FIRST FINANCIAL BANK v. CS ASSETS, LLC, Civil Action No. 08-0731-WS-M.

• Decision Date: 13 January 2010
• Docket Number: Civil Action No. 08-0731-WS-M.
• Citation: 678 F. Supp.2d 1216
• Parties: FIRST FINANCIAL BANK, Plaintiff, v. CS ASSETS, LLC, Defendant.
• Court: U.S. District Court — Southern District of Alabama

678 F.Supp.2d 1216

FIRST FINANCIAL BANK, Plaintiff, v. CS ASSETS, LLC, Defendant.

Civil Action No. 08-0731-WS-M.

United States District Court, S.D. Alabama, Southern Division.

January 13, 2010.

Charles C. Simpson, III, Johnstone, Adams, Bailey, Gordon & Harris, Mobile, AL, for Plaintiff.

George R. Irvine, III, Stone, Granade & Crosby, P.C., Daphne, AL, for Defendant.

ORDER

WILLIAM H. STEELE, District Judge.

This matter comes before the Court on the Motion for Summary Judgment of Defendant (doc. 46) and on the Motion for Summary Judgment by Plaintiff (doc. 51). Both motions have been extensively briefed and are now ripe for disposition.

I. Nature of the Case.

This dispute involves two lenders who do not see eye to eye as to the redemption of real property under Alabama law.¹ Plaintiff, First Financial Bank ("First Financial"), and defendant, CS Assets, LLC ("CS Assets"), were both mortgagees for the same five parcels of property located on Little Lagoon in Gulf Shores, Alabama. When the mortgagor (which is not a party hereto) defaulted on its loan obligations, CS Assets (the senior mortgagee) foreclosed on those five parcels, as well as two others. Thereafter, First Financial (a junior mortgagee) invoked the statutory redemption mechanism prescribed by Alabama Code §§ 6-5-247, et seq. There is no doubt that First Financial has the right to redeem those five parcels in which it possesses an interest. Nonetheless, the parties emphatically disagree as to the proper redemption price. Having proven unwilling or unable to find common ground on virtually any component of the redemption price calculations, the parties now call upon the Court to blaze a trail across a foreboding landscape of esoteric legal principles, hoary Alabama precedents, and heretofore-unexplored statutory language to fix the redemption price, all against the backdrop of a complex, multifaceted commercial transaction. Their cross-motions for summary judgment (with criss-crossing and overlapping legal issues, and arguments that seamlessly bounce back and forth from the briefing on one motion to that on the other, such that their briefs read like a series of six briefs on a single motion rather than three briefs on each of two distinct motions) have presented these issues for resolution at this time.

II. Background.

A. Factual History.²

The facts concerning the underlying loan transactions and foreclosure are critical to certain of the issues presented on summary judgment. Those facts are somewhat complicated, but largely uncontested.

Our story begins innocuously enough in November 2004, when a non-party developer called West Beach, LLC ("West Beach"), sought to build a 90-unit condominium project fronting on Little Lagoon in Gulf Shores, Alabama, with beach access to the Gulf of Mexico. That month, West Beach borrowed $2,000,000 from non-party Heritage Bank ("Heritage"), and granted Heritage a mortgage on six parcels of property (labeled Parcels A, B, C, D, E and F). (Province Dep., at Exhs. 5 & 6.)³ Five months later, in April 2005, West Beach borrowed $1,000,000 from First Financial and, as security, granted First Financial a mortgage on Parcels A, B, C, D and E (but, significantly, not Parcel F). (Id. at Exh. 7.)

Unfortunately, West Beach's business fortunes deteriorated, such that by early 2007 it was in default of its obligations under both the Heritage loan and the First Financial loan. (Freeman Aff., ¶¶ 2, 3; doc. 48, Exh. D.) First Financial directed its counsel to foreclose on the mortgage on May 31, 2007 unless satisfactory arrangements were reached in the interim. (Freeman Aff., ¶ 4.) Meanwhile, Heritage's successor in interest sold the Heritage loan to CS Assets on April 12, 2007, and assigned the associated promissory note and mortgage to CS Assets on April 19, 2007. (Doc. 48, Exhs. E-G.) The Loan Purchase and Sale Agreement reflects that as of April 16, 2007, the amounts owed by West Beach under the Heritage loan consisted of the following: "$2,000,000 principal, $105,875 accrued interest, $4,500 appraisal fee, and approximately $20,000 attorneys fees." (Doc. 48, Exh. E, at ¶ 6.D.)

In lieu of foreclosing on the Heritage mortgage based on West Beach's default, CS Assets extended and modified the loan. On April 30, 2007, West Beach and CS Assets entered into a Renewal Promissory Note and an Amendment to Mortgage and Security Agreement. (Doc. 48, Exhs. H, I.) The Renewal Promissory Note provided that West Beach owed the principal sum of $2,515,722, with interest accruing at the rate of 12% per annum until paid in full. (Doc. 48, Exh. H.) A separate Loan Agreement executed by CS Assets and West Beach on April 30, 2007, explained how the new principal amount had been calculated, as compared to the original Heritage loan, which had a principal sum of $2,000,000. In particular, the Loan Agreement reflects the following: (1) as of April 30, 2007, West Beach's indebtedness under the Heritage loan was in the "total amount of $2,300,000.00, which amount includes late charges, fees, expenses and a default rate of interest" (Mosher Dep., Exh. 18, at 1); and (2) the remaining principal consisted of an interest reserve of $150,943, a "renewal fee" of $75,472, lender's fees and expenses of $27,488, and taxes and recording costs of $11,819, less $50,000 in cash to be paid at closing (id. at 2).⁴ In the Amendment to Mortgage and Security Agreement executed in connection with the loan modification, West Beach granted CS Assets a mortgage on a seventh parcel of land, which has been dubbed in these proceedings the "Metes and Bounds Parcel." That parcel is also located north of West Beach Boulevard and is adjacent to some or all of Parcels A through E. (Doc. 48, Exh. I.)

While all of this was taking place with the Heritage mortgage, First Financial was not standing idly by. Rather, First Financial and West Beach negotiated an Accommodation Agreement in Lieu of Foreclosure, which was finalized on May 30, 2007. (Doc. 48, Exh. J.) This Agreement extended the maturity date of the First Financial loan through September 30, 2007, and required West Beach to pay interest, fees, late charges, and an interest reserve in a total amount exceeding $145,000. In that Agreement, West Beach and First Financial agreed that the modification executed between CS Assets and West Beach for the Heritage loan "is subordinate to the mortgage of First Financial... for any amount in excess of $2,308,119.00, it being understood that additional amounts may accrue pursuant to the original $2,000,000.00 loan." (Id., ¶ 3.a.) Of course, CS Assets was not a signatory to the Accommodation Agreement between West Beach and First Financial, and no formal agreement was executed by First Financial and CS Assets to pin down the relative priority of the various items rolled into the original Heritage loan by virtue of the CS Assets/West Beach loan modification.⁵

Unfortunately for all concerned, West Beach proved unable to satisfy even these reworked financial obligations, and ultimately defaulted on both loans. Pursuant to its position as senior lender, CS Assets foreclosed on all seven West Beach parcels (including Parcels A through E, as to which First Financial held a second mortgage, and Parcel F and the Metes and Bounds Parcel, as to which First Financial held no interest) on November 30, 2007. (Doc. 49, Exh. M, at ¶ 8.) At auction, the highest and best bid for those seven parcels was CS Assets' credit bid of $1,600,000. (Doc. 48, Exh. K.)⁶ That $1.6 million bid was offset from West Beach's total indebtedness to CS Assets, which CS Assets computed at that time as being $2,682,977.20 (including interest and late charges). (Mosher Dep., Exh. 5, at ¶ 13.) Subtracting the foreclosure bid from the balance owed yielded a resulting deficiency of $1,082,977.20, as of November 30, 2007, plus reasonable attorney's fees. (Id. at ¶¶ 13-14.)

Sometime later, First Financial timely elected to exercise its statutory right of redemption under Alabama law. Although there were, by all accounts, extensive negotiations between the parties that nearly produced a mutually acceptable redemption price, they were ultimately unsuccessful. When the negotiations failed, all potential points of agreement of compromise fell by the wayside, and this litigation followed.

B. Relevant Procedural History.

On or about November 7, 2008, First Financial filed its Complaint for Redemption of Real Property against CS Assets in state court.⁷ The Complaint specified that First Financial was seeking to exercise its statutory right of redemption pursuant to Alabama Code §§ 6-5-247 et seq., as to all seven West Beach parcels (i.e., Parcels A through F, and the Metes and Bounds Parcel). Following removal to federal court, CS Assets filed a Partial Motion to Dismiss (doc. 5), challenging First Financial's ability to redeem Parcel F and the Metes and Bounds Parcel, as to neither of which First Financial professed to be a mortgagee or to hold any legal or equitable interest. This Court granted the Partial Motion to Dismiss, and dismissed First Financial's redemption claims as to Parcel F and the Metes and Bounds Parcel, pursuant to the following reasoning:

"Given the common-sense notion under Alabama law that ... one cannot redeem property in which one has no interest, and given that the purposes of the redemption device would be in no way served by allowing redemption in that scenario, First Financial has not stated a claim on which relief can be granted insofar as it seeks redemption of those two parcels. Accordingly, the Motion to Dismiss (doc. 5) is granted, and plaintiff's claims for redemption of Parcel F and the Metes and Bounds Parcel are dismissed; provided, however, that by virtue of having pursued this Motion, CS Assets has waived any right it may have had to object to this action as an improper piecemeal redemption. In so ruling, the Court expressly invokes its equitable powers to adjust the rights and

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