Chrysler Capital Realty, Inc. v. Grella

• Decision Date: 19 August 1991
• Docket Number: D,No. 394,394
• Citation: 942 F.2d 160
• Parties: CHRYSLER CAPITAL REALTY, INC., Plaintiff-Appellant, v. Joseph J. GRELLA, Mid-America Building Associates Limited Partnership, Rene Frank and Mabon, Nugent & Co., Defendants-Appellees. ocket 90-7549.
• Court: U.S. Court of Appeals — Second Circuit

Page 160

942 F.2d 160

CHRYSLER CAPITAL REALTY, INC., Plaintiff-Appellant, v. Joseph J. GRELLA, Mid-America Building Associates Limited Partnership, Rene Frank and Mabon, Nugent & Co. Defendants-Appellees.

No. 394, Docket 90-7549.

United States Court of Appeals Second Circuit.

Argued Oct. 31, 1990.

Decided Aug. 19, 1991.

Marvin Wexler, New York City (Kornstein, Veisz & Wexler, Howard S. Veisz and Mark Platt, of counsel), for plaintiff-appellant.

Howard R. Hawkins, Jr., New York City (Cadwalader, Wickersham & Taft, Pamela Rogers Chepiga, Gregory M. Patrick, and David DeGregorio, of counsel), for defendants-appellees.

Before NEWMAN and PRATT, Circuit Judges, and SWEET, District Judge, for the Southern District of New York, sitting by designation.

GEORGE C. PRATT, Circuit Judge:

This appeal, which arises from a large mortgage transaction gone awry, raises a novel issue under Michigan state law. For this reason, and because the issue appeared to be one of particular importance to the state of Michigan, we certified the state law issue to the Michigan Supreme Court at plaintiff's request. That court, however, declined (by a 4-3 vote) to answer our query, so we are left to determine on our own plaintiff's attempt to extend Michigan law so as to provide relief from defendant's alleged fraud.

Plaintiff-appellant Chrysler Capital Realty, Inc. ("Chrysler") challenges the judgment entered in the United States District Court for the Southern District of New York, John F. Keenan, Judge, that granted defendant-appellee Mabon, Nugent & Co.'s ("Mabon's") motion to dismiss the complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The district court held that Chrysler, a mortgagee who had successfully bid the entire amount of the indebtedness at a foreclosure sale of the mortgaged property, could not maintain an action for damages, despite its allegations that the actual value of the property at the time of sale was much less than the indebtedness and that it had been fraudulently induced into the transaction. We agree with the district court's holding and therefore affirm the judgment.

BACKGROUND

The facts relevant to this appeal are straightforward. Chrysler, a Delaware corporation engaged in the business of real estate financing, lent $11,936,250 to defendant Mid-America Building Associates Limited Partnership ("Mid-America"), a Michigan limited partnership. The loan was made on a nonrecourse basis, but was secured by a purchase-money first mortgage on the Mid-America Building, located in Southfield, Michigan. Mabon, a New York partnership that owns 100 percent of one of the limited partners in Mid-America, arranged the mortgage loan from Chrysler to Mid-America.

Soon after the loan closing, Mid-America defaulted in the monthly interest payments, eventually leading to a foreclosure sale of the building. By the time of sale, the debt had swelled to $12,679,603.23 as a result of Mid-America's failure to pay either principal or interest. Chrysler, the only bidder at the foreclosure sale, purchased the building by bidding an amount equal to the entire indebtedness owed by Mid-America, including accrued interest and foreclosure costs.

Chrysler then brought this action against the defendants, claiming that it had suffered $5,300,000 in damages, because the fair market value of the property at the time of the foreclosure sale was no more than $7,400,000. Essentially, Chrysler claimed that Mabon had fraudulently induced it to lend Mid-America $11,936,250 to purchase the office building. It asserted, however, a variety of claims sounding in fraud, aiding and abetting fraud, negligent misrepresentation, breach of contract, as well as vicarious tort liability for the actions of the limited partnership.

The district court dismissed Chrysler's complaint in its entirety because it found that Chrysler could not, as a matter of law, have suffered damages in the circumstances of this case. It held that Michigan law required proof of damages as an essential element of all of Chrysler's claims, and that under Michigan law, Chrysler's successful bid of the full amount of the debt at the foreclosure sale extinguished the mortgage debt. Since Chrysler was thus deemed to have been paid in full, the court held that it could not maintain any action for damages.

DISCUSSION

As a preliminary matter, we agree with the district court's application of New York's choice of law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941) (federal court in diversity action should apply choice of law rules of state in which court sits); Entron, Inc. v. Affiliated FM Ins. Co., 749 F.2d 127, 131 (2d Cir.1984) (same). We also agree that under those rules, Michigan law governs the disposition of this case, because it is the state with the most significant relationship to the events giving rise to this litigation. Machleder v. Diaz, 801 F.2d 46, 51 (2d Cir.1986) ("[u]nder New York law a court must apply the substantive tort law of the state that has the most significant relationship with the occurrence and with the parties") (citation omitted), cert. denied sub nom. Machleder v. CBS, Inc., 479 U.S. 1088, 107 S.Ct. 1294, 94 L.Ed.2d 150 (1987).

We now turn to the crux of this appeal. In challenging the district court's dismissal of its complaint, Chrysler claims that the court erroneously relied on a Michigan rule distilled from Whitestone Savings and Loan Assn. v. Allstate Ins. Co., 28 N.Y.2d 332, 321 N.Y.S.2d 862, 270 N.E.2d 694 (1971), which holds that a lender is deemed to have received repayment of a loan in full if, at a foreclosure sale, it successfully bids the full amount of the loan. The court found that Chrysler's voluntary, successful bid of the full amount of its debt at the foreclosure sale extinguished the mortgage debt, as well as any subsequent claim for damages. The district court reasoned that since Michigan law required proof of damages as an essential element of each of Chrysler's claims against Mabon, see Fassihi v. Sommers, Schwartz, Silver, Schwartz & Tyler, P.C., 107 Mich.App. 509, 309 N.W.2d 645, 649 (Mich.Ct.App.1981) (fraud); Prosser and Keeton on Torts § 110, at 765 (5th ed. 1984) (negligent misrepresentation); Shippey v. Madison Dist. Public Schools, 55 Mich.App. 663, 223 N.W.2d 116, 119 (Mich.Ct.App.1974) (breach of contract), and Chrysler could not, as a matter of law, assert a claim for damages, the complaint had to be dismissed.

Chrysler claims that while the legal fiction in Whitestone has been applied when lenders try to prove actual damages in subsequent actions based on notes or collateral agreements, it has yet...