Lasalle Commercial Mortg. Sec., Inc. v. Bank of Am., N.A.
| Decision Date | 21 August 2014 |
| Docket Number | Case No. 13 C 5605 |
| Parties | LASALLE COMMERCIAL MORTGAGE SECURITIES, INC., SERIES 2006-MF4 TRUST, acting by and through its Master and Special Servicer, MIDLAND LOAN SERVICES, a division of PNC Bank, National Association, and whose Trustee is WELLS FARGO BANK, N.A., Plaintiff, v. BANK OF AMERICA, N.A. as successor in interest to LaSalle Bank National Association, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Plaintiff LaSalle Commercial Mortgage Securities, Inc., Series 2006-MF4 Trust, acting by and through its Master and Special Servicer, Midland Loan Services, a division of PNC Bank, National Association, has sued Defendant Bank of America, N.A. ("Defendant") as successor in interest to LaSalle Bank National Association ("LaSalle"). Plaintiff alleges that LaSalle breached various representations and warranties provided in a contract under which LaSalle sold Plaintiff a pool of securitized mortgage loans. Defendant moves to dismiss the Second Amended Complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth herein, the Court denies Defendant's motion.
In 2006, LaSalle sold Plaintiff a pool of securitized commercial real estate mortgage loans worth over $450.9 million, which LaSalle had previously originated for the purpose of securitization and sale. 2d Am. Compl. ¶¶ 1-2, 21. Plaintiff and LaSalle conducted this sale pursuant to two written agreements, the Mortgage Loan Purchase Agreement ("MLPA") and the Pooling and Servicing Agreement ("PSA"). Id. ¶¶ 1-2. The MLPA includes a list of representations and warranties that LaSalle made with respect to the loans sold, incorporated by reference into the PSA. Id. ¶ 61. These representations and warranties serve to ensure the quality of the loans, and breach of a representation and warranty decreases a loan's value by increasing its riskiness. Id. ¶¶ 6-8, 61. The PSA further provides that, within ninety-days' notice of breach of any representation and warranty materially and adversely affecting a loan, LaSalle or its successor in interest must either cure the breach or buy back the affected loan at the purchase price. Id. ¶ 63; see PSA § 2.03(b), id., Ex. 1 at 72.
Alleging that LaSalle breached three of the representations and warranties in the MLPA, Plaintiff first claims that LaSalle breached Representation and Warranty 10 with respect to twenty-one loans in the pool. 2d Am. Compl. ¶ 30. Representation and Warranty 10 provides:
The Mortgage Loan documents for each Mortgage Loan contain enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the practical realization against the Mortgaged Property of the principal benefits of the security intended to be provided thereby, including realization by judicial or non-judicial foreclosure.
Id. ¶ 29(a) (emphasis added). Plaintiff's theory is that LaSalle breached Representation and Warranty 10 by failing to include sufficient power-of-sale language in the loan documents toallow for non-judicial foreclosure of Oklahoma and Washington properties securing loans in the pool. Id. ¶ 30.
Next, Plaintiff claims that LaSalle breached Representations and Warranties 24 and 36 with respect to 282 loans in the pool.2 Id. ¶¶ 39, 50. Representation and Warranty 24 provides:
The origination, servicing and collection practices used by the Seller . . . with respect to [each] Mortgage Loan have been in all material respects legal and have met customary industry standards.
Id. ¶ 29(b) (emphasis added). In turn, Representation and Warranty 36 provides:
An appraisal of the related Mortgaged Property was conducted in connection with the origination of [each] Mortgage Loan, and such appraisal satisfied the guidelines in Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as in effect on the date such Mortgage Loan was originated.
Id. ¶ 29(c) (emphasis added). Plaintiff alleges that LaSalle breached Representation and Warranty 24 by failing to meet customary industry standards in its origination of 282 loans in the pool, and that LaSalle breached Representation and Warranty 36 by using appraisal practices that violated Title XI of the Financial Institutions Reform, Recovery and Enforcement Act3 with respect to the same 282 loans. Id. ¶¶ 39, 43, 50.
On September 5, 2012, Plaintiff provided Defendant with written notice of the alleged breaches, as agreed under the PSA. Id. ¶¶ 63-64. Defendant, however, has neither cured the alleged breaches nor paid Plaintiff the purchase price for the 282 loans in question. Id. ¶ 65. In response, Plaintiff has brought suit for breach of contract, seeking judicial enforcement of theparties' agreement. Id. ¶ 68. Defendant now moves to dismiss the Second Amended Complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).
To survive a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint must "state a claim to relief that is plausible on its face[.]" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "Factual allegations must be enough to raise a right to relief above the speculative level[.]" Id. at 555. In reviewing Defendant's motion to dismiss, the Court must accept as true all well-pleaded allegations in the complaint and must draw all possible inferences in Plaintiff's favor. See Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008).
Alleging breach of contract, Plaintiff claims that LaSalle breached three of the representations and warranties included in the MLPA and PSA. The parties have agreed that the MLPA and PSA are to be governed by New York law. See PSA § 11.04, 2d Am. Compl., Ex. 1 at 212-13; MLPA § 11, id., Ex. 2 at 12. To state a claim for breach of contract under New York law, a complaint must allege "(1) the existence of an agreement, (2) adequate performance of the contract by the plaintiff, (3) breach of contract by the defendant, and (4) damages." Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996). Defendant asserts that Plaintiff has failed to sufficiently allege the third element - the existence of a breach of contract.
Under the PSA, a breach includes a "breach of any representation or warranty with respect to a Mortgage Loan . . . which . . . materially and adversely affects the value of such Mortgage Loan." PSA § 2.03(b), id., Ex. 1 at 72. For the reasons set forth below, the Courtfinds that Plaintiff has stated a claim for breach of contract based on breaches of Representations and Warranties 10, 24, and 36 of the MLPA.
Plaintiff alleges that LaSalle breached Representation and Warranty 10 by failing to include sufficient power-of-sale language in certain mortgage loan documents to allow for non-judicial foreclosure of the Oklahoma and Washington properties securing loans in the pool LaSalle sold Plaintiff. 2d Am. Compl. ¶¶ 32-37. Plaintiff further alleges that this breach materially and adversely affected twenty-one loans in the pool, claiming that the loans were riskier and therefore less valuable than they would have been if the loan documents had included language necessary to allow for non-judicial foreclosure. Id. ¶¶ 8, 38. Defendant moves to dismiss this claim on the grounds that Representation and Warranty 10 did not require LaSalle to include language allowing for non-judicial foreclosure of any properties securing loans in the pool. Def.'s Mem. Supp. Mot. Dismiss 16-17. The Court finds that Defendant's argument does not compel dismissal of Plaintiff's claim.
Twenty-one loans in the pool LaSalle sold to Plaintiff are secured by properties located in the states of Oklahoma and Washington. Id. ¶ 30. Under Oklahoma and Washington law, mortgage loan documents can be enforced by non-judicial foreclosure only if they include certain language specified by statute. See 46 Okl. Stat. § 43(A);4 Wash. Rev. Code § 61.24.030.5
As stated above, Representation and Warranty 10 provides that the mortgage loan documents for each loan in the pool LaSalle sold to Plaintiff include provisions allowing for "the practical realization against the Mortgaged Property of the principal benefits of the security intended to be provided thereby, including realization by judicial or non-judicial foreclosure." 2d Am. Compl. ¶ 29(a) (emphasis added). Plaintiff has alleged that the mortgage loan documents securing properties in Oklahoma and Washington do not contain the language specified in those states' respective statutes to leave open the possibility of non-judicial foreclosure. Id. ¶¶ 32-37. Taken as true, this allegation suffices to state a claim entitling Plaintiff to relief based on breach of Representation and Warranty 10.
For its part, Defendant argues that the phrase "including realization by judicial or non-judicial foreclosure" should be read disjunctively, and that LaSalle is not in breach of Representation and Warranty 10 so long as judicial foreclosure is an option available to Plaintiff. See Def.'s Mem. Supp. Mot. Dismiss 17. It is, however, also possible to read Representation and Warranty 10 as providing that both judicial and non-judicial foreclosure will remain available to Plaintiff. See Schane v. Int'l Bhd. of Teamsters Union Local No. 710 Pension Fund Pension Plan, -- F.3d ----, 2014 WL 3611613, at **3-4 (7th Cir. July 23, 2014) (); Pl.'s Mem. Opp'n Def.'s Mot. Dismiss 20 ("[A] plain reading of Representation and Warranty 10 shows that Defendant was representing that the loan documents allowed Plaintiff the option of judicial or non-judicial foreclosure.") (emphasis in original).
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