Fannie Mae v. Univ. Vill. Apartments

• Decision Date: 27 October 2015
• Docket Number: No. ED 101796,ED 101796
• Citation: 479 S.W.3d 706
• Parties: Fannie Mae, Appellant/Cross–Respondent, v. University Village Apartments, UVA Partners L.L.C., Rick Yackey, Midland Management, L.L.C., Woodsmill Management Company, and Bill L. Bruce, Respondents/Cross–Appellants.
• Court: Missouri Court of Appeals

479 S.W.3d 706

Fannie Mae, Appellant/Cross–Respondent,

v.University Village Apartments, UVA Partners L.L.C., Rick Yackey, Midland Management, L.L.C., Woodsmill Management Company, and Bill L. Bruce, Respondents/Cross–Appellants.

No. ED 101796

Missouri Court of Appeals, Eastern District, DIVISION TWO .

Filed: October 27, 2015

Motion for Rehearing and/or Transfer to Supreme Court Denied December 7, 2015

Application for Transfer Denied January 26, 2016

Edward T. Bullard, Christopher J. Aikin, Co–Counsel, Elizabeth C. Burke, Co–Counsel, Shook, Hardy & Bacon, L.L.P., 2555 Grand Boulevard, Kansas City, Missouri 64108–2613, for Appellant.

Michael J. Parnas, The Parnas Law Firm, LLC, 7710 Carondelet Avenue, Suite 516, Clayton, Missouri 63105, Donald R. Carmody, John E. Hilton, Co–Counsel, Carmody, MacDonald, P.C., 120 South Central Avenue, Suite 1800, St. Louis, Missouri 63105, for Respondent.

Philip M. Hess, Presiding Judge

Introduction

Fannie Mae appeals the judgment of the Circuit Court of St. Louis City awarding it $161,816.08 for the breach of the obligation to pay net rents and $194,146.96 in attorney and expert fees. In four points on appeal, Fannie Mae claims that the trial court erred by reducing Fannie Mae's net rents damages because (1) reduction of damages is an affirmative defense that was not pleaded or tried by consent; (2) the loan documents allowed a credit only for "current operating expenses;" (3) the amounts credited were unrelated to the borrower's failure to pay net rents and, thus, do not reduce liability; and (4) even if the reduction was warranted, $142,060.66 of that amount was improperly credited twice. University Village Apartments, L.P., UVA Partners, L.L.C., Bill L. Bruce, Rick Yackey, Midland Management L.L.C., and Woodsmill Management Company (Defendants) cross-appeal. In two points, Defendants claim that the trial court erred by (1) awarding Fannie Mae any net rents damages because payments made from rents collected post default were made for "reasonable operating expenses;" and (2) assessing attorney and expert fees against Bruce and Yackey. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

Factual Background

In 2005, real estate developers, Bruce and Yackey, undertook the redevelopment of a St. Louis warehouse near St. Louis University into a modern 242–unit apartment complex, including commercial space on the ground level. Multiple entities were formed for the execution of the project, including University Village Apartments, L.P. (Borrower), which would be the owner of the project; UVA Partners, L.L.C. (Partner), which was Borrower's general partner; and University Village Tenant, L.L.C. (Tenant), which was the master tenant that entered into a Master Lease for the property. Woodsmill Management Company (Woodsmill), wholly owned and controlled by Bruce, entered into a management agreement to manage the property. Midland Management, L.L.C. (Midland), owned and controlled by Bruce, actually performed the daily management of the property. Landmark Capital (Landmark), also owned by Bruce, subleased the property's commercial space from Tenant.

Initially, the project was financed through several loans. Additional financing was available through the sale of historical tax credits, for which the building was eligible. Because this financing would not be realized until the sale of the credit, a smaller "bridge" loan was obtained from Great Southern Bank (GSB) for use until the tax credits were sold.¹ Several years later, near the project's completion, Borrower sought a permanent loan to replace these loans.

Loan Documents

Consequently, in March 2008, Borrower executed a Multifamily Note (Note) in the amount of $31,000,000. The Note was secured by a security instrument, the Multifamily Deed of Trust, Assignment of Rents and Security Agreement (Deed of Trust), which encumbered the property. The Note and Deed of Trust were assigned to Fannie Mae.

As relevant to this dispute, Paragraph 9(a) of the Note provides that Borrower "shall have no personal liability" under the Note or Deed of Trust for repayment of the indebtedness.² Paragraph 9(b), however, includes several exceptions to non-recourse liability, or bar against personal liability, including liability for a "portion of the Indebtedness equal to any loss or damage suffered by [Fannie Mae] as a result of:

(1) failure of Borrower to pay [Fannie Mae] upon demand after an Event of Default, all Rents to which [Fannie Mae] is entitled under Section 3(a) of the [Deed of Trust] and the amount of all security deposits collected by Borrower from tenants then in residence; [or]

* * *

(5) failure to apply Rents, first, to the payment of reasonable operating expenses ... and then to Debt Service Amounts, except that Borrower will not be personally liable (i) to the extent that Borrower lacks the legal right to direct the disbursement of such sums because of a bankruptcy, receivership or similar judicial proceedings, or (ii) with respect to Rents that are distributed in any calendar year if Borrower has paid all operating expenses and Debt Service Amounts for that calendar year.

Section 3(a) of the Deed of Trust, referenced by Paragraph 9(b)(1), provides that Borrower "absolutely and unconditionally assigns and transfers to [Fannie Mae] all Rents."³

The Note was also accompanied by an Acknowledgement and Agreement of Key Principal to Personal Liability for Exceptions to Non–Recourse Liability (Acknowledgment). This document was signed by Bruce and Yackey, who agreed to "absolutely, unconditionally, and irrevocably ... pay to [Fannie Mae], or its assigns, on demand, all amounts for which Borrower is personally liable under Paragraph 9 of the [Note]."

Default & Foreclosure

On May 1, 2010, Borrower failed to fulfill its monthly payment obligation on the debt.⁴ Thereafter, Borrower remained in default, remitting only partial payments in May and July 2010. In January 2011, Fannie Mae filed a petition against Borrower, Partner, Bruce, Yackey, Midland, and Woodsmill, among others. Fannie Mae contemporaneously filed a motion to appoint a receiver. The trial court appointed the receiver on January 24, 2011.

On November 22, 2011, consistent with the power of sale provision in the Deed of Trust, Fannie Mae foreclosed on the property and a trustee's sale was held. The successor trustee accepted Fannie Mae's credit bid of $26,000,000 and ownership of the property was transferred to Fannie Mae. At the time, the total payoff amount on the loan was $44,155,374.89. At the time of the foreclosure, PNC Bank held the post-default payments Borrower had made, which included $142,060.66 in partial debt service payments from May and July 2010 and $66,141.26 in "replacement reserves," an account that Borrower had paid into every month to cover the project's capital needs. This total amount, $208,201.92, referred to as "impound balances," were "swept" to Fannie Mae at foreclosure.

As the new owner of the property, Fannie Mae sought to terminate the Master Lease. Chevron TCI, Inc. (Chevron), however, had purchased the property's historical tax credits for $8.4 million and its receipt of the tax benefit for the purchase of those credits was contingent on continuation of the Master Lease through December 15, 2011. Fannie Mae, therefore, agreed not to terminate the Master Lease before that date in exchange for $500,000 (Chevron payment).

Trial Court Proceedings

Approximately six months after the foreclosure, in May 2012, Fannie Mae filed an amended petition. In relevant part, the petition alleged in Count I that Borrower breached the terms of the Note and is liable to Fannie Mae for both the deficiency on the Note and net rents; in Count IV that Partner is liable to the extent of Borrower's liability; and in Counts II and III that Bruce and Yackey are liable to the extent of Borrower's liability under the Acknowledgment as guarantors. With respect to the deficiency claim, Fannie Mae alleged that the GSB loan, which had been extended after execution of the loan documents, constituted a "transfer" that had triggered recourse liability under the Note, i.e., personal liability for the Note's deficiency. Fannie Mae's net rents claim was based on the failure to remit net rents due after the event of default, in violation of Paragraphs 9(b)(1) and (5) of the Note. The petition also alleged, in Counts VI, VII, and VIII that Woodsmill and Midland breached the Woodsmill Management Agreement, the Assignment of Management Agreement, and their fiduciary duty to Fannie Mae.

After a bench trial, the trial court issued a "partial judgment" rejecting Fannie Mae's claim that Borrower, Partner, Bruce, and Yackey were liable for the deficiency due on the Note, reasoning that none of the events triggered personal liability for the entire deficiency of the loan. Next, considering Fannie Mae's net rents claim, the trial court found Borrower liable for net rents during the default period under Paragraph 9(b)(1) and (5) of the Note, Partner liable to the extent of Borrower's liability, and Bruce and Yackey liable for net rents as guarantors under the Acknowledgement. The trial court also found that Woodsmill and Midland breached the management agreements and their fiduciary duty to Fannie Mae.

With respect to measuring damages, i.e., the net rents due, the trial court concluded as follows:

40. Fannie Mae presented evidence sufficient to establish damages in the amount of $870,024.00 in Net Rents not paid to Fannie Mae. That figure is derived from the following amounts that should have been placed in trust and paid to Fannie Mae but were not:

• $350,904 in rent, though recorded as revenue on the general ledger, was not collected from Landmark Capital ...;

• $20,800 in parking income, also recorded as revenue on the general ledger, that was not collected from the Harrison Building;

• $320,552 was transferred to Midland Management without invoices or supporting documents (there is no

...