Flatiron Acquisition Vehicle, LLC v. Cse Mortg. LLC, 1:17-cv-8987-GHW
| Decision Date | 17 March 2019 |
| Docket Number | 1:17-cv-8987-GHW |
| Parties | FLATIRON ACQUISITION VEHICLE, LLC and CS PARADISO HOLDINGS, LLC, Plaintiffs, v. CSE MORTGAGE LLC, CAPITALSOURCE COMMERCIAL LOAN, 2006-2, CAPITALSOURCE FINANCE LLC, and CAPITALSOURCE INC. Defendants. |
| Court | U.S. District Court — Southern District of New York |
In March of 2013, Flatiron Acquisition Vehicle ("Flatiron") expressed interest in acquiring CS Paradiso Holdings, LLC ("Paradiso" or the "Company"), a real estate company owned and controlled by CSE Mortgage LLC ("CSE"), CapitalSource Commercial Loan, 2006-2 ("CapitalSource Commercial Loan"), CapitalSource Finance LLC ("CapitalSource Finance), and CapitalSource Inc ("CapitalSource"). Before entering into a purchase agreement to purchase the Company, Flatiron Acquisition Vehicle learned of underlying, unresolved litigation involving Paradiso and the Tellico Village Property Owners Association (the "TVPOA"), which managed properties that Paradiso owned and collected assessments from the owners of these properties. Flatiron wanted the litigation to be resolved before it acquired the Company, but, inexplicably—or at least unexplained here—its counsel failed to require that the litigation be fully resolved as a condition to closing in the purchase agreement.
Before closing on Flatiron's acquisition of the Company, the TVPOA, Paradiso Holdings, Capital Source Finance, and Capital Source entered a settlement agreement in which Paradiso, CapitalSource, and CapitalSource Finance each assumed obligations to convey deeds or record documents required to transfer ownership of lots in the Tellico Village from Paradiso back to the TVPOA. Shortly thereafter, Flatiron purchased Paradiso with full knowledge of the obligations that the settlement agreement created, but because final resolution of the settlement agreement was not a condition to the closing, Paradiso had continuing obligations under the settlement agreement after Flatiron acquired it.
Paradiso and its now former owners, the defendants here, were not swift to fulfill their obligations under the settlement agreement and the TVPOA resorted to litigation to force their hand. In February 2014, after six months of non-compliance, the TVPOA sued Paradiso—now owned by Flatiron—CapitalSource, and CapitalSource Finance to compel them to record the documents and transfer the properties. The TVPOA first filed suit in 2014, but voluntarily dismissed the case after the required records were properly recorded and the deeds conveyed.
Paradiso, however, not only failed to honor its obligations under the settlement agreement. It also failed to pay its assessments to the TVPOA for the lots in the Tellico Village. In May 2015, the TVPOA again sued in a Tennessee Chancery Court, seeking to recover the unpaid assessments and other fees associated with the lots that Paradiso was meant to convey to the TVPOA. The court found that Paradiso was the holdover owner of the lots in question, that it had defaulted on its obligation to pay assessments and fees associated with the properties that it was meant to convey to the TVPOA in August of 2013. The Court and entered an order for summary judgment in the amount of $550,993.83 against Paradiso.
Now, Paradiso—together with its owner Flatiron—comes to this Court alleging that the defendants, by their acts and omissions, share responsibility for the damages that Paradiso sustained as a result of its failure to comply timely with the original settlement agreement. Because the settlement agreement imposed joint and several obligations on the defendants as well as Paradiso,the motion to dismiss the contractual claims is denied; the remaining claims are dismissed for the reasons set forth below.
Established in 1985, Tellico Village is a planned residential and commercial community that consists of over 5,000 acres of land alongside the Tellico Lake in Loudon County, Tennessee. Dkt. No. 41, Second Amended Complaint ("SAC") ¶ 35. The TVPOA serves as Tellico Village's manager. Id. ¶ 18. TVPOA's responsibilities include managing the Tellico Village properties as well as collecting annual assessment fees from residents and owners of the lots located within the community. Id. ¶ 37. Under the terms of the declaration of covenants and restrictions for Tellico Village (the "Declaration"), every owner of Tellico Village lots agreed to pay to the TVPOA an annual assessment fee (the "Assessments"). Id. ¶ 38. The TVPOA collects the Assessments on a monthly basis at a fixed rate for the year. Id. ¶ 39. Pursuant to Section 7 of Article X of the Declaration, if a resident or owner of a Tellico Village lot fails to timely remit payment, the Assessments become delinquent. Id. ¶ 40; Ex. C at 17. In the case of delinquency, the TVPOA has authority under the terms of the Declaration to declare the Assessments for the entire year due, with interests and extra costs. Id.
Paradiso was formed on or around October 28, 2009 for the purpose of holding title to and managing real property in Tellico Village. Id. ¶¶ 33, 34; see also Dkt. No. 45, Defendants' Memorandum of Law in Support of Motion to Dismiss ("Defendants' Memorandum") at 2. Around December 22, 2009, the members of Paradiso executed its operating agreement and named CSE as the Company's manager. Id. ¶ 33. The defendants in this case—CSE, CapitalSource Commercial Loan, CapitalSource, and CapitalSource Finance (collectively, the "Defendants")—exercised complete control over Paradiso. Id. ¶ 42. Because Paradiso had invested in real propertylocated in Tellico Village while under the Defendants' control, it was required to comply with the terms of the Declaration, including the requirement to pay the Assessments with respect to the properties that it owned; however, Paradiso repeatedly failed to make the required payments to the TVPOA. Id. ¶ 43.
Around March 18, 2013, Flatiron, a real estate investment company, expressed interest in purchasing Paradiso. Id. ¶ 44. Before Flatiron completed the purchase, it discovered that the TVPOA had filed suit against defendants CapitalSource, CapitalSource Finance, and Paradiso in Loudon County Tennessee's Chancery Court because they had failed to pay the Assessments owed with respect to the properties owned by Paradiso1 (the "Loudon County Lawsuit"). Id. ¶¶ 44-45. The Loudon County Lawsuit caused Flatiron to reconsider purchasing Paradiso and, in an e-mail dated June 21, 2013, Flatiron explained that the purchase was contingent on Defendants' resolving the lawsuit. Id. ¶ 47; Ex. D. However, as discussed below, Flatiron did not make the resolution of the case an express condition precedent in their purchase agreement—if it had, this lawsuit would never have begun.
Defendants CapitalSource and CapitalSource Finance retained Hodges, Doughty & Carson, PLLC (the "Hodges Firm") to represent them and Paradiso in the Loudon County Lawsuit. Id. ¶ 48. Oliver Adams, an attorney at the Hodges Firm, appeared as the attorney of record on behalf of Defendants and Paradiso. Id. On June 6, 2012, the TVPOA filed a motion for partial summary judgment only with respect to Paradiso. Id. ¶ 50. The Hodges Firm was unsuccessful in its defense of the motion. Id. On or around November 26, 2012, the chancery court issued an order awarding TVPOA a money judgment against Paradiso in the amount of $1,263,881.68 to account for the unpaid Assessments and fees accrued over several years. Id. ¶ 51. During the course of the Loudon County Lawsuit, Sue Choi served as associate general counsel for Defendants and directed Adams'sconduct during the litigation. Id. ¶ 52.
On July 19, 2013, the TVPOA, Paradiso, and defendants CapitalSource and CapitalSource Finance executed a settlement agreement (the "Settlement Agreement") that resolved the Loudon County Lawsuit. Id. ¶ 53. Among other conditions, the Settlement Agreement required Paradiso to transfer 272 parcels of land that it owned to the TVPOA by quitclaim deed (the "TVPOA Parcels"). Id. ¶ 53. The Settlement Agreement also required:
Defendants2 or their affiliates, successors or assigns, as applicable, [to] promptly record releases of all Deeds of Trust, Security Agreements, Fixture Filings, Assignments of Rents and Leases, and amendments thereto, or similarly security instruments of record, which may encumber the [p]roperties in favor of any of the Defendants or their affiliates, successors or assigns . . . .
Specifically, Section 1 of the Settlement Agreement imposes two requirements relevant to this case. Section 1(i) provides, "[Paradiso] shall convey the parcels of real property . . . to [the TVPOA] or its designee by quitclaim deed, and shall also assign all of its interest in the corresponding contract for deeds for the Properties . . . ." Id. Ex. A, § 1(i). Section 1(ii) states, "[Paradiso, CapitalSource, and CapitalSource Finance] or their affiliates, successors or assigns, as applicable, shall promptly record releases of all Deeds of Trust, Security Agreements, Fixture Filings, Assignments of Rents and Leases, and amendments thereto, or similar security instruments of record, which may encumber the properties in favor of any of the Defendants or their affiliates, successors or assigns" (the "Release Documents"). Id. Ex. A, § 1(ii). Section 3 of the Settlement Agreement provides, "the quitclaim deed and the Release Documents shall be recorded on or before August 19, 2013." Id. Ex. A, § 3. Pursuant to Section 19, the obligations under the agreement bound each signatory jointly and severally. Id. Ex. A, § 19.
On July 25, 2013, following the resolution of the Loudon County Lawsuit, Flatiron and defendants CSE Mortgage and CapitalSource Commercial Loan executed a purchase agreement (the "Purchase Agreement") in which CSE Mortgage and CapitalSource Commercial Loan agreed to sell Flatiron all of their equity interest in...
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