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Sma Portfolio Owner, LLC v. Corporex Realty & Investment, LLC

United States District Court, E.D. Kentucky, Northern Division, Covington

June 12, 2015

SMA PORTFOLIO OWNER, LLC, et al., Plaintiffs,
v.
CORPOREX REALTY & INVESTMENT, LLC, et al., Defendants. BANK OF AMERICA, N.A., Plaintiff,
v.
CPX MADISON PLACE OFFICE, LLC, Defendant.

MEMORANDUM OPINION AND ORDER

DAVID L. BUNNING, District Judge.

In a series of cases, Plaintiff/Counterclaim Defendant Bank of America, N.A. (BOA) has brought breach of contract and foreclosure claims against the borrowers of three commercial real estate loans (CPX Tampa Gateway OPAG, LLC; CPX Olympic Building II, LLC; and CPX Madison Place Office, LLC), as well as breach of guaranty claims against the guarantor of those loans (Corporex Realty & Investment, LLC). The borrowers and guarantor have in turn filed counterclaims based on failed loan modification negotiations.

BOA has filed motions for summary judgment on its breach of contract and foreclosure claims against CPX Madison Place, LLC (Case No. 2:11-cv-168, Doc. # 234), and on the Defendant/Counterclaim Plaintiffs' counterclaims and affirmative defense (Case No. 2:12-cv-23, Doc. # 232; Case No. 2:11-cv-168, Doc. # 234). The Court heard oral argument on BOA's motions on May 21, 2015. Tim Palmer appeared on behalf of BOA; Earl Messer appeared on behalf of the Defendants/Counterclaim Plaintiffs. At the conclusion of the hearing, the motions were submitted for decision. (Case No. 2:12-cv-23, Doc. # 261).

There is no genuine dispute that the loans are in default, no evidence BOA breached a provision in the loan documents giving the borrowers a right of first refusal, and the parties entered into binding pre-negotiation letters in which they waived all claims or defenses arising from the negotiations. Therefore, BOA's Motions for Summary Judgment on all remaining claims in Cases No. 2:12-cv-23 and 2:11-cv-168 are granted.

I. FACTUAL AND PROCEDURAL BACKGROUND

In Case No. 2:12-cv-23, BOA brings breach of guaranty claims against Defendant/Counterclaim Plaintiff Corporex Realty & Investment, LLC (Realty) concerning three commercial loans: the Tampa loan (Count I), the Olympic loan (Count II), and the Madison loan (Count III). The Court granted permission to intervene to the borrowers of the Olympic and Madison loans, Defendant/Counterclaim Plaintiffs CPX Olympic Building II, LLC (Olympic) and CPX Madison Place Office, LLC (Madison). (Doc. # 10). Because they were assigned the notes, SMA Portfolio Owner, LLC and SMA Issuer I, LLC were substituted as Plaintiffs for BOA on Counts I and II (Docs. # 34, 162); those claims have since been dismissed by agreed order (Docs. # 78, 206). In Case No. 2:11-cv-168, BOA has filed for foreclosure and breach of contract against Madison.

Realty has brought counterclaims for breach of the implied covenant of good faith and fair dealing and promissory estoppel; Madison has a counterclaim and affirmative defense for breach of the implied covenant of good faith and fair dealing; and Olympic has counterclaims for breach of the implied covenant of good faith and fair dealing, promissory estoppel, and breach of contact (i.e., the right of first refusal). The Court consolidated these two cases for discovery purposes. (Doc. # 63).[1]

A. The Loans, Guarantee, and Default

In October 2006, Madison executed a $33.5 million promissory note to BOA[2] secured by a mortgage on a Northern Kentucky office building known as CPX Madison Place. (Doc. # 232-6, 7). Realty guaranteed the loan. ( Id. Ex. 12). Pursuant to Section 12.1 of the note, Madison was required to meet a debt coverage ratio of 1.10 to 1.0 as of August 31, 2010. ( Id. Ex. 6). On October 25, 2010, BOA notified Madison that it had failed the debt coverage test and that it had thirty days to pay down the principal, or the loan would be in default. ( Id. Ex. 16). Madison never cured the debt coverage default. (Docs. # 232-2 at 5; 13 at ¶ 31). On November 30, 2010, BOA sent Madison and Realty a notice of default, demanding immediate payment of all sums due under the note. (Doc. # 1 Ex. I). The loan matured on October 31, 2011, Madison never repaid the balance, and Madison has made no payments since April 2012. (Doc. # 232-5, 6).

In December 2005, Olympic executed a $11, 250, 000 promissory note to BOA secured by a mortgage on a Northern Kentucky office building known as Olympic II. ( Id. Exs. 8, 9). Realty guaranteed payment of the loan. ( Id. Ex. 13). The Olympic note matured on February 1, 2011, Olympic never repaid the balance, and BOA declared the loan in default on March 1, 2011. ( Id. Exs. 10, 23).

In January 2008, CPX Tampa Gateway OPAG, LLC (Tampa) (Realty, Madison, Olympic, and Tampa collectively "Corporex")[3] executed a $9, 740, 00 promissory note to BOA secured by a mortgage in a Florida hotel. ( Id. Ex. 11). Like with the Madison and Olympic notes, Realty guaranteed the Tampa loan. (Ex. 14). The Tampa note had a February 1, 2011 maturity date, Tampa never repaid the balance, and BOA declared it in default on March 1, 2011. ( Id. Exs. 11, 23).[4]

Each of the loan agreements granted the respective borrower a right of first refusal:

Lender agrees that in the event that it determines to assign or sell the Note or any portion thereof to any person or entity not affiliated with Lender, Lender shall, provided Borrower is not then in default under this Note or any of the Loan Documents, allow Borrower or Borrower's affiliates a right of first refusal to purchase same, which right of refusal must be exercised and completed within thirty (30) days of the date Lender provides Borrower with written notice of the terms and conditions of a proposed assignment or sale.

( Id. Exs. 6, 8, 11).

B. The Pre-Negotiation Agreements

On December 13, 2010, BOA sent Madison and Realty a Pre-Negotiation Letter (PNL) for the Madison loan. The PNL stated that BOA would "discuss the Loan with [Madison and Realty] representatives, provided that the following agreement and understandings govern." ( Id. Ex. 19). The agreement contained the following relevant terms:

1. Negotiations. Any discussions... relating to the Loan and the Loan documents that Borrower, Guarantor and/or their representative may have previously had, or in the future may have, with representatives of Lender (any and all such previous and future discussions, negotiations, correspondence and other communications being hereinafter referred to as "Loan Communications") are not binding upon any of Borrower, Guarantor or Lender. Lender is not under any obligation to discuss, pursue or agree to any modifications, consents or approvals or assumptions of the Loan. No party hereto shall have any defense to any action by any other party, or assert any waiver by such other party, based on any Loan Communications.
2. Releases. Each party hereto completely, irrevocably and unconditionally releases... the other party from any and all... claims... whatsoever, in law or in equity, which such releasing party now has or may hereafter have against the other party... arising out of... any Loan Communications.
3. No Reliance. No officer, employee or representative of any party is authorized to commit such party orally to any agreement or to any modification of the Loan Documents, and no party may rely on any Loan Communication that may be construed to the contrary. While the parties may reach agreement on one or more preliminary issues... the parties agree that neither party shall be bound by any agreement on individual issues unless and until (1) agreement is reached on all issues; and (2) the parties' agreement on all issues has been reduced to a written agreement and signed by authorized representatives of all of the parties.
* * *
5. Discussions. Any party hereto may discontinue negotiations at any time upon notice, written or oral, without any liability or obligation to the other party.

Id.

William Butler, in his capacity as CEO (Butler is Chairman of the Corporex entities (Doc. # 251-2 at ¶ 3)), signed the PNL on Madison's and Realty's behalf, while Leslie O. Andren, in her capacity as Senior Vice President, signed on BOA's behalf. (Doc. # 232-19). On February 1, 2011, BOA sent Corporex similar PNLs for the Tampa and Olympic loans, which Butler also signed. ( Id. Exs. 20, 21).

C. The Negotiations

The following description of the parties' negotiations concerning the three loans is taken from evidence in the record and draws all reasonable inferences in Corporex's favor. Slusher v. Carson, 540 F.3d 449, 453 (6th Cir. 2008).

In August 2009, Corporex contacted BOA regarding the August 31, 2010 debt coverage test on the Madison loan. BOA informed Corporex that it wanted to "work" with them on the loan, but that it was a bad time to take any action that would require an appraisal due to the recession and resulting decline in commercial real estate values. (Doc. # 251-5 at 86:15-89:10; Ex. 6 at 55:20-62:24). In May 2010, Corporex again met with BOA to discuss the debt coverage test. At that time, BOA told Corporex that if the Madison property appraised at an amount equal or greater to the outstanding balance, BOA could "work around" the debt coverage issue. ( Id. Ex. 5 at 97:2-21).

In August 2010, the parties held a conference call to discuss how they could reach an agreement to extend or modify all three loans. During the call, Corporex told BOA that it had received a refinancing offer for the Olympic loan. After asking Corporex about the terms of the refinancing offer, BOA told Corporex not to accept it because it could arrange a better deal. ( Id. Ex. 5 at 106:10-20; Ex.6 at 62:9-63:20). BOA then instructed Corporex to make a proposal to extend or modify all three loans. ( Id. Ex. 5 at 106:17-20; Ex. 10 at ¶ 14). After the call, Corporex ceased discussions with the lender offering the alternative refinancing option. ( Id. Ex. 5 at 109:5-110:13). Corporex then submitted a loan modification proposal to BOA on September 8, 2010. (Doc. # 232-15).

As part of the debt coverage test, BOA had the Madison property appraised. Although the appraisal value came back for more than the balance owed, it was not enough to satisfy the debt covenant. (Docs. # 232-16; 251-7 at 83:5-85:6; 251-8 at 52:9-13). In response, BOA sent Corporex a letter on October 25, 2010, informing them that it had thirty days to make a $4.5 million principal payment in order to prevent the Madison loan from going in default. (Doc. # 232-16). The parties then held a conference call, during which BOA employee Phil Cole told Corporex that the letter was just a "matter of procedure" and that BOA would respond to Corporex's September loan modification proposal. (Doc. # 251-5 at 140:9-142:21). After the call, it was Corporex's and Cole's understanding that Corporex was not required to make the payment demanded in the letter. ( Id. Ex. 2; Ex. 7 at 146:15-19). In an affidavit, Butler states that Corporex had the financial ability to cure the debt coverage default. (Doc. # 251-2 at ¶ 13). However, that statement is directly contradicted by a December 22, 2010 letter to Andren, wherein Butler states: "the maximum amount of cash we can muster within our resources for initial principal reductions is $3, 000, 000." (Doc. # 252-3).

On November 1, 2010, BOA sent its first counteroffer to Corporex's September modification proposal, which Corporex rejected by sending another proposal. (Docs. # 232-17; 251-14). Shortly thereafter, BOA, Madison, and Realty signed the PNL. From that time forward, the parties continued to exchange "term sheets" in an attempt to reach an agreement. (Doc. # 232-23, 24, 25). Each offer from BOA contained the following disclaimer:

The terms and conditions are provided for discussion purposes only and this letter does not constitute an offer, agreement or commitment to lend or renew at this time.
The actual terms and provisions upon which the Bank may extend credit to Borrower are subject to necessary credit committee approval, satisfactory review of documentation and such other requirements as determined by the Bank in its sole discretion.

( Id. Exs. 17, 23, 24, 25).

In a January 2011 conference call, Andren indicated that BOA could do a three-year extension on the Madison loan in return for a $3 million principal payment. (Doc. # 251-5 at 165:8-15; 180:5-7). Corporex had originally asked for a four-year extension on the Madison loan. (Doc. # 232-15). For Corporex, getting a long-term extension on the Madison loan was a key part of the negotiations because it would have put Corporex in a better position to negotiate a lease extension with the Madison property's anchor tenant. ( Id. at 116:4-24; Ex. 6 at 29:20-33:25). On March 15, 2011, Andren informed Corporex that BOA would not be able to grant a three-year extension on the Madison loan, but would only be able to extend the loan to February 2013 (which would amount to approximately a sixteen-month extension).[5] (Doc. # 251-5 at 198:17-24).

In April 2011, the parties agreed on an outline to modify the three loans, which by that time were all in default. ( Id. Ex. 5 at 209:24-212:9). In mid-June, BOA sent over the draft modification documents. (Doc. # 232-27). The documents contained different and additional terms than Corporex had agreed to, which prompted the parties to hold a June 22, 2011 conference call. (Doc. # 251-5 at 230:1-20; Ex. 19). After that call, it was Corporex's position that the parties had reached an impasse, while it was BOA's understanding that Corporex would be providing a list of its objections. ( Id. Ex. 5 at 232:6-7; Doc. # 232-28). The day after the conference call, Corporex sent BOA a letter rejecting BOA's offer, acknowledging that it was "aware of the potential implications of not executing the documents [BOA] sent." (Doc. # 232-29). BOA brought the breach of guaranty action against Realty a week later. (Doc. # 1).

D. BOA Internal Discussions and Procedures

During this negotiation process there were, of course, internal discussions and procedures taking place at BOA with respect to the three loans. On August 26, 2010, Cole told another BOA employee that he was informed by "DR" that BOA was to "get ours first for [Corporex], " to which the other employee responded "[a]gree. We are first at table." (Doc. # 251-9). Corporex asserts that D.R. is a "high-ranking Bank officer." (Doc. # 251 at 4). There is also evidence that some BOA employees did not expect Corporex to accept BOA's initial counter-proposal on the loan modifications. ( Id. Ex. 8 at 103:14-15). Specifically, in a September 30, 2010 e-mail, Cole states: "I really don't think this is a solution, more a[n] attempt to show that we thought about it prior to starting the transfers." ( Id. Ex. 11).

In November 2010, BOA began the process of downgrading Corporex's loans, which would ultimately lead to BOA transferring the loans to the Special Assets Group (SAG). ( Id. Ex. 3 at 108:5-110:20; Ex. 4 at 48:6-14). BOA informed Corporex that it was transferring the loans to the SAG before the parties signed the PNLs. ( Id. Ex. 5 at 150:8-151:20). BOA told Corporex that the SAG would have "more flexibility, " but did not explain what that meant. Id.

In addition to preparing the loans for transfer to the SAG, a November 22, 2010 email chain shows that BOA was in the process of decreasing its "exposure strategy" for the loans. ( Id. Ex. 15). The conversation begins with Cole informing a group of co-workers that he planned to recommend changing Corporex's exposure strategy from "decrease" to "out." Id. Two employees responded that they agreed with the "out" designation. "Out" is defined in the e-mail in the following manner:

Out-Credit exposure is unacceptable at any level. New requests should not be entertained for existing loans renewed except as a means to accomplishing a complete payout.

Id. BOA never informed Corporex that it had changed its exposure strategy on the loans to "out." (Doc. # 251-2, 10).

On November 30, 2010, the Corporex loans were formally transferred to the SAG. (Doc. # 232-39 at 131:23-132:24). At that time, the Madison loan was in default due to the debt coverage trip, while Tampa and Olympic were still performing. (Doc. # 251-2 at ¶ 9).

E. The Sale of the Olympic and Tampa Loan

As discussed supra, BOA was required to give the respective borrower the right of first refusal before it "determined" to sell the loan, so long as the borrower was not in default. (Doc. # 234 at Exs. 6, 8, 11). In September 2011 (six months after they went into default), BOA sold the Tampa and Olympic loans ...


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