Bkcap, LLC v. Captec Franchise Trust 2000-1, CAUSE NO. 3:07-cv-637

• Court: U.S. District Court — Northern District of Indiana
• Writing for the Court: Roger B. Cosbey
• Decision Date: 21 July 2011
• Docket Number: CAUSE NO. 3:07-cv-637
• Citation: Bkcap, LLC v. Captec Franchise Trust 2000-1, CAUSE NO. 3:07-cv-637 (N.D. Ind. Jul 21, 2011)
• Parties: BKCAP, LLC, GRAYCAP, LLC, and SWCAP, LLC, Plaintiffs / Counterclaim Defendants, v. CAPTEC FRANCHISE TRUST 2000-1, Defendants / Counterclaim Plaintiffs.

BKCAP, LLC, GRAYCAP, LLC, and SWCAP, LLC, Plaintiffs / Counterclaim Defendants, v. CAPTEC FRANCHISE TRUST 2000-1, Defendants / Counterclaim Plaintiffs.

CAUSE NO. 3:07-cv-637

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF INDIANA FORT WAYNE DIVISION

Enter: July 21, 2011

OPINION AND ORDER

I. INTRODUCTION

These Findings of Fact and Conclusions of Law follow a two-day bench trial held on May 3-4, 2011, focused on what the Borrowers and the original Lenders really intended when they included an ambiguous pre-payment premium in 34 separate promissory notes as part of a $49 million mortgage financing deal.

The focus of the trial stemmed from a ruling by the Seventh Circuit Court of Appeals after summary judgment was granted in favor of the Defendant, Captec Franchise Trust 2000-1 ("the Trust"), an assignee of an original Lender, on the declaratory judgment and breach of contract claims brought by the Plaintiffs, BKCAP, LLC, GRAYCAP, LLC, and SWCAP, LLC (the "Borrowers"). In short, the Seventh Circuit reversed the District Court's conclusion that the pre-payment premium language was unambiguous and should be read as supporting the Trust's interpretation. BKCAP, LLC v. Captec Franchise Trust, No. 3:07-cv-637-CAN, 2008 WL 3833939 (N.D. Ind., Aug. 12, 2008), rev'd 572 F.3d 353 (7th Cir. 2009) ("'BKCAP I").

The Seventh Circuit essentially determined that while the contract language definingthe pre-payment premium was clear, it was nonetheless ambiguous because it made no economic sense; that is, the formula (if literally followed) would never impose a penalty in the event of pre-payment. Since such an absurdity—a pre-payment penalty that never exacts a penalty—could not have been the intent of rational business entities, the case was remanded for trial on what was intended by this particular provision.¹

At trial, the Borrowers argued that the original contracting parties modified a standard form note to accommodate a bargained-for privilege; that is, the Borrowers were granted the right to pre-pay a note without penalty after ten years and to pre-pay with a non-punitive prepayment premium if the pay-off was within the first ten years. The Borrowers maintain that their interpretation of the pre-payment formula is supported by: (1) a confirmatory discussion at the July 1999 loan closing, and (2) the fact that except for the Trust's 12 notes, the holders of all the other 21 notes accepted payment in 2007 (within the first ten years) using the Borrowers' methodology for the pre-payment premium.² Thus, the Borrowers seek a declaration that their interpretation is the correct one, and ask for damages.

The Trust, on the other hand, argues that all the documentation surrounding the transaction shows that the original parties intended a "make-whole" or "yield maintenance" pre-payment premium so that any holder (including, of course, the Trust's investors) would receive all of the expected principal and interest on their investment through at least the firstten years. The Trust claims that the Borrowers' arithmetic calculation (which the Borrowers assert was approved at the closing and honored by the other holders) is about $800,000 shy of making the investors whole and does not maintain the expected yield and that instead, a balloon payment, which does not expressly appear in the loan contracts, must be incorporated into the equation.

Following the trial and preparation of a transcript,³ counsel submitted post-trial briefs and responses, as well as proposed findings of fact and conclusions of law. After examining the entire record, considering the arguments of counsel, and determining the credibility of the witnesses, the Court makes the following Findings of Fact and Conclusions of Law in accordance with Federal Rule of Civil Procedure 52(a) based upon a preponderance of the evidence.

II. FINDINGS OF FACT⁴

The Borrowers are wholly-owned subsidiaries of Quality Dining Inc. ("QDI"), a large restaurant franchisee company with approximately 170 different fast-food restaurants, mostly "Chili's" and "Burger King," scattered throughout several states, including Indiana, Michigan, and Pennsylvania. (Tr. 7, 12.) John Firth ("Firth") joined QDI in 1996 as its general counsel, advanced to executive vice-president in 1998, and now serves as president. (Tr. 9-11.) By early 1997, and for reasons unrelated to this lawsuit, QDI was in serious financial distress. (Tr. 13.) By mid-1998, and even after a major re-alignment of the business and a down-sizing ofpersonnel, QDI still needed to refinance its unsustainable $110 million bank indebtedness. (Tr. 14-16, 21.)

With its already high debt load, QDI pursued alternative financing and solicited loan proposals from niche lenders to the franchise restaurant industry, entities such as FFCA, Captec, and CNL. (Tr. 16-18, 21.) Captec and CNL aggressively pursued QDI's loan business, but because they were smaller than FFCA, and because QDI's projected loan package was going to be bigger than either could handle alone, they wanted to share the loans. (Tr. 22-23.) Partially for that reason, QDI initially accepted the proposal from FFCA, because, as a major lender, FFCA would be able to quickly close on the loans and deliver the funds. (Tr. 24.) Early in 1999, however, it became apparent that QDI and FFCA were unlikely to come to terms, and QDI again initiated contact with Captec and CNL, who remained eager to make the loans. (Tr. 32.) By the end of April 1999, QDI decided to proceed with the combined loan proposal from Captec and CNL. (Tr. 36.)

QDI identified various Chili's or Burger King restaurant properties that it could mortgage to secure the 34 separate loans, each for about $1-$2 million for a total of $49 million. (Tr. 17, 34-35.) QDI formed 12 special purpose entities as indirect, wholly-owned subsidiaries to administer the loans, three of which, the Borrowers, are the Plaintiffs here. (Tr. 17, 34-35, 144.) Captec originated 18 of the loans, with CNL taking the other 16. (Tr. 41.) Captec also brought in Krass Monroe, an experienced Minneapolis law firm well-known for representing lenders in these types of transactions, who Captec usually used for such deals. (Tr. 23-24; Evans Dep. 46.)

Krass Monroe provided QDI with Captec's standard form promissory note for review.(Tr. 37, 39; Ex.1.) The standard form note granted the Borrowers the privilege of paying a loan early, but only after the expiration of an unspecified term of years (a "lock-out" provision), and with a "pre-payment premium," defined as:

equal to the present value (computed at the Reinvestment Rate) of the difference between a stream of monthly payments necessary to amortize the outstanding principal balance of this Note at the Stated Rate and a stream of monthly payments necessary to amortize the outstanding principal balance of this Note at the Reinvestment Rate (the "Differential"). In the event the Differential is less than zero, the pre-payment premium shall be deemed zero. . . .

(Ex. 1; Tr. 43, 46.)

Put another way, if interest rates fell and the Borrowers decided to prepay the Note, they would have to pay a penalty equal to the difference between two variables:

(1) the present value of the stream of monthly payments provided by the loan's amortization schedule from the date of pre-payment, computed at the "Reinvestment Rate"—i.e., the U.S. Treasury rate at the date of pre-payment; and

(2) the present value of the same stream of monthly payments computed at the "Stated Rate"—i.e., the stated interest rate of the loan.

(Ex. 1; Tr. 43, 46.)

Firth spear-headed the negotiations on behalf of QDI, and since Captec/CNL pledged that QDI would only have to deal with one contact, he interfaced with Robert Schrader, the Captec representative and a fellow lawyer. (Tr. 44, 46.) Although Captec's standard note contained the lock-out clause, Schrader offered QDI the ability to pre-pay the notes without penalty after ten years if QDI would agree to 20 more basis points (two-tenths of a percent)—or roughly an additional $100,000 per year. (Tr. 43-44.) This ultimately boosted the interest rate on the Chili's restaurant loans to 9.94% (Exs. 8-13) and the Burger King restaurant loans to 9.79%. (Exs. 2-7.) QDI wanted the latitude to pre-pay without penalty afterten years, so it agreed to Schrader's offer, but in place of any lock-out provision, it also sought an agreement allowing it to pre-pay within the first ten years provided that any resulting prepayment premium would not be punitive. (Tr. 43-45, 375; Ex. PP.) Captec/CNL agreed to those points as well. (Tr. 43-45, 375.)

Krass Monroe, principally through attorney Randy Evans, then created the 34 notes (each secured by a mortgage) by re-drafting the Captec standard form note in a number of ways. Specifically, the pre-payment provision in each of the notes was eventually re-written in the following manner in an effort to correspond to the agreement between Firth and Schrader:

Lender shall not be required to accept any tender of pre-payment of the principal balance of this Note at any time during the first ten (10) "loan years" when the "Reinvestment Rate (as hereinafter defined) is lower than the Stated Rate unless Lender also receives from Borrower a sum of money (the "Prepayment Premium") which shall be equal to the positive difference between the present value (computed at the Reinvestment Rate) of the stream of monthly payments of principal and interest under this Note from the date of the prepayment through the tenth (10th) anniversary of the First Full Payment Date at the Stated Rate (without duplication of either the Default Rate or the late charge set forth in Section 4 below) and the outstanding principal balance of this Note as of the date of the pre-payment (the "Differential"). In the event the Differential is less than zero, the Pre-Payment Premium shall be deemed to be zero. For purposes of this Note, the "Reinvestment Rate" is an interest rate equal to the then current yield on United

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