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Fccd Limited v. State Street Bank and Trust Company and

February 15, 2011

FCCD LIMITED,
PLAINTIFF,
v.
STATE STREET BANK AND TRUST COMPANY AND TRIMONT REAL ESTATE ADVISORS, INC., DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge:

OPINION & ORDER

Plaintiff FCCD Limited ("FCCD"), the holder of a senior interest in a commercial real estate loan, has brought this action for breach of the loan agreement against the holder of the subordinate interest in the loan, State Street Bank and Trust Company ("State Street"), and the servicer of the loan, TriMont Real Estate Advisors, Inc. ("TriMont"). This Opinion addresses the parties' cross-motions for summary judgment.

BACKGROUND

The Complaint asserts three causes of action against State Street: declaratory judgment, breach of contract, and breach of the implied covenant of good faith and fair dealing. It also asserts a claim for tortious interference with contract against TriMont. The Complaint principally asserts that State Street breached its obligation under the loan agreement to transfer control over the loan to FCCD, the senior interest holder, in the event of a default by the borrower. FCCD alleges that State Street is thwarting the overarching design of the loan agreement -- to ensure that the party with control over the loan has a sufficient economic stake in the loan that it has an incentive to make sound decisions.

The following facts are not in dispute. On July 21, 2006, Lehman Brothers Holdings Inc. ("Lehman") entered into an agreement (the "Loan Agreement") with a Mexican land developer, Logan Hotels and Resorts, Mexico, S.A. De C.V. (hereinafter the "Borrower") to provide a loan (the "Loan") of up to $65 million. The Loan was secured by a first mortgage lien on 840 acres of vacant land located in the City of Los Cabo, Baja California Sur, Mexico. At the time of the Loan, the property was appraised as having a value of $58.8 million; by the end of 2007, it had increased in value to well over $100 million. The Borrower intended to use the Loan to construct "hotels, villas and fractional beach residences" in addition to "an 18 hole golf course, a retail village, and additional residential developments." Because the property would not generate income during the development phase, the Loan Agreement provided that "[a]ll principal, interest and other sums due under the Loan Documents . . . shall be due and payable in full on the Maturity Date."

On January 19, 2007, Lehman entered into a Loan Participation Agreement (the "Participation Agreement") with FCCD whereby it sold to FCCD a senior interest in the Loan. The preamble to the Participation Agreement provided,

Lehman has agreed to sell and transfer to Senior Participant, and Senior Participant has agreed to purchase and receive from Lehman, an undivided senior participation interest in the Loan on the terms and conditions set forth in this agreement (such senior participation interest in the Loan being hereinafter referred to as "Senior Participant's Participation"; the subordinate interest in the Loan which is retained by Lehman is hereinafter referred to as the "Lehman Interest").

The term "Lehman's Pro Rata Share" was defined to mean "the percentage obtained by dividing (x) the sum of the aggregate unpaid principal amount of the Loan less the unpaid principal amount of the Participation Amount by (y) the aggregate unpaid principal amount of the Loan." The Participation Agreement further provided that FCCD was to receive payments of interest at a rate of 12.5%, while Lehman would continue to receive interest at the 15% rate as set forth in the Loan Agreement. The Participation Agreement specified that it was an integrated written contract and that its interpretation would be governed by New York law.

In the event of a default by the Borrower, the "Waterfall" provision of the Participation Agreement contemplated that FCCD, as the senior interest holder, would have first priority in reimbursements of principal and interest:

At any time that an Event of Default shall have occurred and be continuing, all amounts received by Lehman with respect to the Loan shall be applied to the extent of all such received amounts in the following order of priority: (A) first, to pay to Servicer any Unreimbursed Costs; (B) second, to pay to Senior Participant interest on the outstanding Senior Participation Amount at the Interest Rate;

(C) third, to pay to Senior Participant the Participation Amount; (D) fourth, to pay to Lehman all sums due and payable to Lehman other than its portion of the Additional Fee; (E) fifth, to pay to Senior Participant the Senior Participant Additional Fee; and (F) finally, the balance to Lehman.

This structure explains why Lehman's interest was considered "subordinate" to that of FCCD: if the loan suffered a loss, Lehman's interest would be the first to absorb that loss. In exchange for assuming the riskier participation in the loan, Lehman was compensated at a higher interest rate than FCCD.

As the holder of legal title to the Loan, Lehman retained "the sole and exclusive authority with respect to the administration of, and exercise of rights and remedies with respect to, the Loan." This included the right to control the collection of payments of principal and interest, known as the "servicing" of the loan. The Participation Agreement specifically empowered Lehman to appoint a servicer of the loan. Control over the servicing of a loan gives the lender "the ability to control essential decision making with respect to enforcement of a loan following a default."

Lehman's right to service the loan under the Participation Agreement was not absolute, however. In the event of a default on the Loan, the Participation Agreement provided that the right to service the loan would be transferred to the senior interest holder if the subordinate interest holder's prospect of recovery was so diminished that it could no longer be said to have a sufficient economic stake in the Loan. The Participation Agreement set forth a formula ...


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