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U.S. Bank National Association v. Dexia Real Estate Capital Markets

United States District Court, S.D. New York

July 9, 2014

U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR THE REGISTERED HOLDERS OF WACHOVIA BANK COMMERCIAL MORTGAGE TRUST, COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2006-C28, ACTING BY AND THROUGH ITS SPECIAL SERVICER CWCAPITAL ASSET MANAGEMENT LLC, Plaintiff,
v.
DEXIA REAL ESTATE CAPITAL MARKETS F/K/A ARTESIA MORTGAGE CAPITAL CORPORATION, Defendant.

Michael C. Hartmere, Esq., Venable LLP, New York, NY, Gregory A. Cross, Esq., Heather Deans Foley, Esq., Colleen Mallon, Esq., Venable LLP, Baltimore, MD, for Plaintiff.

David D. Ferguson, Esq., G. Edgar James, Esq., Polsinelli Shughart PC, Kansas City, MO, for defendant.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge.

I. INTRODUCTION

Plaintiff U.S. Bank National Association, as Trustee for the Registered Holders of Wachovia Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2006-C28 ("the Trust"), acting by and through its Special Servicer CWCapital Asset Management LLC ("CWCAM"), brings this diversity breach of contract suit against Dexia Real Estate Capital Markets f/k/a Artesia Mortgage Capital Corporation ("Dexia"). The parties crossmove for summary judgment. For the following reasons, the Trust's motion for summary judgment is GRANTED and Dexia's motion for summary judgment is DENIED.

II. BACKGROUND

A. The Contracts

In September 2006, Dexia made a $13, 800, 000 commercial mortgage loan (the "Marketplace Loan") to MP Operating, LLC and Annex Operating, LLC (collectively, the "Borrowers").[1] The Marketplace Loan is evidenced by a promissory note and secured by a mortgage against an office building located in Stearns County, Minnesota.[2] Four individuals (the "Guarantors") "were purported to have executed a guaranty in favor of Dexia and its successors and assigns" in connection with the Marketplace Loan (the "Guaranty").[3] Section 2(b)(iv) of the Guaranty (the "Full-Recourse Provision") provides that the Guarantors shall be personally liable for the entire amount of the indebtedness evidenced by the promissory note if certain conditions were not met with respect to the Stearns County property.[4]

On October 1, 2006, Dexia and Wachovia Commercial Mortgage Securities ("WCMS") entered into a Mortgage Loan Purchase Agreement (the "MLPA").[5] "Pursuant to the MLPA, Dexia sold commercial mortgage loans... to [WCMS] to be deposited into the Trust and securitized through the issuance of mortgage pass-through certificates."[6]

Dexia made several representations and warranties regarding the loans sold to WCMS, including the Marketplace Loan. Representation 5 states, in relevant part, that "[e]ach related... agreement executed by the related Mortgagor in connection with [each] Mortgage Loan is a legal, valid and binding obligation of the related Mortgagor... enforceable in accordance with its terms."[7] Representation 6 states, in relevant part, that "[a]s of the date of its origination, there was no valid offset, defense, counterclaim, abatement or right to rescission with respect to any of the related... agreements executed in connection" with each Mortgage Loan.[8]

On the same day, WCMS, the Trust, Wachovia Bank National Association (the "Master Servicer"), and CWCAM (the "Special Servicer"), entered into a Pooling and Servicing Agreement ("PSA"), in which WCMS assigned its "rights, title and interest" to several mortgage loans, as well as its rights under "Sections 2, 3, 9, 10, 11, 12, 13, 14, 16, 17, 18 and 19 of each of the [corresponding] Mortgage Loan Purchase Agreements" to the Trust.[9] The Marketplace Loan and Guaranty were assigned to the Trust as part of the PSA.[10]

Section 2.03 of the PSA and Section 3 of the MLPA provide the sole remedy available for document defects and breaches of representations and warranties.[11] Section 2.03(a) of the PSA provides that

[p]romptly upon becoming aware of any Document Defect' or Breach, '... any party [who]... determines that such Document Defect or Breach materially and adversely affects the value of the affected Mortgage Loan, the interest of the Trust Fund therein or the interests of any Certificateholder... shall notify the Master Servicer of such determination and promptly after receipt of such notice, the Master Servicer [or Special Servicer], shall request in writing... that the applicable Mortgage Loan Seller, not later than ninety (90) days from receipt of such written request... (i) cure such Document Defect or Breach... in accordance with Section 3(c) of the applicable [MLPA] [or] (ii) repurchase[s] the affected Mortgage Loan... in accordance with Section 3(c) of the related [MLPA].[12]

A Document Defect is "considered to materially and adversely affect" the value of the loan, interest of the Trust, or interest of any Certificateholder only when "the document with respect to which the Document Defect exists is required in connection with an imminent enforcement of the mortgagee's rights or remedies under the related Mortgage Loan."[13]

B. Minnesota State Court Litigation

"The Marketplace Loan went into default in January 2010 as a result information that does not conform in any material respect with the corresponding information set forth in the Mortgage Loan Schedule, or does not appear to be regular on its face." A "Breach" is defined as "a breach of any representation or warranty relating to any Mortgage Loan set forth in the applicable Mortgage Loan Purchase Agreement." PSA 2.03(a). of [the] Borrowers' failure to pay the required monthly debt service due in that month."[14] After the loan was transferred to CWCAM for special servicing in March 2010, the Special Servicer determined that "the debt service coverage ratio, effective gross income, and physical occupancy rate requirements in the Guaranty were not met, thereby triggering the Guarantors' liabilities under the Full-Recourse Provision."[15] "On September 7, 2010, the Trust filed an action in Stearns County, Minnesota, seeking, among other things, to foreclose upon the lien of the Mortgage, appointment of a receiver, and to enforce the Full-Recourse Provision of the Guaranty."[16]

"The Guarantors responded to the Trust's complaint in the Stearns County Litigation by raising as an affirmative defense that they had not executed the Guaranty with the Full-Recourse Provision and that it was therefore unenforceable."[17] In November 2010, the Guarantors moved for summary judgment, claiming that they executed a limited form of the guaranty that did not include the Full-Recourse Provision. The Guarantors contended that Best & Flanagan, the law firm that served as Dexia's closing counsel, "had taken the Guarantors' signature page from the more limited form of the guaranty and attached it to the form of the Guaranty containing the Full-Recourse Provision without their consent."[18] After the completion of discovery, the Trust amended its complaint to add an alternative theory of contract reformation, arguing that the Guaranty should be reformed to incorporate the Full-Recourse Provision because the Guarantors had ratified the Full-Recourse Provision through later actions.[19]

On July 11, 2011, the Stearns County trial court held that the Full-Recourse Provision was unenforceable because there was insufficient evidence that the Guarantors "had accepted the offer of a Full-Recourse Guaranty or that they intended to ratify [Dexia's closing counsel's] modification to the original Alternative Guaranty."[20] In a separate order dated September 21, 2011, the court held that the rest of the Guaranty was enforceable against the Guarantors because they admitted to signing the more limited guaranty, but granted summary judgment in favor of the Guarantors on the Trust's reformation claim.[21]

In August 2012, the Guarantors sued Dexia and its closing counsel in Hennepin County, Minnesota for fraud and negligence relating to the swapping of the signature page.[22] Dexia filed a counterclaim against the Guarantors for contract reformation and a cross-claim against its closing counsel, alleging malpractice.[23] The Guarantors moved to dismiss Dexia's counterclaim, arguing that the reformation argument was barred by res judicata and collateral estoppel.[24] On March 20, 2014, the Hennepin County court granted the Guarantors' motion to dismiss, holding that "[t]he related doctrines of res judicata and collateral estoppel prevent Dexia from relitigating legal issues that were already decided... in the Stearns County Litigation."[25]

C. Demand and Suit

On September 29, 2011, the Trust wrote to Dexia stating that as a result of the Stearns County trial court orders, "the form of the Guaranty maintained in the Mortgage File was never properly executed by the Guarantors, is not a valid and binding contract... and is unenforceable as a full recourse guaranty" and Dexia has breached its representations and warranties.[26] The letter requested that Dexia cure the document defect or repurchase the loan in accordance with Section 3 of the MLPA and Section 2.03 of the PSA.[27] "Dexia refused to purchase the Loan."[28] The Trust appealed the July and September 2011 orders on July 9, 2012, but withdrew its appeal with ...


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