Bowles Sub Parcel A, LLC v. Wells Fargo Bank, N.A. (In re Bowles Sub Parcel A, LLC)

• Decision Date: 01 July 2015
• Docket Number: 14–1065.,Nos. 14–1055,14–1064,14–1060,14–1056,14–1061,s. 14–1055
• Citation: 792 F.3d 897
• Parties: In re BOWLES SUB PARCEL A, LLC, Debtor. Bowles Sub Parcel A, LLC, Appellant, v. Wells Fargo Bank, N.A., as Trustee for the Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torcyhlight Loan Services, LLC as its successor Special Servicer, Appellee. In re Fenton Sub Parcel A, LLC Debtor. Fenton Sub Parcel A, LLC, Appellant, v. Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee. In re Bowles Sub Parcel B, LLC Debtor. Bowles Sub Parcel B, LLC Appellant, v. Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee. In re Fenton Sub Parcel B, LLC Debtor. Fenton Sub Parcel B, LLC Appellant, v. Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee. In re Bowles Sub Parcel C, LLC Debtor. Bowles Sub Parcel C, LLC Appellant, v. Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee. In re Fenton Sub Parcel C, LLC Debtor Fenton Sub Parcel C, LLC Appellant, v. Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

792 F.3d 897

In re BOWLES SUB PARCEL A, LLC, Debtor.

Bowles Sub Parcel A, LLC, Appellant

v.Wells Fargo Bank, N.A., as Trustee for the Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torcyhlight Loan Services, LLC as its successor Special Servicer, Appellee.

In re Fenton Sub Parcel A, LLC Debtor.

Fenton Sub Parcel A, LLC, Appellant

v.Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee.

In re Bowles Sub Parcel B, LLC Debtor.

Bowles Sub Parcel B, LLC Appellant

v.Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee.

In re Fenton Sub Parcel B, LLC Debtor.

Fenton Sub Parcel B, LLC Appellant

v.Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee.

In re Bowles Sub Parcel C, LLC Debtor.

Bowles Sub Parcel C, LLC Appellant

v.Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee.

In re Fenton Sub Parcel C, LLC Debtor

Fenton Sub Parcel C, LLC Appellant

v.Wells Fargo Bank, N.A., as Trustee for Registered Holders of J.P. Morgan Chase Commercial Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2, by and through Torchlight Loan Services, LLC, as its successor Special Servicer, Appellee.

Nos. 14–1055

14–1056

14–1060

14–1061

14–1064

14–1065.

United States Court of Appeals, Eighth Circuit.

Submitted: Feb. 12, 2015.

Filed: July 1, 2015.

Eric John Magnuson, Ralph V. Mitchell, Matthew J.M. Pelikan, Minneapolis, MN, for Appellant.

Thomas Henry Boyd, Michael Rosow, Minneapolis, MN, Frederick Carter, Gregory A. Cross, Kendall A. Camuti, Baltimore, MD, for Appellee.

Before GRUENDER, SHEPHERD, and KELLY, Circuit Judges.

Opinion

KELLY, Circuit Judge.

In these six consolidated bankruptcy cases, we consider whether the bankruptcy court¹ erred in determining that a default-interest provision in a loan agreement was a valid liquidated-damages provision under Minnesota law. Having jurisdiction under 28 U.S.C. § 1291, we affirm.

Appellants are six limited liability companies (collectively, Debtors). Debtors own three “pools” of commercial and industrial real estate that are subject to mortgages held by the Registered Holders of J.P. Morgan Chase Commercial Mortgage Securities Corp., Commercial Mortgage Pass–Through Certificates, Series 2004–LN2 (the Trust).² The Trust made three separate commercial loans to Debtors, pursuant to three separate promissory notes (Notes), each with virtually identical provisions except for the loan amounts, the collateral securing the loan, and other related, loan-specific data. Relevant to this appeal, section 1.04(c) of the Notes provided that upon a default, the interest rate on the remaining principal would be 5% in addition to the non-default rate of 5.04%.

In May 2011, Debtors defaulted on their loans; and in May 2012, they filed for Chapter 11 protection in bankruptcy court. The Trust then filed a proof of claim for default interest in the amount of $1,516,739.80. Debtors objected to the claim.

On February 12, 2013, the bankruptcy court held a hearing on the objections, and the Notes and other loan documents were admitted as evidence. Attorneys for both the Trust and Debtors called witness Rakeesh Patel, CW Capitol's assigned asset manager for the loans.³ Patel testified about the expenses associated with a default of a loan such as this one⁴ and said that the 5% default-interest rate was, in his experience, consistent with the default-interest rate for loans of a similar type. He also testified that, though he lacked personal knowledge of the circumstances surrounding the signing of this particular loan, “there was no way to know what the damage is [or] what the defaults would have been at that time.”

Stephen Hoyt, the chief manager for Debtors, also testified. Hoyt said he was a knowledgeable and sophisticated real estate investor with 33 years of experience in commercial real estate. According to Hoyt, the additional 5% default interest duplicated other costs associated with defaulting that Debtors were already paying the Trust. These costs included attorneys' fees, late fees, and the costs of administration and enforcement. Hoyt opined that enforcing the default-interest provision would result in “double debt paying, if not triple debt paying.” Patel expressly disagreed and testified that the default interest did not duplicate other costs Debtors were obligated to pay.

Following the hearing, the bankruptcy court allowed the claim for default interest, finding Debtors failed to rebut the presumption under Minnesota law that the default-interest provision in the Notes was a valid liquidated-damages provision. Debtors appealed to the district court. The district court affirmed,⁵ agreeing that Debtors had not presented sufficient evidence to overcome the default-interest provision's presumptive validity. In this timely appeal, Debtors argue the default-interest provision is an unenforceable penalty under Minnesota law.

“Though this case comes to us on appeal from the district court, we sit in review of the bankruptcy court's decision.” Tri–State Financial, LLC v. First Dakota Nat'l Bank, 538 F.3d 920, 922 (8th Cir.2008). As the second court of review, we apply the same standards of review as the district court: “[W]e review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo.” Id. at 923–24 (quotation omitted).

First, Debtors assert the bankruptcy court misapplied Minnesota law⁶ because it did not require the Trust to prove its actual damages. But Debtors misstate Minnesota law concerning liquidated damages. “Generally, liquidated damages are fixed sums payable to a party when actual damages are difficult to ascertain or prove.” In re Qwest's Wholesale Serv. Quality Standards, 702 N.W.2d 246, 262 (Minn.2005). Under Minnesota law, liquidated damage provisions are presumed valid. Gorco Constr. Co. v. Stein, 256 Minn. 476, 99 N.W.2d 69, 74 (1959). To determine if a provision is a valid liquidated damages provision or an impermissible penalty, Minnesota courts consider whether (1) “the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach”; and (2) “the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.” Id. at 74–75 (citing Restatement of Contracts § 339 (1932) ). If these conditions are met, a contract provision for liquidated damages can be enforced without proving actual damages. Willgohs v. Buerman, 262 Minn. 415, 115 N.W.2d 59, 62 (1962). Put another way, “where the actual damages resulting from a breach of the contract cannot be ascertained or measured by the ordinary rules, a provision for liquidated damages not manifestly disproportionate to the actual damages will be sustained.” Gorco Const., 99 N.W.2d at 75. “The controlling factor ... is whether the amount agreed upon is reasonable or unreasonable in the light of the contract as a whole, the nature of the damages contemplated, and the surrounding circumstances.” Id. at 74.

The language of the Notes themselves supports the stipulated damages provision's validity. See Meuwissen v. H.E. Westerman Lumber Co.,

218 Minn. 477, 16 N.W.2d 546, 550 (1944) (noting that to determine whether a liquidated damages provision is valid, courts look at “the language of the contract itself and the facts and circumstances under which it was made” (quotation omitted)). In the Notes, the parties agreed “that it would be extremely difficult or impracticable to determine...