31800 Wick Rd. Holdings, LLC v. Future Lodging–Airport, Inc.

• Decision Date: 30 January 2012
• Docket Number: Case No. 10–13692.
• Citation: 848 F.Supp.2d 757
• Parties: 31800 WICK ROAD HOLDINGS, LLC, Plaintiff, v. FUTURE LODGING–AIRPORT, INC. and Kays Zair, Defendants. and Future Lodging–Airport, Inc., Counter–Plaintiff v. 31800 Wick Road Holdings, LLC, Counter–Defendant, and Bank of America As Trustee for the Registered Holders of LB–UBS Commercial Mortgage Trust 2006–c7, Commercial Mortgage Pass–Through Certificates, Series 2006–C7; and CW Capital Asset Management LLC, Third–Party Defendants.
• Court: U.S. District Court — Eastern District of Michigan

848 F.Supp.2d 757

31800 WICK ROAD HOLDINGS, LLC, Plaintiff,

v.FUTURE LODGING–AIRPORT, INC. and Kays Zair, Defendants.andFuture Lodging–Airport, Inc., Counter–Plaintiff

v.31800 Wick Road Holdings, LLC, Counter–Defendant,andBank of America As Trustee for the Registered Holders of LB–UBS Commercial Mortgage Trust 2006–c7, Commercial Mortgage Pass–Through Certificates, Series 2006–C7; and CW Capital Asset Management LLC, Third–Party Defendants.

Case No. 10–13692.

United States District Court,

E.D. Michigan,

Southern Division.

Jan. 30, 2012.

Douglas W. Eyre, Miller, Canfield, Detroit, MI, Emily C. Palacios, Miller, Canfield, Ann Arbor, MI, Megan B. Odell, Miller Canfield Paddock and Stone, P.L.C., Troy, MI, for Plaintiff and Counter–Defendant.

Brian B. Brown, Kullen & Kassab, Farmington Hills, MI, for Defendants and Counter–Plaintiff.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF/COUNTER–DEFENDANTS' MOTIONS FOR PARTIAL SUMMARY JUDGMENT (# 35 and # 40)

GEORGE CARAM STEEH, District Judge.

On September 16, 2010, 31800 Wick Road Holdings, LLC (“Wick Road”) filed a complaint in this court seeking to recover money allegedly owed by defendant Future Lodging–Airport, Inc. (“Borrower”) under the terms of a promissory note in the principal amount of $2,650,000, to foreclose its mortgage lien on the real and personal property that constitute a 123–room hotel located in Romulus, Michigan, and to recover amounts allegedly owed to it by defendant Kays Zair under the terms of a Guaranty of Payment and a Guaranty of Recourse Obligations of Borrower. On April 29, 2011, Wick Road moved for summary judgment on its mortgage foreclosure claim against Borrower and its guaranty of payment claim against Zair. On June 27, 2011, Wick Road and the third-party defendants moved for summary judgment on the counterclaim/third-party complaint. These motions have been fully briefed by the parties. On September 1, 2011, the court held oral argument on the motions. For the reasons set forth below, the court grants in part and denies in part Wick Road's motions for partial summary judgment.

BACKGROUND

On August 21, 2006, Borrower obtained a $2,650,000 commercial mortgage loan from Lehman Brothers Bank, FSB. The loan is evidenced by a promissory note and is secured in part by a mortgage on the real and personal property that constitutes a 123–room hotel located at 31800 Wick Road in the city of Romulus, Michigan. The description of the mortgaged property is set forth more specifically in the mortgage.

The mortgage requires Borrower to make payments on “the Debt at the time and in the manner provided in the Note.” (Mortgage, § 3.1.) The debt is defined as:

the aggregate of the indebtedness evidenced by the Note in lawful money of the United States of America, interest, default interest, late charges, prepayment premiums and other sums, as provided in the Note, this Security Instrument or the other Loan Documents ..., all other moneys agreed or provided to be paid by Borrower in the Note, this Security Instrument or the other Loan Documents and all sums advanced pursuant to this Security Instrument to protect and preserve the Property and the lien and the security interest created hereby.

(Mortgage, § 2.1.) The note requires Borrower to make payments on the amounts due on the 11th day of each month. The mortgage includes, as an event of default, “if any portion of the Debt is not paid on the date the same is due or if the entire Debt is not paid on or before the Maturity Date ...” (Mortgage, § 9.1.) Upon default, Wick Road may take certain actions, “which may be pursued concurrently or otherwise”, including:

(a) declare the entire unpaid Debt to be immediately due and payable; (b) with or without entry, institute proceedings, judicial or otherwise, for the complete or partial foreclosure of this Security Instrument under any applicable provision of law in which case the Property or any interest therein may be sold for cash or upon credit in one or more parcels or in several interests or portions and in any order or manner ...

(Mortgage, § 10.1.)

The mortgage provides for the application of proceeds as follows:

The purchase money, proceeds and avails of any disposition of the Property, or any part thereof, or any other sums collected by Lender pursuant to the Note, this Security Instrument or the other Loan Documents, may be applied by Lender to the payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper.

(Mortgage, § 10.2.) The loan and loan documents were eventually assigned to Wick Road.

In connection with the loan, Zair executed a guaranty of payment and a guaranty of recourse obligations of Borrower. Underthe guaranty of payment, Zair “absolutely, unconditionally and irrevocably” guaranteed payment of the debt. The guaranty also entitles Wick Road to proceed “directly and at once, without notice” against Zair to collect and recover the full amount of his liability “without proceeding against Borrower ... or foreclosing upon, selling, or otherwise disposing of” the mortgaged property. (Guaranty, § 9.) The guaranty also contains the following provision:

Notwithstanding anything [to] the contrary contained herein, Guarantor's maximum liability under this Guaranty shall be limited to the sum which is (i) twenty five percent (25%) of the unpaid principal balance of the Loan (the “Guaranteed Principal Amount”), (ii) interest on the Guaranteed Principal Amount at the Default Rate prevailing from time to time under the Note and (iii) amounts payable by Guarantor under Section 4 hereof.

(Guaranty, § 18.) Section 4 requires Zair to reimburse Wick Road “for all expenses (including reasonable counsel fees and disbursements) incurred by Lender in connection with the collection of the Guaranteed Obligations or any portion thereof or with the enforcement of this Guaranty.” (Guaranty, § 4.) The guaranty also provides “[a]ll moneys available to Lender for application in payment or reduction of the Debt may be applied by Lender in such manner and in such amounts and at such time or times and in such order and priority as Lender may elect in its sole discretion.” (Guaranty, § 5.)

The mortgage contains provisions related to a “Replacement Reserve and Leasing Reserve” whereby Borrower was required to make deposits to be placed into a replacement reserve escrow account and Wick Road was required to make disbursements from the account to reimburse Borrower for certain costs incurred. The agreement provides:

Each request for disbursement from the Reserve shall be in a form specified or approved by Lender, and shall be accompanied by evidence of the full performance of the obligations of the leasing agent or satisfactory completion of the Work or payment for FFE Replacements, as the case may be, and such bills, invoices and other evidence of the incurrence of the related costs and expenses as Lender may reasonably request.

(Exhibit B to Mortgage, § 3(d).)

Zair attests that from 2006 to the end of 2009, the lender routinely allowed Borrower to assign disbursements from the reserve escrow account to the lender in lieu of making a monthly payment on the loan. From the payment history sheet for January 1, 2009 through May 13, 2010, it appears installment payments were made from the reserve account for the April 11, 2009 and August 11, 2009 payments.

At the beginning of December 2009, Borrower submitted a reserve escrow disbursement request in the amount of $39,670.56 and requested the lender utilize the funds to satisfy Borrower's monthly payment obligation. The lender requested Borrower make the payment directly. Zair represents the following month he submitted another request and again requested that the lender use the funds to satisfy Borrower's monthly payment obligation. The lender again requested Borrower make the payment directly. Borrower and Zair assert Wick Road has refused to honor the disbursement requests or to release funds held in escrow. Wick Road claims the December 2009 and January 2010 requests were not properly supported with proof that the purported purchases actually occurred.

Eventually, Borrower claims, it was unable to continue to meet its various obligations, including obligations to Choice Hotels, the franchisor. Choice Hotels has sent numerous notices of default. Borrower claims these defaults were caused by Wick Road's withholding of the reserve funds which caused cash flow problems. A receiver was eventually appointed.

Wick Road alleges Borrower failed to make timely payments since January 11, 2009 and failed to make any payments since August 23, 2010 and thus has breached the terms of the agreements. Wick Road also alleges Borrower breached the agreements by: failing to comply with reporting obligations; failing to comply with access obligations; failing to maintain adequate capital; and failing to deliver documents received under the franchise agreement or management agreement. Wick Road also argues the terms of the mortgage do not allow the use of the reserve escrow account funds as a substitute for Borrower's monthly payment.

Borrower filed a counterclaim and third-party claims against Wick Road and its related entities. In the counterclaim/third-party complaint, Future Lodging asserts claims for breach of contract, tortious interference with Future Lodging's relationship with Choice Hotels, and conversion of the reserve escrow account funds. In its breach of contract claim, Future Lodging asserts violations of the covenant of good faith and fair dealing, failing to grant and apply disbursements from the mortgage's reserve account to Future Lodging's monthly mortgage payment, failing to pay taxes and insurance, and accelerating the indebtedness in bad faith. The tortious interference claim is based on Wick Road's alleged withholding of disbursements and failing to timely pay insurance and taxes.

On April 29, 2011, Wick Road moved for summary judgment on its mortgage...