JPMorgan Chase Bank, N.A. v. Meritage Homes Corp.

• Decision Date: 04 September 2012
• Docket Number: 2:11-CV-01364-PMP-RJJ
• Parties: JPMORGAN CHASE BANK, N.A., Plaintiff/Counterdefendant, v. MERITAGE HOMES CORPORATION and MERITAGE HOMES OF NEVADA, INC., Defendants/Counterclaimants.
• Court: U.S. District Court — District of Nevada

JPMORGAN CHASE BANK, N.A., Plaintiff/Counterdefendant,

v.MERITAGE HOMES CORPORATION and MERITAGE HOMES OF NEVADA, INC., Defendants/Counterclaimants.

2:11-CV-01364-PMP-RJJ

UNITED STATES DISTRICT COURT DISTRICT OF NEVADA

DATED: September 4, 2012

ORDER

Presently before the Court is Plaintiff JPMorgan Chase Bank, N.A.'s ("JPMorgan") Motion for Summary Judgment (Doc. #14), filed on September 14, 2011. Defendants Meritage Homes Corporation and Meritage Homes of Nevada, Inc. (collectively, "Meritage") filed an Opposition and Cross-Motion for Summary Judgment (Doc. #39) on October 26, 2011. JPMorgan filed a Reply and Opposition to Meritage's Cross-Motion (Doc. #43) on November 21, 2011. Meritage filed a Reply on its Cross-Motion (Doc. #53) on December 9, 2011.

Also before the Court is Meritage's Motion for Relief Pursuant to Rule 56(d) (Doc. #40), filed on October 26, 2011. JPMorgan filed an Opposition (Doc. #43) on November 21, 2011. Meritage filed a Reply (Doc. #52) on December 9, 2011.

Also before the Court is Meritage's Motion for Leave to File Sur-Reply or Alternatively to Strike (Doc. #51), filed on December 9, 2011. JPMorgan filed an Opposition (Doc. #61) on December 23, 2011. Meritage filed a Reply (Doc. #64) on January 3, 2012.

Also before the Court is JPMorgan's Motion for Substitution of Parties Pursuant to Federal Rule of Civil Procedure 25(c) (Doc. #54), filed on December 12, 2011. Meritage filed an Opposition (Doc. #63) on December 29, 2011. JPMorgan filed a Reply (Doc. #70) on January 13, 2012.

The parties filed various supplemental briefs in relation to the above motions. (Doc. #77, #78, #80.) The Court held a hearing on these motions on February 14, 2012. (Mins. of Proceedings (Doc. #73).)

I. BACKGROUND

South Edge, LLC ("South Edge") is a limited liability company that owns a real estate development known as Inspirada. (Opp'n to Mot. Summ. J. & Cross Mot. Summ. J. (Doc. #39), Decl. of Larry Seay ["Seay Decl."] at 2.) South Edge was formed by eight builders who are South Edge's members: KB Home Nevada, Inc.; Coleman-Toll Limited Partnership; Pardee Homes of Nevada; Beazer Homes Holdings Corp.; Meritage; Focus South Group, LLC; Alameda Investments, LLC; and Kimball Hill Homes. (Id.)

To fund the Inspirada project, South Edge took out loans in the aggregate amount of $585 million pursuant to a Credit Agreement under which JPMorgan acts as Agent for a consortium of lenders. (Id. at 2-3.) As security for the loans, JPMorgan and the other lenders obtained liens on virtually all of South Edge's real and personal property. (Id.) Additionally, each South Edge member and its respective parent signed guaranties in favor of JPMorgan as Agent under the Credit Agreement, including the Repayment Guaranty at issue in this case. (Mot. Summ. J. (Doc. #14), Decl. of James E. Hough ["Hough Decl."], Ex. A.) Generally, the Repayment Guaranty provides that Meritage will pay its portion of the purchase price for the land, along with interest and other fees and payments, in the event that South Edge experiences a "Bankruptcy Event" as defined in the Repayment Guaranty. (Id.)

Through various interrelated agreements, the parties structured loan repayment to be satisfied in two ways. First, South Edge's members entered into Acquisition Agreements with South Edge pursuant to which members would "takedown" a section of the property, meaning the member would purchase a portion of the land, thereby gradually transferring the property from South Edge to the members. (Seay Decl. at 3 & Ex. 6.) South Edge was to use the takedown money received from the member to make payment to JPMorgan. (Id. at 4 & Ex. 3.) In return, JPMorgan would release its lien on the parcel of property taken down by the member. (Id. at 4 & Ex. 3.) Second, South Edge was to make periodic interest payments to JPMorgan. (Id. at 4 & Ex. 3.) To make these payments, South Edge made capital calls on its members. (Id. at 4.)

Pursuant to the takedown schedule, Meritage had two takedowns, one in April 2007 and one in April 2008. (Id. at 3 & Ex. 6.) Meritage performed its April 2007 takedown. (Id. at 7.) However, by late 2007, two of South Edge's members indicated they might not be able to perform under the various agreements related to South Edge and Inspirada. (Id. at 5.) In February 2008, South Edge's members held a vote on a capital call to fund an interest payment. (Id. at 6 & Exs. 12-14.) Meritage voted in favor of funding the interest payment, but all of the other members except one either voted against it or declined to vote. (Id. at 6 & Ex. 14.) As a result, South Edge did not receive capital call funds, did not make the interest payment to JPMorgan, and thereby triggered an Event of Default under the Credit Agreement. (Id. at 6 & Ex. 14.) On March 10, 2008, JPMorgan issued a formal notice of default to South Edge. (Id. at 6 & Ex. 15.)

Meritage's second takedown was scheduled for April 2008. (Id. at 7 & Ex. 6.) On April 15, 2008, Meritage wired over $16 million to the escrow agent for its second takedown. (Id. at 7 & Ex. 16.) Meritage also contacted JPMorgan to confirm JPMorgan would release its liens on the property. (Id. at 7 & Ex. 17.) JPMorgan's Managing Director indicated "he did not believe there would be any issue" with Meritage executing itstakedown, but he "was going to check with his legal department and get back to [Meritage] with a formal response." (Id., Ex. 17.) JPMorgan subsequently refused to release its liens on the property because South Edge was in Material Default under the Credit Agreement. (Id. at 7 & Ex. 18.) Meritage thus did not complete its April 2008 takedown. (Id. at 7.)

JPMorgan, South Edge, the members, and their respective parents thereafter entered into a Forbearance Agreement. (Id. at 8 & Ex. 19.) Under the Forbearance Agreement, the parties essentially agreed that JPMorgan would allow South Edge more time to address the financial problems of two of its members rather than pursue remedies based on South Edge's default. (Id. at 8 & Ex. 19.) The Forbearance Agreement expired at the end of June 2008 without any cure of existing defaults. (Id., Ex. 20.)

In November 2008, counsel for JPMorgan suggested that if Meritage still wanted to perform its final takedown, that it contact JPMorgan and request a waiver of the condition in the Credit Agreement that there be no Material Default at the time of a takedown. (Id., Ex. 18.) There is no evidence Meritage made any such request. In October 2009, JPMorgan suggested to all members that if they wished to perform individual takedowns, JPMorgan would allow them to do so despite the defaults and would release its liens on the property, so long as the member paid the full purchase price and the major infrastructure deposit. (Id., Ex. 20.) There is no evidence that any of the members performed a takedown in response to this offer.

On December 9, 2009, JPMorgan initiated an involuntary bankruptcy petition against South Edge and moved for the appointment of a bankruptcy trustee. (In re South Edge, LLC, Case No. 10-32968-BAM; Opp'n to Mot. Summ. J. & Cross Mot. Summ. J., Decl. of Douglas Northrup ["Northrup Decl."], Ex. 12.) The bankruptcy court granted the motion, and the Office of the United States Trustee designated Cynthia Nelson (the "Trustee") to serve as South Edge's trustee. (Northrup Decl., Ex. 14.)

After an unsuccessful appeal to this Court of the order appointing the Trustee, JPMorgan entered into a Plan Support Agreement with KB Home Nevada, Inc.; Coleman-Toll Limited Partnership; Pardee Homes of Nevada; and Beazer Homes Holdings Corp. (the "Settling Builders"). Pursuant to the Plan Support Agreement, JPMorgan and the Settling Builders agreed to become joint proponents of a proposed plan of reorganization which would settle various lawsuits among the interested parties as well as provide for an exit from bankruptcy. Meritage did not join the Plan Support Agreement. (Northrup Decl., Ex. 5 at 14.)

On June 6, 2011, JPMorgan, as Agent, made demand on Meritage to pay on the Repayment Guaranty, contending South Edge's involuntary bankruptcy proceeding was a "Bankruptcy Event" that triggered the Repayment Guaranty. (Mot. Summ. J., Decl. of William A. Austin ["Austin Decl."], Ex. B.) On June 20, 2011, Meritage responded, indicating that it would not pay the Repayment Guaranty. (Hough Decl., Ex. C.) JPMorgan brought this action on August 23, 2011, asserting a single count for breach of the Repayment Guaranty. (Compl. (Doc. #1).) Meritage filed an Answer and Counterclaim, asserting counterclaims for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory judgment. (Ans. & Countercl. (Doc. #22).)

Thereafter, JPMorgan and the Settling Builders filed the Joint Plan of Reorganization Proposed by JPMorgan Chase Bank, N.A., as Administrative Agent Under the Prepetition Credit Agreement, and the Settling Builders (the "Plan") in the South Edge bankruptcy proceeding. (In re South Edge, LLC, 2:11-CV-01963-PMP-PAL, Order (Doc. #40) at 3.) Every secured and unsecured creditor who returned a ballot supported the Plan, as did seven of South Edge's eight members. (Id.) Only Meritage filed objections to the Plan and the proposed confirmation order. (Id.) After holding a hearing on Meritage's objections at which various witnesses testified, the bankruptcy court overruled the objections and confirmed the Plan. (Id.)

The Plan generally provides for the Settling Builders to contribute approximately $330 million to pay administrative expenses, secured claims, and general unsecured claims against the estate, and to fund various expenses related to future development of Inspirada. (Id.) In exchange, the prepetition lenders agreed to release the Settling Builders for amounts owed under the Credit Agreement and various guaranties by the Settling Builders and their parents, despite the fact that this would leave a deficiency of approximately $47 million owed to the prepetition lenders under...