Dubinsky v. Mermart, LLC

Decision Date10 February 2010
Docket NumberNo. 09-2072.,09-2072.
Citation595 F.3d 812
PartiesJohn DUBINSKY, et al., Plaintiffs-Appellants, v. MERMART, LLC, Defendant-Appellee.
CourtU.S. Court of Appeals — Eighth Circuit
595 F.3d 812
John DUBINSKY, et al., Plaintiffs-Appellants,
v.
MERMART, LLC, Defendant-Appellee.
No. 09-2072.
United States Court of Appeals, Eighth Circuit.
Submitted: January 12, 2010.
Filed: February 10, 2010.

[595 F.3d 813]

Edward J. Sluys, argued, St. Louis, MO (Mitchell A. Margo, on the brief), for Plaintiffs-Appellants.

John D. Comerfort, argued, St. Louis, MO (Edward L. Dowd, Jr., James F. Bennett, on the brief), for Defendant-Appellee.

Before GRUENDER and SHEPHERD, Circuit Judges, and JARVEY,1 District Judge.

JARVEY, District Judge.


John Dubinsky, William Stern, Alvin Siteman, Eldon Schoenberg, David Rasch, and Jack Cregan ("Subordinate Bondholders") invested in a refinancing venture

595 F.3d 814

for a real estate development. They sued the developer of the project, Mermart, L.L.C. ("Mermart"), alleging breach of contract and demanding equitable accounting for failure to pay interest under the financing documents, as well as alleging unjust enrichment, negligence, and fraudulent misrepresentation based on alleged representations that the project was free from environmental hazards. The district court2 dismissed the contract claims, finding that the Subordinate Bondholders failed to obtain written consent of UMB Bank, N.A. ("UMB Bank"), the Senior Mortgagee, as required by the financing documents. The district court also dismissed the negligence, unjust enrichment, and fraudulent misrepresentation claims because the economic loss doctrine precluded recovery. For the following reasons, we affirm.

I. BACKGROUND

In 2001, Mermart commenced a $47.3 million redevelopment of the historic Merchandise Mart Building in downtown St. Louis to convert the property into a mixed-use apartment and retail building. During the renovation, Mermart retained a third-party contractor to remove lead based paint found in the building. The renovation was complete in 2003 when the Missouri Department of Natural Resources issued a certificate of occupancy. In preparation for a later refinancing, Mermart hired Consulting Solutions, Inc. to conduct an independent environmental assessment report. This report, dated April 6, 2005, revealed the continued presence of lead paint and suggested that further remediation was necessary.

On Dec. 1, 2005, Mermart executed a Subordinate Trust Indenture ("Indenture") with itself as the borrower, the Industrial Development Authority of the City of St. Louis ("IDA") as issuers of the Series B subordinate bonds ("Series B bonds"), and UMB Bank as the Trustee. Together with the Indenture, Mermart also completed a series of associated refinancing documents3 (collectively, "Financing Documents") on the same day. The Financing Documents specified that UMB Bank would act as the Trustee for the Subordinate Bondholders and as the Trustee for the Senior Mortgagees, UMB Bank4 and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Subordinate Bondholders then purchased the Series B bonds from the IDA. The Series B bonds bore a fixed annual interest rate of 10 percent from January 15, 2006 to June 15, 2036, at which time the entire principal amount of $1.1 million was also due.

Beginning in 2007, as units became available, Mermart began to remediate the continued presence of the lead paint. Mermart characterized the cost of removal as an "upgrade" expense, rather than a capital expense. This allowed Mermart to deduct the removal costs from the funds available to the Subordinate Net Loan Operating

595 F.3d 815

Income ("SLNOI"), used to make the interest payments to the Subordinate Bondholders. On April 28, 2008, the Subordinate Bondholders notified UMB Bank that Mermart had committed an Event of Default under the Financing Documents by Mermart's failure to make the contractual interest payments. The Trustee, UMB Bank, responded to the Subordinate Bondholders on August 26, 2008 and declined to take legal action against Mermart.

The Subordinate Bondholders, who own 51 percent of the bonds issued, thereafter brought this action seeking damages for breach of contract, equitable accounting, negligence, unjust enrichment, and fraud. Mermart filed a motion to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), seeking dismissal because the Subordinate Bondholders failed to obtain the written consent of the Senior Mortgagee prior to bringing suit. Mermart asserted that the fraudulent misrepresentation claim was not pled with particularity, or, in the alternative, that the negligence, unjust enrichment, and fraudulent misrepresentation claims were precluded by the economic loss doctrine.

The district court granted Mermart's motion to dismiss in its entirety. At issue was whether section 707 of the Indenture controlled, which imposed no restrictions on bringing suit, or whether sections 4(b) and 5(c) of the Subordination Agreement required written consent of the Senior Mortgagee before filing suit. Dubinsky, et al. v. Mermart, L.L.C., 2009 WL 1011503, at *3 (E.D.Mo. Apr.15, 2009). The court agreed with the latter interpretation, finding that the Subordinate Bondholders "were required under the financing documents to obtain the written consent of the Senior Mortgagee [UMB Bank] ... [and] the action was filed without satisfying the applicable prerequisites contained within the financing documents." Id. at *4. The court added that "upon a finding that plaintiffs were restricted by the Subordination Agreement, the claims for an equitable accounting and breach of contract should be dismissed." Id.

Next, the court found separate and independent grounds for dismissal of the negligence, unjust enrichment, and fraudulent misrepresentation claims. The court held that the negligence claim was an issue "based on" the Financing Documents and was "precluded by the Subordination Agreement," again, because the Subordinate Bondholders did not first seek written consent to file a claim, and also because the negligence claim was precluded by the economic loss doctrine. Id. at *5. The unjust enrichment claim failed for similar reasons. Id. at *6. Lastly, the court held that the fraudulent misrepresentation claims failed because the alleged fraudulent misrepresentations did not "pertain to any matter outside of or collateral to the contracts." Id. at *7.

The Subordinate Bondholders appeal.

II. DISCUSSION

We review de novo a motion to dismiss for failure to state a claim under Rule 12(b)(6). Ashley County, Ark. v. Pfizer, Inc., 552 F.3d 659, 665 (8th Cir.2009). To survive a motion to dismiss, a claim must have "facial plausibility when the plaintiff pleads a factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). We must take all facts alleged in the complaint as true, but "threadbare" assertions of a cause of action are insufficient. Charles Brooks Co.

595 F.3d 816

v. Ga.-Pac., L.L.C., 552 F.3d 718, 721 (8th Cir.2009).

At the outset, we must determine whether the Subordination Agreement required the Subordinate Bondholders to obtain the written consent of the Senior Mortgagee before bringing the enforcement action. The Subordinate Bondholders argue that this condition precedent to bringing enforcement actions under sections 4(b) and 5(c) of the Subordination Agreement applies only to the Subordinate Mortgagees and not to the Subordinate Bondholders. They argue that section 707(a) of the Indenture — which does not require written consent — details the procedure applicable to them for enforcement actions.

Mermart urges an interpretation that treats the Financing Documents as an interconnected set of contracts. Pursuant to this interpretation, Mermart would have us find that section 210 of the Indenture controls the Subordinate Bondholders' right to bring suit, because the Subordination Agreement is the controlling document if there are any "conflicts or inconsistency" among the Financing Documents. To further buttress this argument, Mermart urges us to find that the terms "Subordinate Mortgagee" and "Subordinate Bondholder," as used in the Financing Documents, are in effect interchangeable with no discernable differences in meaning or the parties the terms represent.

Pursuant to Missouri law, a court must enforce a contract "as written and according to the plain meaning of the words in the contract when the contract is clear and unambiguous." Contract Freighters, Inc. v. J.B. Hunt Transp., Inc., 245 F.3d 660, 663 (8th Cir.2001) (quoting Farmland Indus., Inc. v. Frazier-Parrott Commodities, 111 F.3d 588, 590 (8th Cir. 1997)). When faced with conflicting or ambiguous specific and general provisions in a contract, a court should enforce the more specific of the terms. Five Star Quality Care-MO, L.L.C. v. Lawson, 283 S.W.3d 811, 815 (Mo.Ct.App.2009). The terms of a contract should be read as a whole to determine the intent of the parties, TAP Pharm. Prods., Inc. v. St. Bd. of Pharmacy, 238 S.W.3d 140, 143 (Mo.2007), and "[t]he test...

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