United States District Court, W.D. Kentucky, at Louisville
CHARLES R. SIMPSON III, Senior District Judge.
Litigation, as the last bastion of crumbling business ventures, rarely takes prisoners. This foreclosure action is no different. There will be no winners here, despite the declaration of a victor at the conclusion of the case.
Magistrate Judge James D. Moyer spent many hours attempting to mediate the matter to settlement, but without success. The court will therefore decide the outstanding legal issues in order to bring this case to a conclusion.
For the reasons set forth herein, the court will enter a separate order rendering the following rulings:
1. The motion of PNC Bank, National Association, to dismiss Counts I through VIII (fraud/fraudulent inducement, fraudulent omissions, violation of KRS 286.8-010, et seq., negligence/negligent misrepresentations, declaratory judgment: economic duress, tortious interference with contract, tortious interference with prospective business advantage, breach of contract/breach of duty of good faith and fair dealing), Count X (promissory estoppel), and Count XI (punitive damages) of the Counterclaim [DN 56] of Seminary Woods, LLC, Seminary Woods Condominiums Council of Co-Owners, LLC, Whittington Realty Partners LLC, Norman E. Risen, Anna J. Risen, Kent E. Risen, Marc H. Risen, Linda Risen, C. Ronald Wise, and Jennifer S. Wise (collectively, "Seminary Woods") (DN 73) will be GRANTED.
2. The motion of PNC Bank, National Association, to dismiss the counterclaims (fraud/fraudulent inducement (Count One), fraud by omission (Count Two), violation of KRS 268.8-010, et seq. (Count Three), negligent misrepresentation (Count Four), promissory estoppel (Count Five), equitable estoppel (Count Six), and punitive damages (Count Seven)) [DN 107] of Laurence and Patricia Benz and Albert and Patricia Fiorini (collectively, the "Benz/Fiorini parties" or the "Benz/Fiorinis") (DN 109) will be GRANTED.
3. The motion of the Benz/Fiorini parties to amend their counterclaims and answer (DN 119) will be DENIED on the ground of futility.
4. The motion of PNC Bank, National Association, for leave to file a sur-reply to the Benz/Fiorini parties' motion to amend their counterclaims and answer (DN 143) will be GRANTED.
5. The motion of Benz/Fiorini parties for summary judgment (DN 157) will be DENIED.
6. The petition of Receiver NTS Development Company for advice (DN 180) will be DENIED.
7. The motion of Stephen J. Evans and Gerry Evans for summary judgment (DN 195) will be DENIED AS AGAINST PNC BANK, NATIONAL ASSOCIATION.
8. The cross-motion of PNC Bank, National Association, for summary judgment against Stephen J. and Gerry Evans (DN 202) will be GRANTED.
9. The motion of Seminary Woods for leave to file a second amended counterclaim (DN 232) will be DENIED on the ground of futility.
10. The motion of Seminary Woods for leave to file a supplemental response to PNC Bank, National Association's motion to dismiss various counterclaims of Seminary Woods (DN 233) will be GRANTED.
11. The renewed petition of Receiver NTS Development Company for advice (DN 244) will be DENIED.
The motions presently before the court arise in the context of this foreclosure action filed by PNC Bank, National Association ("PNC"), on certain mortgaged property known as the Seminary Woods condominium project. The following background facts are alleged in the Complaint.
The condominium building is located at 6600 Seminary Woods Place in Jefferson County, Kentucky. The project was intended to contain a total of sixty-three condominiums and five garage units. As of the time of the filing of the Complaint, nineteen condominium units and five garage units had allegedly been developed with forty-four additional units still to be constructed. Of the nineteen constructed units, fourteen had been sold to third-parties and five units and five garage units were owned by the entity Seminary Woods, LLC. The development of the property has come to a virtual standstill, and the property is now in receivership ordered by this court.
On April 19, 2006, NCB, as lender; Seminary Woods, LLC, as borrower; and C. Ronald Wise, Jennifer Wise, Laurence N. Benz, Patricia G. Benz, Albert E. Fiorini, Patricia A. Fiorini, Norman E. Risen, Anna J. Risen, Marc H. Risen, Linda Risen, and Kent E. Risen, as guarantors, entered into a Construction Loan Agreement for the development of the Seminary Woods project. Contemporaneously therewith, Seminary Woods LLC executed a Promissory Note evidencing the loan described in the Construction Loan Agreement in the principal sum of $29, 220, 000.00 plus interest. To secure payment of the Promissory Note, Seminary Woods LLC also executed a Mortgage, Security Agreement, Fixture Financing Statement, an Assignment of Rents and Leases, and a Guaranty Agreement executed by each of the guarantors.
The above documents were amended in writing numerous times with the most current iterations consisting of:
(1) Third Amendment to Note, Eleventh Amendment to Construction Loan Agreement, and Reaffirmation of Guarantors (DN 1-32) executed July 26, 2010; and
(2) Amended and Restated Eleventh Amendment to Mortgage, Security Agreement and Fixture Financing Statement, and Assignment of Rents and Leases (DN 1-35) executed February 12, 2013.
Additionally, on December 18, 2012, PNC, Seminary Woods, and the guarantors entered into an Agreement Regarding Release of Unit 903 (DN 1-33).
The obligations of the various contracting parties to the agreements and guaranties were consistently and clearly carried forward and reaffirmed throughout the iterations. The Third Amendment to Note, Eleventh Amendment to Construction Loan Agreement, and Reaffirmation of Guarantors contains the following language regarding consent to term, reaffirmation and ratification of the original obligations, and the release of claims against PNC:
3.3 Guarantor Consent. The Guarantors hereby consent and agree to the terms, covenants, and provisions of this Third Amendment, and each Guarantor hereby reaffirms and ratifies his or her respective continuing obligations under the terms of the 2006 Guaranties (as modified by the Second Amendment with respect to the Primary Note Payment Guaranty) and each further reaffirms and ratifies his or her respective continuing obligations under the terms of the Supplemental Note Payment Guaranties.
3.4 Release. Borrower and each Guarantor hereby fully and forever release, acquit, and discharge Bank, its affiliates, subsidiaries, shareholders, directors, officers, employees, servants, representatives, agents, attorneys, and other persons acting on behalf of any of the foregoing, and the heirs, representatives, successors and assignees of each of them from any and all liability on account of any and all claims, demands, actions, or causes of action whether in law or in equity or otherwise, whether in contract or tort or pursuant to any statute, code, ordinance or regulation, whether direct or indirect, whether known or unknown, whether presently discoverable, whether suspected, unclaimed or claimed, including, without limitation that class of claims popularly known as "lender liability" which the Borrower or Guarantor ever had, now has or may have against Bank arising out of or in any way related to loan transactions with Bank, loan requests to Bank, the Loan Documents, the negotiation and execution of this Agreement or relationships or transactions of any kind or nature involving the Bank, Borrower, and any Guarantor or their related entities or persons, employees, agents, affiliates successors or assignees. The Borrower and Guarantors represent, warrant, and acknowledge that adequate, sufficient good and valuable consideration, in the form of the Bank's waiver of the existing Event of Default, the extension of the Curtailment Dates and other valuable consideration, have been received from Bank for this release. This section is set out in bold type to emphasize its importance to Bank as part of the consideration for this Agreement.
DN 1-32, p. 8.
Two years after the contracting parties executed the above-quoted document, they executed an Agreement Regarding Release of Unit 903 in which they affirmed their understanding and agreement with various recitals contained therein, including the following:
C. The Primary Note matured on September 30, 2011 and remains unpaid. Borrower sought extension of the Maturity Date, and tendered to Lender its check for an extension fee; however, Borrower has not made Principal Curtailment Payments required by the Third Amendment, and Lender did not agree, in writing or otherwise, to an extension of the Maturity Date and did not negotiate the check tendered by Borrower. Since the Maturity Date, Borrower has sought forbearance from Lender regarding Lender's enforcement rights. Borrower notified Lender on December 28, 2011, that it could no longer make interest payments to Bank and renewed its request to Bank for a forbearance of its rights upon default. The parties have been and are currently engaged in discussion regarding various options available for repayment of the obligations of Borrower and Guarantors under the Loan Agreement and respective Guarantees, and concurrent with those discussions desire to enter into this Agreement now to evidence the terms of the sale of Unit 903 to the Porters...
DN 1-33, pp. 1-2.
The contracting parties thus clearly acknowledged and affirmed for the third time in July of 2010 their respective obligations under the note and guaranties, and fully released any and all claims against PNC in connection with the financial transactions relating to the project. The contracting parties confirmed in August of 2012 that the note had matured and was and remained unpaid. PNC conditioned the release of Unit 903 for sale to the Porters on the Borrower's and Guarantors' agreement to certain conditions including, in particular, that
B. Events of Default exist under the Loan Documents as set forth in the Recitals hereto and said Events of Default continue and are not intended, nor should they be construed, to be waived by Lender as a result of this Agreement.
C. Lender has the right to seek remedies under the terms and conditions of the Loan Documents...
... Section 2.03 Guarantor Consent. The Guarantors hereby consent and agree to the terms, covenants and provisions of this Agreement, and each Guarantor hereby reaffirms and ratifies his or her continuing obligations under the terms of the 2006 Guaranties and further reaffirms and ratifies his or her respective continuing obligations under the terms of the Supplemental Loan Guaranties.
Section 2.04 No Substitution or Novation. Nothing in this Agreement shall be construed as a substitution or novation of the Borrower's indebtedness to the Lender under the Loan Documents, which shall remain in full force and effect as hereby amended and the terms of which are hereby reaffirmed by the Borrower and Guarantors.
DN 1-33, pp. 3-4.
We thus come to March 5, 2013 when PNC filed the Complaint in this court. It declared the loan in default and sought recovery from all obligated defendants pursuant to the Note, Mortgage, Security Agreement, and Guaranties. As stated in the Complaint (DN 1, ¶ 6):
This is an action to enforce a mortgage (the "Mortgage") given to National City Bank of Kentucky, now by merger known as PNC Bank, National Association, on real property located in Jefferson County, Kentucky, owned by the mortgagor and defendant, Seminary Woods, LLC, which was developed as a condominium project commonly know as Seminary Woods (the "Project"). The Bank also seeks a money judgment against Seminary Woods, LLC and guarantors of indebtedness to the Bank, for their respective obligations, as alleged more fully herein, to repay the unpaid balance owed on a promissory note, the repayment of which is secured by a mortgage, a security agreement and personal guarantees. In connection with the development of the Project, N. Risen, M. Risen, and K. Risen incorporated Defendant, Seminary Woods Condominiums Council of Co-Owners, Inc. (the "Council"), for the purpose of managing the Project, and the Bank is joining the Council as a party to this action to obtain appropriate relief concerning its activities in connection with the enforcement of the Bank's mortgage.
The agreements evidence that the borrower and guarantors agreed and affirmed repeatedly that Events of Default under the Loan Documents occurred and were not remedied. Upon the filing of suit against them, they now attempt to challenge the enforceability of those documents against them.
PNC also states in the Complaint (DN 1, ¶ 24) that:
The Trustees, the Richards, Merenbloom, Scalzitti, the Royces, A. Fiorini, R. Wise, N. Risen, M. Risen, L. Risen, K. Risen, Whittington [Realty Partners, LLC ("WRP")], MJE Real Estate, the Eichbergers and the Evans are sometimes referred to herein as "Contract Holders." The Contract Holders are joined as defendants in this action in order to require them to assert any interest they may have in the Project.
In challenging the enforceability of the various agreements, the "Seminary Woods" and the "Benz/Fiorini" defendants have proceeded in this case separately, filing their own motions and responsive briefs. However, there is significant overlap in their positions. To that extent, their contentions will be addressed together. For simplicity, the court's references below to "the contracting parties" will refer to the parties to the loan documents including, particularly, the various versions of the Construction Loan Agreement, Note, and Guaranty Agreements. Where appropriate, the court will refer to arguments made by particular defendants.
The contracting parties filed Answers to the Complaint and Counterclaims ("CCs") against PNC. The following list delineates the various counterclaims of the contracting parties in their current pleadings and/or proposed amended pleadings:
The defendants do not dispute that the loan came due and remains unpaid. The essential premise of the contracting parties is that they were fraudulently induced to enter into the agreements with PNC by alleged misrepresentations or omissions concerning the availability of End User Financing ("EUF"), mortgage loan products which they wished to suggest to potential purchasers of the condominium units. Most of the legal theories asserted in the counterclaims rise or fall on the issue of PNC's purported promise to offer an EUF program for the benefit of prospective condominium purchasers.
A. Legal Standard
Under Fed.R.Civ.P. 8(a)(2), a pleading must contain a short and plain statement of the claims showing that the pleader is entitled to relief. The pleading standard in Rule 8(a)(2) does not require detailed factual allegations, but "demands more than an unadorned, the defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2008) ( quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (1955)).
To withstand a Rule 12(b)(6) motion to dismiss for failure to state a claim, it is not enough that the complaint contains "facts that are merely consistent with a defendant's liability, " rather, a plaintiff must allege "facts - not legal conclusions or bald assertions - supporting a plausible' claim for relief." Id. at 687 ( quoting Twombly, 550 U.S. at 557)). A complaint that offers legal conclusions or a recitation of the elements of a cause of action will not meet this pleading standard. See id. "[C]onclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss." Mezibov v. Allen, 411 F.3d 712, 716 (6th Cir. 2005). The court must take all of the factual allegations in the complaint as true, but is "not bound to accept as a true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678. If the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has not shown the pleader is entitled to relief. Id. at 677-78. See also, Buridi v. Branch Banking and Trust Co., No. 3:12-CV-0486-S, 2013 WL 1309763 (W.D.Ky. March 25, 2013); Our Lady of Bellefonte Hospital, Inc. v. Tri-State Physicians Network, Inc., No. 06-141-HRW, 2007 WL 2903231 (E.D.Ky. Sept. 27, 2007); Headwaters Construction Co. v. National City Mortgage Co., 720 F.Supp.2d 1182 (D.Idaho 2010).
B. Analysis of Counterclaims
1. Equitable Lien Claims
First, we note that PNC has not moved to dismiss Count Nine of Seminary Woods' Amended Counterclaim which seeks a declaratory judgment that Seminary Woods is entitled to assert an equitable lien representing various interests which it claims are superior to any claim of PNC.
The Benz/Fiorinis have sought leave to amend their Counterclaim to add a similar equitable lien claim to that of Seminary Woods, urging the same legal ground for priority, and alleging that PNC had actual knowledge that the Benzs and Fiorinis had equity in the project prior to PNC releasing any of its loan funds for construction and prior to PNC recording its mortgage on the property. (DN 119-1, ¶¶ 108, 109).
The Benz/Fiorinis cite to Tile House, Inc. v. Cumberland Fed. Savings Bank, 942 S.W.2d 904 (Ky. 1997) in support of their proposed equitable lien claim. Tile House involved the construction of a home for Michael and Michelle Hannigan and a foreclosure action against their contractor who failed to complete that construction. The court stated, in pertinent part, that
as between the Hannigans and the Cumberland Bank, it is undisputed that Cumberland, through its closing officer, had actual notice that the Hannigans were purchasers of a lot and had paid $3, 000 as a down payment and that they had paid another $25, 236 on the construction contract. Consequently, the bank was on actual notice of the equitable lien of the Hannigans; however, the mechanics' lienholders were clearly not on any notice... The bank, although on notice of the equitable interest of the Hannigans, did not take any steps to subordinate that interest to their mortgage.
942 S.W.2d at 906.
PNC has objected to the proposed declaratory judgment claim on the ground that, as investors in Seminary Woods, the Benz/Fiorinis have no ability to redress individual injuries resulting from their investment in the project undertaken by the company by asserting an equitable lien for their own benefit. (DN 130, p. 12). PNC suggests that "The Benz Parties should seek any relief related to alleged funds spent on the Seminary Woods project as a part of the cross-claims filed in this case among Seminary Woods, LLC and its Members...or in other litigation related to the project pending in the Jefferson Circuit Court..." (DN 130, p. 12, n. 18).
The Benz/Fiorinis contend that the Benzes bought two condominium units in the building and the Fiorinis own part of one unit. They contend that they made deposits for those purchases before PNC recorded its mortgage, and thus liken their position to that of the Hannigans. The problem with this argument is that nowhere in the 106 paragraphs of proposed factual allegations which are incorporated into Count Ten of the Proposed Amended Counterclaim (DN 119-1) are there any allegations concerning their purchase of condominium units nor any allegations with respect to the timing of any such purchases and the filing of the mortgage by PNC. Thus they do not allege any facts which could possibly bring them within the contours of the Tile House principle upon which they urge priority., 
As noted earlier in this opinion, "[C]onclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss." Mezibov v. Allen, 411 F.3d 712, 716 (6th Cir. 2005). "A proposed amendment is futile if the amendment could not withstand a Rule 12(b)(6) motion to dismiss." Rose v. Hartford Underwriters Ins. Co., 203 F.3d 417, 420 (6th Cir. 2000). As the Proposed Amended Counterclaim is devoid of facts in support of the priority principle asserted in Tile House, leave to file proposed Count Ten will be denied as futile.
2. Claims of KRS 286.8-220(2) Violations
Subtitle 8 of the Kentucky Financial Services Code governs practices of mortgage loan companies and brokers in Kentucky. Section 286.8-220(2)(a) and (b) provides:
It shall be unlawful for any person, in connection with a transaction involving the mortgage lending process, or in connection with the operation of a mortgage loan business or the management or servicing of mortgage loans, directly or indirectly,
(a) to employ a device, scheme, or artifice to defraud;
(b) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person...
For purposes of Subtitle 8, "Mortgage loan' means any loan primarily for personal, family, or household use..." As the loans in issue in this case are commercial construction loans, KRS 286.8-220(2) is inapplicable in this case. The claims alleging violations of this section will be dismissed and the filing of the Benz/Fiorini's Proposed Amended Counterclaim - Count Two will be denied as futile.
3. Claim of Violation of The Equal Credit Opportunity Act and Regulation B
The Benz/Fiorinis have moved for leave to amend their counterclaim to add a claim for violation of the Equal Credit Opportunity Act (15 U.S.C. § 1691, et seq. and its implementing regulation, Regulation B, 12 CFR Part 202. They claim in proposed Count Nine that:
104. The Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. §§ 1691-1691f and Regulation B, 12 C.F.R. § 202, prohibit a lender from requiring a personal guaranty based upon marital status alone. Instead, before a lender may require such a guarantee from a spouse, it must make an independent evaluation of its need for that guaranty. That is, it must consider the assets of each spouse independently and cannot blindly demand a guarantee based upon marital status. The Bank violated Regulation B by requiring Ms. Benz and Ms. Fiorini to sign a Guaranty Agreement and then to "reaffirm" based solely upon marital status.
105. The Bank has pleaded that Ms. Benz and Ms. Fiorini re-affirmed their guaranty agreements with the Bank in 2013 when they executed releases in connection with certain condominium unit sales. Although they both deny that they reaffirmed any valid, enforceable guaranty agreement, should this Court disagree, Ms. Benz and Ms. Fiorini alternatively plead here that the Bank's conduct violated Regulation B of the ECOA.
The sole factual allegation in support of this claim is found at paragraph 15 of the Proposed Amended Counterclaim:
Further, the Bank had blindly and apparently out of routine practice required Messrs. Benz's and Fiorini's spouses to execute guarantees without evaluating their wealth independent of Mr. Benz and Mr. Fiorini's or vice versa so as to determine if Mr. Benz's and Mr. Fiorini's individual wealth was substantial enough such that their personal guarantees standing alone sufficed to support their limited guaranty obligations.
Taking this allegation as true, it is insufficient to state a claim for violation of the ECOA and Regulation B ...