Den Norske Bank v. First Nat. Bank of Boston

• Decision Date: 17 November 1993
• Docket Number: Civ. A. No. 92-11294 GN.
• Citation: 838 F. Supp. 19
• Parties: DEN NORSKE BANK AS, Plaintiff, v. The FIRST NATIONAL BANK OF BOSTON, N.A. and BancBoston Real Estate Capital Corporation, Defendants.
• Court: U.S. District Court — District of Massachusetts

838 F. Supp. 19

DEN NORSKE BANK AS, Plaintiff, v. The FIRST NATIONAL BANK OF BOSTON, N.A. and BancBoston Real Estate Capital Corporation, Defendants.

Civ. A. No. 92-11294 GN.

United States District Court, D. Massachusetts.

November 17, 1993.

John P. Zavez and Laura Steinberg, Sullivan & Worcester, Boston, MA, for plaintiff.

Joseph L. Kociubes and Stephanie A. Kelly, Bingham, Dana & Gould, Boston, MA, for defendants.

GORTON, District Judge.

Report and recommendation accepted and adopted.

REPORT AND RECOMMENDATION RE: DEFENDANTS' MOTION FOR SUMMARY JUDGMENT (DOCKET ENTRY # 5); PLAINTIFF'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT (DOCKET ENTRY # 12)

November 3, 1993

BOWLER, United States Magistrate Judge.

On November 2, 1992, defendants First National Bank of Boston, N.A. ("FNBB") and BancBoston Real Estate Capital Corporation ("BancBoston") (collectively: "defendants") filed a motion for summary judgment seeking summary judgment on all three counts contained in the complaint. (Docket Entry # 5). On December 30, 1992, plaintiff Den Norske Bank AS ("DnB") filed an opposition and a motion for partial summary judgment with respect to Count I of the complaint.¹ (Docket Entry # 12).

On September 29, 1993, this court held a hearing and took Defendants' Motion for Summary Judgment (Docket Entry # 5) and DnB's motion for partial summary judgment (Docket Entry # 12) under advisement.

BACKGROUND

DnB filed this action on May 22, 1992, against defendants on the following three counts: (1) breach of contract (Count I); (2) breach of fiduciary duty (Count II) and (3) violation of Massachusetts General Laws chapter 93A ("chapter 93A") (Count III). (Docket Entry # 1). The instant litigation arises out of defendants' alleged breach of a participation agreement dated April 11, 1986. Under the participation agreement, DnB acquired a 17.34% interest in a loan given by BancBoston to Glades Road Association ("Glades"), a Florida partnership, in connection with Glades' construction of an office building in Boca Raton, Florida. (Docket Entry # 1).

The subsequent decline in the Florida real estate market resulted in a restructuring of the loan in September 1991 despite DnB's objection. DnB complains that defendants acted in disregard of DnB's express rights under the participation agreement. In addition, by failing to adequately examine various alternatives in lieu of restructuring the loan, defendants allegedly breached their fiduciary duty owed to DnB. (Docket Entry # 1).

I. DEFENDANTS' MOTION FOR SUMMARY JUDGMENT (DOCKET ENTRY # 5)

For purposes of summary judgment, this court finds the following facts.² In 1985 BancBoston and Glades entered into an agreement evidenced by various loan documents under which BancBoston loaned an estimated $55,256,000³ to Glades ("Glades loan") for the construction of an office building in Boca Raton ("the project"). The non-recourse loan was secured by a first mortgage on the project's real estate, a security interest in all personal property, an assignment of leases and rents and a letter of credit issued by Canadian Imperial Bank. (Docket Entry # 1, ¶ 6; Docket Entry # 5, ¶¶ 1-2; Docket Entry # 13, ¶¶ 1-2).

On April 11, 1986, BancBoston and Glades entered into a participation agreement ("participation agreement"). Under the participation agreement, DnC America Banking Corporation ("DnC America")⁴ acquired a 17.34% interest up in the Glades loan up to a maximum amount of $7,500,000. (Docket Entry # 1, ¶¶ 6-7; Docket Entry # 5, ¶ 3; Docket Entry # 13, ¶ 3). The essential or basic form of the participation agreement "was BancBoston's." (Docket Entry # 1, ¶ 8; Docket Entry # 5, ¶ 8).

Paragraph 11 is a key provision of the participation agreement for purposes of defendants' motion for summary judgment.⁵ This paragraph is subdivided into three sections and reads as follows:

11. Approval of Principal's Actions. Principal agrees that it shall not without prior written agreement by all Participants: (1) reduce the amount of the Loan principal or interest payments; (2) reduce the Loan interest rate; (3) postpone for a period of more than 60 days any due date for payment of the Loan principal; (4) release or subordinate any of the collateral or waive any claim against any guarantor or person who may be secondarily liable who would have a material, adverse effect on the collection and enforcement of the Loan or the Loan Documents; (5) suspend the accrual of Loan interest.

In other matters concerning the routine administration of the loan, Principal agrees not to deviate from the Loan Documents unless the majority (dollars outstanding) of the lending institutions agree to the change provided Principal is in the majority. In all cases where a consensus cannot be reached on matters of administration that is acceptable to Principal, Principal agrees to adhere to the Loan Documents.

In all cases pertaining to default, Principal agrees to adhere to Paragraph 13.

(Docket Entry # 1, Ex. A).

Paragraph 13 of the participation agreement expressly pertains to defaults. The first section reads as follows:

13. Loan Default Procedures. Principal and Participants agree that in the case of default, courses of action will be agreed to by a majority (dollars outstanding) of the lending institutions providing the Principal is in the majority. In cases where a consensus cannot be reached on matters pertaining to default that is acceptable to Principal, the Principal agrees to adhere to the Loan Documents for all appropriate remedies.

(Docket Entry # 1, Ex. A).

On November 12, 1987, BancBoston transferred its interest in the loan documents to FNBB. (Docket Entry # 5, ¶ 4; Docket Entry # 8, Ex. B; Docket Entry # 12, ¶ 3). Under the terms of the participation agreement, BancBoston and its successor FNBB were responsible for administering the loan.⁶ (Docket Entry # 1, Ex. A).

In 1989 and 1990 FNBB obtained appraisals of the project from Landauer Associates ("Landauer"). Landauer appraised the project in 1989 and 1990 respectively at $53,000,000 and $41,000,000. (Docket Entry # 16, ¶ 13). By the beginning of 1991 the Florida real estate market was in decline. (Docket Entry # 1, ¶ 11; Docket Entry # 5, ¶ 6; Docket Entry # 16, ¶ 13). In February 1991 an entity referred to as Victor Capital Group appraised the project in a "valuation range of" $35,800,000 to $44,800,000. (Docket Entry # 17, Ex. 1). Internally, FNBB viewed the project as having an estimated value of $36,780,000 in the winter and spring of 1991. (Docket Entry # 16, ¶ 14; Docket Entry # 17, Ex. 2). A May 1991 Shared National Credits Subject to Criticism report classified $34,656,000 of the $55,256,000 loan as substandard. (Docket Entry # 16, Ex. C).

In a report dated July 30, 1991, appraising the project as of June 17, 1991, Matonis MacDermott & Company ("Matonis") estimated the project as having a fair market value of $24,700,000 based on an "as is" sale of the project within a 12 month period ("Matonis report"). DnB received a copy of this report. (Docket Entry # 5, ¶ 6; Docket Entry # 13, ¶ 6; Docket Entry # 8, ¶ 7 & Ex. C; Docket Entry # 16, ¶ 15 & Ex. C). The Matonis report did not analyze the estimated worth of the project in the event the parties opted to foreclose on the project and own and operate it thereafter for an undetermined number of years. (Docket Entry # 8, Ex. C; Docket Entry # 16, ¶ 15).

The project loans were due to be repaid at the end of 1991. (Docket Entry # 1, ¶ 11; Docket Entry # 4, ¶ 11). In early to mid 1991 defendants notified DnB that Glades was seeking either to extend the due date on the loans or to reduce the amount of indebtedness. (Docket Entry # 1, ¶ 11; Docket Entry # 4, ¶ 11).

Schwartz, on behalf of DnB, avers that throughout the spring and summer of 1991 FNBB discussed various refinancing proposals with Glades.⁷ Schwartz attests that DnB was neither notified of nor included in these discussions. In fact, as evidenced by certain FNBB interoffice communications, Schwartz avers that defendants attempted to combine a restructuring of the $55,200,000 loan to Glades with a requirement that Claridge purchase two buildings acquired by a subsidiary of FNBB. (Docket Entry # 13, ¶ 12; Docket Entry # 17, Ex. 6 & 7). The communications between FNBB and Glades concerning restructuring the Glades loan during the spring and summer of 1991 are disputed.

On July 1, 1991, Glades failed to make the monthly interest payment due to FNBB at that time. On or about July 12, 1991, FNBB notified Glades of its default and demanded payment of the outstanding interest within ten days. Glades failed to cure the default. (Docket Entry # 5, ¶ 8; Docket Entry # 13, ¶ 8). Glades' actions constituted a default under the terms of the loan documents. (Docket Entry # 1, ¶ 12; Docket Entry # 4, ¶ 12).

Thereafter, FNBB instituted mortgage foreclosure and other collection procedures as provided under the terms of the loan documents. Specifically, on or about July 26, 1991, FNBB accelerated the loan and gave notice to Glades that a total of $53,325,112.95 was immediately due and owing. FNBB then drew on a letter of credit and applied $18,086,388.24 in proceeds to the outstanding amount. DnB received its pro rata share of $1,491,240. Glades failed to pay the remaining $35,238,274. On or about August 16, 1991, FNBB commenced foreclosure proceedings and instituted judicial action to enforce the assignments of leases and rents. (Docket Entry # 5, ¶¶ 9 & 10; Docket Entry # 8, ¶¶ 11 & 12; Docket Entry # 12, ¶ 8; Docket Entry # 13, ¶¶ 9 & 10).

According to an internal report dated August 23, 1991, FNBB estimated the fair market value of the project at $21,700,000. The internal report appraised the project at a lower fair market value than the Matonis report because the internal report utilized a lower percentage figure to value the project's anticipated net operating income for the year 2002 and a higher percentage figure for discounting capitalized income...