United States District Court, Southern District of New York
July 17, 2003
LASALLE BANK NATIONAL ASSOC. PLAINTIFF,
CITICORP REAL ESTATE, INC. DEFENDANT. CITICORP REAL ESTATE, INC. THIRD-PARTY PLAINTIFF, V. CRIIMI MAE SERVICES LIMITED PARTNERSHIP; ORIX CAPITAL MARKETS, LLC; AND MARRIOTT INTERNATIONAL, INC. THIRD-PARTY DEFENDANTS.
The opinion of the court was delivered by: Harold Baer, Jr., District Judge
OPINION AND ORDER
Three motions in this case are before the Court. Third-party defendants Criimi Mae Services Limited Partnership ("Criimi"), Orix Capital Markets ("Orix"), and Marriott International, Inc. ("Marriott") have each moved to dismiss all claims brought by third-party plaintiff, Citicorp Real Estate Inc. ("Citicorp"), for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6). For the following reasons, each motion is granted in part and denied in part.
A. Standard of Review Under Rule 12(b)(6)
On these motions to dismiss, the Court accepts as true the factual allegations in Citicorp's third-party complaint, and draws all reasonable inferences in favor of Citicorp. See Bolt Electric Inc. v. City of New York, 53 F.3d 465, 469 (2d Cir. 1995). Furthermore, dismissal will be granted only if "`it appears beyond doubt that [Citicorp] can prove no set of facts in support of [its] claim which would entitle [it] to relief.'" Id. (quoting Walker v. City of New York, 974 F.2d 293, 298 (2d Cir. 1992), and Ricciuti v. New York Transit Auth., 941 F.2d 119, 123 (2d Cir. 1991)). "The issue is not whether a plaintiff is likely to prevail ultimately, `but whether the claimant is entitled to offer evidence to support the claims.'" Gant v. Wallingford Board of Ed., 69 F.3d 669, 673 (2d Cir. 1995) (quoting cases). When deciding a motion to dismiss, a court may consider not only the third-party complaint, but also "any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference." See Cortec Indus. Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991). However, where such incorporated documents contradict an allegation in the pleadings, the document controls. See 2 Broadway L.L.C. v. Credit Suisse First Boston Mortg. Capital L.L.C., No. 00 Civ. 5773, 2001 WL 410074, at *9 (S.D.N.Y. Apr. 23, 2001)
On December 24, 1997, Brock Suite Greenville, Inc. ("Brock Suite") borrowed $6.75 million from L.J. Melody & Company ("LJM"), a mortgage loan provider, secured by a mortgage on a hotel that Brock Suite styled as a "Residence Inn by Marriott." See Third-party Compl. ¶ 17. LJM immediately sold the loan to Citicorp and with it assigned all "rights, title and interest in, to and under the note, the mortgage and certain related loan documents."*fn2 See id. ¶ 17. In response to a request by LJM, Marriott sent a comfort letter to LJM on December 18, 1997 detailing what procedures Marriott would follow if Brock Suite were in default under its franchise agreement. See id. ¶¶ 55-56, Ex. 4. In fact, Brock Suite had violated the franchise agreement with Marriott as of March 31, 1998, according to a Notice of Default Marriott sent on that date to Mel Melle, the chief financial officer of Hallwood Realty Group, Brock Suite's parent company,*fn3 which noted the hotel's customer-service performance was below the threshold required by Marriott. See id. ¶ 30. Citicorp alleges that neither its employees nor LJM's employees received a copy of this letter or notice of its contents. See id. ¶ 31.
On April 1, 1998, LaSalle, Citicorp, Criimi and several other entities signed a Pooling and Services Agreement (the "PSA") for the purchase by LaSalle of $1.3 billion worth of mortgages loans, which were to be included in a Real Estate Mortgage Investment Conduit (REMIC) Trust. See Compl. ¶ 16. LaSalle was and remains the Trustee and Administrator of the REMIC Trust, Citicorp was the Mortgage Loan Seller, and Criimi was the Special Servicer. See id. ¶ 1 & n. 1. Citicorp made several representations and warranties in the PSA, including that "[t]here is no material default, breach or event of acceleration existing under the related Mortgage Note . . ." See id ¶ 17 (quoting PSA § 2.05(d)(xxv)). However, as noted above the Brock Suite loan was in default, contrary to this representation and warranty. LaSalle and Criimi learned of Brock Suite's default under the Franchise Agreement no later than January 28, 1999, which is the date that this loan was transferred to the Special Servicer, which is responsible for servicing and administering certain mortgage loans, such as those that are in default under the related loan documents.*fn4 However, Citicorp was not notified about Brock Suite's default until February 5, 2001, when Orix, as Special Servicer, sent Citicorp a notification of Brock Suite's default and demanded that Citicorp repurchase the mortgage.
LaSalle brought suit against Citicorp for breach of its warranties and representations under the PSA. Citicorp counterclaimed, alleging that LaSalle had failed to timely notify Citicorp of the Brock Suite default, as required by § 2.05(e) of the PSA. This Court denied LaSalle's motion to dismiss the counterclaim under Rule 12(b)(6), finding that Citicorp had asserted a valid claim for breach of contract. See LaSalle Bank Nat'l. Ass'n v. Citicorp Real Estate, Inc., 2003 WL 1461483 (S.D.N.Y. Mar. 21, 2003).
On March 28, 2003, Citicorp filed a third-party complaint against Marriott for failure to notify Citicorp of Brock Suite's default despite Marriott's undertaking of this obligation in the comfort letter to LJM and against Criimi and Orix for failure to timely notify Citicorp of Brock Suite's default as required by PSA § 2.05(d). Citicorp claims that if it is found liable to LaSalle for breach of the PSA, it is entitled to recover from the third-party defendants for all or part of the damages it owes LaSalle. Third-party Compl. at ¶¶ 54-148. Citicorp also brought a thirdparty claim for breach of the implied covenant of good faith against ARCap, who succeeded Orix as Special Servicer and who remains in this position. Citicorp subsequently withdrew this claim.
A. Criimi's and Orix's Motions to Dismiss*fn5
Citicorp alleges three causes of action against Criimi and Orix (collectively "Special Servicers") — breach of contract, indemnity, and breach of the duty of good faith and fair dealing. Orix and Criimi move to dismiss on different theories. Orix moves to dismiss Citicorp's thirdparty claims against it on the basis that any damages that they may have caused by failing to notify Citicorp of the default will be set-off against any damages for which Citicorp is liable to LaSalle. Because Citicorp alleges in its third-party complaint that the Special Servicers are agents of LaSalle,*fn6 Orix contends that this is a two-party dispute between Citicorp and the Trust. Moreover, because the law imputes an agent's knowledge to its principal, LaSalle will be liable to Citicorp for any damages shown by the proof to illustrate that the Special Servicer knew of but failed to timely notify Citicorp of a material default in the Brock Suite loan. Meanwhile, Criimi contends that the notice provision of 2.05(e) is a condition precedent to Citicorp's obligation to cure or repurchase under § 2.03. Under this view, if LaSalle, Criimi, and Orix failed to give Citicorp prompt written notice, Citicorp's obligation to cure or repurchase was extinguished and LaSalle has no cause of action against Citicorp, thus effectively ending the entire lawsuit. The Special Servicers further assert that any possibility of separate damages that the Special Servicers caused Citicorp is eliminated because LaSalle has specifically consented to set off any damages that Citicorp establishes were caused by Criimi's and/or Orix's late notice against any damages LaSalle can recover against Citicorp. Citicorp primarily contends that an earlier ruling in this matter, in which LaSalle's motion to dismiss Citicorp's counterclaim that LaSalle breached § 2.05(e) of the PSA by its failure to give prompt written notice upon its discovery of a material breach of the PSA, compels the same result here with respect to the Special Servicers.*fn7
1. The Breach of Contract Claim Against Special Servicers
A necessary element of a cause of action for breach of contract is that the breach cause the non-breaching party damage. See Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996); see also 5 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1235 (1990, updated 2003). Orix correctly argues that if the Special Servicers are LaSalle's agents, the Special Servicers' knowledge is imputed to LaSalle and LaSalle will be fully liable for any damage to Citicorp caused by either its or the Special Servicers' failure to give timely notice. See Farr v. Newman, 14 N.Y.2d 183, 187 (1964) ("It is well-settled that the principal is bound by notice to or knowledge of his agent in all matters within the scope of his agency although in fact the information may never actually have been communicated to the principal."); see also Paramount Ins. Co. v. Rosedale Gardens, Inc., 293 A.D.2d 235, 240 (N.Y. App.Div. 1st Dep't 2002). If the Special Servicers obtained knowledge which triggered their prompt-notice obligations, then LaSalle is deemed to have the same knowledge and the same obligations. However, the PSA expressly establishes that the Special Servicers are independent contractors of LaSalle as Trustee: "The relationship of each of the Master Servicer and Special Servicer to the Trustee under this Agreement is intended by the parties to be that of an independent contractor and not that of a joint venturer, partner or agent." PSA § 3.01(c) (emphasis added). As independent contractors, therefore, the Special Servicers' knowledge and obligations under the PSA were not necessarily the same as LaSalle's knowledge and obligations. At this juncture, the possibility remains that the evidence will show that Orix and/or Criimi knew about Brock Suite's breach of its franchise agreement with Marriott before LaSalle and thus they had an earlier obligation than LaSalle to promptly notify Citicorp and the other parties; it is also possible that Citicorp can show that Orix and/or Criimi's failure to give such earlier notice resulted in additional damages which Citicorp cannot recover from LaSalle. Thus, Citicorp has at this stage of the litigation adequately pled damages and Orix's motion to dismiss Citicorp's breach-of-contract claim is denied.
b. Condition precedent or promise
Criimi contends that the prompt-notice provision in § 2.05(d) is a condition precedent and when not met excuses Citicorp's obligation to cure or repurchase the Brock Suite loan. Because this theory is helpful to Citicorp, Citicorp not surprisingly does not vigorously dispute it; however, Orix takes the position that prompt notice is a promise rather than a 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. Determination of whether the language constitutes a promise or condition precedent depends on whether the contract used the language in conditional terms, such as "if" and "unless and until." The law generally resolves any ambiguities in favor of a promise rather than a condition precedent. See Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 691 (1995). Although the prompt-notice provision starts with the word "upon," in this context it does not overcome the preference against finding conditions precedent. Moreover, although the cure-or-repurchase and the prompt-notice provisions both involve notice, the two do not expressly refer to each other. Furthermore, Citicorp's obligation to cure or repurchase is triggered in either of two situations — when it receives notice of or when it discovers on its own a material defect in a mortgage loan or a breach of its representations and warranties in the PSA. Finally, as Citicorp candidly concedes, this Court already ruled that the prompt-notice provision gives rise to a separate claim rather than a defense.
c. Significance of LaSalle's letter to the court
In the alternative, the Special Servicers contend that LaSalle's representation in court and in a letter that it would indemnify Criimi and Orix for any amount that it is found to be liable against Citicorp removes any doubt that Citicorp cannot state a claim against the Special Servicers given the lack of damages. In this letter, LaSalle stated that:
for purposes of this action, . . . any recovery to
which [LaSalle] is entitled against defendant
Citicorp Real Estate, Inc. ("Citicorp") for
Citicorp's breach of any representation and warranty
under the PSA shall be offset by any damages caused
to Citicorp by the alleged failure of Orix or Criimi
to provide prompt notice of that breach to the extent
that either was obligated to do so. . . .
Accordingly, Citicorp shall not incur liability to
LaSalle in this action caused by any allegedly late
notice sent by Orix and/or Criimi of a breach of the
PSA by Citicorp.
Letter from Jordan W. Siev to Hon. Harold Baer. Jr. (June 10, 2003). Citicorp responds that although LaSalle's undertaking may be relevant to other issues such as mootness, it is not relevant here on a motion to dismiss for failure to state a claim. Although neither party has directed the Court to any cases, I conclude that the LaSalle undertaking will not and should not be a determinant on this motion to dismiss.
2. The Indemnity Claim Against Special Servicers
Citicorp's second claim against Special Servicers is for implied indemnity.*fn8 At oral argument, Citicorp conceded that if its breach-of-contract claims against Orix and Criimi are upheld, its other claims are redundant and unnecessary. In any event, Citicorp's claim for implied indemnity against the Special Servicers lacks necessary elements and is dismissed on the merits. Citicorp alleges that there are "unique special factors" that demonstrate the would-be indemnitor — the Special Servicers — bear the ultimate responsibility for the damage to Citicorp. See City of New York v. Black & Veatch, 1997 WL 624985, at * 11 (S.D.N.Y., Oct. 6, 1997) ("[A] party must show facts demonstrating that there is something `special' about the contractual relationship that would warrant implying in fact a contract for indemnification."); see also People's Democratic Republic of Yemen v. Goodpasture, Inc., 782 F.2d 346, 351 (2d Cir. 1986). "The burden of establishing an implied agreement to indemnify is a heavy one, especially in business relationships where parties are free to negotiate for express indemnification clauses." Black & Veatch, 1997 WL 624985, at *10. Citicorp claims that the "unique special factor" is that Orix and Criimi knew that Citicorp no longer was able to effectively monitor the Brock Suite loan and could not take any action until it received notice. The Special Servicers also argue that this Court's rejection of LaSalle's claim for negligent misrepresentation, which also required a "special relationship" between the parties, is dispositive here as well. Even if Citicorp is correct that the "special relationship" necessary for implied indemnification is different than the "special relationship" necessary for negligent misrepresentation, to find implied indemnification here would conflict with PSA § 6.01 which states that "the Special Servicer . . . shall be liable . . . only to the extent of the respective obligations specifically imposed and undertaken by the . . . Special Servicer." Moreover, it is far-fetched, at least in my humble opinion, for one to conclude that there is something especially unique about the fact that one party to a contract knows that the other party no longer can effectively monitor an aspect of the transaction.
3. The Breach of Implied Covenant Claim Against Special
Citicorp concedes that its claim for breach of implied covenant is duplicative of its claim for breach of contract because both claims seek the same relief. Accordingly, its claim for breach of the implied covenant, which is pled in the alternative, can only be sustained if its breach-of-contract claim is dismissed. See Citicorp's Resp. to Criimi's Mot. to Dismiss at 9. Because the Court upheld Citicorp's claims against Orix and Criimi for breach of contract, it is not necessary to reach this claim.
B. Marriott's Motion to Dismiss
Citicorp asserts three claims against Marriott — promissory estoppel, indemnity, and negligence. Each claim stems from the "comfort letter" Marriott sent to LJM on December 18, 1997 in which it indicated the procedures that it would follow if Brock Suite defaulted on its loan. The relevant parts of this "comfort letter" are as follows:
Franchisee has requested that we inform Lender [L.J.
Melody] of the procedure that Marriott will follow in
the event Franchisee is in default under the
Franchise agreement, and the following are the
procedures that Marriott will follow:
1. Marriott will notify Lender in writing of
any voluntary surrender by Franchisee of the
Franchise Agreement, or of any action Marriott
intends to take as a result of a default under the
Franchise Agreement by Franchisee.
Upon receipt of a written request from Lender,
Marriott will issue a replacement comfort letter,
substantially similar to this letter, to a
wholly-owned subsidiary of Lender, to the trustee
of a trust established in connection with the
securitization of the loan or to a successor
mortgagee that is a financial institution in the
business of routinely financing real estate
transactions and in good financial condition. Any
such replacement comfort letter shall supersede
The obligations of Marriott set forth in this
letter shall remain in effect for so long as
Lender's note secured by a first mortgage or deed
of trust and the Franchise Agreement with respect
to the Hotel both remain in effect.
In its motion to dismiss, Marriott argues that 1) the comfort letter it sent to LJM is not a legally enforceable contract, and 2) that the comfort letter was not assignable to any other entity nor assigned to Citicorp. Citicorp contends that it has adequately alleged that it reasonably and foreseeably relied on the comfort letter when it added the Brock Suite loan to the pool securitized by the PSA. Citicorp argues that the promises made in the comfort letter were assigned to Citicorp as the successor mortgagee, and that Citicorp relied on the promises in the comfort letter by obligating itself to the representations and warranties in the PSA. Id. at ¶¶ 61-62.
1. Promissory Estoppel
Taking these claims one by one, "In New York, promissory estoppel has three elements: `a clear and unambiguous promise; a reasonable and foreseeable reliance by the party to whom the promise is made, and an injury sustained by the party asserting the estoppel by reason of the reliance.'" Cyberchron Corp. v. Calldata Sys. Dev. Inc., 47 F.3d 39, 45 (2d Cir. 1995) (quoting sources).
Although "comfort letters" are common devices in business, there is relatively little case law on the extent to which courts will give them any legal effect. The best description, at least for me, goes like this:
Generically speaking, a comfort letter is an
instrument written by a third party and is designed
to encourage the creation of an agreement between two
other parties. [S]ometimes a comfort letter leads to
the subsequent involvement of the drafting party in
the agreement itself, despite that party's original
intent that the letter not create any
obligations. . . .
Comfort letters are often drafted by a parent
company and are aimed at encouraging a lending
institution to issue credit to a subsidiary. The
drafter of the instrument wants to avoid incurring
liability on the parent company's part for the
non-performance of the potential debtor, the
subsidiary. Yet, at the same time, the parent
wishes to encourage the potential creditor, the
financial institution, to enter into a legally
binding transaction. In other words, a comfort
letter of this type is aimed at being something
more than a letter of introduction, but something
less than a guaranty or suretyship
commitment. . . .
. . . In principle and consistent with other
types of gentleman's agreements, courts generally
view comfort letters as unenforceable. The parent
company, however, may find itself held liable as a
guarantor when a court considers the letter in the
context of the whole relationship among the three
parties and finds it to be part of an implied
[T]he enforceability of a comfort letter
depends on a number of factors, the first being the
language of the instrument itself. An intent on the
part of the drafter to be bound as guarantor is
likely to be found if the instrument, despite the
fact that it calls itself a "comfort letter,"
contains operative language such as "guaranty,"
"contract" or other words of promise. The more
detailed the instrument, the more likely a court
will be to find it indicative of an intent to
contract. . . .
In addition to the language of the instrument
itself, the context in which the comfort instrument
was written and other external factors may lead a
court to find that the drafter assumed the role of
guarantor. One such factor is the sophistication of
the parties and whether they sought legal advice as
to the meaning and legal significance of the
comfort instrument. Oral representations and the
parties' prior dealings may also affect
enforceability: one party may argue that the
instrument was part of the contractual relationship
between lender and borrower, not merely tangential
to it. An instrument is likely to be enforceable if
it is customarily viewed in the particular trade or
profession at issue as legally binding. Finally, a
court may scrutinize the parties' reasons for using
the comfort instrument, as well as the role that
the instrument played in their agreement. If the
recipient of the comfort letter reasonably relied
on terms given or implied by the instrument, then
that comfort letter's statements, even if
promissory language has been avoided, may be held
enforceable under a theory of promissory estoppel
or detrimental reliance even though the drafter had
good reasons for wanting to avoid a formal
Herbert Bernstein and Joachim Zekoll, The Gentleman's Agreement in Legal Theory and Modern Practice, 46 Am. J. Comp. L. 87, 98-101 (1998); see also Alan M. Christenfeld & Shephard W. Melzer, Comfort Letters — How Comforting Are They?, N.Y. L.J., June 3, 1999, at 5 (characterizing comfort letters in three categories — weak, medium, and strong).
In sum, although comfort letters in general do not give rise to legally binding obligations, courts will enforce them on a contract or promissory estoppel theory depending on the specific circumstances. Both sides point to aspects of the comfort letter that support their respective contentions. For example, Marriott notes that the letter was addressed to LJM and that the letter stated that Marriott would issue a "substantially similar" replacement letter if requested to do so but only to certain specified successors. As a sophisticated commercial entity, Citicorp should have known that the promises contained in a comfort letter generally do not bind the promisor. On the other hand, Citicorp points to the strong language used in the letter — for example, Marriott stated that "the following are the procedures that Marriott will follow" and referred to its promises contained in the letter as "obligations." Moreover, Marriott stated the obligations would remain in effect while both the franchise agreement and LJM's note remained in effect. Because of the fact-specific nature of the inquiry suggested by the commentary above, I will not dismiss Citicorp's claim at this stage, given that Citicorp has alleged that it received this comfort letter and relied on the obligations stated therein in adding the Brock Suite loan to the PSA. While doubtful that the circumstances surrounding the issuance of this comfort letter justify Citicorp's reliance, I will permit — indeed, in my view, I have to permit — Citicorp the opportunity to develop sufficient facts that show, among other things, that Citicorp in fact relied on the letter and that its reliance was reasonable given the specific transaction and the parties involved, and this claim may proceed.
2. Negligence and Indemnity Against Marriott
Citicorp's second and third claims against Marriott are for indemnity and for negligence. As noted above, comfort letters have, in certain circumstances, been enforced on a legal theory of contract or promissory estoppel. However, Citicorp does not cite any case or other authority where a comfort letter gives rise to a claim for indemnity or for negligence, and this Court declines to do so here and those claims are dismissed.
For the foregoing reasons, Orix's and Criimi's respective motions to dismiss Citicorp's third-party complaint as to them is denied with respect to Citicorp's claim for breach of contract and granted in all other respects. Marriott's motion to dismiss Citicorp's third-party complaint against it is denied with respect to the promissory estoppel claim and granted as to the negligence and indemnity claims.
IT IS SO ORDERED.