Hibiscus Associates Ltd. v. Board of Trustees of Policemen and Firemen Retirement System of City of Detroit
| Decision Date | 20 April 1995 |
| Docket Number | 92-3047,Nos. 92-2387,s. 92-2387 |
| Citation | 50 F.3d 908 |
| Parties | RICO Bus.Disp.Guide 8790 HIBISCUS ASSOCIATES LTD., a Florida partnership; Gerald M. Wochna; Joyce Wochna; Thomas A. Head; Rita B. Head; The Hibiscus Development, Inc., Plaintiffs-Counterclaim Defendants-Appellees, Cross-Appellants, v. BOARD OF TRUSTEES OF the POLICEMEN AND FIREMEN RETIREMENT SYSTEM OF the CITY OF DETROIT, Defendant-Counterclaim Plaintiff-Appellant, Cross-Appellees. HIBISCUS ASSOCIATES LTD., a Florida partnership; Gerald M. Wochna; Joyce Wochna; Thomas A. Head; Rita B. Head; The Hibiscus Development, Inc., Plaintiffs-Counterclaim Defendants-Appellees, v. BOARD OF TRUSTEES OF the POLICEMEN AND FIREMEN RETIREMENT SYSTEM OF the CITY OF DETROIT, Defendant-Counterclaim Plaintiff-Appellant. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Alan K. Cotler, Pepper, Hamilton & Scheetz, Philadelphia, PA, for appellants.
Robert J. Valerian, Kahn, Kleinman, Yanowitz & Arnson, Cleveland, OH, for appellees.
Appeal from the United States District Court for the Middle District of Florida.
Before ANDERSON and DUBINA, Circuit Judges, and ESCHBACH *, Senior Circuit Judge.
This litigation concerns a $10.6 million loan that the Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit (hereinafter the "Pension Fund") made to Hibiscus Associates, Ltd. (hereinafter "HAL") on December 9, 1985, for development of the Oaks Shopping Center in Melbourne, Florida. A dispute arose between the parties in this case over whether HAL and the Guarantors of the loan (Hibiscus Development, Inc. (hereinafter "HDI")), Thomas and Rita Head, and Gerald and Joyce Wochna) 1 had satisfied their obligations under the loan. HAL and the Guarantors are the plaintiffs in this action, and brought suit seeking a declaratory judgment and specific performance of a mortgage loan and guaranty modification agreement (the "Modification"), that was negotiated in 1988. The Pension Fund counterclaimed alleging federal and state RICO violations, breach of contract, and fraudulent inducement regarding the Modification. This case has gone to trial twice with two juries returning verdicts in favor of the Pension Fund. Despite these verdicts, the district court below entered various orders in both trials limiting the recovery of the Pension Fund. The Pension Fund appeals these adverse rulings. We find that the district court erred in granting a second trial, thus we reinstate the jury's verdict in the first trial and remand for further proceedings.
In October 1984, Gerald Wochna and Thomas Head entered into an agreement to purchase a 17-acre parcel of property on Hibiscus Road in Melbourne, Florida. They decided to build a shopping center at the location, and formed HAL to further their business interests in the property. In June of 1985, the Mortgage Investors Group, Inc. ("MIG") contacted HAL regarding a potential investment in the property. MIG is the Pension Fund's investment advisor and manager. On July 30, 1985, HAL applied through MIG for a construction loan from the Pension Fund to build a shopping center on the Melbourne property.
On December 9, 1985, the Pension Fund loaned HAL $10.6 million to develop the Oaks Shopping Center on the Melbourne property. As part of the loan, the parties executed a Construction and Permanent Loan Agreement (the "Loan Agreement"), a Mortgage Note (the "Note"), a Construction and Permanent Mortgage and Security Agreement (the "Mortgage"), and an Assignment of Leases and Rents. HDI, the Heads, and the Wochnas executed personal guarantees of HAL's performance of its loan obligations and repayment of the debt.
The Loan Agreement split the transaction into two loans: the construction loan and the permanent loan. Under the construction loan, HAL was only required to make interest payments on the balance of the loan; however, the amount of the Guarantors' liability during the construction loan period was $10.6 million (the full amount of the loan). Upon commencement of the permanent loan, HAL was required to make payments on both the principal and interest of the loan, but the Guarantors' liability was to be reduced to $2.12 million. Under the Agreement, the construction loan period was to last two years. However, the Loan Agreement contained the following condition on commencement of the permanent loan Conversion from Construction Loan to Permanent Loan. Upon the expiration of the Construction Loan Period (whether on the Completion Date or, at Borrower's election, on the second anniversary of the Closing Date) and provided (i) no Event of Default has occurred and no event is occurring which, with the passage of time or the giving of notice, or both, would constitute an Event of Default under any Loan Document; (ii) Lender has received the Final Survey; (iii) all conditions regarding the Construction Loan have been satisfied; and (iv) Borrower has obtained the required Architect's Certificate of Completion and a permanent and unconditional certificate of occupancy and other required permits from applicable Governmental Authorities, the Loan shall convert to a Permanent Loan, pursuant to which interest shall accrue at the applicable Basic Interest Rate and monthly payments of principal and interest shall be payable in an amount sufficient to amortize the outstanding principal balance over a term of thirty (30) years, with final payment of principal, accrued interest and all other sums due under the Loan on the Maturity Date.
Loan proceeds were to cover the cost of the land and construction as described in a detailed construction budget provided in the Loan Agreement. Upon completion of construction, the "cost savings" provision of the Loan Agreement allowed HAL to draw as profit from the loan proceeds any savings between the budgeted construction costs and the actual costs of the shopping center. Proceeds were disbursed to HAL as costs were incurred via HAL's submission of monthly requests for loan advances ("draw requests"). In each draw request, HAL itemized the costs it incurred for which loan funds were being requested. Head signed the draw requests, and in doing so certified that the requested funds would pay the list of costs, that project costs remained as originally projected, and that the remainder of the loan was "sufficient to fully complete and pay for construction of the entire building." HAL submitted monthly draw requests to MIG, and upon receipt of the draw requests (usually by U.S. mail), the Pension Fund would advance the funds requested, usually by wire transfer.
One of the items in the construction budget was Retail Tenant Improvements. During construction, each retail space would be left an empty shell until a tenant had signed a lease for that space. After a tenant had been signed, the Tenant Improvement dollars were used to "finish" the retail space for the tenant. For example, Tenant Improvement funds were spent to apply floor finish to the concrete floor slab, paint and cover walls, install electricity and phones, install sprinklers, and other finish-work. The loan budgeted $375,768 for Tenant Improvements to the 51,575 square feet of retail space in the shopping center, or slightly more than $7.25 per square foot. 2 Head and Wochna treated this budget item as an allowance, drawing only $7.25 per square foot from the loan for completed tenant improvements and charging HAL or the tenant for the difference if the improvement cost was greater. Tenants routinely requested improvements costing more than $7.25 per square foot. In fact, the actual cost of Tenant Improvements averaged between $12 to $13 per square foot. In each case, Head and Wochna drew only the $7.25 per square foot "allowance" from the loan, and the balance was paid by HAL and/or the tenant.
In October, 1986, Head and Wochna reported that construction was substantially complete and that the requisite certifications had been obtained. Tenant improvements on the leased retail space had been funded and completed. Head and Wochna informed the Pension Fund that a reserve of $398,000 was sufficient to complete the 42,000 square feet of unleased retail space and requested that the remaining hard cost allocation be paid to them pursuant to the "cost savings" provision of the Loan Agreement. This $398,000 reserve included $344,000 for Retail Tenant Improvements on the remaining unleased space, or slightly more than $7.25 per square foot. The Pension Fund wired the funds requested to HAL, and distributed $250,000 in cost savings to HDI, Head and Wochna.
HAL's efforts to lease the rest of the space in the center during the remainder of 1986 and 1987 met with only limited success. Additionally, HAL began to experience problems collecting rent from some of the current tenants. By February, 1988, the Oaks was operating at a monthly deficit of $30,000, and the interest reserve had almost run out. Clearly, the Oaks was in trouble financially, and all were concerned that HAL might not be able to keep up with the loan payments once the interest reserve ran out. On February 22, 1988, Head wrote to MIG on behalf of HAL and the Guarantors requesting a modification of the Loan Agreement and Guaranties to give them "monetary and emotional relief."
The parties entered into negotiations to modify the loan agreement and the Modification became effective in April of 1988. Under the Modification, HAL and the Guarantors agreed to contribute $300,000 in "new cash" to the property. This "new cash" was to be spent on the Oaks according to a budget attached to the Modification. In consideration for these promises, instead of paying a flat 10% interest per year on the loan, HAL was permitted to pay interest equal to the net cash flow from the center with a floor of 7.25% per year and a ceiling of 10% per year. The Modification also reduced the Guarantors' personal liability on the project to $1 million.
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