at 15). Because Realty is not the
borrower, it cannot claim that it lost a refinancing opportunity or right to repurchase the
loan; as the guarantor, its only conceivable damages would come from having to repay the
Tampa loan. However, Realty agreed that its obligation to repay the loan was not “subject
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to any counterclaim or defense that Guarantor may have against the Lender.” Because
Realty has no damages or cognizable claim, BOA’s Motion for Summary Judgment is
granted.
F.
Damages
The Court has determined that BOA is entitled to summary judgment on its breach
of contract claim against Madison and its breach of guaranty claim against Realty. BOA
has submitted an affidavit by Senior Vice President Gretchen Hart, with supporting
business records, that establish Madison owes BOA $32,464,218.18 on the Madison loan
as of September 2, 2014. (Doc. # 232-5, Ex. C). Other than their counterclaims and
affirmative defenses, which this Court has dismissed as a matter of law, Madison and
Realty offer no argument to dispute this amount. In Realty’s Answer, they admit that the
principal owed on the Madison loan was $28,112,000 as of June 30, 2011. (Doc. # 13 at
¶ 34). The difference in what is now owed is due to interest accruing after default, which
the parties agreed upon in the promissory note. (Doc. # 232-6 at § 2.3). Thus, BOA is
entitled to a $32,464,218.18 money judgment against Madison and Realty with interest
accruing at the default rate as of September 2, 2014.
BOA claims that under the Madison loan documents, it is authorized to pay
insurance premiums, taxes, assessments, and other unpaid obligations, and then “recover
all such amounts so disbursed, with interest accruing on the unpaid balance at the Default
Rate until paid in full.” (Case No. 2:11-cv-168, Doc. # 1, Count IV). In its Motion for
Summary Judgment, BOA states that “for purposes of summary judgment only, [it] is only
seeking to recover unpaid principal and interest.” (Doc. # 232-2 at 14). BOA then reserves
the right to seek additional fees and costs “[i]n the event this Court denies [its] Motion.”
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(Id.). The Court has granted BOA’s Motion in full, and to date, BOA has not made a claim
for any of the additional expenditures referenced in Count IV. Therefore, the Court will
dismiss Count IV at this time, without prejudice.
IV.
CONCLUSION
Accordingly, for the reasons stated herein:
1.
Bank of America, N.A.’s Motions for Summary Judgment (Doc. # 232 in Case
No. 2:12-cv-23; Doc. # 234 in Case No. 2:11-cv-168) on CPX Madison Place Office, LLC’s,
CPX Olympic Building II, LLC’s, and Corporex Realty & Investment LLC’s counterclaims
and affirmative defenses are GRANTED;
2.
Bank of America, N.A.’s Motion for Summary Judgment (Doc. # 234 in Case
No. 2:11-cv-168) on its breach of contract (Count I) and foreclosure (Count II) claims
against CPX Madison Place Office, LLC is GRANTED;
3.
Bank of America, N.A.’s Motion for Summary Judgment (Doc. # 232 in Case
No. 2:12-cv-23) on its breach of guaranty claim (Count III) against Corporex Realty &
Investment, LLC is GRANTED;
4.
Bank of America, N.A.’s claim for a Judgment for Additional Expenditures
(Count IV in Case No. 2:11-cv-168) is dismissed without prejudice;
5.
A Judgment in favor of Bank of America, N.A. shall be entered concurrently
herewith.
This 12th day of June 2015.
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