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U.S. Bank National Association v. BFPRU I, LLC

United States District Court, S.D. New York

January 28, 2017

U.S. BANK NATIONAL ASSOCIATION, ET AL., Plaintiffs,
v.
BFPRU I, LLC, ET AL., Defendants.

          OPINION AND ORDER

          John G. Koeltl United States District Judge.

         This action arises out of a dispute between the plaintiffs, U.S. Bank National Association and Wells Fargo Bank, N.A., (collectively, the “Lender”); the defendants and third party plaintiffs, BFPRU I LLC, (the “Borrower”) and Mark Karasick and Michael Silberberg (the “Guarantors”); and the third party defendant, the Lender's loan servicer, LNR Partners, LLC (“LNR”). The defendants move to dismiss the plaintiffs' First Amended Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure. This motion is denied. LNR moves to dismiss the defendants' third party complaint. This motion is granted.

         I.

         The following facts alleged in the First Amended Complaint and the third party complaint are accepted as true for purposes of the pending motions.

         In 2013, the Lender and Borrower modified a Loan Agreement related to a $410 million commercial mortgage loan (the “Loan”) secured by two commercial buildings in Chicago, One Prudential Plaza and Two Prudential Plaza (the “Property”) by entering into an Amended Loan Agreement. First Am. Compl. (“FAC”) ¶ 1, ECF No. 31. The Amended Loan Agreement bifurcated the loan into a $336 million “A” Note and a $74 million “B” Note. FAC ¶ 25.

         The Amended Loan Agreement provided that the Borrower could prepay the loan upon a “Refinancing Capital Event.” FAC ¶ 1, 27-28. To initiate a Refinancing Capital Event, the Borrower would notify the Lender by providing the proposed terms of a refinancing offered by a separate third-party lender. FAC ¶ 28. The Borrower and Lender would then each obtain “as is” appraisals of the Property that “conform[] to the requirements for appraisals relied upon by regulated financial institutions.” FAC ¶ 29. If the appraisals were within 5% of each other, the “Appraised Fair Market Value” would be 96% of the average of the two appraisals, and this figure would be used to calculate the amount required to secure a release of the Property. FAC ¶ 30-31. The Amended Loan Agreement also stated that the Borrower would “cooperate with and timely provide any and all information as may be reasonably requested by the Lender's appraiser in order to complete [the] appraisal.” FAC ¶ 29 (quoting Am. Loan Agmt. § 3.6(c), Edwards Decl. Ex. 1, ECF No. 37). The Loan Agreement and Amended Loan Agreement stated that the failure to satisfy these obligations constituted an Event of Default. See FAC ¶¶ 79-80. Further, as part of the modification, the Guarantors signed a Guaranty Agreement agreeing to be held liable to the Lender for any losses sustained by the Lender arising out of or in connection with “any fraud, willful misconduct or intentional material misrepresentation by Borrower . . . or by any Guarantor in connection with the Loan.” FAC ¶ 84.

         The Borrower initiated a Refinancing Capital Event on April 2, 2015, and the Lender then engaged Integra Realty Resources (“IRR”) on April 21, 2015 to perform an appraisal on the Property. FAC ¶ 32-35. The following day, IRR submitted a written request to the Borrower's managing agent for the Property, Jones Lang LaSalle (“JLL”) for information related to the Property, including a specific request for all leasing information and “information on leases under negotiation.” FAC ¶ 35. JLL responded to the request by providing information on various types of leasing activity, but did not provide any information relating to leases under negotiation. FAC ¶ 38-39. JLL also provided financial projections to IRR forecasting a decline in leasing at the Property. FAC ¶ 39.

         Based on the information provided by JLL, IRR completed its appraisal on May 27, 2015 and arrived at an “as is” value of the Property of $430, 000, 000 as of May 12, 2015. FAC ¶ 41. The Borrower's appraiser, Butler Burgher Group (“BBG”) completed its appraisal on May 26, 2015, arriving at an “as is” value of $427, 400, 000 as of April 8, 2015. FAC ¶ 42. Based on these two appraisals, the Appraised Fair Market Value was determined to be $411, 552, 000. FAC ¶ 43.

         The Refinancing Capital Event was set to close on July 30, 2015, and in anticipation of the closing, the Borrower and Guarantors provided a Certification to the Lender. FAC ¶ 44. The Certification stated that the Borrower and Guarantors, “as of this 30th day of July, 2015, ” had “provided all financial, operating and leasing information about the Property” to the Lender, to IRR, and BBG; that “[a]ll such financial, operating and leasing information provided to Lender, [IRR] and [BBG] is complete, true and accurate in all respects”; and that “[n]one of Borrower or any Guarantor is aware of any additional financial, operating or leasing information that would have a material effect on the value of the Property.” FAC ¶ 44 (quoting Certification ¶ 1, Kapoor Decl. Ex. 3, ECF No. 39).

         Upon closing, as a result of the priority of payment schedule outlined in the Amended Loan Agreement, the Lender received full repayment for the A-note, but received no payment for the B-note. FAC ¶¶ 2, 74-75, 97. Thereafter, the Lender learned that a newly refinanced loan made to the Borrower and secured by the Property was being marketed in a prospectus that valued the Property at $642, 000, 000. FAC ¶ 47. The valuation was based on an “as is” appraisal performed by CBRE Inc. as of June 24, 2015, which, according to the plaintiffs, used the same methodology as the Borrower and Lender appraisals. FAC ¶ 4, 47.

         The plaintiffs allege that the CBRE appraisal exceeded the other appraisals because the CBRE appraisal incorporated the terms of several pending leases that were determined to have a high probability of being fully executed. FAC ¶ 53. The plaintiffs allege that the defendants or their agents participated in these lease negotiations, that they had knowledge of these lease negotiations, and that all property leases required approval by the Guarantors prior to execution. FAC ¶¶ 60-62.

         According to the defendants' third party complaint, a majority of these new leases were disclosed to the plaintiffs' loan servicer and the third party defendant, LNR, in connection with the Borrower's May 2015 and June 2015 property reserve disbursement requests for tenant improvements and third party leasing brokerage commissions. Third Party Compl. (“TPC”) ¶ 41, ECF No. 13. LNR provided loan servicing to the Lender pursuant to a Pooling and Servicing Agreement (the “PSA”), to which the defendants were not a party. See TPC ¶ 52; PSA, TPC Ex. 6. The PSA further specified that nonparties such as the Borrower and Guarantors had no benefits, rights, remedies or claims under the PSA. PSA ¶ 12.08 at 298. Finally, as part of the July 30, 2015 closing of the Refinancing Capital Event, the defendants signed a General Release that “absolutely, unconditionally, and irrevocably waive[d]” any claims against LNR. See General Release, Kapoor Decl. Ex. 4, ECF No. 39.

         The plaintiffs filed suit, alleging (1) breach of contract against the Borrower; (2) breach of contract against the Guarantors; (3) fraudulent concealment and misrepresentation against the Borrower and Guarantors; (4) negligent omission and misrepresentation against the Borrower and the Guarantors; and (5) unjust enrichment against the Borrower. FAC ¶¶ 88-157. The defendants move to dismiss the plaintiffs' claims.

         The defendants filed a third party complaint against LNR for (1) negligent omission; (2) contribution; and (3) indemnification. LNR moves to dismiss the defendants' claims.

         II.

         In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiffs' favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007); Arista Records LLC v. Lime Group LLC, 532 F.Supp.2d 556, 566 (S.D.N.Y. 2007). The Court's function on a motion to dismiss is “not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient.” Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). The Court should not dismiss the complaint if the plaintiff has stated “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While the Court should construe the factual allegations in the light most favorable to the plaintiff, “the tenet that a court must accept as true all of the allegations contained in the complaint is inapplicable to legal conclusions.” Id.; see also SEC v. Rorech, 673 F.Supp.2d 217, 221 (S.D.N.Y. 2009).

         The same principles apply to the motion to dismiss the complaint and the motion to dismiss the third party complaint. See, e.g., Elastic Wonder, Inc. v. Posey, No. 13-cv-5603 (JGK), 2015 WL 273691, at *1 (S.D.N.Y. Jan. 22, 2015).

         III.

         The defendants maintain that all of the plaintiffs' claims should be dismissed. The parties agree that New York law is the governing law to be applied and the Court can accept that agreement. See Burt Rigid Box, Inc. v. Travelers Prop. Cas. Corp., 302 F.3d 83, 91 (2d Cir. 2002).

         A.

         The defendants argue that the plaintiffs' fraud and negligent misrepresentation claims should be dismissed because they are duplicative of their breach of contract claims, and because the fraud and negligent misrepresentation claims fail to satisfy Rule 9(b) of the Federal Rules of Civil Procedure.

         1.

         “[U]nder New York law, parallel fraud and contract claims may be brought if the plaintiff (1) demonstrates a legal duty separate from the duty to perform under the contract; (2) points to a fraudulent misrepresentation that is collateral or extraneous to the contract; or (3) seeks special damages that are unrecoverable as contract damages.” Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 183 (2d Cir. 2007).

         A duty to disclose separate from the duty to perform under the contract may arise “where one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge.” TVT Records v. Island Def Jam Music Grp., 412 F.3d 82, 91 (2d Cir. 2005) (quoting Brass v. Am. Film Tech., Inc., 987 F.2d 142, 150 (2d Cir. 1993)).

         A duty to disclose separate from a contractual duty may also arise if the defendants made a partial or ambiguous statement that required additional disclosure in order to avoid misleading the other party. See id.; see also Brass, 987 F.2d at 150 (noting that under New York law, a duty to disclose exists “where [a] party has made a partial or ambiguous statement, on the theory that once a party has undertaken to mention a relevant fact to the other party it cannot give only half of the truth.”).

         A plaintiff may also bring parallel fraud and breach of contract claims when there are “[m]isrepresentations of present facts made post-contract formation [that] are collateral or extraneous to the contract.” Minnie Rose LLC v. Yu, 169 F.Supp.3d 504, 520-21 (S.D.N.Y. 2016); see also Eagle Comtronics, Inc. v. Pico Products Inc., 682 N.Y.S.2d 505, 507 (App. Div. 1998) (“Plaintiff does not allege merely that Defendant entered into the contract while misrepresenting its intent to perform as agreed, but alleges that, after the contract was entered into, defendant repeatedly misrepresented or concealed existing facts.” (citation omitted)); but see Madison Capital Co., LLC v. Alasia, LLC, 615 F.Supp.2d 233, 240 (S.D.N.Y. 2009) (determining that a plaintiff was barred from bringing both a negligent misrepresentation claim and a breach of contract ...


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