Wonderland Shopping Center Venture Ltd v. CDC Mortgage

• Decision Date: 26 October 2001
• Docket Number: DEFENDANTS-APPELLEES,No. 01-1668,PLAINTIFF-APPELLANT,01-1668
• Citation: 274 F.3d 1085
• Parties: (6th Cir. 2001) WONDERLAND SHOPPING CENTER VENTURE LIMITED PARTNERSHIP,, MACOMB MALL ASSOCIATES LIMITED PARTNERSHIP, ET AL., PLAINTIFFS v. CDC MORTGAGE CAPITAL, INC., ET AL., Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1085

274 F.3d 1085 (6th Cir. 2001)

WONDERLAND SHOPPING CENTER VENTURE LIMITED PARTNERSHIP, PLAINTIFF-APPELLANT, MACOMB MALL ASSOCIATES LIMITED PARTNERSHIP, ET AL., PLAINTIFFS v. CDC MORTGAGE CAPITAL, INC., ET AL., DEFENDANTS-APPELLEES

No. 01-1668

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: October 26, 2001

Decided and Filed: December 20, 2001

Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 01-70056--Denise Page Hood, District Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] I. W. Winsten (argued and briefed), Honigman, Miller, Schwartz & Cohn, Detroit, Michigan, for Plaintiffs-Appellants.

Kathleen A. Lang (argued), Robert P. Hurlbert (briefed), Dickinson, Wright, Pllc, Detroit, Michigan, Eric S. Rosenthal (argued), Barris, Sott, Denn & Driker, Detroit, Michigan, for Defendants-Appellees.

Before: Jones and Clay, Circuit Judges; Dowd, District Judge.^*

OPINION

Clay, Circuit Judge

Plaintiff, Wonderland Shopping Center Venture Limited Partnership ("Wonderland"), appeals from the district court's order denying Plaintiff's motions for preliminary injunction and summary judgment, and granting summary judgment in favor of Defendants, CDC Mortgage Capital, Inc., CDC Depositor Trust ST I, LaSalle National Bank, and CDC Depositor Trust ST I Commercial Mortgage Pass-Through Certificates Series 1998-ST-I, on Plaintiff's claim for breach of contract under Michigan law and Defendants' counterclaim requesting declaratory judgment of the parties' rights and liabilities under a contract. For the reasons set forth below, we AFFIRM the order of the district court.

BACKGROUND

On January 4, 2001, Plaintiff and non-appealing co-plaintiffs, Macomb Mall Associates L.P. ("Macomb Mall"), and Columbus Mall Associates L.P. ("Columbus Mall"), filed suit against Defendants, CDC Mortgage Capital, Inc., CDC Depositor Trust ST I, and CDC Depositor Trust ST I Commercial Mortgage Pass-Through Certificates 1998-ST-I, for breach of three loan agreements pursuant to Michigan law. In their answer filed on February 27, 2001, Defendants asserted counterclaims requesting a declaration of the rights and obligations of the parties under a contractual provision common to all three loan agreements. On March 21, 2001, Plaintiff and the non-appealing co-plaintiffs filed an amended complaint, joining Defendant LaSalle National Bank ("LaSalle"), and adding a request for an injunction of a mortgage foreclosure announced by Defendants.

Pursuant to the district court's expedited scheduling order, on April 3, 2001, Defendants filed a motion for summary judgment with regard to the breach of contract claims. Plaintiff opposed Defendants' motion, filing a cross-motion for summary judgment and a motion for a preliminary injunction against a foreclosure sale on April 10, 2001. Co-plaintiffs Macomb Mall and Columbus Mall subsequently settled their claims against Defendants and, on April 27, 2001, the district court dismissed their claims.

The district court held a hearing on the summary judgment motions and Plaintiff's motion for preliminary injunction on May 2, 2001. Two days later, on May 4, the district court granted Defendants' motion for summary judgment and denied Plaintiff's motion for summary judgment and preliminary injunction. The district court accepted Defendants' construction of a key, disputed contract provision, and thus concluded a preliminary injunction was unnecessary because Plaintiff could not show likelihood of success on the merits. Even though the district court rejected Plaintiff's request for a preliminary injunction, the district court concluded that a security bond of $1.2 million would have been appropriate pursuant to Fed. R. Civ. P. 65(c) if a preliminary injunction had issued.

On May 18, 2001, the Sheriff of Wayne County, Michigan conducted a mortgage foreclosure sale on the property subject to the loan agreement. Defendant LaSalle purchased the property.

Facts

Plaintiff Wonderland is a Michigan limited partnership with its principal place of business in Southfield, Michigan. Plaintiff owns and operates a shopping mall in Livonia, Michigan. On December 11, 1997, Nomura Asset Capital Corporation ("NACC") loaned Plaintiff $41,650,000.00 pursuant to a loan agreement ("the agreement" or "the contract") and promissory note ("the note"). In early 1998, NACC transferred the loan to its affiliate Nomura Depositor Trust ST I ("Nomura Depositor"), which subsequently assigned this and other loans to a trust, Nomura Depositor Trust ST I Commercial Pass-Through Certificates Series 1998-ST-I ("the Trust"). Defendant LaSalle, a nationally chartered bank with its principal place of business in Chicago, Illinois, was the trustee for the Trust.

On August 2, 1999, Defendant CDC Mortgage Capital, Inc. ("CMCI"), a New York corporation with its principal place of business in New York City, acquired the loans from NACC, including all of NACC's rights, obligations, and liabilities under the loan agreement between NACC and Plaintiff. With this acquisition, the Trust became known as CDC Depositor Trust ST I Commercial Mortgage Pass-Through Certificates Series 1998-ST-I. The Trust is the holder of the loans, and CMCI's affiliate, Defendant CDC Depositor ST I, is the directing holder of the Trust with the right to take certain actions with regard to the loans in the Trust. LaSalle remained trustee for the Trust.

The loan extended to Plaintiff is called a "Reverse Earn-Out Loan," a type of loan secured on properties with currently unstable cash flows, expected to experience improvement in the future. In recognition of this expected improvement, the original loan amount was based on Plaintiff's anticipated net operating income ("NOI"). During the first three years of the loan, the loan agreement obligated Plaintiff to make interest payments only but set performance goals for Plaintiff. Plaintiff's stated three-year goal, in the language of the loan agreement, was a "Stabilization NOI [that] produces a Debt Service Coverage Ratio of [greater than] 1.20 to 1." (J.A. at 476). In other words, the loan agreement gave Plaintiff three years to attain net operating income sufficient to cover 120% of its debt.

If, after three years, Plaintiff had not attained this goal, then the loan agreement provides a mechanism for "resizing," or reducing, the loan amount to a level sufficient to allow Plaintiff to cover 120% of its debt. Section 7(b) of the note and section 2.9 of the agreement address matters pertaining to this resizing mechanism. Section 7(b) of the note provides:

If the Stabilization NOI produces a Debt Service Coverage Ratio (based upon the Original Principal Amount and the Debt Service Constant) of less than 1.20 to 1, Payee¹ shall have the option, in its sole and absolute discretion, to decrease the principal amount of the Loan (the "Resizing") in order to achieve a minimum Debt Service Coverage Ratio of 1.20 to 1, based upon such reduced principal balance (the "Resized Principal Balance") and the Debt Service Constant by requiring [Plaintiff] to repay a portion of the Loan without premium or penalty equal to the difference ("Difference") between (i) the Original Principal Amount and (ii) the Resized Principal Balance. The Resized Principal Balance shall be subject to adjustment in accordance with Section 7(d) below.² [Plaintiff] shall repay the Difference, together with all accrued and unpaid interest through the end of the interest calculation period in which the repayment is made, on the date (the "Conversion Date") which is the eleventh (11th) day of the first calendar month following the calendar month in which Payee notifies [Plaintiff] of Payee's determination of the Difference. [Plaintiff] may only repay the Difference from (a) the Buy-up Fee payable to [Plaintiff] under Section 7(d), (b) cash from [Plaintiff] which does not result in a lien on the Loan proceeds or the Mortgaged Property, or (c) the proceeds of the Mezzanine Financing described in the Loan Agreement.

(J.A. at 545 (footnote 2 added).) Section 2.9 of the agreement, headed "Mezzanine Financing," provides:

If the Stabilization NOI produces a Debt Service Coverage Ratio of less than 1.20 and 1 and [Plaintiff] does not (i) elect to repay the Difference in cash pursuant to its rights under the Note or (ii) prepay the Loan in accordance with the provisions of Section 2.8 ³, Borrower shall repay the Senior Mezzanine Loan Amount with the proceeds of senior mezzanine financing which shall be provided by Lender on the following terms and conditions: . . . .

(J.A. at 476 (footnote 3 added).) Sections 2.9.1 and 2.9.2 proceed to describe "mezzanine financing," a series of unsecured loans for the excess, unresized loan principal repayable only from available cash but convertible by Defendants or a successor into equity interests in Plaintiff.

In an affidavit submitted in opposition to Defendants' motion for summary judgment, David W. Schostak ("Schostak"), president of Plaintiff's general partner, discussed the negotiations leading to the loan agreement. Shostak stated that NACC officials:

all told me that the Loans would be pooled with other loans so that the rights to the principal and interest from all of these pooled loans could be sold to investors in a securities offering; the Loan's resizing feature functioned as a 'pre-packaged workout provision,' thus preventing a default or foreclosure of the Loans and thereby facilitating the securities offering; the lender was required to resize each Loan if a Borrower did not achieve the required NOI so as to avoid a default that would impair the securities offering; and the securities offering was enhanced by the resizing feature that reduced the amount of the secured Loan to a level where the Borrower would not be in default.

(J.A. at 442.)

On September 23, 1998, Nomura Depositor released an "offering circular" as part of an effort to...