U.S. Bank National Association, as Trustee for the Registered Holders of Wachovia Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2006-C28 v. Dexia Real Estate Capital Markets
Filing
90
OPINION AND ORDER re: 68 MOTION for Summary Judgment filed by U.S. Bank National Association, as Trustee for the Registered Holders of Wachovia Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2006-C28, 74 MOTION for Summary Judgment filed by Dexia Real Estate Capital Markets. For the foregoing reasons, the Trust's motion for summary judgment is GRANTED and Dexia's motion for summary judgment is DENIED. Dexia shall repurchase the M arketplace Loan at the applicable purchase price as set forth in the PSA and MLPA. The Trust shall file a written submission as to the proper calculation of the purchase price by July 21, 2014. Dexia's response is due on August 4, 2014. The Trust's reply is due on August 11, 2014. The Clerk of the Court is directed to close these motions (Dkt. No. 68 and 74). (Signed by Judge Shira A. Scheindlin on 7/9/2014) (lmb)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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U.S. BANK NATIONAL
ASSOCIATION, AS TRUSTEE FOR
THE REGISTERED HOLDERS OF
WACHOVIA BANK COMMERCIAL
MORTGAGE TRUST, COMMERCIAL
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 2006-C28,
ACTING BY AND THROUGH ITS
SPECIAL SERVICER CWCAPITAL
ASSET MANAGEMENT LLC,
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DATE FI.LU..D: .
OPINION AND ORDER
12-cv-9412
Plaintiff,
- against DEXIA REAL ESTATE CAPITAL
MARKETS F/K/A ARTESIA
MORTGAGE CAPITAL
CORPORATION,
Defendant.
·---------------------------------------------------
)(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
Plaintiff U.S. Bank National Association, as Trustee for the
Registered Holders of Wachovia Bank Commercial Mortgage Trust, Commercial
Mortgage Pass-Through Certificates, Series 2006-C28 ("the Trust"), acting by and
1
through its Special Servicer CWCapital Asset Management LLC (“CWCAM”),
brings this diversity breach of contract suit against Dexia Real Estate Capital
Markets f/k/a Artesia Mortgage Capital Corporation (“Dexia”). The parties crossmove for summary judgment. For the following reasons, the Trust’s motion for
summary judgment is GRANTED and Dexia’s motion for summary judgment is
DENIED.
II.
BACKGROUND
A.
The Contracts
In September 2006, Dexia made a $13,800,000 commercial mortgage
loan (the “Marketplace Loan”) to MP Operating, LLC and Annex Operating, LLC
(collectively, the “Borrowers”).1 The Marketplace Loan is evidenced by a
promissory note and secured by a mortgage against an office building located in
Stearns County, Minnesota.2 Four individuals (the “Guarantors”) “were purported
to have executed a guaranty in favor of Dexia and its successors and assigns” in
connection with the Marketplace Loan (the “Guaranty”).3 Section 2(b)(iv) of the
Guaranty (the “Full-Recourse Provision”) provides that the Guarantors shall be
1
See Plaintiff’s Statement of Undisputed Material Facts in Support of
Its Motion for Summary Judgment (“Pl. 56.1 Statement”) ¶ 1.
2
See id. ¶ 2.
3
Id. ¶ 7.
2
personally liable for the entire amount of the indebtedness evidenced by the
promissory note if certain conditions were not met with respect to the Stearns
County property.4
On October 1, 2006, Dexia and Wachovia Commercial Mortgage
Securities (“WCMS”) entered into a Mortgage Loan Purchase Agreement (the
“MLPA”).5 “Pursuant to the MLPA, Dexia sold commercial mortgage loans . . . to
[WCMS] to be deposited into the Trust and securitized through the issuance of
mortgage pass-through certificates.”6
Dexia made several representations and warranties regarding the loans
sold to WCMS, including the Marketplace Loan. Representation 5 states, in
relevant part, that “[e]ach related . . . agreement executed by the related Mortgagor
in connection with [each] Mortgage Loan is a legal, valid and binding obligation of
the related Mortgagor . . . enforceable in accordance with its terms.”7
4
See 9/25/06 Limited Recourse Obligations Guaranty, Exhibit (“Ex.”)
1 to the 4/1/14 Declaration (“Decl.”) of Colleen M. Mallon, counsel for plaintiff, ¶
2(b)(iv).
5
See Pl. 56.1 Statement ¶ 11.
6
Id. ¶ 12.
7
10/1/06 Mortgage Loan Purchase Agreement (“MLPA”), Ex. 3 to
Mallon Decl., Schedule I (General Mortgage Representations and Warranties), at I2.
3
Representation 6 states, in relevant part, that “[a]s of the date of its origination,
there was no valid offset, defense, counterclaim, abatement or right to rescission
with respect to any of the related . . . agreements executed in connection” with each
Mortgage Loan. 8
On the same day, WCMS, the Trust, Wachovia Bank National
Association (the “Master Servicer”), and CWCAM (the “Special Servicer”),
entered into a Pooling and Servicing Agreement (“PSA”), in which WCMS
assigned its “rights, title and interest” to several mortgage loans, as well as its
rights under “Sections 2, 3, 9, 10, 11, 12, 13, 14, 16, 17, 18 and 19 of each of the
[corresponding] Mortgage Loan Purchase Agreements” to the Trust.9 The
Marketplace Loan and Guaranty were assigned to the Trust as part of the PSA.10
Section 2.03 of the PSA and Section 3 of the MLPA provide the sole
remedy available for document defects and breaches of representations and
warranties.11 Section 2.03(a) of the PSA provides that
8
Id.
9
10/1/06 Pooling and Servicing Agreement (“PSA”), Ex. 2 to Mallon
Decl., § 2.01(a).
10
See Pl. 56.1 Statement ¶¶ 9-10.
11
A “Document Defect” is defined as “any document or documents
constituting a part of a Mortgage File . . . [that] has not been properly executed, is
missing (beyond the time period required for its delivery hereunder), contains
4
[p]romptly upon becoming aware of any ‘Document Defect’ or
‘Breach,’ . . . any party [who]. . . determines that such Document
Defect or Breach materially and adversely affects the value of the
affected Mortgage Loan, the interest of the Trust Fund therein or
the interests of any Certificateholder . . . shall notify the Master
Servicer of such determination and promptly after receipt of such
notice, the Master Servicer [or Special Servicer], shall request in
writing . . . that the applicable Mortgage Loan Seller, not later
than ninety (90) days from receipt of such written request . . . (i)
cure such Document Defect or Breach . . . in accordance with
Section 3(c) of the applicable [MLPA] [or] (ii) repurchase[s] the
affected Mortgage Loan . . . in accordance with Section 3(c) of the
related [MLPA].12
A Document Defect is “considered to materially and adversely affect” the value of
the loan, interest of the Trust, or interest of any Certificateholder only when “the
document with respect to which the Document Defect exists is required in
connection with an imminent enforcement of the mortgagee’s rights or remedies
under the related Mortgage Loan.”13
B.
Minnesota State Court Litigation
“The Marketplace Loan went into default in January 2010 as a result
information that does not conform in any material respect with the corresponding
information set forth in the Mortgage Loan Schedule, or does not appear to be
regular on its face.” A “Breach” is defined as “a breach of any representation or
warranty relating to any Mortgage Loan set forth in the applicable Mortgage Loan
Purchase Agreement.” PSA 2.03(a).
12
Id.
13
Id. Accord MLPA, Section 3(c).
5
of [the] Borrowers’ failure to pay the required monthly debt service due in that
month.”14 After the loan was transferred to CWCAM for special servicing in
March 2010, the Special Servicer determined that “the debt service coverage ratio,
effective gross income, and physical occupancy rate requirements in the Guaranty
were not met, thereby triggering the Guarantors’ liabilities under the Full-Recourse
Provision.”15 “On September 7, 2010, the Trust filed an action in Stearns County,
Minnesota, seeking, among other things, to foreclose upon the lien of the
Mortgage, appointment of a receiver, and to enforce the Full-Recourse Provision of
the Guaranty.”16
14
Pl. 56.1 Statement ¶ 34.
15
Id. ¶¶ 35-36.
16
Id. ¶ 37. The facts that follow are based largely on the 4/1/14
declaration of Heather Deans Foley, counsel for the Trust in this action as well as
the Stearns County case. While Dexia does not contest the truth of any of the
following facts, it contends that this testimony should not be considered because
the Trust did not list Foley as a potential witness in its Rule 26(a) disclosures and
the Trust has not been able to depose Foley or her law firm, Venable. But Dexia
has always known that Foley would be a potential witness and has twice attempted
to depose her, or a representative from Venable. Both times, the Trust objected on
the basis of attorney-client privilege and I upheld those objections. See Transcript
of 11/19/13 and 3/10/14 Conferences. The Foley declaration merely summarizes
the procedural history of the Stearns County litigation, including the arguments put
forth during motion practice and the substance of the court’s decisions, all of
which is a matter of public record. Foley has not waived attorney-client privilege,
nor is there any harm or prejudice in considering her testimony on these summary
judgment motions.
6
“The Guarantors responded to the Trust’s complaint in the Stearns
County Litigation by raising as an affirmative defense that they had not executed
the Guaranty with the Full-Recourse Provision and that it was therefore
unenforceable.”17 In November 2010, the Guarantors moved for summary
judgment, claiming that they executed a limited form of the guaranty that did not
include the Full-Recourse Provision. The Guarantors contended that Best &
Flanagan, the law firm that served as Dexia’s closing counsel, “had taken the
Guarantors’ signature page from the more limited form of the guaranty and
attached it to the form of the Guaranty containing the Full-Recourse Provision
without their consent.”18 After the completion of discovery, the Trust amended its
complaint to add an alternative theory of contract reformation, arguing that the
Guaranty should be reformed to incorporate the Full-Recourse Provision because
the Guarantors had ratified the Full-Recourse Provision through later actions.19
On July 11, 2011, the Stearns County trial court held that the FullRecourse Provision was unenforceable because there was insufficient evidence that
the Guarantors “had accepted the offer of a Full-Recourse Guaranty or that they
17
Pl. 56.1 Statement ¶ 40.
18
Id. ¶¶ 41-42.
19
See id. ¶ 48.
7
intended to ratify [Dexia’s closing counsel’s] modification to the original
Alternative Guaranty.”20 In a separate order dated September 21, 2011, the court
held that the rest of the Guaranty was enforceable against the Guarantors because
they admitted to signing the more limited guaranty, but granted summary judgment
in favor of the Guarantors on the Trust’s reformation claim.21
In August 2012, the Guarantors sued Dexia and its closing counsel in
20
U.S. Bank Nat’l Ass’n v. MP Operating, LLC, No. 73-cv-10-7965,
Order (Minn. Dist. Ct. Jul. 11, 2011), Ex. 7 to Mallon Decl., at 14.
21
See Pl. 56.1 Statement ¶ 62. On July 1, 2014, the Stearns County
court issued an order denying Best & Flanagan’s motion to intervene. Best &
Flanagan sought to intervene in the Stearns County case, three years after partial
summary judgment was granted in favor of the Guarantors, arguing that important
documents supporting the reformation claim were not made part of the summary
judgment record. The Stearns County court denied the motion to intervene, but
remarked that “[t]he summary judgment record was woefully incomplete and that
summary judgment would not have been granted if the information offered in
support of the motion to intervene had been part of the summary judgment record.”
U.S. Bank Nat’l Ass’n v. MP Operating, LLC, No. 73-cv-10 7965, Order Denying
Intervention (Minn. Dist. Ct. Jul. 1, 2014), Ex. A to 7/3/14 Letter from G. Edgar
James, counsel for Dexia, to the Court (“7/1/14 Stearns County Order”), at 3-4.
Specifically, the court said that “[t]he summary judgment record did not include
the Loan Application [and] Commitment Letter, both of which confirm the
[Guarantors’] agreement to the full recourse guarantee, or at least, raise genuine
issues of material fact as to that point.” Id. at 4, n. 3. However, as the Trust points
out, and Dexia concedes, the Commitment Letter, which references the Loan
Application, was, in fact, part of the summary judgment record. See 7/8/14 Letter
from Gregory A. Cross, counsel for the Trust, to the Court, at 2 n. 3; Pl. 56.1
Statement ¶ 53; Dexia’s Counter-Statement to Pl. 56.1 Statement, ¶ 53. Thus, the
court’s statements in the July 1, 2014 order about the completeness of the summary
judgment record are premised, at least in part, on a factual misstatement.
8
Hennepin County, Minnesota for fraud and negligence relating to the swapping of
the signature page.22 Dexia filed a counterclaim against the Guarantors for contract
reformation and a cross-claim against its closing counsel, alleging malpractice.23
The Guarantors moved to dismiss Dexia’s counterclaim, arguing that the
reformation argument was barred by res judicata and collateral estoppel.24 On
March 20, 2014, the Hennepin County court granted the Guarantors’ motion to
dismiss, holding that “[t]he related doctrines of res judicata and collateral estoppel
prevent Dexia from relitigating legal issues that were already decided . . . in the
Stearns County Litigation.”25
C.
Demand and Suit
On September 29, 2011, the Trust wrote to Dexia stating that as a
result of the Stearns County trial court orders, “the form of the Guaranty
maintained in the Mortgage File was never properly executed by the Guarantors, is
not a valid and binding contract . . . and is unenforceable as a full recourse
22
Pl. 56.1 Statement ¶ 72.
23
See id. ¶ 73.
24
See id. ¶ 75.
25
Abel v. Yip, No. 27-cv-13-9898, Order Granting Motion, (Minn. Dist.
Ct. Mar. 20, 2014), Ex. 11 to Mallon Decl., at 7.
9
guaranty” and Dexia has breached its representations and warranties.26 The letter
requested that Dexia cure the document defect or repurchase the loan in accordance
with Section 3 of the MLPA and Section 2.03 of the PSA.27 “Dexia refused to
purchase the Loan.”28 The Trust appealed the July and September 2011 orders on
July 9, 2012, but withdrew its appeal with prejudice on November 13, 2012, before
it had been briefed.29 The Marketplace Loan remains outstanding and is in
default.30 The Trust filed this action on December 27, 2012.
III.
LEGAL STANDARD ON SUMMARY JUDGMENT
Summary judgment is appropriate “only where, construing all the
evidence in the light most favorable to the non-movant and drawing all reasonable
inferences in that party’s favor, there is ‘no genuine issue as to any material fact
and . . . the movant is entitled to judgment as a matter of law.’”31 “A fact is
material if it might affect the outcome of the suit under the governing law, and an
26
9/29/11 letter from Gregory Cross, counsel for the Trust, to Artesia
Mortgage Capital Corporation [Dexia’s former name], Ex. 8 to Mallon Decl., at 5.
27
See id.
28
Pl. 56.1 Statement ¶ 68.
29
See id. ¶¶ 63-64.
30
See id. ¶ 84.
31
Rivera v. Rochester Genesee Reg’l Transp. Auth., 702 F.3d 685, 692
(2d Cir. 2012) (quoting Fed. R. Civ. P. 56(c)) (other quotations omitted).
10
issue of fact is genuine if the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.”32
“[T]he moving party has the burden of showing that no genuine issue
of material fact exists and that the undisputed facts entitle him to judgment as a
matter of law.”33 “When the burden of proof at trial would fall on the non-moving
party, it ordinarily is sufficient for the movant to point to a lack of evidence to go
to the trier of fact on an essential element of the non[-]movant’s claim.”34 The
burden then “shifts to the non[-]moving party to present specific evidence showing
a genuine dispute.”35 This requires “‘more than simply show[ing] that there is
some metaphysical doubt as to the material facts,’”36 and the non-moving party
cannot “rely on conclusory allegations or unsubstantiated speculation.”37
In deciding a motion for summary judgment, “[t]he role of the court is not to
32
Windsor v. United States, 699 F.3d 169, 192 (2d Cir. 2012), aff’d, 133
S. Ct. 2675 (2013) (quotations and alterations omitted).
33
Coollick v. Hughes, 699 F.3d 211, 219 (2d Cir. 2012) (citations
omitted).
34
Jaramillo v. Weyerhaeuser Co., 536 F.3d 140, 145 (2d Cir. 2008).
35
Id.
36
Brown v. Eli Lilly & Co., 654 F.3d 347, 358 (2d Cir. 2011) (quoting
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)).
37
Id.
11
resolve disputed issues of fact but to assess whether there are any factual issues to
be tried.”38 “‘Credibility determinations, the weighing of the evidence, and the
drawing of legitimate inferences from the facts are jury functions, not those of a
judge.’”39
IV.
APPLICABLE LAW
A.
Breach of Contract
1.
Elements
The elements of breach of contract under New York law40 are well
established: “(1) the existence of a contract between [the plaintiff] and th[e]
defendant; (2) performance of the plaintiff’s obligations under the contract; (3)
breach of the contract by th[e] defendant; and (4) damages to the plaintiff caused
by th[e] defendant’s breach.”41
2.
38
Statute of Limitations
Cuff ex rel. B.C. v. Valley Cent. Sch. Dist., 677 F.3d 109, 119 (2d Cir.
2012).
39
Redd v. New York Div. of Parole, 678 F.3d 166, 174 (2d Cir. 2012)
(quoting Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000)).
40
The MLPA and PSA are governed by New York law. See MLPA §
15 and PSA § 11.04.
41
Diesel Props S.r.l. v. Greystone Bus. Credit II LLC, 631 F.3d 42, 52
(2d Cir. 2011).
12
Breach of contract claims are subject to a six year statute of
limitations.42 A breach of contract claim accrues at the time of breach, even if
plaintiff does not suffer damages until a later date.43
“[W]here a demand is necessary to entitle a person to commence an
action, the time within which the action must be commenced shall be computed
from the time when the right to make the demand is complete.”44 “Under New
York law, claims which are subject to pre-suit cure or demand requirements accrue
when the underlying breach occurs, not when the demand is subsequently made or
refused,” unless a demand is a substantive predicate to a suit.45
A substantive demand is an “essential [legal] element of the plaintiff’s
cause of action,” such as for example, replevin.46 When a demand requirement is
considered substantive, the statute of limitations does not begin to run until
42
See Civil Practice Law and Rules (“CPLR”) § 214(3).
43
See Ely-Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402
(1993).
44
CPLR § 206(a)
45
Deutsche Alt–A Securities Mortg. Loan Trust. Series 2006–OA1 v. DB
Structured Prods., Inc., 958 F. Supp. 2d 488, 499 (S.D.N.Y. 2013).
46
Continental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16, 21 (2d Cir.
1996). For example, “[d]emand upon, and refusal of, the person in possession of
the chattel to return it [are] essential elements of a cause of action in replevin.” In
re Peters, 821 N.Y.S.2d 61, 65 (2006).
13
demand is made and refused.47 But where a demand is merely procedural, “the
time within which the action must be commenced shall be computed from the time
when the right to make the demand is complete,” that is, from the date of the
breach.48 Thus, a party “‘may not extend the accrual date of the statute of
limitations simply by delaying its demand for payment [because a] cause of action
for breach of contract accrues when the party making the claim possesses a legal
right to demand payment.’”49
3.
Condition Precedent
“Under New York law, a condition precedent is an act or event which
must occur before another party’s duty to perform its promise arises.”50
“Conditions are not favored under New York law, and in the absence of
unambiguous language, a condition will not be read into the agreement.”51 In cases
47
See Continental, 77 F.3d at 21. See also CPLR § 206(a).
48
Parker v. Town of Clarkstown, 629 N.Y.S.2d 787, 788 (2d Dep’t
1995) (emphasis added).
49
Lehman XS Trust, Series 2006–4N ex rel. U.S. Bank, Nat’l Ass’n v.
Greenpoint Mortg. Funding, Inc., No. 13 Civ. 4707, 2014 WL 108523, at *3
(S.D.N.Y. Jan. 10, 2014) (quoting Lehman Bros. Holdings, Inc. v. Evergreen
Moneysource Mortg. Co., 793 F. Supp. 2d 1189, 1194 (W.D. Wash. 2011))
(emphasis in original).
50
LaSalle Bank Nat. Assoc. v. Citicorp Real Estate, Inc., No. 02 Civ.
7868, 2003 WL 21671812, at *3 (S.D.N.Y. July 16, 2003).
51
Ginett v. Computer Task Group, Inc., 962 F.2d 1085, 1100 (2d Cir.
1992).
14
involving notice provisions and cure and repurchase obligations, courts have held
that “the sending of a notice to cure [is] a condition precedent to the repurchase
obligation where the repurchase provision state[s]” that the repurchase obligation
is triggered “‘following the expiration of the related cure period.’”52 But courts
have declined to find that a notice requirement is a condition precedent when the
repurchase can be triggered by something other than a notice,53 or where the
repurchase provisions and notice provisions “do not expressly refer to each
other.”54
4.
Prior Material Breach
“[A] party’s performance under a contract is excused where the other
party has substantially failed to perform its side of the bargain or, synonymously,
52
BNY Mellon Trust Co. v. Morgan Stanley, No. 11 Civ. 0505, 2013 WL
3146824, at *17 (S.D.N.Y. Jun. 19, 2013) (quoting Assured Guaranty Municipal
Corp. v. DB Structured Prods., Inc., 927 N.Y.S.2d 880 (Sup. Ct. N.Y. Co. 2011)).
53
See Trust for Certificate Holders of Merrill Lynch Mortg.
Passthrough Certificates Series 1999–C1 v. Love Funding Corp., No. 04 Civ.
9890, 2005 WL 2582177, at *7 (S.D.N.Y. Oct. 11, 2005) (finding that the notice
provision was not a condition precedent where obligation to cure or repurchase
could be triggered “within sixty (60) days of either discovery by or notice to
[Seller] of any Breach of a representation or warranty”).
54
LaSalle Bank, 2003 WL 21671812, at *3.
15
where that party has committed a material breach.”55 A breach is material if it
“go[es] to the root of the agreement between the parties [and] is so substantial that
it defeats the object of the parties in making the contract.”56
B.
Breach of Covenant of Good Faith and Fair Dealing
Under New York law, every contract contains an implied promise that
“neither party to a contract shall do anything which has the effect of destroying or
injuring the right of the other party to receive the fruits of the contract.”57 A breach
of the covenant is “merely a breach of the underlying contract,” and “cannot be
used to create new contractual rights between the parties.”58
C.
Collateral Estoppel and Res Judicata59
“Res judicata and collateral estoppel are related doctrines.
Fundamental to both doctrines is that a ‘right, question or fact distinctly put in
issue and directly determined by a court of competent jurisdiction cannot be
55
Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 186
(2d Cir. 2007).
56
Frank Felix Assocs., Ltd. v. Austin Drugs, Inc., 111 F.3d 284, 289 (2d
Cir. 1997) (quotation marks omitted).
57
M/A-COM Sec. Corp. v. Galesi, 904 F.2d 134, 136 (2d Cir. 1990).
58
Cohen v. Elephant Wireless, Inc., No. 03 Civ. 4058, 2004 WL
1872421, at *11 (S.D.N.Y. Aug. 19, 2004) (quotation marks and citations omitted).
59
The parties agree that Minnesota law governs the issue of res judicata
and collateral estoppel.
16
disputed in a subsequent suit between the same parties or their privies.’”60 “The
doctrine of res judicata bars a claim where litigation on a prior claim involved the
same cause of action, where there was a judgment on the merits, and where the
claim involved the same parties or their privies.”61 “Collateral estoppel . . . applies
to specific legal issues that have been adjudicated and is also commonly and
accurately known as ‘issue preclusion.’”62 “The issue on which collateral estoppel
is to be applied must be the same as that adjudicated in the prior action and it must
have been necessary and essential to the resulting judgment in that action.”63
Collateral estoppel may be applied when “(1) the issue was
identical to one in a prior adjudication; (2) there was a final
judgment on the merits; (3) the estopped party was a party or in
privity with a party to the prior adjudication; and (4) the estopped
party was given a full and fair opportunity to be heard on the
adjudicated issue.”64
“A plaintiff uses offensive collateral estoppel when he or she ‘seek[s]
60
Hauschildt v. Beckingham, 686 N.W.2d 829, 837 (Minn. 2004)
(quoting Kaiser v. Northern States Power Co., 353 N.W.2d 899, 902 (Minn.
1984)).
61
Wilson v. Commissioner of Revenue, 619 N.W.2d 194, 198 (Minn.
2000).
62
Hauschildt, 686 N.W.2d at 837.
63
Id.
64
State v. Lemmer, 736 N.W.2d 650, 659 (Minn. 2007) (quoting
Willems v. Commissioner of Pub. Safety, 333 N.W.2d 619, 621 (Minn. 1983)).
17
to estop a defendant from relitigating the issues which the defendant previously
litigated and lost against another plaintiff.’”65 Courts have expressed concern that
offensive collateral estoppel may be unfair to defendants, but have permitted its
use in the absence of unfairness. Offensive collateral estoppel may be considered
unfair in four circumstances – 1) if the second proceeding was unforeseeable; 2) if
the judgment relied on is inconsistent with previous judgments in favor of
defendant; 3) if different procedures apply in the subsequent action; and 4) if
plaintiff could have easily joined in the earlier action.66
Privity “‘expresses the idea that as to certain matters and in certain
circumstances persons who are not parties to an action but who are connected with
it in their interests are affected by the judgment with reference to interests involved
in the action, as if they were parties.’”67 “Privies to a judgment are those who are
so connected with the parties in estate or in blood or in law as to be identified with
them in interest, and consequently to be affected with them by the litigation.”68 The
65
Falgren v. State Board of Teaching, 545 N.W. 2d 901, 906 (Minn.
1996) (quoting Parklane Hosiery Co. v. Shore, 439 U.S. 322, 329 (1979)).
66
See id. at 906-07. See also Parklane, 439 U.S. at 329.
67
Rucker v. Schmidt, 794 N.W.2d 114, 118 (Minn. 2011) (quoting
Margo–Kraft Distribs., Inc. v. Minneapolis Gas Co., 200 N.W.2d 45, 47 (Minn.
1972)).
68
Id.
18
Supreme Court of the United States recently held that “nonparty preclusion may be
justified based on a variety of pre-existing substantive legal relationship[s]
between the person to be bound and a party to the judgment . . . includ[ing], but . . .
not limited to, preceding and succeeding owners of property, bailee and bailor, and
assignee and assignor.”69
V.
DISCUSSION
A.
The Trust’s Suit Is Timely
Dexia moves for summary judgment because the Trust’s claims are
time-barred.70 Dexia argues that “[b]ecause the representations on which [the
Trust’s] claims are based were made by Dexia in the [MLPA]” those claims
accrued on the date the MLPA was executed – October 1, 2006 – making the
December 27, 2012 complaint untimely.71
Dexia correctly argues that the demand requirement in Section 2.03 of
the PSA and Section 3(c) of the MLPA is procedural, not substantive, and thus, has
69
Taylor v. Sturgell, 553 U.S. 880, 894 (2008) (quotation omitted).
70
See 4/1/14 Dexia Real Estate Capital Markets’ Memorandum of Law
in Support of Its Motion for Summary Judgment (“Dexia Mem.”), at 8.
71
Id.
19
no bearing on the accrual date.72 But there is no per se rule that breach of
representations and warranties occurs at the time of closing and accrues on that
date. Rather, the claim accrues when all of the elements that establish a breach –
as defined in the contract – have occurred and plaintiff has a legal right to make
the demand.73
Here, the PSA and MLPA clearly state that a breach must “materially
and adversely affect the value of the affected Mortgage Loan” or the interests of
the Trust before the Trust is entitled to make a demand.74 The Trust alleges that
Dexia breached Representations 5 and 6 of the MLPA, which represented that each
agreement within the relevant loan file is a “legal, valid and binding obligation . . .
enforceable in accordance with its terms” and that there is no valid defense or right
72
See Greenpoint, 2014 WL 08523, at *4 (holding that a procedural
demand is “a pre-suit remedial provision that is neither an element of the breach of
contract claim, nor grounds for a separate breach of contract claim” and thus,
cannot serve to delay the accrual); ACE Sec. Corp. v. DB Structured Prods., Inc.,
977 N.Y.S.2d 229, 231 (1st Dep’t 2013) (reversing trial court’s ruling that
plaintiffs’ claim did not accrue until defendants failed to timely cure or repurchase
defective mortgage loans).
73
See Greenpoint, 2014 WL 08523, at *4 (“The alleged underlying
breach occurred when the Trust experienced a ‘material and adverse’ effect.”);
Lehman XS Trust, Series 2006-GP2 ex rel. U.S. Bank, Nat’l Ass’n v. Greenpoint
Mortg. Funding Inc., No. 12 Civ. 7935, 2014 WL 1301944, at *4 (S.D.N.Y. Mar.
31, 2014) (“[A] trustee could not state a claim for material breaches that had not
yet occurred.”).
74
PSA § 2.03(a); MLPA § 3(c).
20
to rescission “with respect to any” such agreement.75 Because the Full-Recourse
Provision of the Guaranty was never legally enforceable, these representations
were breached on the closing date.
But as I previously held when denying Dexia’s motion to dismiss,
“[t]he Trust is not entitled to demand cure or repurchase merely because a breach
of the Representation exists; in order for the Special Servicer to demand cure or
repurchase, the material and adverse effect condition must be met.”76 Here, the
breach is based on a Document Defect, defined in the contracts as “any document .
. . [that] has not been properly executed.”77 The contracts further specify that a
Document Defect is not “considered to materially and adversely affect” the value
of the loan or the interests of the Trust, “unless the document with respect to which
the Document Defect exists is required in connection with an imminent
enforcement of the mortgagee’s rights or remedies under the related Mortgage
Loan.”78
Dexia argues that this language “is merely part of the procedural
75
MLPA, at I-2.
76
U.S. Bank, Nat’l. Ass’n v. Dexia Real Estate Capital Mkts., 959 F.
Supp. 2d 443, 448 (S.D.N.Y. 2013).
77
PSA § 2.03(a); MLPA § 3(c).
78
Id. (emphasis added).
21
demand protocol[,] not a substantive element of a breach of contract action . . . and
therefore cannot serve to extend the statute of limitations.”79 I disagree. A
“breach” is an element of a breach of contract action. The elements of an
actionable breach, however, are defined by the contract and the accrual period
begins when those elements are satisfied. The “material and adverse” effect is an
element of the breach – the Trust had no legal right to make a demand until it
occurred.
The contracts specifically state that a Document Defect does not have
a “material and adverse” effect until the document is needed “in connection with an
imminent enforcement of the mortgagee’s rights or remedies.”80 Even if the
Guaranty was defective on October 1, 2006, it did not “materially and adversely
affect” the value of the loan or interests of the Trust until it was needed to enforce
the Full-Recourse Provision, or in January 2010, when the Marketplace Loan went
into default.81 Thus, the Trust’s suit, filed on December 27, 2012, is timely.
79
Dexia Mem. at 15 (emphasis in original).
80
PSA § 2.03(a); MLPA § 3(c). Dexia argues that “this case does not
involve a Document Defect and the ‘required for imminent enforcement’ language
is inapplicable” because the Trust has sued for breach of representations and
warranties. Dexia Mem. at 15. But this is implausible – the basis of the breach is
the Document Defect in the Guaranty.
81
The Trust argues that there was no material and adverse effect until
the Stearns County court ruled that the Full-Recourse Provision of the Guaranty
22
B.
The Trust Performed Under the Contract
1.
Notice Requirement
Dexia also moves for summary judgment on the ground that the Trust
“fail[ed] to meet the condition precedent of timely notifying Dexia of [its] demand
for cure.”82 Dexia argues that the Trust knew that the Guarantors claimed the FullRecourse Provision was unenforceable in May 2010, but “waited more than 16
months to send its cure demand to Dexia . . . functionally depriv[ing] Dexia of any
possibility of curing the alleged breaches.”83 The Trust responds that there is no
prompt notice requirement in the MLPA, or that, in the alternative, such a
requirement was satisfied by the September 29, 2011 notice.
Section 3(c) of the MLPA outlines Dexia’s obligations upon receiving
“written notice of a Document Defect or Breach pursuant to Section 2.03(a) of the
Pooling and Servicing Agreement.” Section 2.03(a) states that “[p]romptly upon
was unenforceable in July 2011. See Plaintiff’s Memorandum of Law in Support
of Its Motion for Summary Judgment, at 14. But the Stearns County court ruled
that the Full-Recourse Provision had always been unenforceable because the
Guarantors only signed a more limited version of the Guaranty. The document
including the Full-Recourse Provision was defective at the time it was signed;
however, as per the contract, the defect only had a material and adverse effect on
the value of the loan when it was needed to enforce the mortgagor’s rights
following the borrowers’ default.
82
Dexia Mem. at 17.
83
Id.
23
becoming aware of any Document Defect or Breach” and determining that the
defect or breach materially and adversely affects the value of a loan or the interest
of the Trust, the party that discovers the defect or breach “shall notify the Master
Servicer of such determination.” “Promptly after receipt of such notice,” the
Master or Special Servicer, “shall request in writing” that the Seller cure or
repurchase the loan.84
In LaSalle Bank National Association v. Citicorp Real Estate, the
court declined to find a similar provision to be a condition precedent. In that case,
the provision stated that “[u]pon discovery by any of the parties hereto of a breach
of any of . . . the representations or warranties set forth . . . above which materially
and adversely affects the value of [the loan] . . . the party discovering such a breach
shall give prompt written notice to each of the parties hereto.”85 The court
concluded that “[a]lthough the prompt-notice provision [includes] the word ‘upon,’
in this context it does not overcome the preference against finding conditions
precedent” in the absence of unambiguous language.86 “Unambiguous language
indicating a condition include the terms ‘on condition that,’ ‘provided that,’ ‘if,’
84
PSA § 2.03(a).
85
LaSalle Bank, 2003 WL 21671812, at *2 n.7.
86
Id. at *3.
24
‘unless and until,’ or ‘null and void.’”87 Although a ninety day time period for
Dexia to cure begins to run upon receiving written notice, nothing in the contract
suggests that Dexia’s notice is necessary to trigger a repurchase obligation or that
the obligation is conditioned upon receiving the notice.88
The notice is, at most, “a promise, not an express condition that must
be literally performed.”89 Thus, in order to excuse Dexia’s non-performance, any
failure to provide “prompt” notice after learning of a possible defect with the
Guaranty, would have to be “material” to the MLPA.
But Dexia has offered no evidence to show how failure to give written
notice of the breach in May 2010 was material.90 Dexia admits that it was aware of
the Stearns County litigation and that the Trust took discovery from Dexia’s
87
Powlus v. Chelsey Direct LLC, No. 09 Civ. 10461, 2011 WL 135822,
at *4 (S.D.N.Y. Jan. 10,2011).
88
See Ace Sec. Corp. Home Equity Loan Trust, Series 2007-HE3 ex rel.
HSBC Bank USA, Nat. Ass’n v. DB Structured Products, Inc., No. 13 Civ. 1869,
2014 WL 1116758, at *15 (S.D.N.Y. Mar. 20, 2014) (holding that a provision
requiring a Trustee to “promptly notify” the seller “and ask it to cure the breach or
repurchase the loan within 60 days is not a condition precedent because “nothing in
the agreements . . . expressly conditions [the seller’s] repurchase obligation on
receiving notice from the Trustee.”).
89
Id.
90
See Frank Felix, 111 F.3d at 289 (“For a breach of a contract to be
material, it must go to the root of the agreement between the parties” and be “so
substantial that it defeats the object of the parties in making the contract.”).
25
closing counsel “regarding the Guaranty, the execution of the Guaranty, and the
negotiations relating to the Guaranty.”91 Dexia was not “deprived of the
opportunity to cure” because nothing in the MLPA or PSA conditioned its ability
to cure on receiving written notice from the Trust.92 Most importantly, there is
ample evidence in the record that Dexia would not have cured even if it received
notice because it “believed [it] had that [valid] personal guarantee.”93 Thus, even if
the Trust had failed to provide “prompt notice,” such failure would be insufficient
to excuse Dexia’s non-performance.
2.
Covenant of Good Faith and Fair Dealing
Dexia opposes the Trust’s motion for summary judgment because
“[t]here is a material issue of fact as to whether Plaintiff has breached the [MLPA]
by failing to use good faith efforts in [its] litigation against the Guarantors.”94
91
12/9/10 Letter from Kim JoDene Donat, counsel for Best & Flanagan,
to Stephanie Dionne, representative of Dexia, Ex. 5 to Mallon Decl., at 1.
92
While the MLPA and PSA dot not require Dexia to cure absent
written notice, nothing in the Agreements appears to preclude it from doing so.
Further, it is unclear what Dexia could have done to cure given the circumstances
of the defect.
93
2/11/14 Deposition Testimony of Diana Kutas, corporate
representative of Dexia, Ex. 12 to Mallon Decl., at 268:12.
94
Dexia Real Estate Capital Markets’ Opposition to Plaintiff’s Motion
for Summary Judgment (“Dexia Opp.”), at 12.
26
Dexia alleges that the Trust’s “failure to obtain affidavits or other evidence from
Dexia to assist [the Trust] in refuting the guarantors’ claims” shows that it
breached the duty of good faith and fair dealing.95
The Trust responds that it could not have breached the MLPA because
it is not a party to that agreement. However, Dexia contends that the MLPA and
PSA were “executed the same day . . . as part of a single transaction.”96 While the
two contracts refer to each other, there is no evidence in either document that the
contracts are part of the same transaction. As the Trust persuasively argues, “the
MLPA is a discrete purchase and sale agreement regarding particular loans
originated by Dexia, whereas the PSA governs the ongoing relationship among the
parties to the PSA (i.e., the Trustee, the Master Servicer, [and] the Special
Servicer) charged with operating and administering the Trust.”97
Alternatively, Dexia argues that the Trust is a party to the MLPA as a
result of the assignment in the PSA. But in the PSA, WCMS assigned certain of its
rights as purchaser under the MLPA to the Trust. It did not assign its obligations.98
95
Id. at 13.
96
Id. at 5.
97
5/15/14 Plaintiff’s Reply in Support of Its Motion for Summary
Judgment, at 4.
98
See id.
27
Section 18 of the MLPA explains that “[t]he assignee shall, to the extent of such
assignment, succeed to the rights and obligations hereunder of the Purchaser.”99
The extent of the assignment does not extend to WCMS’s obligations under the
MLPA.
C.
Dexia Breached the MLPA By Failing to Repurchase the
Marketplace Loan
Dexia argues that it did not breach the MLPA because the Full-
Recourse Provision of the Guaranty is enforceable, and thus, it had no duty to
repurchase.100 This argument is precluded by the doctrine of collateral estoppel –
twice. Under Minnesota law, collateral estoppel precludes a party from relitigating identical legal issues where there was a final judgment on the merits, the
estopped party was a party or in privity with a party to the prior adjudication, and
the estopped party was given a full and fair opportunity to be heard on the
adjudicated issue.101
Dexia has already fully litigated the issue of whether it was
collaterally estopped from relitigating the enforceability of the Full Recourse
Provision in the Hennepin County litigation. The issue of whether the Stearns
99
MLPA § 18 (emphasis added).
100
Dexia Opp. at 14.
101
See Lemmer, 736 N.W.2d at 659.
28
County decision estops Dexia from relitigating the enforceability of the Guaranty
was the exact issue at the center of the Hennepin County litigation, which reached
a final judgment on the merits. Dexia was a party to the Hennepin County action
and had a full and fair opportunity to be heard, including full briefing on the
Guarantor’s motion to dismiss and oral argument.
The Trust was not a party to the Hennepin County litigation, and thus,
seeks to use that judgment offensively to preclude Dexia from raising an
affirmative defense that the Guaranty was enforceable. While courts are hesitant to
permit the use of offensive collateral estoppel when such use would be unfair to the
defendant or result in duplicative litigation, no such unfairness exists here. None
of the unfairness factors identified by the Supreme Courts of the United States and
Minnesota are present.102
The breach of contract proceeding in this Court was foreseeable. The
Hennepin County judgment is not inconsistent with previous judgments. Different
procedures do not apply in this action. The Trust could not have joined in the
Hennepin County action for the same reason that the Hennepin County court
granted the Guarantors’ motion to dismiss against Dexia – the Trust, like Dexia,
was collaterally estopped from relitigating the enforceability of the Full-Recourse
102
See Falgren, 545 N.W.2d at 906-07. See also Parklane, 439 U.S. at
329.
29
Provision.
Even in the absence of the Hennepin County judgment, collateral
estoppel would apply because the enforceability of the Full-Recourse Provision
was fully litigated in the Stearns County litigation. Dexia’s arguments as to the
enforceability of the Full-Recourse Provision are identical to the arguments raised
by the Trust in the Stearns County litigation. Although Dexia was not a party to
the Stearns County litigation, it is bound by that judgment as a privy of the Trust.
The Trust, by virtue of its “substantive legal relationship” as Dexia’s assignee to
the rights on the loan, had an identical interest to Dexia in enforcing the FullRecourse Provision.103 Dexia claims that the Trust’s “incentive to fully litigate the
issues in the Stearns case is a question of fact and . . . posits that [the Trust’s]
incentive was colored by [its] belief that it could force Dexia to repurchase the
Loan if [the Trust] lost in that case.”104 However, Dexia has offered no facts to
support this allegation. At best, Dexia’s allegations again amount to disagreement
with the Trust’s litigation strategy, but that is not enough to destroy the privity
created by the commonality of interest and the substantive legal relationship
103
Taylor, 553 U.S. at 894. Accord 7/1/14 Stearns County Order, at 9
(describing Dexia and the Trust as privies because “they had [a] mutual or
successive relationship in the same property rights”).
104
Dexia Opp. at 17.
30
between the Trust and Dexia. For these reasons, the defective Guaranty constitutes
a breach of Representations 5 and 6 of the MLPA and Dexia’s failure to repurchase
the loan upon demand is a breach of the MLPA.
D.
Specific Performance Is the Appropriate Remedy
The MLPA and PSA provide that if Dexia fails to cure a breach or
defect within 90 days of the written request, it must repurchase the loan at an
applicable purchase price.105 “Under New York law . . . a party can be compelled
to perform its contractual obligations if (1) there is a valid contract; (2) plaintiff
has substantially performed under the contract and is willing and able to perform
its remaining obligations; (3) defendant is able to perform its obligations; and (4)
plaintiff has no adequate remedy at law.”106 “When specific performance is
contemplated by the contract, courts tend to find that irreparable harm would be
suffered unless specific performance is granted.”107
In Wells Fargo Bank v. Bank of America, the court recently ordered
specific performance where the contractual provision, like the one here, provided
105
See MLPA § 3(c) and PSA § 2.03(a).
106
LaMirada Prods. Co. v. Wassell PLC, 823 F.Supp. 138, 140
(S.D.N.Y. 1993) (citations omitted).
107
Wells Fargo Bank v. Bank of Am., No. 11 Civ. 4062, 2013 WL
372149, at *8 (S.D.N.Y. Jan. 31, 2013).
31
that a mortgage loan seller’s “obligation to cure any breach or repurchase . . . for
the affected Mortgage Loan pursuant to [the contract] shall constitute the sole
remedy available to the Purchaser in connection with a breach of any of the
Seller’s representations and warranties.”108 The court concluded that specific
performance was appropriate because “the parties contemplated that [the Seller]
would repurchase any loans for which r[epresentations] [and] w[arranties] were
breached ; indeed, it is the sole remedy available under the contractual
language.”109 “The CMBS [commercial mortgage-backed securities] case law and
the parties’ contract make clear that a repurchase provision is designed to shift the
risk to the selling party in the event that a dispute arises, and that such a provision
is the appropriate method of making Plaintiff whole once a breach of warranty is
established.”110 Because the parties bargained for specific performance and
because repurchase of the Marketplace Loan remains possible,111 it is the
appropriate remedy in this case.
108
Id.
109
Id.
110
Wells Fargo Bank v. Bank of Am., No. 10 Civ. 9584, 2013 WL
1285289, at *10 (S.D.N.Y. Mar. 28, 2013) (quotation omitted).
111
See Pl. 56.1 Statement ¶¶ 84-85 (explaining that the Marketplace Loan
is outstanding and secured by the Stearns County property and that the Mortgage
File can be transferred from the Trust and Special Servicer.)
32
VI.
CONCLUSION
For the foregoing reasons, the Trust's motion for summary judgment
is GRANTED and Dexia's motion for summary judgment is DENIED. Dexia shall
repurchase the Marketplace Loan at the applicable purchase price as set forth in the
PSA and MLP A. The Trust shall file a written submission as to the proper
calculation of the purchase price by July 21, 2014. Dexia's response is due on
August 4, 2014. The Trust's reply is due on August 11, 2014. The Clerk of the
Court is directed to close these motions (Dkt. No. 68 and 74).
SO ORDERED:
Dated:
New York, New York
July 9, 2014
33
- Appearances For Plaintiff:
Michael C. Hartmere, Esq.
Venable LLP
1270 Avenue of the Americas, 25th Floor
New York, NY 10020
(212) 307-5500
Gregory A. Cross, Esq.
Heather Deans Foley, Esq.
Colleen Mallon, Esq.
Venable LLP
750 East Pratt Street, Suite 900
Baltimore, MD 21202
(410) 244-7742
For Defendant:
David D. Ferguson, Esq.
G. Edgar James, Esq.
Polsinelli Shughart PC
900 W. 48th Place, Ste. 900
Kansas City, MO 64112
(816) 753-1000
34
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