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LASALLE BANK NATL. ASSOC. v. CITICORP REAL ESTATE

July 17, 2003

LASALLE BANK NATIONAL ASSOC. PLAINTIFF,
v.
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.

I. INTRODUCTION*fn1

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)

B. Facts

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.

II. DISCUSSION

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 ยง 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 ...


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