Flags I, Inc. v. Boston Five Cents Sav. Bank

• Citation: 831 F. Supp. 928
• Decision Date: 30 September 1993
• Docket Number: Civ. No. 90-340-B.
• Parties: FLAGS I, INC., et al. v. THE BOSTON FIVE CENTS SAVINGS BANK, et al.
• Court: U.S. District Court — District of New Hampshire

831 F. Supp. 928

FLAGS I, INC., et al. v. THE BOSTON FIVE CENTS SAVINGS BANK, et al.

Civ. No. 90-340-B.

United States District Court, D. New Hampshire.

September 30, 1993.

Jamie Hage, Manchester, NH, Robert Ketchand, Houston, TX, Bruce Topman, Donald Elliott, New York City, for plaintiffs.

James Muirhead, Thomas Richards, Manchester, NH, for defendants.

ORDER

BARBADORO, District Judge.

This case concerns a failed effort by a lender and its borrowers to restructure their debt and equity interests in two related real estate development projects. Financial problems with both projects prompted the parties to enter into complex negotiations that resulted in the lender's agreement to advance additional funds to several of the plaintiffs in exchange for plaintiffs' agreement to surrender ownership and control over one of the projects and to release certain potential claims against the lender and its affiliate. When this agreement failed to stabilize relations among the parties, plaintiffs commenced this action alleging that the lender violated the bank anti-tying laws.

The lender and its affiliate argue that they are entitled to summary judgment with respect to plaintiffs' anti-tying claims because they claim that their conduct is protected by the "traditional banking practice" exemption from the bank anti-tying laws. For the reasons that follow, I accept defendants' arguments and grant their motion for summary judgment.

I. FACTS

The real estate development projects that give rise to the present case are known as The Villages at Granite Hill I ("Granite Hill I") and The Villages at Granite Hill II ("Granite Hill II"). Both projects were intended to make substantial profits for the plaintiffs and their lender. However, like many such projects conceived during the 1980s, the projects have yet to be successful. The projects and the parties' unsuccessful restructuring effort are described below.

A. Granite Hill I

Granite Hill I is a large complex of condominiums and single family homes in Hooksett, New Hampshire. The project was conceived in 1985 when several of the individual plaintiffs and their former partners agreed with the Boston Five Cents Savings Bank, FSB ("Boston Five") to develop the first phase of Granite Hill I as a joint venture. Pursuant to this agreement, Boston Five incorporated Province Street Corporation ("Province Street") as a wholly owned service corporation, and several of the individual plaintiffs incorporated Flags I, Inc. ("Flags") to serve as equal partners in the project.

Shortly thereafter, Province Street and Flags executed a joint venture agreement ("Joint Venture Agreement") forming Granite Hill Associates ("GHA") to develop Granite Hill I. Flags contributed land valued at approximately $2 million and Province Street agreed to contribute an equivalent amount in cash as their initial capital contributions to GHA. Except for certain costs identified as "Hard Costs Overruns," the Agreement specified that additional capital contributions would be shared equally by Flags and Province Street. The Agreement also provided that the partners would receive periodic distributions from the project's net cash flow. Under the Agreement, Province Street was allowed to recover its initial capital contribution on a preferred basis and thereafter distributions would be shared equally. Finally, the Agreement provided that GHA would be overseen by a two-member management committee composed of one person selected by Flags and one person selected by Province Street.

Washington Development Company ("WDC"), a partnership comprised of several of the individual plaintiffs, was selected to manage Granite Hill I. After construction was well underway, the Villages at Granite Hill Realty, Inc. ("Granite Hill Realty") replaced the project's original real estate broker and Granite Hill Contractors-Hooksett, New Hampshire, Inc. ("Granite Hill Contractors") replaced the project's first general contractor. Both Granite Hill Realty and Granite Hill Contractors are owned by several of the individual plaintiffs.

Boston Five provided financing for Granite Hill I. As of March 1990, the outstanding balance on GHA's loans to Boston Five was $10,849,201.

B. Granite Hill II

Granite Hill II was intended to be a large development of condominiums and single family homes adjacent to Granite Hill I. The land for the project was purchased in 1986 and title is held in a trust ("the Granite Hill Trust"). Washington Development Company, Inc. ("WDI"), a corporation owned by several of the individual plaintiffs, and Province Street, were named as both trustees and equal beneficiaries in the Trust. Although substantial on-site and off-site improvements subsequently were completed, only two model homes were under construction by the beginning of 1990.

Boston Five made several loans to the Granite Hill Trust to finance the purchase of the property, the completion of infrastructure improvements, and the construction of the model homes. As of March 1990, the Trust owed Boston Five $11,766,608 on these loans.

C. The Decline in the Real Estate Market

Granite Hill I initially appeared to be highly successful. It won construction and marketing awards and many units were built and sold. As a result, Province Street recovered its initial capital contribution and additional distributions totalling $2,734,761. Province Street also received $100,000 in cash and a note of $262,500 ("the Shops Note") from the sale of land by GHA to WDI for a commercial development known as the Shops at Granite Hill. Flags also recovered approximately $1,000,000 of its capital contribution to GHA. Finally, WDI earned management fees, Granite Hill Realty earned brokerage commissions, and Granite Hill Contractors earned income on its construction contracts with GHA.

When the New Hampshire Real Estate market experienced a sharp decline in 1988, both Granite Hill I and Granite Hill II began to experience financial difficulties. By 1989, sales at Granite Hill I had slowed to the point that GHA needed additional capital contributions from Province Street to cover debt service and the cost of on-going operations. By the end of 1989, GHA owed approximately $335,000 to its contractors and its loans from Boston Five were in arrears. Granite Hill II was also experiencing similar difficulties. Although substantial infrastructure improvements had been completed and sales agreements for four units had been signed, only two model homes had been built. By the end of 1989, Boston Five's loans to the Granite Hill Trust were also in arrears.

D. Restructuring Agreement

In March 1990, the parties executed a complex agreement ("the Restructuring Agreement") substantially altering the parties' debt and equity interests in both projects. Several significant aspects of the Agreement are discussed below.

1. Restructuring of GHA

The Restructuring Agreement provided that GHA would be converted from a general partnership to a limited partnership. Whereas Flags and Province Street had each held a 50% general partnership interest in GHA under the Joint Venture Agreement, The Restructuring Agreement provided that Flags' interest in GHA was converted into a 49% limited partnership interest. Similarly, Province Street's interest in GHA was to be converted into a 50% limited partnership interest and a 1% general partnership interest. The Restructuring Agreement also required Flags to release any claims against Boston Five or Province Street arising from a breach of any trust or fiduciary duty that Province Street might owe to Flags in the future because of Flags' new status as a limited partner in GHA. Thus, the Agreement vested Province Street with the power to act as if it were the sole owner of GHA, notwithstanding Flags' 49% limited partnership interest. The Restructuring Agreement further specified that Flags ultimately would share equally in any distributions or profits earned by GHA. However, the Agreement provided that the payment of any such profits or distributions would be deferred until the projected completion date for Granite Hill I.

2. Restructuring of Granite Hill Trust

The Restructuring Agreement specified that the equal beneficial interests held by Province Street and WDI in the Granite Hill Trust were to be converted into a limited partnership in which WDI would become the sole general partner with combined general and limited partnership interests of 99%. Province Street would retain only a 1% limited partnership interest in the Trust. The Agreement also required Province Street to release any claim for breach of trust or fiduciary duty it might have against WDI so as to permit WDI to control the Trust as if it were the sole owner of the Trust assets.

3. Releases of Claims Against Boston Five and Province Street

An essential aspect of the Restructuring Agreement is its requirement that the parties release past and future claims against Boston Five and Province Street. In addition to the previously described releases purportedly negating any fiduciary duty Province Street might owe to Flags arising from Province Street's new role as the sole general partner in GHA, the Agreement also required Flags, WDI, WDC, Granite Hill Contractors, and Granite Hill Realty to release: (i) any claim "by or against Boston Five relating to Granite Hill I, Granite Hill II, or their course of dealing with respect thereto, whether or not arising as aforesaid"; and (ii) any claim "now existing or hereafter arising against Province Street and Boston Five based on any fiduciary or trust relationship...." Thus, any claim that plaintiffs may have had to compel defendants to advance further funds to complete the development of Granite Hill II was to be released by the Restructuring Agreement.

4. Extension of Credit by Boston Five

As consideration for the benefits it received under the Restructuring Agreement, Boston Five agreed to loan additional funds to the plaintiffs and to modify...