Bellwether Enter. Real Estate Capital v. Jaye

• Decision Date: 10 June 2020
• Docket Number: CIVIL ACTION NO. 19-10351 SECTION "F",c/w 19-13058 SECTION "F"
• Parties: BELLWETHER ENTERPRISE REAL ESTATE CAPITAL v. CHRISTOPHER JAYE, ET AL.
• Court: U.S. District Court — Eastern District of Louisiana

BELLWETHER ENTERPRISE REAL ESTATE CAPITAL v. CHRISTOPHER JAYE, ET AL.

CIVIL ACTION NO. 19-10351 SECTION "F"

c/w 19-13058¹ SECTION "F"

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF LOUISIANA

June 10, 2020

ORDER AND REASONS

Before the Court are cross-motions for summary judgment. For the reasons that follow, the motions of Christopher Jaye, Kristi Morgan, and Mirus New Orleans are GRANTED and the motion of Bellwether Enterprise Real Estate Capital is DENIED.

Background

This contract dispute arises from a project to build affordable housing in New Orleans East and concerns, principally, a stipulated damages provision in a contract between borrowers and their lender. The borrowers say the provision is unenforceable under a Louisiana law allowing courts to modify stipulated damages that are "so manifestly unreasonable as to be contrary to public policy." LA. CIV. CODE art. 2012. The Court agrees.

Christopher Jaye and Kristi Morgan own a real estate development company called Mirus New Orleans. That company owns the Village of Versailles project—the first affordable housing development built in New Orleans East after Hurricane Katrina.

To fund the Village of Versailles project, Jaye, Morgan, and Mirus obtained a $31,552,100 commercial mortgage loan from Bellwether. The loan is insured by the United States Department of Housing and Urban Development and memorialized in a mortgage note and a building loan agreement. Under the building loan agreement, Bellwether disbursed loan proceeds upon receipt of "draw requests" from Mirus. After funding each draw, Bellwether sold GNMA mortgage-backed securities in the amount of the draw to Lancaster Pollard, an investment company.

Pivotal to the project was one date—August 31, 2018. By then, two events should have occurred: completion of construction and final endorsement. Final endorsement is when HUD approves a loan for insurance; to ensure that it occurred on time, and as a condition of the loan, Jaye, Morgan, and Mirus entered into an extension-fee agreement with Bellwether. That agreement required the borrowers to pay Bellwether a monthly "extension fee" if final endorsement did not occur by August 31, 2018:

1. Extension Fees. (a) Obligor agrees that in the event that Final Endorsement has not occurred on or before August 31, 2018, Obligor shall be liable and obligated to pay to Lender a monthly extension fee (the"Extension Fee") equal to (i) 1/8^th of one percent (0.125%) of the original face amount of the FHA Mortgage Note for each "monthly Period" (as defined below) or portion thereof, commencing on September 1, 2018 and continuing through November 31, 2018 then increasing to (ii) 1/4^th of one percent (0.25%) of the original face amount of the FHA Mortgage Note for each Monthly Period or portion thereof, commencing on December 1, 2018 and continuing until Final Endorsement. In the event that Final Endorsement shall not theretofore have occurred, Obligor shall be obligated to pay each such monthly Extension Fee in advance, fifteen (15) days prior to the commencement of the applicable Monthly Period; provided that Lender shall refund the last such monthly Extension Fee to Obligor in the event that Final Endorsement shall occur prior to the commencement of the applicable Monthly Period. Thereafter, there shall be no refund of the monthly Extension Fee. As used herein [sic] "Monthly Period" shall mean a period starting on the first day of a month and ending on the last day of that month.

This extension-fee agreement, Bellwether maintains, compensates it for the losses it would suffer if final endorsement did not occur by August 31, 2018. Those losses would allegedly result from Bellwether's trade agreement with its investor, Lancaster Pollard. Under that trade agreement, Bellwether had to pay Lancaster Pollard a fee of $39,440.13—which equates to 0.125% of the delivery amount of the $31, 552, 100 loan—for each month final endorsement was delayed.

Delay ensued. The parties dispute the reason: Bellwether points to a lawsuit the general contractor brought against Mirus and others; the borrowers highlight Bellwether's alleged negligence in impeding the selection of a project management agent.Whatever the reason for the delay, it is undisputed that the general contractor on the project, Broadmoor, LLC, sued Mirus, Bellwether, and others in September 2018. See Eastern District of Louisiana Civil Action No. 18-9064. And it is undisputed that Broadmoor's lawsuit complicated the final-endorsement process; the Federal Housing Administration Multifamily Program Closing Guide (HUD Guide), which governs the closing of HUD-insured loans, illustrates how.

Section 1.17(A) of the HUD Guide contemplates delays caused by disputes between a borrower and a contractor, like the litigation involving Mirus and Broadmoor:

A. Disputes. Occasionally, Borrower and the general contractor may have disputes regarding change orders, the quality or cost of the construction work, or the timing of payments therefore [sic]. This may delay final closing. If Borrower and the general contractor enter into arbitration, litigation, or both, the delay may be excessive. It may be impossible to reach agreement in order to complete final closing. Such delays may cause Lender and Borrower to ask HUD to finally endorse the Note even without the full participation of the general contractor, because the cost of continuing to incur extension or other fees and Lender's need to convert the underlying financing of the mortgage loan to permanent status.

Section. 1.17(B) of the HUD Guide contains a procedure for final endorsement despite such litigation:

B. Closing Without General Contractor. If both the HUB Director and HUD Closing Attorney, each in his or her own discretion, agree, the parties may proceed tofinal closing without the participation of the general contractor if the following conditions are met:

1. Cost certification must have been satisfactorily completed by all parties required [sic] subject to this requirement.

2. The remaining mortgage loan proceeds must be placed in escrow pending the outcome of the dispute.

3. The title company must issue affirmative title insurance coverage over any liens that are in place related to the dispute.

4. There must be a mechanism in place for eventual resolution of the dispute or termination of the escrow that is satisfactory to HUD, such as litigation that does not involve HUD.

So, for the loan to proceed to final endorsement despite the Broadmoor litigation, all of the requirements set out in Section 1.17(B) had to be met. The parties dispute whether those conditions could have been met, but they agree that final endorsement did not occur by way of Section 1.17(B).

The Broadmoor litigation settled in March 2019, and final endorsement occurred around the same time.

As that dispute resolved, another emerged. Because final endorsement did not occur by August 31, 2018, Bellwether invoked the extension-fee agreement and demanded fees from Jaye, Morgan, and Mirus. Bellwether said the borrowers owed $39,441 per period for the monthly periods beginning on September 1 and October 1 and $78,881 per period for the monthly periods beginning on November 1, December 1, January 1, February 1, and March 1. Bellwetherreceived a fraction of what it claimed: the borrowers made just two $39,441 payments, for the monthly periods beginning September 1 and October 1. The borrowers declined to pay the $354,965 in extension fees that allegedly accrued during the monthly periods from November 1 to March 1. So Bellwether sued.

In its one-count complaint, filed in May 2019, Bellwether alleged that Jaye and Morgan breached the extension-fee agreement by failing to pay $354,965 in extension fees. For reasons unexplained, Bellwether did not sue Mirus—the company owned by Jaye and Morgan and also bound by the extension-fee agreement. But Mirus soon entered the fray.

In October 2019, Mirus filed a separate suit against Bellwether; it too arose from the extension-fee agreement. See Eastern District of Louisiana Civil Action No. 19-13058. Mirus sued Bellwether for: (1) breach of contract; (2) a declaratory judgment that the extension-fee agreement is unenforceable; (3) payment of a thing not owed; and (4) negligence.

For its contract claim, Mirus alleged that Bellwether breached implied obligations arising from the extension-fee agreement by "unreasonably and wrongfully delay[ing]" final endorsement. Mirus said it gave Bellwether everything it needed to proceed to final endorsement by August 31, 2018, but Bellwether failed to do so.

Mirus based its negligence claim on similar allegations—that Bellwether "unreasonably impede[d] Mirus' selection of management" and "unreasonably cause[d] rescission of and delaying HUD's approval" of project management.

For its declaratory-judgment claim, Mirus alleged that the extension-fee agreement is unenforceable because (a) it provides for "liquidated penalty damages" that are "manifestly unreasonable" under Civil Code Article 2012, and (b) Bellwether failed to place Mirus in default.

Finally, for its claim for payment of a thing not owed, under Civil Code Article 2299, Mirus alleged that Bellwether is "bound to restore" the payments Mirus made under the allegedly unenforceable extension-fee agreement.

Meanwhile, in the original lawsuit, Jaye and Morgan counterclaimed against Bellwether for breach of contract and a declaratory judgment that the extension-fee agreement is unenforceable. The contract and declaratory-judgment counterclaims mirrored the claims Mirus brought in Eastern District of Louisiana Civil Action No. 19-13058.

In both lawsuits, Bellwether moved to dismiss for failure to state a claim. See FED. R. CIV. P. 12(b)(6). The Court denied the motions, in part, and held that: (1) Jaye, Morgan, and Mirus stated a claim that Bellwether breached its Civil Code Article 1772-derived obligation not to prevent the suspensive condition of final endorsement from occurring; (2)...