SMA Portfolio Owner LLC et al v. Corporex Realty & Investment, LLC et al
Filing
84
MEMORANDUM OPINION AND ORDER; 1)Defs' Objections 70 are SUSTAINED IN PART and OVERRULED IN PART; 2)Magistrate's 65 Report and Recommendation is GRANTED IN PART and DENIED IN PART; 3)Pla's 27 Motion to Dismiss Amended Counterclaims is GRANTED IN PART and DENIED IN PART; 4)Defs' 40 Motion for Leave to File Second Amended Counterclaims is GRANTED; 5)Defs' 67 Motion to Strike is DENIED AS MOOT. Signed by Judge David L. Bunning on 6/19/2012. (LST)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON
CIVIL ACTION NO. 12-23-DLB-JGW
BANK OF AMERICA, N.A., ET AL.
VS.
PLAINTIFFS
MEMORANDUM OPINION AND ORDER
CORPOREX REALTY & INVESTMENT, LLC, ET AL.
DEFENDANTS
VS.
BANK OF AMERICA, N.A.
COUNTERCLAIM DEFENDANT
***************
Plaintiff Bank of America, N.A. (“BOA”) commenced this action to recover damages
for breach of guaranties against Defendant Corporex Realty & Investment, LLC
(“Corporex”) as guarantor of three allegedly defaulted promissory notes. Originally, in June
2011, BOA filed this action in the Cincinnati Division of the United States District Court for
the Southern District of Ohio (Doc. # 1). Corporex filed an Answer and Counterclaim
against BOA in August 2011 (Doc. # 4). Thereafter, Chief Judge Dlott granted a Motion to
Intervene as Defendants/Counterclaim Plaintiffs by two of the debtors of the allegedly
defaulted promissory notes, CPX Olympic Building, II LLC (“CPX Olympic”) and CPX
Madison Place Office, LLC (“CPX Madison”). At this same time, BOA also filed separate
foreclosure actions in this Court against CPX Madison (Civil Action No. 2:11-cv-168) and
1
CPX Olympic (Civil Action No. 2:11-cv-169).1
In October 2011, Corporex, CPX Olympic and CPX Madison (collectively,
“Defendants/Counterclaim Plaintiffs”) filed Amended Counterclaims against BOA (Doc. #
25) alleging (1) breach of the implied duty of good faith and fair dealing; (2) promissory
estoppel; (3) breach of contract; (4) breach of fiduciary duty; and (5) conversion. In
November 2011, BOA filed a Motion to Dismiss Defendants’ Amended Counterclaims (Doc.
# 27). Shortly thereafter, SMA Portfolio Owners, LLC (“SMA”), who is the assignee of two
of the allegedly defaulted promissory notes, was granted leave to be substituted as Plaintiff
for the counts pertaining to the guaranties associated with those notes (Doc. # 34). BOA
remains Plaintiff for the third guaranty agreement.
In December 2011, Defendants filed a Motion for Leave to File Second Amended
Counterclaims (Doc. # 40). Defendants seek to add a cause of action for breach of
contract due to Plaintiffs’ failure to provide Defendants the opportunity to exercise the right
of first refusal to purchase two of the promissory notes. The proposed Second Amended
Counterclaims also clarify which counterclaims are against which Plaintiff and whether as
counterclaim, affirmative defense or both. While the motion to dismiss and motion for leave
to file second amended counterclaims were being briefed, Chief Judge Dlott sua sponte
transferred the case to this Court. Thereafter, the pending motion to dismiss and motion
for leave to file second amended counterclaims were referred to the presiding Magistrate
Judge to prepare a report and recommendation with respect to those motions (Doc. # 55).
1
On March 13, 2012, the presiding Magistrate Judge ordered that these cases be consolidated with
the current case for discovery purposes only (Doc. # 63).
2
This matter is currently before the Court on the Magistrate Judge’s Report and
Recommendation (R&R) entered on March 22, 2012 (Doc. # 65), Plaintiff BOA’s Motion to
Dismiss Defendants’ Amended Counterclaims (Doc. # 27), Defendants’ Motion for Leave
to File Second Amended Counterclaims (Doc. # 40), and Defendants’ Motion to Strike
Declaration (Doc. # 67). The motion to strike was filed after the Magistrate Judge issued
his R&R and therefore was not addressed therein.
In his R&R, the Magistrate Judge recommends granting in part and denying in part
Plaintiff’s Motion to Dismiss and denying Defendants’ Motion for Leave to File Second
Amended Counterclaims. Defendants timely filed objections to the R&R (Doc. # 70), to
which Plaintiff BOA has responded (Doc. # 81). Oral argument was held on June 6, 2012
in Covington. Having considered the entire record and for the reasons set forth below,
Defendants’ Objections (Doc. # 70) are hereby sustained in part and overruled in part,
and the Magistrate Judge’s R&R (Doc. # 65) is hereby granted in part and denied in part.
I.
FACTUAL AND PROCEDURAL BACKGROUND2
In May 2003, CPX Olympic executed a promissory note in the original principal
amount of $11,000,000 in favor of LaSalle Bank, N.A. (“LaSalle”). The amount of that note
subsequently increased to $11,250,000. The maturity date for the CPX Olympic loan as
last amended in the loan documents was February 1, 2011. In October 2006, CPX
2
In their objections, Defendants claim that the Magistrate Judge ignored several factual allegations
contained in their proposed Second Amended Counterclaims. Furthermore, BOA claims that Defendants have
alleged facts in their objections that are not actually pled in their proposed Second Amended Counterclaims.
Indeed, BOA attached an exhibit to its Reply to Defendants’ Objections (Doc. # 81, at 33-35) in which it lists
factual statements contained in Defendants’ objections but not contained in the proposed Second Amended
Counterclaims. Accordingly, the Court includes a thorough recitation of the facts alleged in the proposed
Second Amended Counterclaims, which must be accepted as true at the motion to dismiss stage, and will not
rely on the statement of facts as set forth in the Magistrate Judge’s R&R. See Block v. Ribar, 156 F.3d 673,
677 (6th Cir. 1998).
3
Madison executed a promissory note in the principal amount of $33,500,000 in favor of
LaSalle. The maturity date for the CPX Madison loan as set forth in the original note was
October 31, 2011. In January 2008, CPX Tampa Gateway OPAG, LLC (“CPX Tampa”)
executed a promissory note in the original principal amount of $9,740,000 in favor of
LaSalle.3 The maturity date for the CPX Tampa loan as set forth in the original note was
February 1, 2011, subject to two one-year extension options thereafter. Corporex executed
limited guarantees in favor of LaSalle regarding each of these loans.
All three loans have been and remain “performing,” meaning that all monthly
principal and interest payments, at the non-default rates, have been and continue to be
paid. (Doc. # 40-1, at ¶ 11). Revenues generated from operations have been and continue
to be sufficient to operate the properties and to cover the debt service.
In August 2009, due to the severe economic downturn in the United States and in
light of the upcoming loan maturity and debt coverage ratio measurement dates, CPX
Madison and Corporex initiated discussions with BOA. However, BOA indicated that any
modification of the existing loan structure would require an appraisal of the property and
advised that the parties should hold off on discussions given the state of the economy and
its adverse effect on commercial real estate valuations at that time. BOA assured CPX
Madison and Corporex that it would work with them to modify and extend the loan once the
economy improved. CPX Madison and Corporex relied upon BOA’s recommendation and
promise and did not have the property appraised or further seek a loan modification or
extension at that time.
3
CPX Tampa is not a party to any of the cases pending before the Court.
4
Subsequently, in mid-2010, CPX Madison and Corporex again approached BOA to
discuss the CPX Madison loan. CPX Madison was required to meet a debt coverage
covenant as of August 31, 2010 and told BOA that it would likely not be able to meet the
test. BOA recommended having an appraisal done and, knowing that the appraisal would
likely provide a low valuation, told CPX Madison and Corporex that as long as the property
was not in excess of 100% loan to value, it would “work around” the upcoming debt
coverage test. (Id. at ¶ 31). CPX Madison relied upon BOA’s recommendation and
promise and therefore cooperated with BOA in obtaining an appraisal of the property. On
June 30, 2010, BOA obtained an appraisal that indicated the “As Is” value of the property
was $32,000,000 and the “As Stabilized” value was $41,900,000, well in excess of the
outstanding loan balance. (Id. at ¶ 33). Either way, the property was not in excess of
100% loan to value, meeting BOA’s stated requirement to “work around” the upcoming debt
coverage test. (Id.). However, just a few days before the cut-off date for the August 31,
2010 debt coverage covenant test, BOA informed CPX Madison and Corporex that,
contrary to its earlier promise, BOA would be unable to waive the coverage test and that
CPX Madison and Corporex would be expected to “right size” the loan in accordance with
the existing loan documents. (Id. at ¶ 34). According to Defendants, this was the start of
a pattern of “bad faith, commercially unreasonable conduct” by BOA. (Id. at ¶ 35).
The CPX Olympic loan had a maturity date of October 31, 2010. In light of the
impending maturity, CPX Olympic and Corporex had secured a proposal to refinance the
loan with another lender by August 2010. They informed BOA of the proposal, but BOA
told them to hold off on pursuing this refinance. BOA directed them to do so because it
was interested in the cash flow from the CPX Olympic property being available to use as
5
security in connection with contemplated extensions and modifications of the CPX Tampa
and/or CPX Madison loans, which funds were not otherwise available under the current
loan structure, and as inducement for a hedge fund to buy a portfolio of loans of which the
CPX Olympic property would be a part. To that end, BOA agreed to a 90-day extension
on the CPX Olympic loan until February 1, 2011, which was also the stated maturity date
for the CPX Tampa loan. Additionally, BOA required that any extension for the three loans
be negotiated together, even though they were three separate loans with no crosscollateralization. Relying on BOA’s promises to work with CPX Madison and Corporex to
modify and extend the CPX Madison loan and work around the debt coverage test, and in
light of BOA’s direction regarding the CPX Olympic loan, CPX Olympic and Corporex did
not further pursue a refinance of the CPX Olympic loan with a different lender.
BOA asked the borrowers and Corporex to put forth a proposal respecting
extensions for all three loans. On September 8, 2010 borrowers and Corporex provided
their first of many extension proposals to BOA. On October 25, 2010, BOA sent a letter to
CPX Madison and Corporex indicating that CPX Madison had failed to meet the debt
coverage covenant and had thirty days to post a letter of credit, deposit funds or pay down
the loan in the amount of $4.54 million. CPX Madison and Corporex then immediately
contacted BOA and were told that the letter was merely “a matter of procedure and the
Bank does intend to respond to [their] proposal.” (Id. at ¶ 43). Finally, on November 1,
2010, BOA sent borrowers and Corporex three term sheets for the three loans and
threatened that “obviously, time is of the essence given the upcoming date for the right to
cure in the default letter issued on October 25, 2010 for the [CPX Madison property].” (Id.
at ¶ 44).
6
Shortly thereafter, on November 16, 2010, CPX Olympic and Corporex again
discussed the refinancing of the CPX Olympic loan with another lender, but BOA told them
to speak instead with BOA’s work-out group because it would have “more flexibility.” (Id.
at ¶ 46). Reasonably relying on BOA’s representation regarding its flexibility and its
promise to work with them, they again did not pursue alternate financing. Then, instead
of responding to borrowers’ and Corporex’s second proposal, on December 1, 2010, BOA
delivered a default letter respecting the CPX Madison loan demanding that Corporex
immediately pay all sums due to BOA under the guaranty. Later, on March 1, 2011, BOA
delivered default notices to CPX Tampa and CPX Olympic, on the ground that the loans
were not repaid by their maturity date of February 1, 2011. Negotiations to extend the loan
maturity dates continued until June 2011 when BOA proposed significant new terms that
materially altered what the parties had agreed to previously, and the parties failed to reach
an agreement regarding the extensions of the loans.
According to Defendants, BOA engaged in a “pattern of bad faith conduct” in which
it would “first agree to certain terms, thereby inducing [Defendants] to make additional
concessions, and then would sit on [Defendants’] response, responding thereafter stating
that [BOA] would accept [Defendants’] concession, but in the end would not honor the
terms [BOA] had earlier stated it would agree to.” (Id. at ¶ 13). Finally, BOA agreed to
extensions of the three loans as outlined in terms sheets drafted by BOA, “but then
reneged on that agreement when [Defendants] would not agree to new terms injected into
the documents by [BOA] at an arbitrarily contrived eleventh hour ... .” (Id.).
Defendants claim that BOA never intended to extend the loans, but instead “acted
to keep the existing, imminent maturity dates in order to position the loans for sale to a
7
buyer who would likely then push to wrest the properties from the Borrowers.” (Id. at ¶ 35).
Indeed, after may promises to modify and extend the loans, BOA ultimately refused to
execute agreements to that effect and have since offered all three loans for sale as part of
a portfolio of loans and have sold two of the loans to a hedge fund.
According to Defendants, BOA has disclosed CPX Madison and CPX Olympic’s
confidential leasing information. Pursuant to the loan documents, the borrowers and
Corporex provided BOA with confidential leasing information respecting the lease terms
with tenants in the CPX Olympic and CPX Madison properties. The leasing information
provided to BOA was not information that was generally available to the public but was
proprietary and confidential in nature.
After negotiations ceased, BOA initiated this action on June 30, 2011. On or about
September 27, 2011 BOA assigned the CPX Tampa promissory note, and all other
documents and instruments evidencing, securing or otherwise relating to the loan, to SMA.
(Doc. # 31, at 2). On or about September 29, 2011, BOA assigned the CPX Olympic
promissory note, and all other documents and instruments evidencing, securing or
otherwise relating to the loan, to SMA. (Id.).
II.
A.
ANALYSIS
Standard of Review
Objections to a magistrate judge’s report and recommendation are reviewed de
novo. 28 U.S.C. § 636(b)(1). The district court judge may “accept, reject, or modify, in
whole or in part, the findings or recommendations made by the magistrate judge.” Id. In
the instant action, Defendants object to the Magistrate Judge’s recommendation that
Counts I-IV of Defendants’ Amended Counterclaims be dismissed and that Defendants’
8
motion for leave to amend be denied.4 The Court will address each objection in turn.
One initial matter deserves brief comment. In his R&R, the Magistrate Judge found
that no material difference existed between Kentucky and Ohio law regarding the issues
before the Court. Therefore, he did not conduct a further choice of law analysis and cited
applicable law from both states. At oral argument, the Court inquired whether the parties
had any objections to the Magistrate Judge’s finding in this respect. Counsel agreed that
there is no material difference between Kentucky and Ohio law and did not object to the
consideration of the laws of both states in adjudicating the pending motions.
B.
The Releases
The Magistrate Judge recommends that Counts I and II (breach of covenant of good
faith and fair dealing and promissory estoppel) of Defendants’ Counterclaims be dismissed
because they are barred by written releases entered into during the negotiation of
extensions or modifications of the promissory notes. In pertinent part, each release
provides:
Each party hereto hereby completely, irrevocably and unconditionally
releases and forever discharges 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. # 28-10, at 3, 8, 12). Loan Communications are defined in the releases as “[a]ny
discussions, negotiations, correspondence and other communications relating to the Loan
and the Loan Documents that Borrower, Guarantor and/or their representatives may have
4
The Magistrate Judge also recommends that Plaintiff’s motion to dismiss be denied with respect to
Defendants’ conversion claim (Count V). At oral argument, counsel indicated that the parties have reached
a settlement agreement regarding the conversion claim. Accordingly, the Court need not address Count V
as the parties have settled that Count.
9
previously had, or in the future may have, with representatives of Lender ... .” (Id. at 3, 7-8,
11-12). Despite being referred to as releases by BOA, the “releases” are actually letters
from BOA to William S. Butler, CEO of CPX Madison/President of CPX Tampa/President
of CPX Olympic/Chairman and CEO of Corporex. (Id.). Butler signed all three letters on
behalf of the CPX entities and Corporex but no representative of BOA signed the letters
regarding the CPX Tampa and CPX Olympic loans. Following oral argument before the
Magistrate Judge, counsel for BOA submitted a declaration and provided copies of the CPX
Tampa and CPX Olympic releases signed by a representative of the bank.5 (Doc. # 64).
Defendants argue that the releases should not be considered at the motion to dismiss
stage because they were not referenced in Defendants’ Counterclaims or central to their
claims.
Assessment of the facial sufficiency of the complaint must ordinarily be undertaken
without resort to matters outside the pleadings. Wysocki v. Int’l Bus. Mach. Corp., 607 F.3d
1102, 1104 (6th Cir. 2010). When resolving a motion to dismiss, then, a district court is
limited to matters formally contained in the pleadings. However, “[i]f referred to in a
complaint and central to the claim, documents attached to a motion to dismiss form part
of the pleadings.” Armengau v. Cline, 7 F. App’x 336, 344 (6th Cir. 2001) (quoting Jackson
v. City of Columbus, 194 F.3d 737, 745 (6th Cir. 1999)); see also Rondigo, L.L.C. v. Twp.
of Richmond, 641 F.3d 673, 681 (6th Cir. 2011) (quoting Bassett v. Nat’l Collegiate Athletic
Ass’n, 528 F.3d 426, 430 (6th Cir. 2008)) (A court may consider “exhibits [attached to the
complaint], public records, items appearing in the record of the case and exhibits attached
5
Defendants have filed a Motion to Strike (Doc. # 67) counsel’s declaration which is currently pending
before the Court.
10
to defendant’s motion to dismiss so long as they are referred to in the complaint and are
central to the claims contained therein.”).
Despite the general rule that documents outside or not referred to in the pleadings
may not be considered in a motion to dismiss unless referred to in the complaint and
central to the claims therein, the Magistrate Judge considered the releases concluding that
“[w]here the plaintiff fails to introduce a pertinent document as part of his pleading,
defendant may introduce the exhibit as part of his motion attacking the pleading.” (Doc. #
65, at 8) (quoting Superior Care Pharmacy Inc. v. Medicine Shoppe Int’l, Inc., No. 2:10-cv207, 2011 WL 597065, at *12 (S.D. Ohio Feb. 10, 2011)). However, any reliance on this
case is misplaced because it is factually distinguishable from the current case before the
Court.
In Superior Care, the court determined that it could consider a release in
adjudicating a motion to dismiss because the amended complaint specifically referenced
the release, and the plaintiff sought rescission of the release as part of the relief sought.
2011 WL 597065, at *12.
The R&R also relied on a Second Circuit case, Yak v. Bank Brussels Lambert, 252
F.3d 127 (2d Cir. 2001), which held that a district court could consider a document when
ruling on a motion to dismiss if the document was “integral” to the complaint and plaintiff
had notice of it, even though plaintiff “[c]arefully avoid[ed] all mention” of the document. 252
F.3d at 130-31. The R&R concluded that the releases were “integral” to the counterclaims
because they are “directly relevant” to the resolution of the counterclaims. (Doc. # 65, at
8). Defendants contend that the R&R misinterpreted the holding in Yak to not only allow
consideration of documents integral to a plaintiff’s complaint (or, in this case, Defendants’
11
counterclaims) but also documents integral to a party’s defenses to the complaint (or, in
this case, counterclaims).
Shortly after the Yak decision, the Second Circuit clarified its rule regarding when
documents not incorporated by reference may be considered in adjudicating a motion to
dismiss. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002). “Because this
standard has been misinterpreted on occasion,” the court reiterated that “a plaintiff’s
reliance on the terms and effect of a document in drafting the complaint is a necessary
prerequisite to the court’s consideration of the document on a dismissal motion; mere
notice or possession is not enough.” Id. (emphasis in the original); see also Maloney v.
CSX Transp., Inc., No. 1:09-cv-1074, 2010 WL 681332, at *3 (N.D.N.Y. Feb. 24, 2010)
(finding that releases could not be considered on a motion to dismiss when the complaint
is devoid of any reliance on them). The Court emphasized that a document is “integral” to
the complaint when the complaint “relies heavily upon its terms and effect.” Id. (quoting Int’l
Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995).
Recently, in Mediacom Southeast LLC v. BellSouth Telecommunications, Inc., 672
F.3d 396, 400 (6th Cir. 2012), the Sixth Circuit cited Chambers with approval and
recognized that documents not attached or incorporated by reference in the complaint may
be considered where the documents are integral to the complaint. 672 F.3d at 400.
However, given that the complaint (or, in this case, counterclaims) must rely upon the terms
and effect of a document in order for it to be “integral” and thus appropriate to consider on
a motion to dismiss, the Magistrate Judge’s conclusion that the releases were “directly
relevant” to the resolution of the counterclaims failed to meet this standard. As Defendants
argue, the Counterclaims do not refer to the releases, and Defendants did not rely upon the
12
releases in drafting their claims. The releases are only central to BOA’s defenses to the
Counterclaims.
BOA argues that other courts have found that a release is “integral” to a party’s
claim, because, where claims have been released, the existence of the release bears on
the party’s ability to maintain the action. In support of this proposition, BOA cites Willis
Corroon Corp. of Utah, Inc. v. United Capitol Ins. Co., No. 97-2208, 1998 WL 30069, at *3
(N.D. Cal. Jan. 5, 1998). In Willis Corroon, the court found that a settlement agreement not
attached to the complaint could be considered in deciding a motion to dismiss. 1998 WL
30069, at *3. While the court determined that the settlement agreement was clearly
“central to [plaintiff’s] ability to bring [the] action since the agreement is a binding contract
which allegedly limits the parties’ right to sue,” it concluded that the settlement agreement
may be considered because plaintiff referred to and relied upon the agreement in the
complaint. Id. Since Defendants have not referred to or relied upon the releases in their
Counterclaims, BOA’s reliance on this case is misplaced.
BOA also relies on Weiner v. Klais & Co., 108 F.3d 86 (6th Cir. 1997) for the
proposition that it may introduce certain documents even if Defendants failed to reference
them in the Counterclaims. In Weiner, an ERISA case, the court found that certain group
health plan documents, under which plaintiff was claiming benefits, could be considered on
a motion to dismiss even though plaintiff did not attach the documents to her complaint.
108 F.3d at 89. The court determined that the plan documents were incorporated through
plaintiff’s reference to “the plan” and were central to her claim that she was entitled to
recover benefits under the plan. Id. Once again this case is factually distinguishable from
the present case. In Weiner, the plaintiff specifically referred to the plan in her complaint
13
and relied upon the plan in forming her claims. As stated above, in the instant case,
Defendants never reference the releases or rely upon any terms contained therein to
formulate their claims.
Therefore, the Court finds that it may not consider the releases that BOA attached
to its motion to dismiss, and it was inappropriate for the Magistrate Judge to do so.6
Defendants’ objections are sustained, and the R&R is overruled in part. Given the Court’s
ruling on this matter, it need not determine whether the Magistrate Judge’s consideration
of BOA’s counsel’s declaration and submission of the fully executed releases (Doc. # 64)
was proper. Consequently, Defendants’ Motion to Strike (Doc. # 67) BOA’s counsel’s
declaration is denied as moot.
C.
Breach of the Implied Duty of Good Faith and Fair Dealing
The Magistrate Judge viewed Defendants’ breach of the implied duty of good faith
and fair dealing counterclaim as one accusing BOA of “inserting deal-breaking clauses into
the loan reworking negotiations at the eleventh hour.” (Doc. # 65, at 10). In addition to
being barred by the releases, the Magistrate Judge found that the covenant cannot be
invoked to defeat a party’s contractual rights. Since BOA acted in accordance with its
contractual rights by seeking to foreclose on the properties and recover on the guaranties,
the mere fact that BOA proposed terms to rework the loans which were not agreeable to
Defendants does not give rise to a claim for breach of the covenant of good faith and fair
6
Furthermore, despite the fact that the R&R stated that Defendants do not dispute the veracity or
applicability of the releases to their claims, Defendants, on more than one occasion, have raised issues with
the validity and enforceability of the releases, specifically that the releases were obtained through bad faith
and misrepresentations. See (Docs. # 60, at 8; # 66, at 52-29). At the very least, Defendants should be
afforded an opportunity to take discovery and present evidence concerning the validity and enforceability of
the releases.
14
dealing. Therefore, he recommends dismissal of this claim.
Defendants contend that the Report erroneously ignored Defendants’ factual
allegations of BOA’s bad faith conduct. Defendants argue that this is not simply a case of
failed negotiations. Rather, BOA strung Defendants along with false promises in order to
get the loans in default and sell them as part of a larger portfolio of loans, free and clear of
Defendants’ rights of first refusal. Defendants also claim that the Magistrate Judge
improperly weighed the factual allegations of BOA’s bad faith. Specifically, they take issue
with the R&R’s conclusions that (1) Defendants offered nothing to “buttress” the allegation
that BOA had decided months before the loans matured that it wanted them to be in
maturity default so it could sell them to a third-party free of the rights of first refusal; and (2)
the factual history alleged by Defendants was “illogical.” Additionally, Defendants argue
that the R&R indulged in inappropriate factual speculations, because the Court is required
to accept the factual allegations as true when deciding a motion to dismiss. Finally,
Defendants assert that the R&R ignored standard law that a material breach by one party
excuses performance by the other party.
Every contract contains an implied covenant of good faith and fair dealing and thus
“impose[s] on the parties thereto a duty to do everything necessary to carry [out the
contract].” de Jong v. Leitchfield Deposit Bank, 254 S.W.3d 817, 823 (Ky. Ct. App. 2007)
(quoting Farmers Bank & Trust Co. v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky.
2005)); see also Littlejohn v. Parrish, 839 N.E.2d 49, 54 (Ohio Ct. App. 2005) (concluding
that public policy dictates that every contract contain an implied duty for the parties to act
in good faith and to deal fairly with each other, which requires not only honesty but also
reasonableness in the enforcement of the contract). However, “[a]n implied covenant of
15
good faith and fair dealing does not prevent a party from exercising its contractual rights.”
de Jong, 254 S.W.3d at 823 (quoting Farmers Bank & Trust Co., 171 S.W.3d at 11); see
also Panagouleas Interiors, Inc. v. Silent Partner Group, Inc., No. 18864, 2002 WL 441409,
at *7 (Ohio Ct. App. Mar. 22, 2002) (lender did not act in bad faith by exercising contractual
rights following a default, despite the pendency of negotiations for a refinance).
As the Restatement Second of Contracts states, “[g]ood faith performance or
enforcement of a contract emphasizes faithfulness to an agreed common purpose and
consistency with the justified expectations of the other party.” Littlejohn, 839 N.E.2d at 54
(quoting Restatement (Second) of Contracts, § 205 cmt. a (1981)). It also states that bad
faith may consist of inaction, or may be the “abuse of power to specify terms, [or]
interference with or failure to cooperate in the other party’s performance.” Id. (quoting
Restatement (Second) of Contracts, § 205 cmt. d).
In the present case, Defendants allege that, as of August 2010, BOA never intended
to modify or extend the loans but engaged Defendants in negotiation discussions in order
to get the loans past their maturity deadlines so they could position the loans for sale to a
hedge fund. Thus, Defendants allege a pattern of intentional dishonesty on the part of BOA
that interfered with their ability to perform the contract. According to Defendants, had they
been able to refinance with another lender, they would have never defaulted on the notes.
Moreover, BOA’s alleged dishonesty prohibited Defendants from exercising their
contractual right of first refusal to buy the notes at a substantial discount. These facts are
sufficient to support a claim for a breach of the implied duty of good faith and fair dealing
at the motion to dismiss stage.
16
Plaintiff argues that even if it acted in bad faith, Defendants claim must fail because
BOA had the contractual right to foreclose on the properties. However, even if a contract
expressly permits a course of conduct, a party may still breach the implied duty of good
faith and fair dealing if it acts dishonestly or unreasonably in carrying out the contract. See
Littlejohn, 839 N.E.2d at 54-55. If BOA’s alleged dishonesty precluded Defendants from
carrying out their obligations under the contract or exercising their right of first refusal, BOA
could still be liable for a breach despite their right to foreclose on the properties.
One final matter deserves brief comment. At various times throughout its briefing
and at oral argument, Defendants appear to argue that they have not defaulted on the
promissory notes and/or guaranties because a material breach by BOA excuses any
performance on their part. Indeed, the Second Amended Counterclaims state that due to
its bad faith conduct, BOA and its successors are estopped from claiming that the notes
were in default at the time BOA transferred its interests in the notes to SMA. The Court
acknowledges this argument only to note that any determination is premature at this time.
Before the Court addresses this matter, Defendants must prove that BOA did breach the
contracts at issue. Accordingly, this issue will be taken up on summary judgment motions
if necessary.
D.
Promissory Estoppel
In addition to being barred by the releases, the Magistrate Judge recommends
dismissal of Defendants’ promissory estoppel claim because the Counterclaims contain no
factual allegation or specification as to what the alleged reliance damages would be.
Moreover, the Magistrate Judge noted that the promissory notes, guaranties and releases
generally provide that their terms may only be modified in writing and/or that no party may
17
be deemed to have waived any of its contractual rights unless it does so in writing. Given
the clear language of the contracts, and the fact that Defendants and BOA are
sophisticated commercial entities, the Magistrate Judge concluded that Defendants’
reliance upon any alleged oral promises by the Bank should be deemed unreasonable as
a matter of law.
Defendants argue that they set forth very specific allegations of damage they
suffered due to the BOA’s bad faith and their detrimental reliance upon BOA’s promises.
Specifically, in their Amended Counterclaims, Defendants allege:
[L]oss of value on the assets owned by [CPX Madison, CPX Olympic and
CPX Tampa]; loss of opportunity with tenants and potential tenants;
expenses to defend against [BOA’s] bad faith claims; loss of refinancing
opportunities; lost profits; lost cash; loss of income from tenants; and injury
to business reputation. [CPX Olympic] in particular has been forced, due to
[BOA’s] wrongful actions, to make lease concessions to its largest tenant,
which included a reduction of the existing rent obligation by $744,893 and an
increase of owner provided tenant improvement allowance of $317,000.
(Doc. #25, at ¶ 78). Although Defendants allege these damages under Count I (breach of
covenant of good faith and fair dealing), they expressly incorporate this allegation in Count
II (promissory estoppel). Defendants’ argument is well-taken. Given the specific damages
alleged in the Counterclaims, Defendants have adequately pled reliance damages
regarding their promissory estoppel claim.
Defendants also contend that the Magistrate Judge erred in finding that Defendants’
reliance on the alleged oral promises by BOA is unreasonable as a matter of law because,
as a general rule, no-oral-modification clauses are disfavored in the law.7
7
Thus,
BOA asserts that Defendants are precluded from raising this argument because it was never raised
before the Magistrate Judge. However, the Court need not address this issue because Defendants’ argument
is immaterial to the Court’s adjudication of this issue.
18
Defendants assert that BOA should not be allowed to “hide” behind the no-oral-modification
clauses in the loan documents and guaranties to protect them from their bad faith conduct.
There are ample allegations that BOA, through its conduct, promises and representations,
induced Defendants to forego other financing opportunities to continue negotiating with
BOA resulting in their being hoodwinked out of their very valuable rights of first refusal.
Moreover, Defendants are not seeking to enforce the proposed refinance term sheets that
were exchanged by BOA and Defendants during work-out negotiations.
Instead,
Defendants’ promissory estoppel claim is based upon BOA’s promises and representations
to Defendants to negotiate in good faith, to work around debt coverage ratios and to be
flexible in extending the loans and refinancing.
Promissory estoppel is not a contractual theory but a quasi-contractual or an
equitable doctrine designed to prevent damage resulting from reasonable and detrimental
reliance upon false representations. Karnes v. Doctors Hosp., 555 N.E.2d 280, 283 (Ohio
1990). The elements necessary to establish a claim for promissory estoppel are: (1) a
promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise
is made; (3) the reliance must be reasonable and foreseeable; and (4) the party claiming
estoppel must be injured by the reliance. Stull v. Combustion Engineering, Inc., 595 N.E.2d
504, 507 (Ohio 1991).
The R&R alternatively concluded that Defendants’ claim should be dismissed
because any reliance by Defendants was unreasonable as a matter of law. Although the
reasonableness of the reliance is typically a factual issue for the jury, “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,
19
2008 WL 5159930, at *4 (Ohio Ct. App. Dec. 9, 2009) (citations and internal quotations
omitted). For example, the Ohio Court of Appeals has found that “[r]eliance on a statement
of future intent made prior to the conclusion of negotiations in a complex business
transaction is unreasonable as a mater of law. Such a rule is particularly appropriate when
two sophisticated business entities are involved in negotiations.” Carcorp, Inc. v. Chesrown
Oldsmobile-GMC Truck, Inc., No. 06AP-329, 2007 WL 259248, at *4 (Ohio Ct. App. Jan.
30, 2007) (citations omitted). Moreover, it is well-settled under Ohio law that courts will
give effect to the manifest intent of the parties where the evidence clearly proves that they
did not intend an agreement to bind them until the agreement is memorialized in a written
document signed by both parties. Id. (citing Richard A. Berjian, D.O., Inc. v. Ohio Bell Tel.
Co., 375 N.E.2d 410, 413 (Ohio 1978)).
BOA cites Mansfield Square, Ltd. v. Big Lots, Inc., 2008 WL 5159930 (Ohio Ct. App.
Dec. 9, 2008) for the proposition that any reliance by Defendants was unreasonable
because the loan documents did not permit oral modifications. However, this case is not
applicable to the present case because Defendants are not seeking to enforce the term
sheets of the modification/extension negotiations. Defendants agree that those terms are
not binding because they were not signed by both parties. To the contrary, Defendants
seek to enforce BOA’s promise to negotiate. Defendants allege that BOA promised to
negotiate in good faith an extension or modification of the loan agreements and directed
them to forego refinancing with another lender. In reliance on BOA’s promise, Defendants
did not pursue refinancing with another lender. As stated above, refinancing with another
lender would have allegedly allowed Defendants to carry out their obligations of the
contract.
The promissory notes did not address loan extension or modification
20
negotiations, besides to say that any extension or modification must be in writing and
signed by all parties.
Therefore, an oral agreement to negotiate did not expressly
contradict any terms of the promissory notes, and it was not per se unreasonable for
Defendants to rely on BOA’s promise to negotiate in good faith. Consequently, Defendants’
objections regarding Count II are sustained, and the R&R is overruled in part. Plaintiff’s
motion to dismiss is denied in this respect, as Defendants have adequately pled a claim for
promissory estoppel.
E.
Breach of Contract–Disclosure of Confidential Information
The Magistrate Judge recommends that Defendants’ Count III (Breach of Contract)
should be dismissed as having been inadequately plead. Count III alleged that BOA
breached its contractual obligations to CPX Olympic and CPX Madison “by providing their
confidential leasing information to third-party businesses in the Tri-State area.” (Doc. # 25,
at ¶ 84). Moreover, Defendants claimed that CPX Olympic and CPX Madison “have been
harmed by BOA’s inappropriate disclosures and are entitled to damages in an amount
which shall be proven at trial.” (Id.). The Magistrate Judge concluded that this Count “is
the sort of conclusory, ‘unadorned, the-defendant-unlawfully-harmed-me accusation’ which
the Supreme Court held insufficient in Ashcroft.” (Doc. # 65, at 13) (quoting Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009)). Additionally, the Magistrate Judge found that the
damages claim was also fatally conclusory.
Defendants argue that the R&R ignores facts actually alleged by the Defendants in
their Amended Counterclaims, namely: (1) Per the loan documents, BOA had a duty not
to share the Defendants’ confidential leasing information, except only with potential buyers
of the debt; (2) That leasing information was proprietary and confidential and not generally
21
available to the public; (3) BOA disclosed this confidential leasing information not just to
potential third-party purchasers of the loan, but to third-party real estate brokers in the TriState area; and (4) The exposure of this information to the public would result in significant
economic harm to Defendants. Defendants assert that the reason for such harm, implied
in the pleadings, is that third-party brokers in the Tri-State area are often negotiating with
Defendants on behalf of prospective tenants. Thus, the disclosure of existing confidential
lease terms gives those brokers an unfair competitive advantage against Defendants,
which is a concrete harm and sufficient to state a claim.
In their response to BOA’s motion to dismiss, Defendants allege that BOA’s
disclosure of confidential leasing information respecting the lease terms with the tenants
in the CPX Olympic and CPX Madison properties was in breach of Section 8.9 of the
promissory notes. Section 8.9 provides: “Borrower acknowledges and agrees that Lender
may share information about the Borrower, in a commercially appropriate manner, with any
of its subsidiaries or affiliates or their successors or any purchasers or potential purchasers
of the Note evidencing the Loan.” (Doc. # 1-1, at 14). Thus, Section 8.9 allows BOA to
share information about the Borrower with any potential purchasers of a note, if it is done
in a commercially appropriate manner. However, Section 8.9 does not prohibit BOA from
disclosing confidential leasing information to third-party brokers. Defendants’ assertion
that, per Section 8.9, BOA had a duty not to share Defendants’ confidential leasing
information, except with potential buyers of the debt, is therefore incorrect. That provision
simply does not address BOA’s duties concerning disclosure of the leasing information.
Defendants have not identified any other provision contained in the loan documents that
actually prohibits the disclosure of confidential leasing information respecting the lease
22
terms with the tenants in the CPX Olympic and CPX Madison properties.8 Accordingly,
Defendants have failed to plead a breach of any contractual obligation, and Count III is
dismissed.
However, even if Defendants adequately alleged a breach of contract, Defendants
failed to adequately plead damages as a result of the breach. Defendants claim that the
exposure of the confidential leasing information to the public “would result in significant
economic harm” to the borrowers and Corporex and that CPX Olympic and CPX Madison
were in fact “harmed” by BOA’s in appropriate disclosures. (Doc. # 25, at ¶¶ 72, 85). In
their objections, Defendants state that the reason for such harm is “implied” in their
pleadings, namely that the disclosure gives the third-party brokers “an unfair competitive
advantage against Defendants.” (Doc. # 70, at 30). Moreover, Defendants assert that they
are not required at the motion to dismiss stage to state the dollar amount of the harm
caused by BOA’s disclosure.
Despite Defendants’ later explanation of alleged damages in their objections, the
amended counterclaims do not specify the harm they allegedly suffered as a result of
BOA’s disclosure of confidential leasing information. As stated above, federal pleading
standards require more than “an unadorned, the defendant-unlawfully-harmed-me
accusation.” Ashcroft, 556 U.S. at 678. Defendants cannot merely plead facts from which
damages may be implied, but rather Defendants are required to identify what those
damages actually are.
“Merely claiming to have suffered damages, without more,
8
Indeed, Defendants’ objections make clear that they are not claiming a breach of Section 8.9, but
some other unidentified or extra-contractual duty. Defendants argue that whether the alleged disclosure was
commercially appropriate or not is irrelevant because the information was disclosed to third-party brokers, not
the potential note purchasers referenced in Section 8.9. As BOA asserts, this argument is self-defeating
because Section 8.9 only addresses disclosures to potential note purchasers.
23
epitomizes conclusory pleading” and is insufficient. Eichholz v. Wells Fargo Bank, N.A.,
No. 10-cv-13622, 2011 WL 5375375, at *5 (E.D. Mich. Nov. 7, 2011). Furthermore, even
if the Court considered Defendants’ implied damages, i.e., the disclosure gives third-party
brokers’ an unfair competitive advantage against Defendants, that allegation is also
insufficient because it fails to constitute an actual harm until a party has taken advantage
of the confidential information to Defendants’ detriment. Nowhere in their Counterclaims
have Defendants alleged that any third-party brokers actually used this information against
them. Consequently, Defendants’ objections to Count III are overruled, and this claim is
dismissed.
F.
Breach of Fiduciary Duty
The Magistrate Judge recommends that Defendants’ claim for breach of fiduciary
duty should be dismissed because, under Kentucky and Ohio law, the relationship between
a bank and a customer or a creditor and a debtor generally does not create a fiduciary duty.
Moreover, the Magistrate Judge found that Defendants have not alleged “with any degree
of specificity whatsoever” how the relationship between BOA and borrowers or BOA and
Corporex is so extraordinary as to constitute a special relationship sufficient to create a
fiduciary duty on behalf of BOA.
Defendants assert that the Report again ignored the specific factual allegations in
the counterclaims supporting Defendants’ claim for breach of fiduciary duty arising from
BOA’s disclosure of confidential leasing information provided by Defendants under the loan
documents. Defendants claim that the information was provided by the borrowers so that
BOA could monitor its collateral, with the understanding that it would be used solely for that
purpose. Additionally, Defendants cite two Kentucky cases for the proposition that the
24
disclosure of the leasing information to Defendants’ competitors constituted a breach of
fiduciary duty under Kentucky law. Defendants arguments are unpersuasive.
A fiduciary duty is defined as “a special confidence reposed in one who in equity and
good conscience is bound to act in good faith and with due regard to the interests of the
one reposing confidence.” Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476,
485 (Ky. 1991) (quoting Security Trust Co. v. Wilson, 210 S.W.2d 336 (Ky. 1948)); see also
Groob v. KeyBank, 843 N.E.2d 1170, 1173 (Ohio 2006) (quoting In re Termination of Emp.
of Pratt, 321 N.E.2d 603, 609 (Ohio 1974) (A fiduciary duty is defined as a relationship “in
which special confidence and trust is reposed in the integrity and fidelity of another and
there is a resulting position of superiority or influence, acquired by virtue of this special
trust.”)). As a general rule, banks do not owe a fiduciary duty to their customers or debtors.
Steelvest, Inc., 807 S.W.2d at 485; Groob, 843 N.E.2d at 1173.9 A fiduciary duty is “the
highest order of duty imposed by law.” In re Sallee v. Fort Knox Nat’l Bank, N.A., 286 F.3D
878, 891 (6th Cir. 2002). “In an arms-length commercial transaction, where each party is
assumed to be protecting its own interest, no such duty arises.” Snow Pallet, Inc. v.
Monticello Banking Co., --- S.W.3d ----, 2012 WL 1370878, at *4 (Ky. Ct. App. Apr. 20,
2012) (citing In re Sallee, 286 F.3d at 894).
In 2002, the Sixth Circuit noted that there were only two published cases in Kentucky
where courts have found a fiduciary relationship to exist between a bank and a borrower:
Steelvest Inc. v. Scansteel and Henkin, Inc. v. Berea Bank & Trust Co. In re Sallee v. Fort
Knox Nat’l Bank, N.A., 286 F.3D 878, 893 (6th Cir. 2002) (citing Steelvest, Inc., 807 S.W.2d
9
In addition, Ohio Revised Code 1109.15(E) expressly provides that unless otherwise agreed in
writing, the relationship between a bank and a debtor does not create a fiduciary relationship.
25
476 and Henkin, Inc. v. Berea Bank & Trust Co., 566 S.W.2d 420 (Ky. Ct. App. 1978)). It
is upon these two cases that Defendants rely.
In analyzing these two cases, the Sixth Circuit emphasized that, in both cases, the
bank profited at the borrower’s expense from confidential information received from the
borrower. Id. at 893. In Steelvest, the bank utilized the borrower’s confidential business
plans to assist one of the borrower’s competitors generate new business for the bank. Id.
(citing Steelvest, Inc., 807 S.W.2d at 485-86). Likewise, in Henkin, the borrower disclosed
confidential information to the bank for the sole purpose of obtaining a loan to pay off a
promissory note. Henkin, 566 S.W2d at 422. The bank immediately used that information
for its own benefit by purchasing the borrower’s note at a discount from the original lender.
Id. Even more egregious, when the borrower was a few days late on its first payment to
the bank, it accelerated all future payments and commenced foreclosure proceedings. Id.
The Sixth Circuit noted that “[f]iduciary relationships arise when circumstances and the
relationship of the parties show the parties understood and agree that confidence is
reposed by one party and trust accepted by the other ... [and] must evidence circumstances
showing both parties agreed that one party would be acting in the interest of the other.” In
re Sallee, 286 F.3d at 893.
In the present case, Defendants fail to allege any facts supporting the existence of
a special relationship between BOA and the borrowers/guarantor that would create a
fiduciary duty on behalf of the bank. Although Defendants claim in their objections that the
leasing information was provided by the borrowers so that BOA could monitor its collateral,
with the understanding that it would be used solely for that purpose, these facts were never
alleged in the amended counterclaims. Moreover, “[a] bank’s committing to keep a
26
customer’s information confidential does not create an obligation to act only in its
customer’s best interest, even to its own detriment, which is what a fiduciary relationship
requires.” Groob, 843 N.E.2d at 1175. As stated above, a bank does not owe a fiduciary
duty to a borrower unless the parties agree to a special repose or trust. In re Sallee, 286
F.3d at 893; Groob, 843 N.E.2d at 1175.
Defendants also fail to allege that BOA benefitted from the alleged disclosure of
confidential leasing information to third-party brokers. In a very recent case, the Kentucky
Court of Appeals agreed with the Sixth Circuit’s interpretation of Kentucky case law and
found that where the borrower has not alleged that the bank profited from any confidence
it gained through the borrower, a fiduciary duty did not exist on behalf of the bank. See
Snow Pallet, Inc., 2012 WL 1370878, at *3-4. Accordingly, Defendants objections are
overruled, and their breach of fiduciary duty claim is dismissed.
G.
Motion for Leave to Amend
After BOA filed its motion to dismiss Defendants’ Amended Counterclaims,
Defendants filed a Motion for Leave to File Second Amended Counterclaims (Doc. # 40)
pursuant to Rule 15(a). In their motion, Defendants seek to add a cause of action for
breach of contract due to Plaintiffs’ failure to provide Defendants the opportunity to exercise
the right of first refusal to purchase the CPX Olympic and CPX Tampa promissory notes.
The proposed Second Amended Counterclaims also clarifies which counterclaims are
against which Plaintiff and whether as counterclaim, affirmative defense or both. Section
8.9 of the relevant promissory notes, provides in relevant part:
[BOA] agrees that in the event that it determines to assign or sell the Note ...
to any person or entity not affiliated with [BOA], [BOA] shall, provided
Borrower is not then in default under this Note or any of the other Loan
27
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 .
(Doc. # 1-1, at 14, 53) (emphasis added).
The Magistrate Judge recommends that Defendants’ Motion for Leave to File
Second Amended Counterclaims be denied because the proposed additional claim is also
subject to dismissal. First, the Magistrate Judge noted that although CPX Tampa is not a
party to this case, Defendants seek to recover damages from BOA and SMA based upon
their failure to comply with the right of first refusal clause as it pertains to both CPX Olympic
and CPX Tampa. Defendants have failed to show why they should be permitted to raise
a breach of contract claim on behalf of a non-party. Additionally, the Magistrate Judge
concluded that at the time BOA determined to sell the notes, i.e., when it came to terms
with a purchaser–in this case, September 2011–, CPX Tampa and CPX Olympic were
already in default as they failed to repay the notes on their maturity deadlines of February
1, 2011. Therefore, he determined that the Defendants were not entitled to exercise their
rights of first refusal.
Defendants argue that the R&R misconstrued the right of first refusal clause when
it concluded that “a sale can only be consummated once all parties agree to all material
terms, so the Bank could only really have determined to sell the note once it came to terms
with a purchaser.” (Doc. # 65, at 21 n.11). Defendants claim that this is directly contrary
to the specific language of the provision, according to which borrowers must exercise their
right of first refusal “within thirty (30) days of the date Lender provides Borrower with written
notice of the terms and conditions of a proposed assignment or sale.” (Doc. # 70, at 19-20)
28
(emphasis added). Defendants contend that the only reasonable reading of the entire right
of first refusal clause is that: (1) the borrowers’ rights to buy the loans arose at the time
BOA determined to sell the loans, i.e., made the decision that it was going to sell the loans;
and (2) the borrowers were then allowed to exercise that right within thirty days after formal
notice from BOA of the terms and conditions BOA had proposed for such a sale. Thus,
both trigger the right of first refusal–the determination by BOA to sell the loan and within
thirty days of BOA’s notice of terms and conditions of a proposed sale. Defendants claim
that they have set forth factual allegations that, as of August 2010, BOA had determined
to sell the loans when none of the three loans were in default and therefore were entitled
to their rights of first refusal at that time, despite the fact that they could not exercise that
right until BOA provided them with written notice of the terms and conditions of a proposed
sale.
1.
Standard of Review
Federal Rule of Civil Procedure 15(a)(2) requires courts to “freely give leave when
justice so requires.” “Nevertheless, leave to amend ‘should be denied if the amendment
is brought in bad faith, for dilatory purposes, results in undue delay or prejudice to the
opposing party, or would be futile.’” Carson v. United States Office of Special Counsel, 633
F.3d 487, 495 (6th Cir. 2011) (quoting Crawford v. Roane, 53 F.3d 750, 753 (6th Cir.
1995)). “A proposed amendment is futile if the amendment could not withstand a Rule
12(b)(6) motion to dismiss.” Riverview Health Institute LLC v. Medical Mutual of Ohio, 601
F.3d 505, 512 (6th Cir. 2010) (quoting Rose v. Hartford Underwriters Ins. Co., 203 F.3d
417, 420 (6th Cir. 2000)).
29
Federal Rule of Civil Procedure 8(a) requires only a “short and plain statement of
the claim showing that the pleader is entitled to relief,” in order to “give the defendant fair
notice of what the...claim is and the grounds upon which it rests.” Erickson v. Pardus, 551
U.S. 89, 93 (2007) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In
reviewing a Rule 12(b)(6) motion to dismiss, this Court “must construe the complaint in a
light most favorable to the plaintiff, and accept all of [his] factual allegations as true. When
an allegation is capable of more than one inference, it must be construed in the plaintiff’s
favor.” Bloch v. Ribar, 156 F.3d 673, 677 (6th Cir. 1998) (citations omitted). The Court,
however, is not bound to accept as true unwarranted factual inferences, Morgan v.
Church’s Fried Chicken, 829 F.2d 10, 12 (6th Cir. 1987), or legal conclusions unsupported
by well-pleaded facts. Teagardener v. Republic-Franklin Inc. Pension Plan, 909 F.2d 947,
950 (6th Cir. 1990).
To survive a motion to dismiss, the complaint “does not need detailed factual
allegations,” Twombly, 550 U.S. at 555, but it must present “enough facts to state a claim
to relief that is plausible on its face.” Id. at 570. To satisfy this standard, the complaint
must provide “more than labels and conclusions [or] a formulaic recitation of the elements
of a cause of action.” Id. at 555. The “[f]actual allegations must be enough to raise a right
to relief above the speculative level.” Id.
2.
Futility
As an initial matter, the Court agrees with the Magistrate Judge’s determination that
Defendants cannot assert a breach of contract claim on behalf of a non-party, i.e., CPX
Tampa. Moreover, the proposed breach of contract claim for right of first refusal does not
assert a cause of action relating to the CPX Madison property, as that property was not
30
sold to SMA. Accordingly, the proposed amendment only applies to the CPX Olympic
property which was sold to SMA in September 2011.
In order to determine whether Defendants’ proposed amendment is futile, the Court
must interpret what the language of the promissory note– “in the event [BOA] determines
to assign or sell the Note”–actually means. Defendants argue that the right of first refusal
first arose when BOA decided to sell the loan and began marketing the loan to potential
buyers in August 2010. Further, they assert that the right could then be exercised within
thirty (30) days of being provided with written notice of the terms and conditions of a
proposed sale. On the other hand, BOA claims that the right could only arise when it had
proposed terms of sale to a particular buyer. As stated above, the Magistrate Judge
agreed with BOA’s interpretation, concluding that BOA could have only determined to sell
the note once it came to terms with a purchaser. The Court disagrees.
It is well settled that the construction of a written contract is a matter of law to be
decided by the court. Morganfield Nat’l Bank v. Damien Elder & Sons, 836 S.W.2d 893,
895 (Ky. 1992) (citation omitted); Beasley v. Monoko, Inc., 958 N.E.2d 1003, 1011 (Ohio
Ct. App. 2011) (citation omitted). If the parties to the contract dispute the meaning of
certain language, the court must first look to the four corners of the agreement to determine
whether an ambiguity exists. Beasley, 958 N.E.2d at 1012 (citation omitted). If any
ambiguities exist, the contract will be construed against its drafter. Id. However, in the
absence of any ambiguities, the terms will be enforced as written. McMullin v. McMullin,
338 S.W.3d 315, 320 (Ky. Ct. App. 2011) (citing Whitlow v. Whitlow, 267 S.W.2d 739, 740
(Ky. 1954)).
31
In the instant case, no ambiguity exists in Section 8.9 of the CPX Olympic
promissory note. It states that: “[BOA] agrees that in the event that it determines to assign
or sell the Note ..., [BOA] shall, provided Borrower is not then in default under this Note or
any of the other Loan Documents, allow Borrower or Borrower’s affiliates a right of first
refusal to purchase same ... .” (Doc. # 1-1, at 53) (emphasis added). 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.merriam-webster.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 whenever BOA made a decision to sell the note.
Moreover, contrary to BOA’s assertion, the second clause of the provision that
states the “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” does not mean that the decision to sell can only be made
once BOA received an offer to purchase the note. The provision has two separate and
distinct parts. First, it dictates when the right of refusal arises, i.e., when BOA determines
to sell the loan, provided CPX Olympic is not then in default. Then, it provides when that
right can be exercised, i.e., within thirty (30) days of the date BOA gives CPX Olympic
written notice of the terms and conditions of a proposed sale. Therefore, the plain meaning
of the promissory note specifies that, as long as CPX Olympic was not in default at the
32
time, the right of refusal arose whenever BOA first made the decision to sell the note, and
BOA was in breach of that provision if it never provided CPX Olympic the opportunity to
exercise that right.
BOA argues that, even if the Court accepted Defendants’ interpretation of the
contract, Defendants motion for leave to amend should still be denied because Defendants
have not alleged any claim for a breach of the right of first refusal. While Defendants have
argued that BOA determined to sell the loans as early as August 2010, they have not pled
this fact. A closer look at Defendants’ allegations is necessary to address this argument.
Defendants allege that in August 2010, BOA “was interested in the cash flow from
the Olympic property being available to use as security ... and as an inducement for a
hedge fund to buy a portfolio of loans of which Olympic would be a part.” (Doc. # 41-1, at
¶ 36). Because of this, Defendants assert that BOA told Corporex and CPX Olympic to
forego pursuing a proposal to refinance the CPX Olympic loan with another lender. (Id.).
Defendants also allege that BOA “never intended to extend the loans, but instead,
notwithstanding its promises to Borrowers and Corporex Realty, acted to keep the existing,
imminent maturity dates in order to position the loans for sale to a buyer who would likely
then push to wrest the properties from the Borrowers.” (Id. at ¶ 35). Moreover, Defendants
claim that “at the very time [BOA] was negotiating with Defendants[] regarding extending
the terms of the loans, it was actively marketing the loans to hedge funds at a discount.”
(Id. at ¶ 95). Accordingly, Defendants allege that BOA breached Section 8.9 of the CPX
Olympic promissory note by failing to provide CPX Olympic the opportunity to exercise its
right of first refusal to purchase the discounted note that BOA sold to SMA. (Id. at ¶¶ 96,
102).
33
Although Defendants never use the magic word “determined” in their allegations, it
is clear that Defendants have alleged sufficient facts to state a claim for a breach of the
right of first refusal. If accepted as true, Defendants’ allegations show that in August 2010,
BOA made an intentional decision to sell the CPX Olympic loan and, in fact, began
marketing the loan to a hedge fund at that time. Therefore, pursuant to the terms of the
promissory note, the right of first refusal arose in August 2010, prior to CPX Olympic’s
default. Because BOA never provided CPX Olympic the opportunity to exercise that right
before selling the loan to SMA, Defendants have stated a claim for breach of contract.
Finally, at oral argument, counsel for SMA argued that CPX Olympic is barred from
bringing a breach of contract claim because they waived all claims in the October 29, 2010
Modification Agreement to the CPX Olympic note. (Doc. # 1-1, at 66). This argument is
misplaced. The release language in the modification agreement provides that CPX
Olympic and Corporex “hereby release and waive all claims and/or defenses they now or
hereafter may have against [BOA] ... on account of any occurrence relating to the Loan, the
Loan Documents, and/or the Property which accrued prior to the date hereof.” (Id.). Thus,
the waiver only applies to claims that have accrued as of October 29, 2010. Any claim for
a breach of the right of refusal had not accrued as of October 29, 2010 because BOA never
provided CPX Olympic an opportunity to exercise that right. Accordingly, the proposed
amendment is not futile, and Defendants’ Motion for Leave to File Second Amended
Counterclaims is granted.
One final matter deserves brief comment.
The proposed Second Amended
Counterclaims are identical to the Amended Counterclaims except for the addition of Count
VI (Breach of Contract/Right of First Refusal) and clarification of which counterclaims are
34
against which Plaintiff and whether as counterclaim, affirmative defense or both.
Accordingly, the Court’s adjudication of BOA’s motion to dismiss regarding Counts I-IV
applies to the Second Amended Counterclaims. In addition to Count VI, Counts I and II will
be allowed to proceed to discovery, and Counts III and IV will be dismissed.
III.
CONCLUSION
Accordingly, for the reasons stated herein, IT IS ORDERED as follows:
(1)
Defendants’
Objections
to
the
Magistrate
Judge’s
Report
and
Recommendation (Doc. # 70) are hereby SUSTAINED IN PART and
OVERRULED IN PART;
(2)
The Magistrate Judge’s Report and Recommendation (Doc. # 65) is hereby
GRANTED IN PART and DENIED IN PART;
(3)
Plaintiff’s Motion to Dismiss Amended Counterclaims (Doc. # 27) is hereby
GRANTED IN PART and DENIED IN PART;
(4)
Defendants’ Motion for Leave to File Second Amended Counterclaims (Doc.
# 40) is hereby GRANTED; and
(5)
Defendants’ Motion to Strike (Doc. # 67) is DENIED AS MOOT.
This 19th day of June, 2012.
G:\DATA\Opinions\Covington\2012\12-23 MOO grant and deny in part R&R.wpd
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