IP of 86th St. 1, LLC v. Morgan Stanley Mortg. Capital Holdings, LLC

• Decision Date: 11 June 2012
• Docket Number: No. 11–2891.,11–2891.
• Citation: 686 F.3d 361
• Parties: IP OF A WEST 86TH STREET 1, LLC, et al., Plaintiffs–Appellants, v. MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS, LLC, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

686 F.3d 361

IP OF A WEST 86TH STREET 1, LLC, et al., Plaintiffs–Appellants,

v.MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS, LLC, Defendant–Appellee.

No. 11–2891.

United States Court of Appeals,Seventh Circuit.

Argued April 9, 2012.

Decided June 11, 2012.

Raymond L. Faust, Attorney, Briane M. House (argued), Attorney, Norris Choplin & Schroeder, LLP, Indianapolis, IN, for Plaintiffs–Appellants.

Constance M. Boland (argued), Attorney, Nixon Peabody LLP, New York, NY, William E. Padgett, Attorney, Barnes & Thornburg LLP, Indianapolis, IN, Brad E. Rago, Attorney, Barnes & Thornburg LLP, Chicago, IL, for Defendant–Appellee.

Before FLAUM and HAMILTON, Circuit Judges, and FEINERMAN, District Judge.^*

FLAUM, Circuit Judge.

In this case, twenty limited liability companies (“the Investors”) joined together to invest in property in Indiana. Needing a loan to finance their purchase, they formed a distinct limited liability company, IP of A Fund Manager, LLC (“IPA Fund Manager”), and vested in that entity the authority to negotiate and execute a loan on their behalf with Morgan Stanley Mortgage Capital Holdings, LLC (“Morgan Stanley”). They named Edward Okun as Manager of IPA Fund Manager. Okun executed a loan, mortgage, and reserve security agreement with Morgan Stanley.

IPA Fund Manager, under the terms of its authority, was not allowed to hold an ownership interest in any of the twenty limited liability companies; it is not clear from the terms of the contract whether Okun, in his individual capacity, was precluded from an ownership interest, as well.

Morgan Stanley decided to sell the loan, ultimately agreeing to sell it to an Okun-controlled entity, IP of A 5201 Lender, LLC (“IPA Lender”). As it structured the sale, Morgan Stanley agreed to offset the purchase price of the loan by the amount of funds available in several escrow, reserve, and impound accounts (hereinafter “the escrow accounts”), in which it held a security interest and which were, under the terms of the loan with the Investors, required to reimburse the Investors for maintenance, taxes, and other property-related expenses. IPA Lender, now holding the loan, never reestablished the escrow accounts, depriving the Investors of $1,361,184.63 in which they, too, had an interest.

Having abandoned their suit against Okun-controlled IPA Lender, the Investors claim that Morgan Stanley, by allowing IPA Lender to use the escrow funds to finance its purchase of the loan, breached their loan agreement and committed conversion. The district court granted summary judgment for Morgan Stanley. We affirm the district court's ruling.

I. Background

The appellee, Morgan Stanley Mortgage Capital Holdings, LLC, has one member, Morgan Stanley Capital, Inc., a Delaware corporation with its principal place of business in New York. As a limited liability company shares the citizenship of its members, the appellee is a citizen of Delaware and of New York. See Muscarello v. Ogle Cnty. Bd. of Comm'rs, 610 F.3d 416, 424 (7th Cir.2010); Thomas v. Guardsmark, LLC, 487 F.3d 531, 534 (7th Cir.2007). The appellants are twenty limited liability companies, IP of A West 86th Street 1–20. Each plaintiff LLC has one member, none of whom are citizens of either Delaware or New York. Accordingly, the parties are completely diverse, and, with the amount in controversy exceeding $75,000, subject-matter jurisdiction is secure under 28 U.S.C. § 1332.

A. Factual Background

The twenty LLCs in this case were formed in 2005 for the express purpose of holding a fractional interest as tenants in common in commercial real estate located at 5201 West 86th Street, Indianapolis, Indiana.

In 2004, the Investors paid $12,650,000 to buy the property. They paid a $6,550,000 down payment and secured a $7,100,000 loan from Dise Group, LLC. Combined, the down payment and the loan exceeded the cost of the property by $1,000,000. The extra money was placed into escrow accounts.

1. Investors' Refinancing Agreement with Morgan Stanley

In 2005, Morgan Stanley refinanced the loan by lending the Investors $7,100,000, of which $6,100,000 was used to refinance the property and of which $1,000,000 was deposited in the escrow accounts. This transaction was memorialized by a promissory note (“Note”), a mortgage and security agreement (“Mortgage”), and a reserve and security agreement (“RSA”). Each of these documents incorporated the terms of the others. Morgan Stanley required that a single agent sign these loan documents and otherwise act on behalf of the Investors.

In turn, each LLC executed a Consent of Co–Owners (“Investors' Consent”) and an amendment to its Limited Liability Company Operating Agreement (“LLC Amendments”). In short, they delegated limited authority to sign and perform under the loan documents to IPA Fund Manager. IPA Fund Manager was a distinct limited liability company managed by Edward Okun.

The Investors' Consent stated, in relevant part:

[T]he Co–Owners hereby authorize IPofA Fund Manager, LLC, a Virginia Limited liability company (including its manager, Edward H. Okun), in its capacity as Vice President of each of the undersigned Co–Owners, to execute in the name of and on behalf of each of the Co–Owners, and to deliver in connection with the Loan that certain Promissory Note, Mortgage and Security Agreement, Assignment of Leases and Rents, Environmental Indemnity Agreement, Memorandum of Master Lease, Memorandum of Tenants in Common Agreement, and any and all commitments, pledges or assignments of any other collateral, indemnities, certificates, affidavits, financing statements, applications, notices and other instruments, agreements or certificates related to the Loan, and to take from time to time any other actions necessary to effect the transactions contemplated above, upon the terms and conditions identical in all material respects to those terms and conditions set forth in the commitment letter attached hereto as Exhibit A, and the execution and delivery of such agreements and documents by such Vice President shall constitute conclusive evidence that the terms and conditions contained in said documents or instruments have been approved on behalf of the Co–Owners pursuant to this Consent.... [A]ny and all other actions heretofore taken by any member, manager, or authorized representative of the Vice President to execute and deliver any of the agreements authorized by the foregoing resolution or to take any of the actions authorized by the foregoing resolution are hereby approved, ratified, and confirmed in all respects. No further action is consented or taken.

The LLC Amendments stated, in relevant part:

3.02 Officers. The Company shall have one officer, which shall be a vice president. The Vice President shall have no voting rights nor have any ownership interest in the Company. The sole responsibilities of the Vice President shall be to execute the Loan Documents on behalf of the Company pursuant to the [Delaware Limited Liability Company] Act or any successor statute in conjunction with its refinancing of the Interest.... Notwithstanding any other provision of this Agreement, the Vice President, without any further action of the Company or the Member is hereby authorized to execute the Loan Documents ... on behalf of the Company.... Third parties dealing with the Company shall be entitled to conclusively rely on the signature of the Vice President as evidence of the authority of the Vice President to execute the Loan Documents on behalf to the Company and to bind the Company.

3.05 Authorization. The Company, and the Member or the Vice President on behalf of the Company, may execute, enter into, deliver, and perform the Loan Documents and all documents, agreements, certificates or financing statement [sic] contemplated thereby or related thereto ..., all without any further act, vote or approval of any Member of [sic] other Person notwithstanding any other provision of this Agreement, the Act or applicable rule or regulation.

(emphasis added).

2. Morgan Stanley Sells the Loan to Okun

Morgan Stanley intended to resell its loan. Proving unsuccessful with third-party buyers, however, it agreed to sell the loan to Okun. Okun purchased the loan through an entity he controlled, IPA Lender.

On August 11, 2006, Morgan Stanley assigned the Note, Mortgage, RSA, and escrow accounts to IPA Lender. The Mortgage assignment stated that Morgan Stanley:

[G]rant[ed], bargain[ed], s[old], convey[ed], assign[ed], transfer[red], and set over, without recourse, representation, or warrant, all of [its] right, title, and interest, of any kind whatsoever, including that of mortgagee, beneficiary, payee, assignee, or secured party ..., in and to the ... [Mortgage] ...; Together with the bonds or notes or obligations described in said Mortgage ..., and the monies due and to grow thereon with the interest, and any and all other related security instruments which secure the indebtedness and/or obligations secured by said Mortgage....

(emphasis added). IPA Fund Manager—still managed by Okun and his associate, Lara Coleman—executed Borrowers' Escrow Instructions in connection with the sale, which, in pertinent part, provided:

In connection with the sale of the Loan by [Morgan Stanley] to [IPA Lender], [IPA Fund Manager] hereby releases all escrow, reserve and/or impound accounts (“Escrows”) of any nature related to the Loan and transfers all of such Escrows to ... [Morgan Stanley] to have and to hold the same forever.

Lara Coleman, Okun's associate and a manager at IPA Lender, was the only signatory on these instructions. According to the Investors, this provision modified Sections 3.4 and 5.1 of the RSA, which stated:

Borrower understands and agrees that, in connection with any sale of the Loan pursuant to Section 18.1 of the Security Instrument, all of Lender's interest in the Reserves and the Reserve Escrow Accounts will by assigned to the transferee of the Loan.... Upon the earlier of (a) Borrower's completion...