ORIX Capital Markets, LLC in its capacity as special servicer and attorney-in-fact for WELLS FARGO BANK, N.A., et al. v. Cadlerocks Centennial Drive, LLC et al

Filing 72

Judge Nathaniel M. Gorton: ORDER entered. MEMORANDUM AND ORDER: "In accordance with the foregoing, plaintiff's motion for partial summary judgment is, with respect to liability for post default diversion of rental income, ALLOWED, but is, in all other respects, DENIED. So ordered." (Moore, Kellyann)

United States District Court
District of Massachusetts
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v.
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CADLEROCKS CENTENNIAL DRIVE, LLC, )
DANIEL CADLE,
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Defendants.
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ORIX CAPITAL MARKETS, LLC IN ITS
CAPACITY AS SPECIAL SERVICER AND
ATTORNEY-IN-FACT FOR WELLS FARGO
BANK, N.A. FORMERLY KNOWN AS
WELLS FARGO BANK MINNESOTA,
N.A., AS TRUSTEES FOR REGISTERED
HOLDERS OF SALOMON BROTHERS
MORTGAGE SECURITIES VII, INC.,
COMMERCIAL MORTGAGE PASS-THROUGH
CERTIFICATE SERIES 2000 C-2,
Plaintiff,

Civil Case No.
10-12019-NMG

MEMORANDUM & ORDER
GORTON, J.
Plaintiff ORIX Capital Markets (“ORIX”) brings suit against
defendants Cadlerocks Centennial Drive, LLC (“Cadlerocks” or
“Borrower”) and Daniel Cadle (“Cadle” or “Guarantor”) for breach
of a promissory note, a guaranty and an environmental indemnity
agreement.
Currently before the Court is the plaintiff’s motion for
summary judgment with respect to Count II (breach of the Guaranty
Agreement) and Count III (breach of the Environmental Indemnity

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Agreement) of its Amended Complaint.
I.

Factual Background
This case involves a dispute with respect to a 4.63 acre

mixed-use commercial and industrial property located at One
Centennial Drive, Peabody, Massachusetts (“the Property”).

In

December 1999, Cadlerocks borrowed $1,925,000 from Salomon
Brothers Realty Corp. (“Original Lender”) for which Cadlerocks
executed a promissory note (“the Note”) secured by a Mortgage on
the property and an Assignment of Leases and Rents (“ALR”).
Cadle also executed an Exceptions to Non-Recourse Guaranty
Agreement (“Guaranty”) and an Environmental Indemnity Agreement
(“Environmental Indemnity”).

The Guaranty renders Cadle

personally liable for all amounts due on the Environmental
Indemnity Agreement.

The Mortgage, Note, ALR and all other loan

documents were assigned by the Original Lender to Wells Fargo
Bank, N.A. in August, 2000.
The Note reached maturity on January 1, 2010.

As of that

date the outstanding balance on the Note was $1,464,934.
Cadlerocks did not pay the amount due and thus was in default.
Cadlerocks continued to make monthly principal and interest
payments of $24,889 on the Note until it ceased making payments
entirely in August 2010.
Following default, ORIX noticed the foreclosure sale of the
property.

Cadlerocks offered to transfer the property to ORIX
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through a deed-in-lieu of foreclosure.

ORIX declined, however,

because of concerns about its own potential liability for taking
title directly from Cadlerocks.

While conducting due diligence

prior to the foreclosure sale, ORIX ordered a Phase I
Environmental Site Assessment of the Property which identified
the possible presence of hazardous materials.

ORIX then

cancelled the foreclosure sale and sought appointment of a
receiver which this Court approved.
Pursuant to the Mortgage and ALR, Cadlerocks is required,
after default, to hold all rents and income from the Property in
trust for ORIX as assignee of the Original Lender.

In September

2010, ORIX twice demanded that Cadlerocks turn over all postdefault rents.

Cadlerocks failed to do so.

In December 2010,

$42,506 was transferred from Cadlerocks’ operating account to the
IOLTA account of Cadle’s counsel.

Cadle asserts that those funds

were transferred to pay himself back for personal loans he had
made to Cadlerocks in 2010 to cover loan payments and operating
expenses.

Of these funds $9,068 was later transferred to the

Receiver.
II.

Procedural History
ORIX filed its complaint on November 11, 2010.

The Court

appointed Francis Morrisey as Receiver on December 15, 2010.
Defendants promptly answered the original complaint and then,

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after plaintiff filed an Amended Complaint in August, 2011,
answered that Complaint as well.
III. Analysis
A.

Legal Standard

The role of summary judgment is “to pierce the pleadings and
to assess the proof in order to see whether there is a genuine
need for trial.” Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822
(1st Cir. 1991) (quoting Garside v. Osco Drug, Inc., 895 F.2d 46,
50 (1st Cir. 1990)).

The burden is on the moving party to show,

through the pleadings, discovery and affidavits, “that there is
no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law.” Fed. R. Civ.
P. 56(c).
A fact is material if it “might affect the outcome of the
suit under the governing law.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986).

“Factual disputes that are irrelevant

or unnecessary will not be counted.” Id.

A genuine issue of

material fact exists where the evidence with respect to the
material fact in dispute “is such that a reasonable jury could
return a verdict for the nonmoving party.” Id.
Once the moving party has satisfied its burden, the burden
shifts to the non-moving party to set forth specific facts
showing that there is a genuine, triable issue. Celotex Corp. v.
Catrett, 477 U.S. 317, 324 (1986).

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The Court must view the

entire record in the light most favorable to the non-moving party
and make all reasonable inferences in that party’s favor.
O’Connor v. Steeves, 994 F.2d 905, 907 (1st Cir. 1993).

Summary

judgment is appropriate if, after viewing the record in the nonmoving party’s favor, the Court determines that no genuine issue
of material fact exists and that the moving party is entitled to
judgment as a matter of law.
B.

Application
1. Breach of Guaranty Agreement (Count II)

ORIX asserts that Cadle is personally liable under the
Guaranty Agreement for 1) the income and profits received by
Cadlerocks since it defaulted on the loan, 2) failure to maintain
or repair the Property and 3) any indemnities under the
Environmental Indemnity Agreement in connection with the presence
of environmental hazards.
a. Post Default Diversion of Rental Income
ORIX claims that Cadle is personally liable for $33,438 as a
result of Cadlerocks’ improper post-default diversion of rental
income that occurred when Cadlerocks transferred funds from its
operating account to its counsel’s IOLTA account.

Cadle,

responds that those funds were, however, transferred as repayment
for personal loans he made to Cadlerocks to allow it to continue
to make loan payments to ORIX and, because ORIX benefitted from

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those proceeds, it should not be able to recover a second time
from him.
Under Paragraph 30 of the Mortgage as applied to Cadle
through the Guaranty, Cadle is personally liable for any
income . . . received by or on behalf of [Cadlerocks]
subsequent to the date on which the Lender gives written
notice that a default has occurred under the Loan and not
applied to the payment of principal or interest due under
the Note or payment of operating expenses.
ORIX provided Cadlerocks with written notice of default on
January 8, 2010.

In December 2010, certain funds were

transferred from Cadlerocks' operating account to its
counsel's IOLTA account.

Because that transaction involved

income received after written notice of default that was not
applied to the payment of principal or interest, the
transfer plainly violates the language of the Mortgage.

As

a result, Cadle is personally liable for the balance of the
misappropriated funds currently in counsel's possession.
b.

Maintenance of the Property

Under the Mortgage, Cadlerocks (and Cadle by virtue of the
Guaranty) agreed to “restore and repair” the Property “to the
equivalent of its original condition.”

The meaning of this

contract term is rendered ambiguous by the facts of this case.
ORIX claims that “original condition” refers to the condition of
the building in 1964 at the time it was built, rather than in
1999 when the Note was signed.

Cadle responds that such an

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interpretation would lead to the incongruous result that
Cadlerocks was in breach the moment the Note was signed and would
have required conversion of the Property to a single building as
it was originally constructed, even though it was subsequently
subdivided.
Despite its claim that the building had to be converted to
its 1964 condition, ORIX also asserts that there is a need for
immediate repairs to the Property in the amount of $523,875.

Two

months before the Property was put into receivership, however, an
appraisal commissioned by ORIX determined that only $91,171 in
immediate repairs were necessary.

Prior to that, a separate

appraisal commissioned by ORIX found the Property to be in
“average condition” and “reasonably well maintained.”

A

contemporaneous inspection “did not reveal any significant
deferred maintenance.”

In fact, the Receiver’s property manager,

Genesis Management Group (“Genesis”), found that the roof, which
ORIX now claims needs to be entirely replaced, was in “overall
good shape.”

Genesis has not identified any of the immediate

repairs ORIX claims are necessary as items it plans to address.
Finally, despite ORIX’s claim that the Property needs immediate
and expensive repairs, ORIX has disavowed any claim that it is
entitled to damages on those grounds.

As a result, there is a

genuine issue of material fact as to whether any repairs are
needed and to what extent Cadle is liable for those repairs.

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2.

Breach of Environmental Indemnification Agreement
(Count III)

Plaintiff asserts that Cadlerocks is liable for costs and
damages related to the presence of environmental conditions on
the Property under the terms of the Environmental Indemnification
Agreement.

Under the terms of the Guaranty, Cadle is personally

liable for all amounts due under the Environmental
Indemnification Agreement.
The Environmental Indemnification Agreement states, in
relevant part, that the indemnitor will indemnify the Lender for
costs arising from the “presence” or “suspected presence” of
“Hazardous Materials...affecting the Property.” However, there is
a genuine issue of material fact as to whether there are any
hazardous materials on the property.
In the Phase I Environmental Assessment conducted prior to
the intended foreclosure, ORIX’s own expert indicated that it
did not identify evidence of significant leaks, spills,
or the improper handling of petroleum or hazardous substances
that might impact the environmental condition of the Subject
Property.
As a result, the expert noted “[n]o concerns identified” with
respect to “Hazardous Substances.”

During the Phase II

investigation, the presence of airborne tetrachroloethylene
(“TCE”) was identified inside the building on the Property.

ORIX

asserts that TCE is a hazardous substance under the Massachusetts
Contingency Plan (“MCP”).

However, an environmental expert hired

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by the Receiver “emphasized...that the property is not a [MCP]
site, since no reportable conditions have been identified.”
ORIX’s own expert also noted in its Limited Subsurface
Investigation Report that “the soil gas concentrations may not
represent release of oil or hazardous materials.”
Even if there are hazardous materials present on the Property,
there remains a genuine dispute as to whether ORIX could have
mitigated all of its damages related to the investigation of the
purported hazardous substances on the Property by relying on the
Environmental Insurance Policy Cadlerocks purchased at the time the
loan was closed.

As a result, summary judgment on this claim is

unwarranted.
ORDER
In accordance with the foregoing, plaintiff’s motion for
partial summary judgment is, with respect to liability for post
default diversion of rental income, ALLOWED, but is, in all other
respects, DENIED.

So ordered.
/s/ Nathaniel M. Gorton
Nathaniel M. Gorton
United States District Judge
Dated October 18, 2012

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