LNV Corporation v. Outsource Service Management, LLC et al
Filing
114
ORDER: Defendants' Motion for Partial Summary Judgment [ECF No. 88 ] is GRANTED. (Written Opinion) Signed by Judge Joan N. Ericksen on October 10, 2014. (CBC)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
LNV Corporation,
Plaintiff,
No. 13-cv-1926 (JNE/LIB)
ORDER
v.
Outsource Service Management, LLC
d/b/a Presidium Asset Solutions and
BF-Negev, LLC,
Defendants.
This case is before the Court on a Motion for Partial Summary Judgment brought jointly
by the Defendants, Outsource Service Management (“OSM”) and BF-Negev. ECF No. 88. For
the reasons discussed below, the motion is granted. 1
Background
This case arises out of a dispute over the parties’ respective rights and obligations
stemming from two loans.
The first, known as the Grande Palisades loan, was made to a developer to build a resort
hotel and condominium complex near Disney World in Orlando, Florida. To fund the loan, the
lead lender, Marshall Financial Group, entered into a number of participation agreements with
other financial institutions, including one in 2007 with Columbian Bank of Kansas. Columbian
Bank subsequently failed and entered receivership. In 2009, the Federal Deposit Insurance
1
OSM and BF-Negev included a request for a protective order under Federal Rule of Civil
Procedure 26(c) in their reply memorandum. The matter of a protective order is not properly
before the Court. See D.Minn. L.R. 7.1(b) (“Unless the court orders otherwise, all
nondispositive motions must be heard by the magistrate judge.”).
1
Corporation acting as receiver sold of a pool of loans owned by Columbian Bank, including its
participation in the Grande Palisades loan, to Plaintiff LNV Corporation. At roughly the same
time, OSM succeeded Marshall as the lead lender.
The second loan giving rise to the disputes here, known as the Bahia loan, was made for
the re-financing and construction of the Little Harbor Development near Tampa, Florida. As
with the Grande Palisades loan, the lead lender of the Bahia loan, BankFirst, entered into a
number of participation agreements, including one in 2007 with First Priority Bank. Since then,
through a series of assignments that are not relevant to this motion, LNV has succeeded First
Priority Bank as participant, BF-Negev has succeeded BankFirst as lead lender, and OSM has
become the loan’s servicer.
In its Complaint, LNV pleads twelve causes of action against OSM and BF-Negev over
the disputes that have arisen in connection with these two loans. In addition to breach of contract
claims based on the written agreements associated with the loans, LNV also asserts civil
theft/conversion, unjust enrichment/quantum meruit, and constructive trust claims against the
Defendants. In turn, in an Answer filed jointly by the Defendants, OSM asserts breach of
contract and unjust enrichment counterclaims against LNV relating to the Grande Palisades
dispute. 2
Discussion
With their Motion for Partial Summary Judgment, OSM and BF-Negev argue that the
record now establishes that the parties’ disputes over the Grande Palisades and Bahia loans are
2
LNV and OSM also each seek a declaratory judgment regarding the impact of the
Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) on the claims
arising out of the Grande Palisades loan. These FIRREA issues are not relevant to this motion.
2
governed by valid and enforceable contracts. Therefore, they argue, it is appropriate for the
Court to streamline the case – and particularly what remains of discovery – by dismissing LNV’s
non-contract claims.
Summary judgment is proper “if the movant shows that 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). “A party asserting that a fact cannot be or is genuinely disputed must support the assertion
by citing to particular parts of materials in the record . . . or showing that the materials cited do
not establish the absence or presence of a genuine dispute . . . .” Id. (c)(1)(A)–(B). The Court
“need consider only the cited materials, but it may consider other materials in the record” not
specifically called to its attention by the parties’ memoranda. Id. (c)(3). In determining whether
summary judgment is warranted, this “evidence and all fair inferences from it must be viewed in
the light most favorable to the non moving party . . . .” Johnson v. Blaukat, 453 F.3d 1108, 1112
(8th Cir. 2006).
LNV opposes the Defendants’ motion, arguing that the record contains sufficient
evidence to create a genuine issue of material fact – or could, with more discovery pursuant to
Federal Rule of Civil Procedure 56(d) – regarding the validity of the Grande Palisades Loan
Participation Agreement between Marshall and Columbian Bank, to which OSM and LNV
succeeded. 3
3
LNV also opposes the motion generally on the ground that Federal Rule of Civil
Procedure 8 authorizes it to plead its claims in the alternative, regardless of their consistency.
That may be true, but as the Court previously noted in ruling on LNV’s Motion to Dismiss, a
non-contract claim may move forward alongside a contract claim only “until the contract is
deemed to be valid and to govern the dispute.” Order of March 4, 2014 at 9, ECF No. 71
(quoting U.S. Bank Nat. Ass’n v. Education Loans Inc., Civ. No. 11-1145 (RHK/JJG), 2011 WL
5520437 (D.Minn. Nov. 14, 2011)). Rule 8’s allowance for alternative pleading poses no bar to
a grant of partial summary judgment here.
3
That issue, as well as the state of the parties’ dispute over the Bahia loan, are discussed
below.
I.
Grande Palisades dispute.
Fundamentally, with respect to the Grande Palisades portion of the case, LNV is suing
OSM for disbursement of a percentage of the Collections received on the Grande Palisades loan
that LNV alleges it is owed as a participant. In turn, OSM is countersuing LNV for certain
Credit Advances and Extraordinary Expenses that OSM alleges LNV is obligated to pay as a
participant.
In its Answer, LNV asserted the following as an affirmative defense to OSM’s
counterclaims:
Based upon the September 23, 2013 Affidavit of Cecelia Borenko in Outsource
Services Management, LLC v. Lake Austin Properties Limited I, LTD, Case No.
8:13-CV-1476-T-35AEP (M.D. Fla. Sept. 23, 2013), filed in connection with
Malbec Investments, LLC’s Renewed Motion to Intervene, OSM’s claims are
barred by fraud, misrepresentation, fraudulent inducement and/or fraudulent
concealment.
Construed in the light most favorable to LNV – in fact, in LNV’s own telling –
Borenko’s affidavit in combination with other materials in the record demonstrates the
following: Marshall originated the $140 million Grande Palisades construction loan. One of the
terms of that loan required the borrower to fund a portion of the cost of the project with
approximately $30 million of its own equity. This is known as the borrower having “skin in the
game”; without it, lenders, as well as participating banks, would typically be unwilling to fund a
project of that magnitude. According to LNV, Marshall knew from the outset that the borrower
was not in compliance with this term, but nevertheless moved forward with the loan because it
stood to benefit financially from it. In order to retain those benefits while minimizing its own
4
exposure to the risk inherent in such a “no money down” unfunded loan, Marshall proceeded to
market participations in the loan to other financial institutions using materials that specifically
stated that the borrower had the required $30 million worth of “skin in the game” furnished by
“related third parties.” Ultimately, more than sixty banks, including Columbian Bank, entered
into participations. The borrower subsequently defaulted.
LNV argues that this evidence creates a genuine issue of material fact as to whether
Marshall secured Columbian Bank’s participation in the Grande Palisades loan by fraud. In this
regard, LNV seeks to establish its right to disaffirm the Grande Palisades Participation
Agreement by way of its noticed affirmative defense of fraudulent inducement and/or fraudulent
concealment.
The parties agree that the Grande Palisades Participation Agreement is governed by New
York law. Under New York law, to sustain its fraud defense, LNV bears the burden of
establishing by clear and convincing evidence: (1) that Marshall either misrepresented a material
fact to Columbian Bank, or, alternatively, concealed a material fact from Columbian Bank that it
had a duty to disclose; (2) that Columbian Bank entered into the Participation Agreement in
justifiable reliance on Marshall’s misrepresentation or concealment; and (3) that Columbian
Bank was injured thereby. 4 Lama Holding Co. v. Smith Barney Inc., 668 N.E.2d 1370, 1373
(N.Y. 1996); Vermeer Owners, Inc. v. Guterman, 585 N.E.2d 377, 378 (N.Y. 1991); Lane v.
4
According to some authorities, the intent to deceive is also an element of fraudulent
inducement. E.g., Channel Master Corp. v. Aluminum Limited Sales, Inc., 151 N.E.2d 833, 835
(N.Y. 1958). But others find that “New York law . . . is well settled that an innocent
misrepresentation of a material fact permits rescission even though made without an intent to
deceive.” Stern v. Satra Corp., 539 F.2d 1305, 1308 (2nd Cir. 1976). See also Banque Arabe,
57 F.3d at 153-54 (discussing differences between fraudulent inducement, fraudulent
concealment, and innocent misrepresentation).
In any event, the presence or absence of scienter is not determinative of the outcome of
the Defendants’ motion.
5
McCallion, 561 N.Y.S.2d 273, 275 (N.Y. App. Div. 1990). See also Stuart v. Lester, 17 N.Y.St.
Rep. 248 (N.Y. Gen. Term 1888) (where defendant resists enforcement of a contract induced by
fraud, it is “not . . . necessary for the defendant to show, in order to defeat a recovery, that he had
suffered a pecuniary loss in any particular sum by reason of the misrepresentation made by the
plaintiff”).
OSM argues that LNV’s fraud defense fails in the face of the plain language of both the
Grande Palisades Participation Agreement between Marshall and Columbian Bank and the Loan
Sale Agreement by which the FDIC-Receiver conveyed Columbian Bank’s interest in the
participation to LNV. These two issues are discussed in turn below.
A. Disclaimer.
OSM first contends that LNV is foreclosed from proving reliance, an essential element of
a fraudulent inducement defense, by the disclaimer that appears in § 2.1 of the Grande Palisades
Participation Agreement. The relevant language is as follows:
c. [Columbian Bank] has, without reliance of any kind or nature on [Marshall],
any other Credit Provider or the directors, officers, agents, employees or attorneys
of [Marshall], and instead in reliance upon information supplied to it by or on
behalf of the Obligor and upon such other information as [Columbian Bank] has
deemed appropriate, made its own independent credit analysis and decision to
purchase its Participation Interest in the Credit;
d. [Columbian Bank] will, independently and without reliance of any kind or
nature on [Marshall], any other Credit Provider or the directors, officers, agents,
employees or attorneys of the Lender, continue to make its own independent
credit analysis and decisions in acting or not acting under this Agreement and the
Credit Agreements[.]
Under New York law, general merger clauses and specific disclaimers are given different
effects. A general merger clause – such as an “omnibus statement that the written instrument
embodies the whole agreement, or that no representations have been made” – “is ineffective to
6
exclude parol evidence to show fraud in inducing the contract[.]” Danann Realty Corp. v.
Harris, 157 N.E.2d 596 , 601 (N.Y. 1959). However, “[w]here a party specifically disclaims
reliance upon a representation in a contract, that party cannot, in a subsequent action for fraud,
assert it was fraudulently induced to enter into the contract by the very representation it has
disclaimed.” Banque Arabe et Internationale D’Investissement v. Maryland Nat. Bank, 57 F.3d
146, 155 (2nd Cir. 1995) (quotation and citation omitted). “The presence of such a disclaimer
clause is inconsistent with the contention that [the party] relied upon the misrepresentation, and
was led thereby to make the contract.” Danann, 157 N.E.2d at 599 (quotation and citation
omitted).
The reliance provisions in the Grande Palisades Participation Agreement constitute a
specific disclaimer. LNV’s defense rests on its contention that Columbian Bank entered into the
Grande Palisades Participation Agreement in justifiable reliance on Marshall’s misrepresentation
or concealment regarding the borrower’s “skin in the game,” which is material, by LNV’s own
articulation of the alleged fraud, because of the indication it provides of the borrower’s
creditworthiness. But Columbian Bank expressly represented in the contract that it had “made
its own independent credit analysis and decision to purchase its Participation Interest in the
Credit” “without reliance of any kind or nature on [Marshall.]” By itself, this would tend to
defeat LNV’s fraud defense. See Banque Arabe, 57 F.3d at 155 (noting that, under New York
law, “disclosure obligations may be modified by contract” and concluding that similarly-worded
participation agreement “operate[d] as a waiver absolving [the lead lender] of responsibility to
make affirmative disclosures concerning the financial risks” of the loan).
However, even such a specific disclaimer will not be given effect in certain
circumstances. To overcome the disclaimer in the Grande Palisades Participation Agreement,
7
LNV must show that the misrepresented or concealed fact at issue – that the borrower did not
have the “skin in the game” required by the terms of the loan – was “peculiarly within the
knowledge” of Marshall, and that Marshall knew that Columbian Bank was “acting in reliance
on mistaken knowledge regarding that issue” when it entered into the participation. Id. See also
Boyle v. McGlynn, 814 N.Y.S.2d 312, 313-14 (N.Y. App. Dept. 2006) (knowledge of the party
alleged to have committed fraud, as well as availability of the information to the allegedly
defrauded party, are questions of fact). On these points, LNV has made a sufficient showing that
would, all else being equal, allow it to move forward with its defense.
OSM argues that the “superior knowledge” doctrine does not apply in circumstances like
these involving a transaction between sophisticated financial institutions, as such parties can be
expected to demand disclosure, and express inclusion in the contract, of any material facts on
which they purport to rely. See, e.g., Rodas v. Manitaras, 552 N.Y.S.2d 618 (N.Y. App. Dept.
1990) (concluding that where “a party has been put on notice of the existence of material facts
which have not been documented and he nevertheless proceeds with a transaction without
securing the available documentation or inserting appropriate language in the agreement for his
protection, he may truly be said to have willingly assumed the business risk that the facts may
not be as represented”).
However, the Grande Palisades Participation Agreement does state, at § 2.1(f), that
“[Columbian Bank] has thoroughly reviewed the Credit Agreements and those documents
contain all of the terms and conditions that [Columbian Bank] considers to be material to the
Credit and upon which [Columbian Bank] has relied in purchasing its interest in the Credit[.]”
As the “Credit Agreements” are the documents evincing the loan that Marshall made to the
8
borrower, the Participation Agreement can be read to incorporate as a material term of
Columbian Bank’s participation the requirement that the borrower have “skin in the game.”
By the same token, the Participation Agreement at § 2.1(b) also attests that
[Columbian Bank] has been granted access to, and received all of, the information
it has requested or believed to be necessary to enable it to make an independent
and informed judgment with respect to the creditworthiness of the Obligor
including information provided to [Columbian Bank] by [Marshall.]
The critical question, then, is whether, with this access, Columbian Bank could have discovered
through an exercise of due diligence what Marshall is alleged to have known about the
borrower’s lack of “skin in the game.” See Royal American Managers, Inc. v. IRC Holding
Corp., 885 F.2d 1011, 1016 (2nd Cir. 1989) (“Where the representation relates to matters that are
not peculiarly within the other party's knowledge and both parties have available the means of
ascertaining the truth, New York courts have held that the complaining party should have
discovered the facts and that any reliance under such circumstances therefore would be
unjustifiable.”); Danann, 157 N.E.2d at 601 (“[I]f the facts represented are not matters peculiarly
within the party's knowledge, and the other party has the means available to him of knowing, by
the exercise of ordinary intelligence, the truth or the real quality of the subject of the
representation, he must make use of those means, or he will not be heard to complain that he was
induced to enter into the transaction by misrepresentations.”) (quotation omitted).
On this question of fact, the particulars of the Borenko affidavit on which LNV bases its
fraud defense are noteworthy. Borenko worked as an Assistant Vice President and Financial
Analyst for Marshall in its Orlando, Florida office from 2004 through 2008. In that capacity,
Borenko was involved in administering the Grande Palisades loan, including performing “all
actions related to the financial analysis of the loan,” “assisting with loan documentation,” and
“gathering the materials in preparing the marketing materials sent out by Marshall to prospective
9
participants in the Loan[.]” According to her affidavit, in early 2007, Borenko made efforts to
obtain documentation from the “related third parties” who were purported to have put up the
required $30 million worth of “skin in the game” for the Grande Palisades loan by way of a
subordinated loan to the borrower. However, Borenko states that she “was never able to get a
satisfactory response” from the guarantors to her attempts to “substantiate that the subordinated
debt was legitimate.” Ultimately, based in some significant degree on the knowledge she had
gained from her prior dealings with the guarantors – rather than solely on the contents of the
documents she was able to review – Borenko concluded that the guarantors “did not have that
kind of liquidity” and that the money actually “had to have come from buyers’ deposits” on two
other condominium projects. Consequently, Borenko suspected that the borrower was not in
compliance with the terms of the Grande Palisades loan, and in April of 2008 she shared her
concerns with others at Marshall.
This record evidence is sufficient to create a genuine issue of material fact as to whether
Columbian Bank could have ascertained the truth regarding the borrower’s alleged lack of “skin
in the game” through an exercise of due diligence before entering into the Participation
Agreement in April of 2007. Furthermore, the discovery that LNV details in its Rule 56(d)
affidavit – including the production of documents relating to the subordinated loan and the
depositions of individuals who were in the employ of Columbian Bank and Marshall at the
relevant time periods – could be expected to provide more insight into the issue.
For these reasons, the specific disclaimer of reliance in the Grande Palisades Participation
Agreement would not, by itself, preclude LNV from proceeding with its fraud defense.
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B. Rescission.
However, there are additional considerations. OSM argues that LNV’s assertion of fraud
is in reality an “affirmative claim for rescission” of the Grande Palisades Participation
Agreement sounding in tort, rather than the affirmative defense that LNV has labeled it, and
requests that the Court treat it as such. See Fed. R. Civ. P. 8(c)(2) (“If a party mistakenly
designates . . . a counterclaim as a defense, the court must, if justice requires, treat the pleading
as though it were correctly designated, and may impose terms for doing so.”).
OSM contends that this move would be determinative in two ways, both of which are
considered below.
1. Tort v. contract.
First, OSM points out that “[u]nder New York law, the assignment of the right to assert
contract claims does not automatically entail the right to assert tort claims arising from that
contract.” Banque Arabe, 57 F.3d at 151. Here, when Columbian Bank failed, all of its “rights,
titles, powers, and privileges” passed to the FDIC as receiver. 12 U.S.C. § 1821(d)(2). The
FDIC-Receiver later sold Columbian Bank’s participation in the Grande Palisades loan to LNV.
According to LNV, the Loan Sale Agreement by which that assignment was made contains no
language evincing an intent by the FDIC-Receiver to transfer its right to assert tort claims arising
from the Grande Palisades Participation Agreement to LNV.
However, even were that true, it would not bar LNV from asserting its fraudulent
inducement defense here. Simply put, that defense is not a tort claim.
There is a qualitative distinction between a cause of action in tort for fraudulent
inducement and fraudulent inducement as an affirmative defense to contract liability. See, e.g.,
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United States Fid. & Guar. Co. v. Delmar Dev. Partners, LLC, 22 A.D.3d 1017, 1019-20 (N.Y.
App. Div. 2005) (where defendant sought to amend its answer “to add fraud in the inducement as
an affirmative defense[,] the proposed claim of fraud is offered only to counter the contractual
rights asserted” by the plaintiff and therefore “no danger exists that the proposed amendment
[would] effectively change[] the original action from one sounding in breach of contract to an
action alleging tortious conduct”). With regard to the latter, New York courts have long held –
as a matter of contract law – that a fraudulently induced contract is a “voidable transaction,” as
the misrepresentation or concealment of a fact material to the agreement precludes the meeting
of the minds that is essential to the formation of a valid and binding contract. E.g., Schenck v.
State Line Telephone Co., 144 N.E. 592, 593 (N.Y. 1924). In consequence, a fraudulently
induced contract may be affirmed or disaffirmed at the choice of the defrauded party. Id.
If the defrauded party desires the benefit of the bargain it was fraudulently induced to
accept, it will ratify the contract and press a claim for damages or specific performance. In the
same action, the defrauded party may also pursue a separate claim in tort seeking compensation
for any loss that may have been caused by the fraudulent inducement itself. 5 See, e.g., Deerfield
Communications Corp. v. Chesebrough-Ponds, Inc., 502 N.E.2d 1003, 1004 (N.Y. 1986)
(rejecting contention that separate awards in same action for breach of contract and for the tort of
fraudulent inducement were duplicative and clarifying that “measure of damages recoverable for
5
New York adheres to the “general rule [that] to recover damages for tort in a contract
matter, it is necessary that the plaintiff plead and prove a breach of duty distinct from, or in
addition to, the breach of contract.” Non-Linear Trading Co., Inc. v. Braddis Associates, Inc.,
675 N.Y.S.2d 5, 13 (N.Y. App. Dept. 1998). Where a plaintiff was fraudulently induced to enter
into the contract, the defendant’s misrepresentation of material facts is “collateral to the contract
. . . and therefore involves a separate breach of duty.” Gosmile, Inc. v. Levine, 915 N.Y.S.2d
521, 524 (N.Y. App. Dept. 2010).
12
being fraudulently induced to enter into a contract which otherwise would not have been made is
indemnity for the loss suffered through that inducement”) (quotation and punctuation omitted).
On the other hand, if the defrauded party desires to return to the position it occupied
before it entered into the fraudulently induced contract, it will disaffirm the contract and press a
claim for rescission “upon the theory that [the] contract is to be treated as nonexistent for lack of
true assent.” Richard v. Credit Suisse, 152 N.E. 110, 111 (N.Y. 1926). With such a claim, the
defrauded party may pursue such “off contract” or “quasi-contract” theories of recovery as unjust
enrichment and quantum meruit, which are, in some contexts, referred to generally as
“restitution” measures. F.T.C. v. Bronson Partners, LLC, 654 F.3d 359, 370 (2nd Cir. 2011)
(explaining that “restitution” was conceived of “as a unifying theory of private-law liability akin
to tort or contract – a descriptor of a class of wrongs rather than any particular remedy” and that
“courts and commentators often use the term ‘restitution’ as a metonym for the class of remedies
particularly identified with that head of liability”). See also Judge Rotenberg Educational
Center Inc. v. Blass, 882 F.Supp.2d 371, 376-77 (E.D.N.Y. 2012) (noting that “quantum meruit,
unjust enrichment, and restitution claims are not separate causes of action under New York law,
but are instead conceptualized as different facets of a single quasi contract cause of action”)
(internal quotation, punctuation, and citation omitted).
Also, as with concurrent causes of action for breach of contract and for the tort of
fraudulent inducement, the defrauded party seeking rescission and restitution may
simultaneously press a separate claim in tort. New York law provides that
[a] claim for damages sustained as a result of fraud or misrepresentation in the
inducement of a contract or other transaction, shall not be deemed inconsistent
with a claim for rescission or based upon rescission. In an action for rescission or
based upon rescission the aggrieved party shall be allowed to obtain complete
relief in one action, including rescission, restitution of the benefits, if any,
conferred by him as a result of the transaction, and damages to which he is
13
entitled because of such fraud or misrepresentation; but such complete relief shall
not include duplication of items of recovery.
N.Y. C.P.L.R. § 3002(e).
With all of these factors considered, then, it is clear that LNV does not assert a fraudulent
inducement claim in tort. Instead, LNV has asserted fraudulent inducement as an affirmative
defense to liability on the Grande Palisades Participation Agreement. That LNV would, if
successful on the merits, earn the right to avoid liability on that contract by disaffirming it does
not transform the defense into a claim in tort.
2. Defense v. claim.
Nevertheless, OSM also contends that LNV is foreclosed from pursuing its fraud defense
by the terms of the Loan Sale Agreement through which LNV acquired Columbian Bank’s
participation in the Grande Palisades loan from the FDIC-Receiver. Regardless of whether
LNV’s assertion of fraud sounds in tort, in § 2.7 of the Loan Sale Agreement, the FDIC-Receiver
expressly withheld from LNV “all right, title, and interest . . . in and to . . . any and all claims of
any nature whatsoever that might now exist or hereafter arise, whether known or unknown, that
[the FDIC-Receiver] has or might have . . . against any third parties involved in any alleged fraud
or other misconduct relating to the making or servicing of a Loan[.]” The Court agrees with
OSM that LNV has asserted such a claim here. 6
6
OSM necessarily contends that it “stands in the shoes” of Marshall as the “third part[y]”
to the Loan Sale Agreement that is alleged to have been “involved in . . . fraud or other
misconduct relating to the making” of the Grande Palisades Participation Agreement. See
Richard T. Blake & Associates, Inc. v. Aetna Cas. & Sur. Co., 681 N.Y.S.2d 73, 75 (N.Y. App.
Dept. 1998) (“It is well established that an assignee stands in the shoes of the assignor and takes
the assignment subject to any pre-existing liabilities.”). Cf. Lapis Enterprises, Inc. v.
International Blimpie Corp., 445 N.Y.S.2d 574 (N.Y. App. Dept. 1981) (“[A]lthough the bank is
not alleged to have itself perpetrated the fraud, it is well settled that an assignee of a mortgage
14
With its Complaint, LNV brings both breach of contract and quasi contract claims against
OSM arising out of the dispute over its participation interest in the Grande Palisades loan. Under
New York law, LNV may recover in quasi contract only if the Grande Palisades Participation
Agreement is voidable or if it does not cover the subject matter of this dispute. ClarkFitzpatrick, 516 N.E.2d at 193 (“A ‘quasi contract’ only applies in the absence of an express
agreement . . . .”). See also, e.g., Joseph Sternberg, Inc. v. Walber 36th Street Associates, 594
N.Y.S.2d 144, 146 (N.Y. App. Dept. 1993) (“[W]here there is a bona fide dispute as to the
existence of a contract or where the contract does not cover the dispute in issue, plaintiff may
proceed upon a theory of quantum meruit and will not be required to elect his or her remedies.”).
LNV does not deny that the Grande Palisades Participation Agreement covers the subject
matter of the parties’ dispute over the Grande Palisades loan. 7 But of course it does argue via its
fraudulent inducement defense that that contract is voidable. It is thus clear that LNV’s assertion
that the Grande Palisades Participation Agreement was fraudulently induced is part and parcel of
its quasi contract claims. Cf. Mid-Atlantic Perfusion Associates, Inc. v. Westchester County
Health Care Corp., 864 N.Y.S. 2d 100, 102 (N.Y. App. Dept. 2008) (finding fraudulent
inducement claim to be “duplicative of the quasi-contract causes of action”).
In this case, LNV is not asserting fraudulent inducement simply to defeat OSM’s breach
of contract claim, as would be true of a pure affirmative defense. See Saks v. Franklin Covey
takes it subject to the equities attending the original transaction [and therefore] subject to the
mortgagor’s action for fraud.”) (internal citations omitted). LNV does not contest this point.
7
As noted above, LNV is suing OSM for disbursement of the Collections on the Grande
Palisades loan that LNV alleges it is owed, while OSM is suing LNV for certain Credit
Advances and Extraordinary Expenses that OSM alleges LNV is obligated to pay. The rights
and obligations of the lead lender and the participant with respect to Collections, Credit
Advances, and Extraordinary Expenses are addressed in § 3 of the Grande Palisades Participation
Agreement and elsewhere.
15
Co., 316 F.3d 337, 350 (2d Cir.2003) (“An affirmative defense is defined as a defendant’s
assertion raising new facts and arguments that, if true, will defeat the plaintiff’s . . . claim, even
if all allegations in the [plaintiff’s] complaint are true.”). Rather, LNV is explicitly asserting a
right to disaffirm the Grande Palisades Participation Agreement, premised upon the material
misrepresentations or omissions that are alleged to have occurred during the formation of that
contract, as a predicate to recovering on the quasi contract theories that it pleads in its Complaint.
E.g., LNV’s Memorandum in Opposition at 25-26, ECF No. 96 (“[D]ue to the fraudulent
inducement[,] LNV may avoid (i.e., rescind) the Grande Palisades Participation Agreement at its
pleasure. . . . Thus, LNV is not relegated to pleading only breach of contract and declaratory
judgment claims, and may assert its other claims as well.”). Under New York law, that is the
assertion of a cause of action for rescission. E.g., Channel Master, 151 N.E.2d at 835
(discussing elements of cause of action “based on fraudulent representations, whether it be for
the rescission of a contract or . . . in tort”); Urquhart v. Philbor Motors, Inc., 780 N.Y.S.2d 176,
177 (N.Y. App. Dept. 2004) (discussing cause of action “for rescission of a contract . . . on the
ground of fraud”).
Regardless of the headings and organization of its pleadings, LNV’s assertion of the right
of rescission in conjunction with an entitlement to quasi contract relief amounts to a “claim,” by
any definition of that term. See, e.g., Black’s Law Dictionary (9th ed. 2009) (defining “claim”
as, inter alia, “[t]he aggregate of operative facts giving rise to a right enforceable by a court,”
“[t]he assertion of an existing right; any right to payment or to an equitable remedy, even if
contingent or provisional,” and “[a] demand for money, property, or a legal remedy to which one
asserts a right”); American Heritage Dictionary (5th ed. 2014) (defining “claim” as, inter alia,
16
“[a] demand for something as rightful or due,” “[a] basis for demanding something; a title or
right,” and “[a] demand for payment in accordance with [a] formal arrangement”).
The broad language of § 2.7 of the Loan Sale Agreement unambiguously indicates that
LNV was not to obtain the right to seek affirmative relief for itself arising out of “any alleged
fraud or other misconduct” in the making of the Grande Palisades Participation Agreement. See,
e.g., Franklin Apartment Associates, Inc. v. Westbrook Tenants Corp., 841 N.Y.S.2d 673, 674
(N.Y. App. Dept. 2007) (“When the terms of a written contract are clear and unambiguous, the
intent of the parties must be found within the four corners of the contract, giving practical
interpretation to the language employed and the parties’ reasonable expectations. . . . The
construction and interpretation of an unambiguous written contract is an issue of law within the
province of the court.”) (internal citations omitted). Whether that relief takes the form of
damages in a tort action or restitution of the benefits conferred under the contract in an action for
rescission, the FDIC-Receiver retained the right to pursue and extract that measure and restore it
to the Columbian Bank receivership. Cf. 12 U.S.C. § 1821(d)(14)(C) (providing for FDICReceiver to bring “claim arising from fraud, intentional misconduct resulting in unjust
enrichment, or intentional misconduct resulting in substantial loss” on behalf of the failed
institution even where state statute of limitations has expired). LNV is thus foreclosed from
pursuing its fraudulent inducement defense here. 8
8
OSM additionally argues that, even if LNV is not barred from asserting its defense by the
Loan Sale Agreement, that defense should go no further because the “remedy” LNV seeks for
the alleged fraudulent inducement of the Grande Palisades Participation Agreement – its
rescission – would be “unworkable.” OSM’s argument is grounded in the evident difficulty of
“unwinding” that contract with respect to all of the various entities that have been a party to it.
As OSM puts it in its reply memorandum,
LNV and OSM are assignees of their interests and have never paid any
consideration to the other. LNV purchased the Participation directly from the
17
C. Non-contract claims.
With the fraudulent inducement defense thus unavailable, LNV presses one other ground
on which to invalidate the Grande Palisades Participation Agreement. According to LNV, its
evidence could demonstrate that Marshall violated Florida law in facilitating payment of the
borrower’s “skin in the game,” thereby rendering the Grande Palisades Participation Agreement
unenforceable under the doctrine of illegality.
This is unpersuasive. The focus of the illegality doctrine is the performance that is
required or contemplated by the contract: “Under New York law, an illegal contract malum in se
is unenforceable and will be voided,” while “[a] contract that is illegal because performance is
FDIC-R, not Marshall or OSM. LNV is certainly not claiming any fraud on the
part of the FDIC-R. Similarly, Columbian and Marshall and Marshall’s servicing
affiliate, BankFirst, are all failed banks. For a time, the FDIC acted as receiver
for each of these failed banks. LNV is certainly not claiming that the FDIC-R
should also be made a party to this case due to its role in the transaction.
Moreover, Columbian’s “purchase” of the Participation carried with it the
obligation to fund certain Loan proceeds to [the borrower]. Columbian did in fact
fund approximately $3 million of the $6 million committed. . . . Yet LNV
purchased its Participation Interest from the FDIC-R at a fraction of its face value.
. . . By asking for rescission, is LNV seeking to have Columbian’s $3 million
“returned” to LNV? Such a remedy would result in a windfall to LNV – all at the
expense of a third party (OSM) who had nothing to do with the alleged fraud.
At this point, there is simply no way to equitably unwind the tangle of
transactions that have grown around the Participation Agreement.
However, the Court is not persuaded that an appropriate remedy could not be fashioned if
the contract were rescinded. Rescission of a fraudulently induced contract is the “substantive
right” of the defrauded party. Schenck, 144 N.E. at 593. The “election of remedies” follows
from the exercise of that right. Id. And under New York law, “[i]f complete restoration is
impossible[,] the terms upon which rescission will be granted rest within the sound discretion of
the court. . . . The court should adjust the equities between the parties to avoid unjust enrichment
. . . in order that no one be placed in a better position after rescission than when the contract was
executed.” Vitale v. Coyne Realty, Inc., 414 N.Y.S.2d 388, 393 (N.Y. App. Dept. 1979)
(citations omitted).
Nevertheless, in light of the Court’s conclusion that LNV is barred from proceeding on
its fraudulent inducement defense by the terms of the Loan Sale Agreement, these considerations
are not determinative here.
18
malum prohibitum may also be voided if: (1) the contract is still executory; or (2) the parties are
not in pari delicto.” Korea Life Ins. Co., Ltd. V. Morgan Guar. Trust Co. of New York, 269
F.Supp.2d 424, 441 (S.D.N.Y. 2003) (internal citations omitted). Performance in accordance
with the terms of the Grande Palisades Participation Agreement is neither malum in se nor
malum prohibitum, and the doctrine is inapplicable. See also Lloyd Capital Corp. v. Pat
Henchar, Inc., 603 N.E.2d 246, 248 (N.Y. 1992) (“As a general rule also, forfeitures by
operation of law are disfavored, particularly where a defaulting party seeks to raise illegality as
‘a sword for personal gain rather than a shield for the public good.’ . . . Allowing parties to
avoid their contractual obligations is especially inappropriate where there are regulatory
sanctions and statutory penalties in place to redress violations of the law.”) (internal citation
omitted).
Therefore, the contract governs. In consequence, the non-contract claims that LNV has
pled against OSM relating to the Grande Palisades dispute must now be dismissed as follows.
1. Civil theft.
First, in Count IX of its Complaint, LNV asserts a “civil theft/conversion” claim against
OSM predicated on the allegation that OSM possesses certain monies that are owed to LNV
under the terms of the Grande Palisades Participation Agreement. Compare Complaint ¶ 137,
ECF No. 1 (asserting that OSM committed civil theft because it “took and/or possesses money
that rightfully belongs to LNV as an approximate 2.12424110% owner of all Collections from
the Grande Palisades Loan as set forth in more detail in the Grande Palisades Loan Participation
Agreement”), with Complaint ¶ 131, ECF No. 1 (asserting that OSM committed breach of
contract because it “failed to timely and promptly pay to LNV money it was owed as a
19
Participant pursuant to the terms of the Grande Palisades Loan Participation Agreement”). But
under New York law, “[a] cause of action for conversion cannot be predicated on a mere breach
of contract.” Fesseha v. TD Waterhouse Inv. Servs., 305 A.D.2d 268, 269 (N.Y. App. Div.
2003). This count is accordingly dismissed.
2. Unjust enrichment.
Second, in Count X, LNV asserts an “unjust enrichment/quantum meruit” claim against
OSM that is also indistinguishable from its breach of contract claim. “Since a valid contract
exists governing the subject matter in dispute, the cause of action for unjust enrichment is
untenable.” G&G Investments, Inc. v. Revlon Consumer Products Corp., 724 N.Y.S.2d 411, 411
(N.Y. App. Dept. 2001). See also Corsello v. Verizon New York, Inc., 967 N.E.2d 1177, 790-91
(N.Y. 2012) (“An unjust enrichment claim is not available where it simply duplicates, or
replaces, a conventional contract or tort claim.”); IDT Corp. v. Morgan Stanley Dean Witter &
Co., 907 N.E.2d 268, 274 (N.Y. 2009) (“Where the parties executed a valid and enforceable
written contract governing a particular subject matter, recovery on a theory of unjust enrichment
for events arising out of that subject matter is ordinarily precluded.”).
This count is therefore dismissed as well.
3. Constructive trust.
Third, in Count XI, LNV asserts a constructive trust claim, “the purpose of [which] is
prevention of unjust enrichment.” Simonds v. Simonds, 380 N.E.2d 189, 194 (N.Y. 1978). See
also Beatty v. Guggenheim Exploration Co., 122 N.E. 378, 380 (N.Y. 1919) (“A constructive
trust is the formula through which the conscience of equity finds expression. When property has
20
been acquired in such circumstances that the holder of the legal title may not in good conscience
retain the beneficial interest[,] equity converts him into a trustee.”). To maintain a constructive
trust claim, New York courts generally require a plaintiff to establish four elements: “(1) a
confidential or fiduciary relation, (2) a promise, (3) a transfer in reliance thereon and (4) unjust
enrichment.” Sharp v. Kosmalski, 351 N.E.2d 721, 723 (N.Y. 1976).
Because LNV does not have a viable unjust enrichment claim, its constructive trust claim
necessarily fails as well. Furthermore, there is no genuine issue of material fact as to the
existence of a confidential or fiduciary relationship here. “[B]anks who participate in loans
together are not fiduciaries, but act at arm’s length. . . . Any fiduciary duties between banks
participating in a loan must be created by ‘unequivocal language’ in the Participation
Agreement.” 330 Acquisition Co. v. Regency Sav. Bank, 306 A.D.2d 154, 155 (N.Y. App. Div.
2003) (citations omitted). See also Banque Arabe, 57 F.3d at 158 (noting that with regard to loan
participation agreements, “there is deemed to be no fiduciary duty unless expressly and
unequivocally created by contract”). The Grande Palisades Participation Agreement not only
does not contain any such language, but it in fact specifically and unequivocally disclaims any
“partnership[,] joint venture or other special relationship of any kind or nature” between the
participant and the lender at § 3.2(b).
This count is therefore dismissed.
II.
Bahia dispute.
The Grande Palisades portion of the case aside, OSM and BF-Negev have also moved for
partial summary judgment on the non-contract claims that LNV pled against them in connection
with the dispute over the participation interest that LNV acquired in the Bahia loan.
21
With regard to these matters, OSM asserts, and LNV does not dispute, that the Bahia
Participation Agreement is governed by Minnesota law. LNV also does not dispute the validity
of the Bahia Participation Agreement itself. In consequence, the non-contract claims that LNV
asserts against BF-Negev and OSM and which flow from the Bahia Participation Agreement
must now be dismissed as follows.
A. Civil theft.
At Count V of its Complaint, LNV asserts a “civil theft/conversion” claim against BFNegev and OSM for allegedly possessing monies that LNV claims it is owed under the Bahia
Participation Agreement. But in Minnesota, “when the gravamen of the complaint is the breach
of contract, the plaintiff may not recover tort damages,” McNeill & Assocs., Inc. v. ITT Life Ins.
Corp., 446 N.W.2d 181, 185 (Minn. Ct. App. 1989), and even “[a] malicious or bad-faith motive
in breaching a contract does not convert a contract action into a tort action,” Wild v. Rarig, 234
N.W.2d 775, 790 (Minn. 1975).
This count is therefore dismissed.
B. Unjust enrichment.
Similarly, at Count VI, LNV asserts an “unjust enrichment/quantum meruit” claim
against BF-Negev and OSM. However, “proof of an express contract precludes recovery in
quantum meruit.” Sharp v. Laubersheimer, 347 N.W.2d 268, 271 (Minn. 1984) (quotation
omitted). This count is dismissed.
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C. Constructive trust.
Finally, at Count VII, LNV asserts a constructive trust claim against BF-Negev and
OSM. To sustain a constructive trust claim, Minnesota law requires the presence of a fiduciary
relationship between the parties. Peterson v. Holiday Recreational Indus., Inc., 726 N.W.2d 499,
507 (Minn. Ct. App. 2007).
The Minnesota Supreme Court has not specifically addressed the relationship between a
lead lender and a participating bank in this context. However, the Eighth Circuit has predicted
that “Minnesota law would hold [a participant] to the marketplace standards of vigilance and
independent inspection, and not grant it any protection beyond the express terms of the
Participation Agreement.” Leonard v. Dorsey & Whitney LLP, 553 F.3d 609, 626 (8th Cir.
2009). Here, the Bahia Participation Agreement does not impose any special duty of care on the
lender; in fact, at § 4.2(c), it explicitly requires the lender only to “exercise that degree of care
that would ordinarily be exercised by lenders administering a construction loan . . . .”
This count is therefore dismissed.
Based on the files, records, and proceedings herein, and for the reasons discussed above,
IT IS ORDERED THAT:
1. Defendants’ Motion for Partial Summary Judgment [ECF No. 88] is GRANTED.
Dated: October 10, 2014
s/Joan N. Ericksen
JOAN N. ERICKSEN
United States District Judge
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