Baybank Middlesex v. 1200 Beacon Properties, Inc., Civ. A. No. 89-2364-C.

Decision Date01 April 1991
Docket NumberCiv. A. No. 89-2364-C.
Citation760 F. Supp. 957
PartiesBAYBANK MIDDLESEX, as Trustee, and Guardian Life Insurance Company of America, Plaintiffs, v. 1200 BEACON PROPERTIES, INC., and A. James Derderian, Defendants/Third Party Plaintiffs, v. CHARLES CONSTRUCTION COMPANY, INC., and Group One, Inc., Third Party Defendants.
CourtU.S. District Court — District of Massachusetts

COPYRIGHT MATERIAL OMITTED

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Stanley Twarog, H. Joseph Hameline, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Mass., for Baybank Middlesex and Guardian Life Ins. Co. of America.

Joel Lewin, Dennis M. Ryan, Pamela B. Shapiro, Hinckley, Allen, Snyder & Comen, Boston, Mass., for 1200 Beacon Properties, Inc. and A. James Derderian.

David J. Hatem, Posternak, Blankstein & Lund, Boston, Mass., for Group One, Inc.

Stanley Martin, James J. Myers, Gadsby & Hannah, Boston, Mass., for Federal Ins. Co. and Charles Const. Co., Inc.

MEMORANDUM

CAFFREY, Senior District Judge.

This case is before the Court on the defendants', 1200 Beacon Properties, Inc. ("1200 BPI" or "Borrower") and A. James Derderian, motion for summary judgment, and the plaintiffs', Baybank Middlesex ("Baybank" or "Trustee") and Guardian Life Insurance Company of America ("Guardian Life"), motion for summary judgment pursuant to Fed.R.Civ.P. 56(c). This action arose out of the financing of the renovation and addition to a hotel located at 1200 Beacon Street, Brookline, Massachusetts (the "Project"). The first Count alleged by the plaintiffs is for breach of contract in connection with its financing of the Project through its purchase of $5,000,000 of tax-exempt Massachusetts Industrial Finance Agency Bonds ("MIFA Bonds" or "Bonds"). The plaintiffs' complaint also contains three additional counts: a Mass. Gen.L. ch. 93A claim, a securities fraud claim for violation of section 10(b) and rule 10b-5 of the Securities and Exchange Act of 1934 (the "Exchange Act"), and a Mass. Gen.L. ch. 231, § 85J claim. Jurisdiction of this Court is founded on the Exchange Act, 15 U.S.C. § 78aa, and pendent jurisdiction. For the reasons stated below, the defendants' motion for summary judgment should be granted, and plaintiffs' motion for summary judgment should be denied.

I.

For the purpose of these motions, the relevant undisputed facts are as follows. This dispute arose out of a credit transaction that occurred in 1984, between 1200 BPI and Guardian Life, involving the purchase of $5,000,000 in tax-exempt MIFA Bonds which were issued to provide funds to loan 1200 BPI to be used to finance the Project. The plaintiff, Guardian Life, provided part of the financing for the Project through the purchase of MIFA Bonds. The defendant/third party plaintiff, 1200 BPI, was the developer of the Project. The defendant/third party plaintiff, Derderian, was the president of 1200 BPI. The third party defendant, Charles Construction Company ("Charles") was the general contractor for the Project, and the third party defendant Group One, Inc. was the architect.

On May 1, 1984, MIFA issued the Bonds in the principal amount of $6,000,000, pursuant to a Mortgage and Trust Indenture ("Indenture" or "Mortgage") among MIFA, the issuer, 1200 BPI, and Patriot Bank, the trustee.1 The proceeds from the sale of the MIFA Bonds were provided to 1200 BPI under a Loan Agreement between MIFA and 1200 BPI. The obligations of the borrower, 1200 BPI, under the Loan Agreement and Indenture were insured by ITT Lyndon Property Insurance Company, the surety.

Under the terms of the Indenture and Loan Agreement, to preserve the tax-exempt status of the interest on the MIFA Bonds, the qualifying capital expenditures for the Project could not exceed $10,000,000 within the three year period prior to and three years after the date the Bonds were issued.

Article VII of the Indenture, and Article IX of the Loan Agreement identify the events of default. The occurrence of an "Event of Taxability" constitutes a default under Section 701(f) of the Indenture and Section 9.1(g) of the Loan Agreement. The Indenture and Loan Agreement define an "Event of Taxability" as:

(a) the inability, at any time, of Hale and Dorr or other nationally recognized bond counsel, to opine (with no qualifications other than those contained in the opinion delivered by Hale and Dorr in connection with the issuance of the Project Bond) that the interest on the Project Bond is not subject to federal income taxation, or (b) the occurrence of Final Determination that the interest on the Project Bond is subject to federal income taxation (excluding, however, such a determination because the Project Bond is or was held for any period by a Substantial User of the Project or a Related Person).

Under Section 702 of the Indenture, the occurrence of an event of default as described above in Section 701 of the Indenture provides for mandatory acceleration of the Bonds by the Trustee in specified circumstances, and in other circumstances the Trustee may only accelerate the Bonds upon the request of the Bondholders and the consent of the Insurer.2 Upon the occurrence of an "Event of Taxability," Section 702 requires the Trustee to declare all outstanding principal and accrued interest thereon to be due and payable. Section 702 further provides that upon acceleration, interest shall accrue at the existing rate until the Trustee has received all outstanding principal, accrued interest and premium due and payable on the Bonds.

If the MIFA Bonds are accelerated under Section 702 of the Indenture because of a default caused by an "Event of Taxability," Section 203 of the Indenture requires the borrower to pay a "Taxability Premium," regardless of who or what caused the Event of Taxability to occur. Section 203 provides in relevant part:

(i) Upon the occurrence of an Event of Taxability and the acceleration of the Bonds pursuant to Section 702 hereof, a premium in an amount equal to three percent (3%) of the then outstanding principal amount of the Bonds (the "Taxability Premium") shall be and become immediately due and payable on the Project Bond.
(ii) In the event that, subsequent to the occurrence of an Event of Taxability, ... the interest on the Bonds is not includable in gross income of any Bondholder, the Bondholders (and/or former Bondholders) shall promptly refund to the Borrower an amount equal to any premium paid under Section 203(i) hereof to such Bondholders.

If a default occurs for some reason other than an Event of Taxability, the borrower is not required to pay the three percent Taxability Premium upon acceleration of the indebtedness by the Trustee.

Section 705 of the Indenture, and Section 9.3 of the Loan Agreement, provide that in the event of default, no remedy set forth in the financing documents "is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and in addition to any other remedy." Section 1111 of the Indenture, and Section 10.10 of the Loan Agreement provide that Massachusetts law will govern the construction, validity and performance of the agreements. In addition, the terms of the financing documents do not expressly provide for voluntary prepayment of the indebtedness.

In December 1986, 1200 BPI's accountant certified to 1200 BPI that the cost of the Project was at least $12,014,043, which was $2,000,000 over the capital expenditures cap. Subsequently, on January 22, 1987, by means of a letter from its accountant, 1200 BPI notified its bond counsel, Hale and Dorr, that the qualifying capital expenditures for the Project had exceeded the $10,000,000 cap. Hale and Dorr then issued a letter dated January 28, 1987, stating that it could no longer opine that the MIFA Bonds were exempt from federal income tax.3

Upon receipt of Hale and Dorr's opinion letter on March 19, 1987, the Trustee, pursuant to Section 702 and 203 of the Indenture, on March 19, 1987, accelerated the Bonds and demanded that all amounts due under the MIFA Bonds, including accrued interest, principal, and the three percent Taxability Premium be paid. (Plaintiffs' Complaint, ¶ 15; Spencer Affidavit, ¶ 8). On March 20, 1987, in response to the acceleration, 1200 BPI tendered to the Trustee all the outstanding principal and accrued interest on the MIFA Bonds. 1200 BPI also paid the three percent Taxability Premium as provided under Section 203 of the Indenture.

Plaintiffs then in October 1989, more than two years after the default and acceleration of the MIFA Bonds, commenced this action against the defendants seeking to recover as damages the sum of the difference between the contract rate of interest and the prevailing rate of interest on a similar grade investment, over the remaining period of the loan, discounted to present value.4

II.

The defendants have moved for partial summary judgment as to Counts I, II, and IV of the plaintiffs' complaint, pursuant to Fed.R.Civ.P. 56(c).5 The plaintiffs have also moved for summary judgment as to Count I, the breach of contract claim. Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The party moving for summary judgment bears the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). The moving party may satisfy this burden by showing that there is an absence of evidence to support the non-moving party's case. Celotex, 477 U.S. at 325, 106 S.Ct. at 2554. Only after the moving party has met its burden of coming forward with proof of the absence of any genuine issue of material fact does the party opposing the...

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