JPMorgan Chase Bank, N.A. v. KB Home et al

Filing 343

ORDER Denying 296 Defendant KB Home and KB Home Nevada's Motion for Preliminary Injunction; Granting 315 KB Home and KB Home Nevada's Motion for Leave to File Excess Pages; and Denying 318 JP Morgan Chase Bank N.A's Motion to Strike. Signed by Judge Philip M. Pro on 9/26/10. (Copies have been distributed pursuant to the NEF - EDS)

JPMorgan Chase Bank, N.A. v. KB Home et al

Doc. 343

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 UNITED STATES DISTRICT COURT D IS T R IC T OF NEVADA *** ) J P M O R G A N CHASE BANK, N.A., ) ) P la in tif f , ) ) v. ) ) K B HOME et al., ) ) D e f e n d a n ts. ) ___________________________________ ) ) A N D ALL RELATED ACTIONS ) )

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ORDER

P re se n tly before the Court is Defendant KBHome and KBHome Nevada Inc.'s (" K B " ) Emergency Motion for a Preliminary Injunction Enjoining JPMorgan Chase Bank, N .A . from Further Converting Major Infrastructure Deposits (Doc. #296), filed on July 2, 2 0 1 0 . Defendants Coleman-Toll Limited Partnership, Toll Brothers, Inc., Pardee Homes of N e v a d a , Weyerhauser Real Estate Company, Meritage Homes of Nevada, Meritage Homes C o rp o ra tio n , Beazer Homes Holdings Corp., and Beazer Homes USA, Inc. filed Joinders (D o c . #298, #299, #300, #302) to KB's motion. Plaintiff JPMorgan Chase Bank, N.A. (" J P M o rg a n " ) filed an Opposition (Doc. #308) on July 19, 2010. KB filed a Reply (Doc. # 3 1 6 ) on July 30, 2010. The Court held a hearing on this motion on August 6, 2010. (Mins. of Proceedings (Doc. #324).) T h is case arises out of a stalled real estate development project. The present d is p u te centers around whether the Court should enjoin the lender, JPMorgan, from further d ra w in g on letters of credit posted by certain Defendants in relation to the project.

Dockets.Justia.com

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I . BACKGROUND In 2004, KB Home Nevada, Inc., Focus South Group, LLC, Coleman-Toll L im ite d Partnership, Alameda Investments (Woodside), LLC, Kimball Hill Homes Nevada, In c ., Pardee Homes of Nevada, Meritage Homes of Nevada, Inc., and Beazer Homes H o ld in g s Corp. ("Builders") formed South Edge, LLC ("South Edge") to purchase nearly 2 0 0 0 acres of vacant real estate in the City of Henderson, Nevada, from the Bureau of Land M a n a g e m e n t, with the goal of developing the property into a master planned community c a lle d "Inspirada." To purchase the land, South Edge obtained a loan from a consortium of le n d e rs, for which JPMorgan acts as the Administrative Agent. Generally, the development p la n called for Builders, as Members of South Edge, to "take down" pods of land to d e v e lo p at certain intervals. The repayment of the loan to JPMorgan was tied to the ta k e d o w n s . To effectuate the project, the Builders, South Edge, and JPMorgan entered into a series of interrelated agreements governing the parties' rights and obligations. T o form South Edge, the Builders entered into an Operating Agreement which p ro v id e d for development and contemplated financing arrangements. South Edge and the B u ild e rs also entered into an Acquisition Agreement which outlined the rights and o b lig a tio n s in relation to the Builders performing their takedowns and acquiring the pods. Pursuant to the Operating and Acquisition Agreements, when a South Edge M e m b e r took down its pod of land, it was required, among other things, to post major cost d e p o s its ("MI Deposits") to cover general infrastructure costs at Inspirada. Section 2.3.6 of th e Operating Agreement provided that the MI Deposits be in the form of either a cash d e p o s it or a letter of credit. Pursuant to section 2.3.6, "[n]o material expenditures for Major In f ra s tru c tu re Costs shall be made except pursuant to the Business Plan or as approved by [ S o u th Edge's] Management Committee." Section 3 of the Acquisition Agreements states th a t upon takedown of a pod, the Builder shall deposit the MI Deposit, and­ /// 2

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U n le s s otherwise required by the "MI Financing," the Builder MI D e p o s it may be in the form of a commercial letter of credit for such a m o u n t and in form and substance satisfactory to the Management C o m m itte e of [South Edge]. . . . Unless otherwise required by the " M I Financing," the Builder MI Deposit shall be deposited at each T a k e d o w n into a third-party construction control account (the "MCD A c c o u n t" ) to be administered by an agent selected by the Management C o m m itte e of [South Edge] or otherwise in accordance with the O p e ra tin g Agreement (the "Disbursement Agent"). The MCD A c c o u n t shall be governed by a disbursement agreement, . . . provided, h o w e v e r, that such disbursement agreement shall be subject to such a d d itio n a l modifications as are required by the MI Financing. Unless o th e rw is e required by the MI Financing or as otherwise provided h e re in with respect to the Builder MI Deposit, funds in the MCD A c c o u n t shall be released from the MCD Account to [South Edge] for th e purpose of paying the Builder MI Costs on a progress of c o n s tru c tio n basis. . . . . Except in the case where the Builder MI D e p o s it represents one hundred percent (100%) of the Builder MI C o s ts for the applicable Takedown, and unless otherwise required by th e MI Financing, the Builder MI Deposit for such Takedown shall be u tiliz e d by [South Edge] to pay the last of the Major Infrastructure C o s ts to become due for such Takedown; provided however, that if, u p o n completion of the Major Infrastructure for a phase ("MI Phase") a n d payment of all Builder MI Costs for such MI Phase, [South Edge] m a y release funds from the MCD Account for such completed MI P h a s e to Builder . . . . T o obtain the funds to purchase the property from the Bureau of Land M a n a g e m e n t, South Edge entered into a Credit Agreement with JPMorgan. Under section 7 .0 3 (b )(iii) of the Credit Agreement, it was a condition of JPMorgan's release of a phase to a Member that "unless such Member's Parent Guarantor has a senior unsecured debt rating o f at least BB- from S&P or Ba3 from Moody's or at least an NAIC2 rating, such Member s h a ll deposit in a Cash Collateral Account with the [JPMorgan] funds, and/or furnish to the [ J P M o rg a n ] a Qualified Letter of Credit . . ." to cover the Member's MI Deposit. Section 7 .0 3 (b )(iv ) of the Credit Agreement provides that if the Member acquiring the pod does not h a v e to make a deposit in a Cash Collateral Account as set forth in subsection (iii), but is o b lig a te d to make a MI Deposit under Section 2.3.6 of the Operating Agreement, the A d m in is tra tiv e Agent "may, at its election, require that the [MI Deposit] be deposited in a C a sh Collateral Account with [JPMorgan], in which event (subject to the provisions of 3

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S e c tio n 9.05) [JPMorgan] shall advance the funds so deposited in accordance with Section 2 .3 .6 of the Operating Agreement." In Section 9.05(a) of the Credit Agreement, South Edge grants JPMorgan a s e c u rity interest in all of South Edge's rights in the Cash Collateral Accounts. Section 9 .0 5 (c ) provides that so long as there is no default, funds in a Cash Collateral Account "may b e used solely for the purpose provided for in the section of this Agreement pursuant to w h ic h such funds were deposited" in the account. However, in the event of a default, " f u n d s in any Cash Collateral Account may be used to pay any Secured Obligations, p ro v id e d , however, that funds deposited in a Cash Collateral Account by or on behalf of a M e m b e r pursuant to Section 7.03(b) may only be used to pay such Member's Adjusted Pro R a ta Share of such Secured Obligations." Obligations are defined to include reasonable a tto rn e ys ' fees. Section 9.06 provides that for any Qualified Letter of Credit delivered to J P M o rg a n pursuant to Sections 5.09, 7.03(b), or 9.07 of the Credit Agreement, JPMorgan m a y draw upon it only for the specified purposes unless there has been an event of default th a t is continuing. After a continuing event of default, JPMorgan "may draw upon any Q u a lif ie d Letter of Credit in the full amount thereof and apply the amount drawn as p ro v id e d in, and subject to the provisions of, Section 9.05(d)." In conjunction with executing the Credit Agreement, South Edge and JPMorgan e n te re d into an Assignment of Acquisition Agreements. Under the Assignment, South Edge " a s s ig n s , transfers, sets over and pledges to [JPMorgan], and hereby grants to [JPMorgan] a s e c u rity interest and Lien in, to and against, all of [South Edge's] right, title and interest, p o w e rs, remedies, privileges and other benefits, whether now owned or hereafter acquired in , to and under the Acquisition Agreements." Upon an event of default, JPMorgan had the rig h t to enforce any of South Edge's rights under the Acquisition Agreements. In April 2007, in association with the first takedowns, the Builders made MI D e p o s its in the following amounts via letters of credit: 4

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KB A la m e d a K im b a ll

$4,979,886 $ 2 ,5 1 2 ,1 1 0 $ 1 ,8 0 0 ,7 9 9

C o le m a n -T o ll M e r ita g e

$ 1 ,2 1 3 ,6 0 9 $ 1 ,1 3 3 ,7 4 7

K B made an additional MI Deposit in October 2007 by increasing its existing letter of c re d it. At the time it created and increased its letter of credit, KB had a rating of BB+ from S & P and Ba1 from Moody's. Kimball posted an additional letter of credit in the amount of $ 1 0 ,6 8 5 ,9 7 9 . Focus made its MI Deposit in the amount of $30,948,897 in cash around that s a m e time. Builders thereafter defaulted on the loan, and no further MI Deposits have been m a d e . Starting in July 2008, JPMorgan started to draw on the letters of credit posted as MI D e p o s its . At the time JPMorgan drew on the letters of credit, KB and Toll sent letters to J P M o rg a n protesting the draws on the basis that no event of default had occurred. However, KB and Toll did not assert that JPMorgan was not entitled to make the draws u p o n an event of default. According to Builders, JPMorgan produced to them for the first time in March 2 0 1 0 account statements for each of the MI Deposits. JPMorgan also disclosed it was using th e MI Deposits to pay not only costs associated with keeping the Inspirada project afloat, b u t also to pay JPMorgan's litigation costs in this action. Builders contend that JPMorgan h a s converted and improperly is using money from Builders' MI Deposits because the re le v a n t agreements provide that the MI Deposits can be used only for major infrastructure c o n s tru c tio n . Builders contend JPMorgan instead has drawn on the letters of credit to fund th is litigation and to fund Focus's arbitration. Builders move for a preliminary injunction s e e k in g to enjoin JPMorgan from drawing on Builders' letters of credit to fund JPMorgan's litig a tio n expenses in this action. Builders also seek to amend their Counterclaims to add c la im s for conversion and declaratory relief. JPMorgan opposes the motion, arguing that B u ild e rs are unable to show imminent, irreparable injury. JPMorgan also argues that it has 5

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a right to draw on the letters of credit under the various interlocking agreements. JPMorgan o p p o se s amendment, asserting it is untimely and Builders have not shown good cause for th e delay. I I . MOTION FOR PRELIMINARY INJUNCTION T o obtain a preliminary injunction, Builders must show by a preponderance of th e evidence that they are "`likely to succeed on the merits, that [they are] likely to suffer irre p a ra b le harm in the absence of preliminary relief, that the balance of equities tips in [ th e ir] favor, and that an injunction is in the public interest.'" Stormans, Inc. v. Selecky, 5 8 6 F.3d 1109, 1127 (9th Cir. 2009) (quoting Winter v. Natural Res. Def. Council, Inc., 129 S . Ct. 365, 374 (2008)). "Typically, monetary harm does not constitute irreparable harm." Cal. Pharmacists Ass'n v. Maxwell-Jolly, 563 F.3d 847, 851 (9th Cir. 2009). Builders have failed to show they are likely to suffer irreparable injury in the a b s e n c e of a preliminary injunction. The dispute over JPMorgan's draws on the letters of c re d it is a dispute over money which can be remedied through money damages. There is little threat that JPMorgan would be unable to pay any judgment should Builders ultimately p re v a il, as Builders themselves note JPMorgan has substantial assets. To the extent B u ild e rs contend the MI Deposits are necessary to ensure liquidity to complete major in f ra s tru c tu re at Inspirada, the MI Deposits contractually were designated to pay the last in f ra s tru c tu re deposits for any particular phase. Because Builders have not performed any m o re development or takedowns, and there is no plan to do so in the foreseeable future, th e re is no immediate need for the funds or a need to ensure a reserve of funds remains a v a ila b le . F u rth e r, Builders have known about the draws on the letters of credit for two ye a rs . KB and Toll both sent JPMorgan letters complaining about the draws in July 2008. Having known about the draws for two years now, Builders cannot complain that injunctive re lie f is now necessary. Builders contend it is JPMorgan's use of the funds to pay its own 6

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litig a tio n costs which triggered the need for injunctive relief, but Builders have known a b o u t JPMorgan's use of the funds since March, yet Builders waited until July to move for in ju n c tiv e relief. Builders' delay further suggests no irreparable injury is at stake. M o re o v e r, the balance of equities does not tip in Builders' favor. Inspirada's c o m p le tio n is in jeopardy because South Edge has not performed and has ceased d e v e lo p m e n t on the project, not because JPMorgan has drawn on the letters of credit. The C o u rt therefore will deny KB's motion for a preliminary injunction to enjoin JPMorgan f ro m further drawing on the letters of credit. K B argues that even if JPMorgan is entitled to draw on the letters of credit, it m u s t do so on a pro rata basis, and JPMorgan has not done so. KB thus requests that J P M o rg a n be enjoined from drawing on the letters of credit or cash MI Deposits d is p ro p o rtio n a te ly. Pursuant to section 9.05(a) of the Credit Agreement, in the event of a d e f a u lt, JPMorgan may use funds in a Cash Collateral Account to pay "any Secured O b lig a tio n s , provided, however, that funds deposited in a Cash Collateral Account by or on b e h a lf of a Member pursuant to Section 7.03(b) may only be used to pay such Member's A d ju ste d Pro Rata Share of such Secured Obligations." KB has not presented evidence re b u ttin g JPMorgan's contention that KB's pro rata share of the Secured Obligations c u rre n tly far exceeds the total amount of its letter of credit. Consequently, JPMorgan could d ra w on KB's entire letter of credit without exceeding KB's pro rata share of the Secured O b lig a tio n s . The Court therefore will not enjoin JPMorgan from drawing d is p ro p o rtio n a te ly on the letters of credit or cash MI Deposits. I I I . MOTION TO AMEND In conjunction with the motion for preliminary injunction, KB requests leave to a m e n d to add counterclaims for conversion and declaratory relief in relation to JPMorgan's d ra w on the letters of credit. JPMorgan opposes the motion to amend. /// 7

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T h e Court will deny the motion to amend. Builders offer no points and a u th o ritie s in support of their request to add new claims. See L.R. 7-2(a). The motion also is untimely, as the deadline to amend passed several months ago. Builders have shown no g o o d cause to extend the deadline. The good cause standard "primarily considers the d ilig e n c e of the party seeking the amendment." Coleman v. Quaker Oats Co., 232 F.3d 1 2 7 1 , 1294 (9th Cir. 2000) (quotation omitted). Builders have known about JPMorgan's d ra w s on the letters of credit for two years, and have known about JPMorgan's use of the f u n d s to finance this litigation since March. Yet Builders did not move to amend to add th e s e claims until early July, despite the fact that Builders had pending before this Court a n o th e r motion to amend to add other claims. Although that motion was filed in February, b e f o re Builders learned JPMorgan was using the money to fund its litigation costs, Builders c o u ld have sought to add the claims earlier. Builders contend they did not act because the p a rtie s were in the midst of settlement talks; however, the settlement talks have not p re v e n te d these parties from briefing other motions or otherwise pressing their positions in th is case. Builders have not shown diligence in seeking amendment, and the Court th e re f o re will deny the request to amend. I V . CONCLUSION IT IS THEREFORE ORDERED that Defendant KBHome and KBHome Nevada In c .'s ("KB") Emergency Motion for a Preliminary Injunction Enjoining JPMorgan Chase B a n k , N.A. from Further Converting Major Infrastructure Deposits (Doc. #296) is hereby D E N IE D . IT IS FURTHER ORDERED that Defendants KB Home and KB Home Nevada In c .'s Motion for Order Permitting Defendants to File a Reply Brief in Excess of Twenty P a g e s (Doc. #315) is hereby GRANTED. /// /// 8

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IT IS FURTHER ORDERED that Plaintiff JPMorgan Chase Bank N.A.'s Motion to Strike Defendants KB Home and KB Home Nevada's Untimely Reply to Their Motion f o r Preliminary Injunction (Doc. #318) is hereby DENIED.

DATED: September 26, 2010

_______________________________ PHILIP M. PRO United States District Judge

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