In Re Rich Capitol

• Decision Date: 15 September 2010
• Docket Number: Bankruptcy No. 09-25422-EPK.,Adversary No. 09-01965-EPK.
• Citation: Rich Capitol, LLC v. Wachovia Bank, NA (In re Rich Capitol, LLC), 436 B.R. 224 (Bankr. S.D. Fla. 2010)
• Court: U.S. Bankruptcy Court — Southern District of Florida
• Parties: In re RICH CAPITOL, LLC d/b/a Capital Walk Apartments, Debtor. Rich Capitol, LLC d/b/a Capital Walk Apartments, Plaintiff, v. Wachovia Bank, N.A., Defendant.

436 B.R. 224

In re RICH CAPITOL, LLC d/b/a Capital Walk Apartments, Debtor.Rich Capitol, LLC d/b/a Capital Walk Apartments, Plaintiff,

v.Wachovia Bank, N.A., Defendant.

Bankruptcy No. 09-25422-EPK.

Adversary No. 09-01965-EPK.

United States Bankruptcy Court, S.D. Florida,West Palm Beach Division.

Sept. 15, 2010.

Heather L. Harmon, Esq., Miami, FL, for Plaintiff.

Heather L. Ries, Esq., Michael R. Bakst, Esq., West Palm Beach, FL, for Defendant.

ORDER GRANTING DEFENDANT, WACHOVIA BANK, N.A.'S MOTION FOR SUMMARY JUDGMENT AGAINST PLAINTIFF, RICH CAPITOL, LLC [DE 54]

ERIK P. KIMBALL, Bankruptcy Judge.

In its Verified Complaint for Equitable Subordination (the “Complaint”) [DE 1], Plaintiff, Rich Capitol, LLC (the “Debtor”) seeks judgment against Wachovia Bank, N.A. (“Wachovia”) pursuant to 11 U.S.C. § 510(c), equitably subordinating Wachovia's claims to the claims of general unsecured creditors and to equity interests in the Debtor. The Debtor states that Wachovia improperly refused to convert the Debtor's construction loan to permanent financing, allegedly in violation of the parties' loan documentation, and sought to collect on Wachovia's loan to the Debtor in various ways, in an attempt to coerce dismissal of a lawsuit brought by the Debtor, the Debtor's principals, and an affiliate of the Debtor against Wachovia. The Debtor argues that Wachovia's actions constitute inequitable conduct injurious to the Debtor's creditors, meriting equitable subordination of Wachovia's claims.

Wachovia states that it determined not to convert the Debtor's construction loan to permanent financing because the Debtor did not satisfy the requirements of the loan agreement, that the lawsuit brought by the Debtor, the Debtor's principals and the Debtor's affiliate against Wachovia had no impact on Wachovia's decision not to continue its lending relationship with the Debtor, that the Debtor is precluded from litigating certain issues here as a result of a judgment in that suit, and that Wachovia's collection activity was specifically authorized by the relevant loan documents.

The Court has considered the Defendant, Wachovia Bank, N.A.'s Motion for Summary Judgment Against Plaintiff, Rich Capital, LLC [DE 54] (the “Motion”), the Plaintiff's Response and Memorandum of Law in Opposition to Defendant, Wachovia Bank, N.A.'s Motion for Summary Judgment Against Plaintiff, Rich Capitol, LLC [DE 67] (the “Response”), the Defendant, Wachovia Bank, N.A.'s Reply to Plaintiff's Response and Memorandum of Law in Opposition to Defendant, Wachovia Bank, N.A.'s Motion for Summary Judgment Against Plaintiff, Rich Capitol, LLC [DE 78] (the “Reply”), the Joint Stipulation of Facts Pursuant to Order Setting Briefing Schedule on Defendant's Motion for Summary Judgment [DE 68] (the “Stipulation of Facts”), the Affidavit of Mary Beth Gordish in Support of Defendant, Wachovia Bank, N.A.'s Reply to Plaintiff's Response and Memorandum of Law in Opposition to Defendant, Wachovia Bank, N.A.'s Motion for Summary Judgment Against Plaintiff, Rich Capitol, LLC [DE 77] (the “Affidavit”), and the pleadings, discovery and disclosure materials on file in this case.

Because each of Wachovia's actions vis-a-vis the Debtor was permitted under the parties' loan documents, Wachovia filed the Affidavit rebutting the Debtor's allegations that Wachovia acted in bad faith, and the Debtor offered no material contradictory evidence, there is no genuine issue of material fact and Wachovia is entitled to judgment as a matter of law. The Court will enter a separate judgment in favor of Wachovia, denying the relief requested by the Debtor in this adversary proceeding.

I. Background and Relevant Facts

The Debtor developed and operates an apartment complex known as Capital Walk Apartments located in Leon County, Florida (“Capital Walk”). Wachovia financed the construction of Capital Walk.

On November 20, 2006, the Debtor executed and delivered to Wachovia: (1) a promissory note (the “Note”) in the original principal amount of $20,750,000.00; (2) a First Mortgage and Security Agreement (the “Mortgage”), granting to Wachovia a security interest in the real property on which Capital Walk was to be built (the “Mortgaged Property”), and an Absolute Assignment of Leases and Rents relating thereto (the “Assignment of Rents”); and (3) a Construction Loan Agreement (the “Loan Agreement,” and with the Note, Mortgage, Assignment of Rents, and Guarantees (defined below), collectively, the “Loan Documents”). Under the Loan Documents, the Debtor agreed to use all amounts advanced under the Note for construction purposes on the Mortgaged Property.

Jerome Rich and Jodi Rich, the sole members of the Debtor, each executed a Guaranty Agreement in favor of Wachovia (together, the “Guarantees”), guarantying payment of all amounts due under the Loan Documents, among other things.

Under the Loan Documents, the Debtor granted to Wachovia a mortgage lien on the Capital Walk project, a security interest in substantially all personal property of the Debtor including, without limitation, property of the Debtor at any time in possession of Wachovia, and a lien on the rents generated by the Capital Walk apartments.

The Loan Documents authorize Wachovia to take a variety of remedial actions should the Debtor default on its obligations thereunder. For example, Section 12 of the Note includes a typical acceleration clause. Section 8.2 of the Loan Agreement authorizes Wachovia to terminate its loan commitment, cease making advances, and accelerate the outstanding debt, among other remedies. Article 8 of the Mortgage addresses various remedial actions. Section 8.1 of the Mortgage permits acceleration of the debt. Section 8.2 of the Mortgage authorizes Wachovia to take possession of Capital Walk and apply the rents, with or without a separate foreclosure or receivership action. Section 8.3 of the Mortgage authorizes Wachovia to commence foreclosure of the mortgage on Capital Walk and any other security interest granted in the Loan Documents. Section 8.4 of the Mortgage permits Wachovia to seek the appointment of a receiver for the Capital Walk project. Section 8.5 of the Mortgage preserves Wachovia's rights under the applicable provisions of the Uniform Commercial Code. Section 8.7 of the Mortgage authorizes Wachovia to bring legal and other action to collect on the debt represented by the Loan Documents including, without limitation, by exercise of the right of setoff. After default, Wachovia may pursue any or all of these remedies, and others, in its discretion.

Under the Loan Documents, Wachovia initially provided construction financing for the Capital Walk project. The Loan Agreement contemplates Wachovia providing short term permanent financing, or “mini-perm” financing, extending from the expected completion of construction on December 3, 2008 through November 19, 2010. Under the Loan Agreement, the Debtor may obtain such mini-perm financing subject to the Debtor meeting certain conditions. Section 5.5 of the Loan Agreement details the conditions for conversion to mini-perm financing as follows:

5.5 Conditions to Conversion. [Wachovia's] obligation hereunder to convert the Construction Period to the Mini-Perm Period is conditioned upon [Wachovia's] receipt of the following, each in form and substance satisfactory to [Wachovia]:

5.5.1 each of the items set forth in subsection 5.4 hereof;

5.5.2 [The Debtor] must have satisfied all of the following conditions:

a. At the commencement of the Mini-Perm Period, no monetary default or material non-monetary default by [the Debtor] shall exist under any of the Loan Documents and no event or circumstance shall exist which, with the giving notice or lapse of time or both, would constitute such a default by [the Debtor] thereunder;

b. The improvements constituting the Project shall have been completed lien-free in substantial compliance with the terms of this Agreement and in substantial accordance with Plans and Specifications as approved by Lender;

c. Certificates of Occupancy shall have been issued in connection with the Improvements; and

d. The Project has stabilized by achieving a minimum ratio of “Net Income” from the Project to debt service coverage of 1.20 to 1 for the most recent ninety (90) consecutive days. “Net Income” shall mean gross rental receipts from the Project and any other income derived from the Project adjusted for the greater of: (i) actual vacancy; or (ii) a seven percent (7%) vacancy factor from the Project, minus the greater of: (i) actual operating expenses of the Project including 3% management fee and annual replacement reserves of 0 per unit; or (ii) the appraised Project operating expenses including a 3% management fee and annual reserves of 0 per unit. Debt service coverage shall be based on the Loan amount of ,750,000, less any principal prepayments, a 30 year mortgage amortization, and an assumed per annum interest rate equal to the then current 10 year Treasury rate plus 2.5% per annum.

e. [The Debtor] shall have paid to [Wachovia] an extension fee of 1/4 of 1% of the total principal balance of the Loan, together with any unfunded liability.

If the aforesaid conditions to conversion have not been satisfied on or before the termination of the Construction Period, the Loan shall not be converted to the Mini-Perm Period and the outstanding principal balance of the Loan, together with all accrued and unpaid interest thereon and all other amounts payable under the Loan Documents, shall immediately be due and payable.

The Construction Period ended on the second anniversary date of the Loan Agreement, or November 20, 2008. The Debtor requested conversion of the Wachovia construction loan to mini-perm financing pursuant to Section 5.5 of the Loan Agreement. Although the parties did not provide copies of all correspondence relating to this request, the Debtor provided copies of a response received from Wachovia and the Debtor's...