Bankers Trust (Delaware) v. 236 Beltway Inv.

• Decision Date: 28 September 1994
• Docket Number: Civ. A. No. 94-518-A.
• Citation: 865 F. Supp. 1186
• Parties: BANKERS TRUST (DELAWARE), Plaintiff, v. 236 BELTWAY INVESTMENT, et al., Defendant.
• Court: U.S. District Court — Eastern District of Virginia

865 F. Supp. 1186

BANKERS TRUST (DELAWARE), Plaintiff, v. 236 BELTWAY INVESTMENT, et al., Defendant.

Civ. A. No. 94-518-A.

United States District Court, E.D. Virginia, Alexandria Division.

September 28, 1994.

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COPYRIGHT MATERIAL OMITTED

Michael Joseph Klisch, McGuire, Woods, Battle & Boothe, Alexandria, VA, for plaintiff.

John H. Rust, Jr., Rust, Rust & Silver, Fairfax, VA and H. Van Sinclair, Arent, Fox, Kintner, Plotkin & Kahn, Washington, DC, for defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

In this case, two general partners of a limited partnership seek to avoid personal liability for a debt of the partnership on the ground that the note evidencing the debt should be reformed to include a non-recourse provision. According to the general partners, the partnership and the lending bank inadvertently omitted the non-recourse provision, and this Court should reform the note to correct this mutual mistake. The noteholder here seeks summary judgment on the ground that it is a holder in due course of the note, which is a negotiable instrument, from which it follows that the noteholder is not subject to various defenses to the note, including the general partners' non-recourse defense. For the reasons stated herein, summary judgment for the noteholder is inappropriate because the partnership's note is not a negotiable instrument, and there is a genuine issue of material fact as to whether a mutual mistake occurred.

I

Plaintiff, Bankers Trust (Delaware) (hereinafter "Bankers Trust"), is a Delaware banking corporation with its principal place of business in Wilmington, Delaware. An affiliate of Bankers Trust, Bankers Trust Company of New York ("BTC"), also plays a role in this matter. BTC is a New York banking firm with its principal place of business in California. Defendants in this matter are 236 Beltway Investment, a Virginia limited partnership (hereinafter "the partnership"), and two general partners, Joseph M. Della Ratta and John C. Webb ("the partners").¹

In 1977, the partnership borrowed $2.5 million from First National Bank of Maryland ("the Note"), secured by a first deed of trust on a parcel of commercial property. The Note paid a floating rate of interest, set each month at the greater of (i) two percent above First National Bank of Maryland's "prime rate of interest" or (ii) two percent above "the prevailing rate on 90-day dealer commercial paper." Although the parties dispute whether the Note was originally a recourse debt, this dispute is not material to the resolution of the issues at bar.

In 1979, following construction on the property, the partnership sought permanent financing for the project. Strouse Greenberg Financial Corporation, a mortgage broker, arranged the financing from Philadelphia Savings Fund Society ("PSFS"). Rather than entering into a new loan agreement, the parties agreed that First National Bank of Maryland would assign the original Note and deed of trust to PSFS. On the date of the assignment, July 10, 1979, the partnership and PSFS also entered into agreements ("the Modification Agreement" and "the Allonge"),² amending the Note and deed of trust. The parties increased the principal amount of the borrowing to $2.7 million and extended the duration of the loan. In addition, the parties eliminated the variable interest rate in favor of a 10% fixed rate. This rate was subject to change during the twenty-four month period following July 10, 1979 in the event the partnership were to request a change and PSFS were to agree. In that event, the partnership would pay a $27,000 fee and PSFS would then reset the interest rate to its "then current interest rate quoted for similar lending opportunities." This provision was never invoked; the partnership never requested that the interest rate be reset.

The partners contend that all parties to the assignment and modification agreed that the loan would henceforth be non-recourse, yet neither the Allonge nor the Modification Agreement mentions this. The central dispute in this case is whether the omission of the non-recourse term was a mutual mistake of the parties, an inadvertent error that occurred in the process of reducing their agreement to writing.

PSFS subsequently changed its name to Meritor Savings Bank ("Meritor") in April 1986. The partnership obtained a second refinancing on the project in 1986, borrowing yet another $1.6 million from Meritor secured by a second deed of trust. All parties agree that this second mortgage is non-recourse.

Thereafter, Meritor formed a securitized pool of commercial mortgages, and sold interests in the pool to investors, pursuant to a Pooling and Servicing Agreement of December 1, 1987 ("the Pooling Agreement"). Through this transaction, the investors essentially purchased from Meritor the future stream of principal and interest payments on 141 commercial mortgages. Meritor first transferred the mortgages to its wholly owned subsidiary, Meritor Mortgage Securities Corporation ("MMSC"). MMSC in turn transferred the mortgages to Bankers Trust and, in exchange, Bankers Trust delivered certificates to MMSC which represented ownership shares of the mortgage pool. MMSC then sold these certificates to the public pursuant to a registration statement filed with the SEC on December 10, 1987 ("the Registration Statement"). The investors acquired legal title to the mortgages, while Bankers Trust held beneficial title on their behalf as trustee. In addition, the Pooling Agreement provided that Meritor would act as servicer of the mortgages, collecting the payments of principal and interest from the borrowers, and passing the money to the trustee for the investors. In June 1993, BTC took over as servicer under the Pooling Agreement.

The partnership made payments on the Note until December 1992. After that, the payments stopped. The unpaid principal balance is now $2,748,093.22, with accrued interest of $477,862.96 and late charges of $137,404.66 through August 18, 1994. Bankers Trust commenced this action on the Note to recover these amounts from the partnership and the individual general partners. The partnership filed a voluntary bankruptcy petition on August 17, 1994 and, as a result, the partnership is protected by the automatic stay of 11 U.S.C. § 362. Absent extraordinary circumstances not present here, the stay does not protect the individual general partners. See Patton v. Bearden, 8 F.3d 343, 348 (6th Cir.1993). At issue, then, is whether Bankers Trust may enforce the Note against the partners.

II

At the threshold, the partners attack the capacity of Bankers Trust to bring this action.³ The partners argue that BTC, not Bankers Trust, is the proper entity to sue on the Note. The answer to this dispute must be found in the Pooling Agreement, which defines the authority of the trustee and the servicer, and creates distinct roles for them.

Under the agreement, the servicer administers the mortgages, collecting payments from the borrowers and foreclosing on mortgages in default. Pooling Agreement §§ 6.01, 6.08. The servicer must then transfer all collected monies to the trustee. Id. § 6.02(c). Article VIII of the Pooling Agreement provides that the trustee will "demand payment or delivery of, and shall receive and collect, directly and without intervention or assistance of any fiscal agent or other intermediary, all money and other property payable to or receivable by the Trustee pursuant to this Agreement." Id. § 8.01. The only payments expressly "payable to or receivable by" the trustee under the agreement are the payments from the servicer. Thus, under the agreement, it is the servicer, acting for the trustee, that collects and receives the moneys due under the mortgages.

Nothing in the Pooling Agreement specifically addresses which entity is entitled to seek a personal judgment against a mortgagor in the event of a mortgage default. Yet, certain provisions point persuasively to the conclusion that the trustee may, as here, maintain such a suit. The trustee, not the servicer, has the "entire right, title and interest in and to the assets comprising the Pool, including the principal and interest received or receivable with respect to the mortgage loan." Id. § 2.01(a). It follows, therefore, that the trustee, as owner of the moneys due under the mortgages, has the right to sue for deficiencies. To be sure, the servicer, as receiver and collector of moneys due under the mortgages, may also have standing to sue for deficiencies.⁴ Nothing in the agreement limits standing to sue to one party, either the trustee or the servicer. Its terms support standing for both, especially given the agreement's apparent purpose to ensure that moneys due under the mortgages are recovered, through legal action if necessary.⁵ Thus, the fact that BTC, as receiver, could have brought this action on Bankers Trust's behalf does not preclude Bankers Trust from doing so in its own name, as owner of the moneys due.

III

The next issue for resolution is whether Bankers Trust is, as it contends, a holder in due course of a negotiable instrument, namely the Note. If so, the partners' reformation defense, however factually valid, fails under Virginia law⁶ because Bankers Trust, as a holder in due course of a negotiable instrument, takes the Note free of most contract defenses. Va.Code § 8.3-305 (repealed 1993).⁷ Specifically, a holder in due course is subject to a limited set of defenses enumerated in the statute, and mutual mistake is not among these. Thus, if the Note is a negotiable instrument, and Bankers Trust is a holder in due course, the partners' allegations of mutual mistake are unavailing.

Under Virginia law in effect at the time, a writing qualifying as a negotiable instrument must:

(a) be signed by the maker or drawer; and

(b) contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or

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