Matson v. Am. Capital, Ltd. (In re LandAmerica Fin. Grp., Inc.)
| Decision Date | 07 February 2014 |
| Docket Number | APN 13-03105-KRH,Case No. 08-35994-KRH |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re: LandAmerica Financial Group, Inc., et al., Debtors. BRUCE H. MATSON, Trustee of the LAC Liquidation Trust, Plaintiff, v. AMERICAN CAPITAL, LTD., Defendants. |
Before the Court are cross motions for summary judgment (the "Motions") filed by Plaintiff Bruce H. Matson ("Matson"), in his capacity as trustee for the LandAmerica Assessment Corporation Liquidation Trust (the "LAC Trust"), and by Defendant American Capital, Ltd. ("American Capital") seeking summary judgment pursuant to Rule 56(c) of the Federal Rules of Civil Procedure (the "Civil Rules"), as incorporated by Rule 7056 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). The Motions concern the allowability under 11 U.S.C. § 501 of proof of claim number 3120 (the "Claim") filed by American Capital in the Chapter 11 bankruptcy case of LandAmerica Assessment Corporation.
The Court took the Motions under advisement following a hearing conducted on December 19, 2013. Finding insufficient contractual privity or its equivalent between American Capital and LandAmerica Assessment Corporation for the imposition of tort liability against theLAC Trust, the Court will grant the motion for summary judgment filed by Matson. This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.1
On November 26, 2008 (the "Petition Date"), LandAmerica Financial Group, Inc. ("LFG") and LandAmerica 1031 Exchange Services, Inc. (the "Initial Debtors") filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). Thereafter, various LFG affiliates including LandAmerica Assessment Corporation ("LandAmerica Assessment") also commenced voluntary cases under Chapter 11 of the Bankruptcy Code in this Court (the "Affiliated Debtors").2 The bankruptcy case of LandAmerica Assessment is being jointly administered with the Initial Debtors and their other LFG Affiliated Debtors under case number 08-35994.3
By Order entered April 22, 2009, all non-governmental persons and entities were required to file proofs of claim against the estate of LandAmerica Assessment by May 18, 2009. American Capital filed a motion on May 15, 2009, seeking authority to conduct an examination of LandAmerica Assessment under Bankruptcy Rule 2004 (the "2004 Motion").4 Before thisCourt had an opportunity to rule on the 2004 Motion, American Capital filed a Motion to Amend Informal Proof of Claim in which American Capital sought leave to file a formal proof of claim to amend its informal claim asserted via its 2004 Motion. The Court granted American Capital's Motion to Amend by order entered November 13, 2009. Once American Capital was permitted to file a formal proof of claim, it withdrew the 2004 Motion by stipulation dated November 20, 2009.
The Court confirmed the Joint Chapter 11 Plan of LFG and its Affiliated Debtors (the "Plan") by order entered November 23, 2010.5 The Plan established the LAC Trust, and it appointed Matson as the fiduciary responsible for administering the LAC Trust. Predicated on the allegations set forth in its Lawsuit, American Capital filed a Claim against the LAC Trust in the amount of $10,190,000 on December 11, 2009. Matson filed his objection to the Claim on March 30, 2012, and thereafter commenced this adversary proceeding.6
The Court has subject-matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B) and (O). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1409.
On February 15, 2006, Wachovia Bank, N.A. ("Wachovia") originated a loan in the principal amount of $13,950,000 (the "Westfield Loan") for the refinance of existing debt by 2003 Westfield Apartments, L.P., an affiliate of Trimark Realty Investments, Inc. (the "Borrower"), on a 424-unit garden style apartment complex located at 14405 Rio Bonito Road, Houston, Texas (the "Westfield Apartments"). On June 11, 2006, Wachovia originated a loan in the principal amount of $6,000,000 (the "Pines Point Loan," and together with the Westfield Loan, the "Loans") for the refinance of existing debt by Oradell/321-Dallas, L.P., also an affiliate of the Borrower, on a 318-unit garden style apartment complex located at 3102 Oradell Lane, Dallas, Texas (the "Pines Point Apartments," and together with the Westfield Apartments, the "Apartment Complexes").
LandAmerica Assessment had been retained by the Borrower to assess the condition of each of the Apartment Complexes in connection with Wachovia's loan underwriting process. LandAmerica Assessment issued two reports separately describing the condition of the Pines Point Apartments and the Westfield Apartments (the "Property Condition Reports").7 The Apartment Complexes were described in the Property Condition Reports as generally being in good condition collectively requiring less than $125,000 in immediate repairs.8
After making the Loans, Wachovia sold them together with other multifamily and commercial loans to Wachovia Commercial Mortgage Securities, Inc. That entity thereupon sold the loans into a commercial mortgage backed security trust.9 The Wachovia Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2006-C26 (the "Wachovia Trust") consisted of 117 loans with a total value of $1.755 billion. American Capital alleges that it bought bonds issued by the Wachovia Trust. American Capital closed on its purchase of the securities in June of 2006.
Both of the Property Condition Reports issued by LandAmerica Assessment contained the following language in a section entitled reliance:
Wachovia Bank, National Association, its employees, agents, successors and assigns, together with its advisors, may circulate, use, copy and rely upon this report in evaluating a request for an extension of credit to be secured by the Subject Property. This report may also be circulated, used, copied and relied upon by . . . any actual or prospective investor (including agent or advisor) in any securities evidencing a beneficial interest in or backed by the Mortgage Loan (or any portion thereof). . . . In addition, this report or a reference to this report may be included or quoted in any offering circular, private placement memorandum, registration statement or prospectus or other related documents and LandAmerica Assessment Corporation agrees to cooperate in answering questions by any of the above parties in connection with a securitization or transaction involving the Mortgage Loan (or any portion thereof) and/or such securities.
American Capital alleges that, based upon this language, LandAmerica Assessment assumed a duty of care to the investors in the Wachovia Trust. The bonds American Capital purchased in the Wachovia Trust were subordinate certificates commonly known as the B-piece. American Capital bought the bonds, which had a face value of $46,696,767.36, for $24,699,102.48. Thedifference between the two amounts represents the discount given the inherent risk of the securities. The owner of the B-piece suffers the first loss when any loan held by the trust goes into default.10 American Capital maintains that it reviewed and relied upon the Property Condition Reports prepared by LandAmerica Assessment before investing in the Subordinate Certificates issued by the Wachovia Trust. American Capital alleges that LandAmerica Assessment breached the duty of care that it owed to investors in the Trust by materially misrepresenting the condition of the Apartments.
Less than a year after Wachovia originated the Loans, both Loans went into default. Servicing of the Loans was transferred at American Capital's direction to a special servicer on March 8, 2007.11 The Special Servicer commenced foreclosure proceedings against the Apartment Complexes, which collateralized the Loans. The foreclosure sale was circumvented when, on July 13, 2007, a court-appointed receiver took possession of and title to the Apartment Complexes.
On July 24, 2007, American Capital sold all of its right, title and interest in the Subordinate Certificates it owned in the Wachovia Trust to a new commercial real estate collateralized debt obligation trust formed by American Capital known as the CRE Trust.12 The CRE Trust sold bonds with an overall face value of $1.175 billion to the general investing public and the proceeds from the sale of those bonds were "up-streamed" to American Capital (the"CRE Trust Re-securitization").13 As a result of the CRE Trust Re-securitization, the CRE Trust became the owner of the Subordinate Certificates that American Capital had originally held in the Wachovia Trust.14
The condition of both of the Loans, which continued to be owned by the Wachovia Trust, deteriorated further over the course of the year following the CRE Trust Re-securitization.15 In May of 2008, the court-appointed receiver was directed to sell the Apartments. American Capital compounded the complexity of this factual scenario when it formed two wholly owned, special purpose entities to acquire the Apartment Complexes. The Pines Point Apartments were sold to Oradell Lane Holdings, L.P. ("Oradell") in consideration for its assumption of the Pines Point Loan, and the Westfield Apartments were sold to Rio Bonito Holdings, L.P. ("Rio Bonito") in consideration for its assumption of the Westfield Loan (Oradell and Rio Bonito are jointly referred to as the "American Capital Special Purpose Entities"). The American Capital Special Purpose Entities improved the physical condition and the operating performance of the Apartment Complexes after taking...
To continue reading
Request your trial