In re Cmr Mortg. Fund, LLC

• Decision Date: 08 May 2009
• Docket Number: Adversary No. 08-3148-TC.,Bankruptcy No. 08-32220 TEC.
• Citation: 416 B.R. 720
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re CMR MORTGAGE FUND, LLC, a California limited liability company, Debtor. CMR Mortgage Fund, LLC, a California limited liability company, Plaintiff, v. Canpartners Realty Holding Company IV LLC, a Delaware limited liability company; SCD Kunia, LLC, a Hawaii limited liability company; and Stanford Carr, an individual, and Does 1 through 20, inclusive, Defendants.

416 B.R. 720

In re CMR MORTGAGE FUND, LLC, a California limited liability company, Debtor CMR Mortgage Fund, LLC, a California limited liability company, Plaintiff, v. Canpartners Realty Holding Company IV LLC, a Delaware limited liability company; SCD Kunia, LLC, a Hawaii limited liability company; and Stanford Carr, an individual, and Does 1 through 20, inclusive, Defendants.

Bankruptcy No. 08-32220 TEC.

Adversary No. 08-3148-TC.

United States Bankruptcy Court, N.D. California.

May 8, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Elizabeth Berke-Dreyfuss, Michael D. Cooper, Penn Ayers Butler, Wendel, Rosen, Black & Dean LLP, Oakland, CA, for Plaintiff.

Jeremy Rosenthal, Sidley, Austin, Brown and Wood, Los Angeles, CA, Ryan Sandrock, Sidley Austin LLP, Douglas R. Young, Farella, Braun and Martel, Racheal Turner, Richard Van Duzer, San Francisco, CA, for Defendants.

MEMORANDUM DECISION RE CANPARTNERS REALTY HOLDING CO. IV LLC'S MOTION TO DISMISS

THOMAS E. CARLSON, Bankruptcy Judge.

Upon due consideration, and for the reasons stated below, the motion to dismiss filed by Canpartners Realty Holding Co. IV LLC is granted with leave to amend as to all claims except the claim for declaratory relief, which is dismissed without leave to amend.

FACTS

This dispute arises out of a $97,000,000 loan to Halekua Development Corporation ("HDC"). Defendant Canpartners Realty Holding Co. IV LLC ("Canyon") and Plaintiff CMR Mortgage Fund, LLC ("CMR") funded HDC's acquisition and development of Hawaiian real property. Compl., ¶ 12. This transaction was memorialized by, inter alia, the following agreements.

A. The Credit Agreement

On March 12, 2007, Canyon, CMR, and HDC executed the Credit Agreement, pursuant to which CMR loaned HDC $42,900,000 and Canyon loaned HDC $55,000,000 (collectively, the "Loan"). The Property was immediately transferred to a subsidiary of HDC, Halekua-Kunia, LLC (HK LLC), which assumed the Loan. (HK LLC and HDC are collectively referred to herein as "HDC"). HDC used the Loan to acquire 161 acres of real property in Hawaii (the "Property"). Compl., ¶ 12. Canyon holds the "A Note"; CMR holds the "B Note". The A Note and the B Note (collectively, the Notes) are secured by the Property, all of the membership interests of HK LLC, and other personal property, including funds held in certain reserve accounts. Credit Agmt., §§ 6, 7.

Under the terms of the Credit Agreement, a portion of the Loan funds were used to set up reserve accounts, including a $6,000,000 account established to pay a third party to provide fill material. Compl., ¶¶ 13, 25. If an Event of Default occurred under the Credit Agreement, Lender¹ "in its sole and absolute discretion, may use the Reserves ... for any purpose", including application of the reserve in connection with the exercise of Lender's remedies under the Credit Agreement. Credit Agmt., §§ 6.1.2; 12.2.4.

The Credit Agreement required HDC to repay Canyon the full principal and outstanding interest on the A Note on March 12, 2008. Id., § 3.1. HDC did not make that payment.

B. The Co-Lender Agreement

On March 12, 2007, CMR and Canyon entered into a co-lender agreement (the "Co-Lender Agreement" or "CLA"). CMR's rights under its B Note are expressly subordinate to Canyon's rights under the A Note. CLA, §§ 6, 7, 9. The Co-Lender Agreement provides that CMR is responsible for funding future advances, and that Canyon is to administer the Loan. Id., §§ 4, 5.

Section 4(a) of the Co-Lender Agreement provides that Canyon shall administer the Loan as agent for CMR and Canyon, subject to "Accepted Servicing Practices", defined as

the servicing and administration of the Loan in accordance with applicable law, the terms of this Agreement and the Loan Documents, and, to the extent consistent with the foregoing, further as follows: (1) with the same care, skill, and diligence as is normal and usual in A Note Holder's general commercial mortgage servicing with respect to mortgage loans that are comparable to the Loan; (ii) with a view toward preserving and protecting the Loan and the Collateral; and (iii) without regard to any other relationship that A Note Holder or any Affiliate thereof may have with Borrower.

CLA, § 1(a)(xii).

The Co-Lender Agreement provides as follows regarding CMR's exercise of remedies upon HDC.

Subject to section 9(d) below, if a Continuing Event of Default occurs under the Loan which has not been timely cured ... including ... any Event of Default arising from the maturity of the A Loan, A Note Holder and B Note Holder hereby agree to use reasonable efforts to reach an agreement with each other on an appropriate manner for responding to such Continuing Event of Default.... If A Note Holder and B Note Holder cannot reach an agreement within ten (10) days following the expiration of the applicable cure period ... A Note Holder may initiate foreclosure proceedings or any other Enforcement Action ... Notwithstanding anything contained herein to the contrary ... [and subject to B Note Holder's cure rights], A Note Holder shall be entitled to commence an Enforcement Action at any time without the consent of B Note Holder if A Note Holder reasonably determines that the commencement of an Enforcement Action is necessary to preserve the Collateral after consultation with B Note Holder.

Id., § 9(a)(emphasis added). In addition, Canyon has the right to initiate an enforcement action when an Event of Default exists at any time during which there is an "Equity Control Condition." Id., § 9(d).

In the event of an uncured Continuing Event of Default, Canyon may: (1) take possession of any of the reserves, including the Fill Reserve; and (2) institute foreclosure proceedings as an "Enforcement Action". Credit Agmt., §§ 6.1.2, 6.8, 12.2.4.

Before the completion of a foreclosure sale, CMR has the option: (a) to take title to the Property; or (b) to purchase the A Note. CLA, § 9(b). If CMR does not exercise either of these options, and Canyon is the winning bidder at any foreclosure sale,

then transfer of title to Premises or the Pledged Interests shall be in the name of [Canyon] ... and [CMR] shall have no further rights or interests in the Loan, (ii) all subsequent Loan Recoveries shall belong to A Note Holder; and (iii) except for the indemnification obligations of [CMR] and [Canyon], this Agreement shall terminate.

Id., § 9(b)(emphasis added).

The Co-Lender Agreement contains the following choice of law provision.

In all respects, including, without limitation, matters of construction and performance of this Agreement and the obligations arising hereunder, this Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York. CLA, § 23.

C. The Pre-Negotiation Agreement

On May 1, 2008, approximately six weeks after HDC failed to pay the A Note upon its due date, Canyon, CMR, and HDC executed the Pre-Negotiation Agreement. The Pre-Negotiation Agreement recites that the Loan maturity date under the Credit Agreement occurred on March 12, 2008, and that the conditions to exercise the option to extend the maturity date were not satisfied. Recital D. The Pre-Negotiation Agreement recites that Canyon received $1,375,000 from CMR, and requires Canyon to apply this sum in accordance with the Loan Documents and the Co-Lender Agreement. Recital G.

The Pre-Negotiation Agreement defines CMR as both a "Lender" and a "Borrower Party." Preamble.

Section 4 of the Pre-Negotiation Agreement preserves Canyon's right to take enforcement action by providing that Canyon's participation in the negotiations "shall not constitute or evidence any waiver, estoppel, release, modification, limitation or forbearance, or any agreement by either Lender to delay the exercise of either Lender's rights or remedies...."

Section 6 of the Pre-Negotiation Agreement provides that the Borrower Parties "irrevocably release" any existing claims or defenses

arising out of the Loan, the Loan Documents, the Co-Lender Agreement, the Collateral or the Property, or any past relationship between or among Borrower Parties [or] Canyon ... that can be asserted ... either to reduce or eliminate ... Borrower Party's liability, if any, for the Loan or to seek affirmative relief or damages of any kind or nature from either Lender ... [except that] Borrower Parties have the right ... to have the ... Collateral ... applied in accordance with the Loan Documents; and (2) CMR has the right ... to application by Canyon of the Deposit in accordance with the Loan Documents and the Co-Lender Agreement.

Section 7 of the Pre-Negotiation Agreement provides that "the Borrower Parties" (including CMR) release the Lenders (including Canyon) from

any and all claims, ... arising, directly or indirectly, in any manner from and/or out of (i) the Loan, the Loan Documents, the Co-Lender Agreement, the Collateral and/or the Property, (ii) either Lender's acts ... in connection therewith, including, ... the terms and conditions of this [Pre-Negotiation] Agreement, or (iii) any ... transaction or event relating thereto, whether known or unknown, ... whether now existing or hereafter arising ... provided, however, that the foregoing release shall not apply to the Excluded Claims, any obligations ... of any of the Lender Releasees which arise under this Agreement, or arise on or after the date hereof under the Loan, the Loan Documents or the Co-Lender Agreement.

D. The Complaint

On November 30, 2008, CMR filed the complaint initiating this action. CMR alleges that, as the Loan approached its maturity date in March 2008 and in the months thereafter, Canyon engaged in a course of commercially unreasonable conduct designed to frustrate CMR's efforts to negotiate a work-out that would preserve the interests of both Canyon and CMR. Compl., ¶ 20. CMR alleges that Canyon engaged in this conduct in an effort to eliminate all of...