Newage Garden Grove, LLC v. Wells Fargo Bank

• Docket Number: Index No. 653775/2022,Motion Seq. No. 001
• Decision Date: 14 July 2023
• Citation: 2023 NY Slip Op 32447 (U)
• Parties: NEWAGE GARDEN GROVE, LLC, Plaintiff, v. WELLS FARGO BANK, N.A., AS TRUSTEE, ON BEHALF OF THE REGISTERED HOLDERS OF THE CSAIL 2017- CX9 COMMERCIAL MORTGAGE TRUST, COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2017-CX9, and RIALTO CAPITAL ADVISORS, LLC Defendants.
• Court: New York Supreme Court

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2023 NY Slip Op 32447(U)

NEWAGE GARDEN GROVE, LLC, Plaintiff, v. WELLS FARGO BANK, N.A., AS TRUSTEE, ON BEHALF OF THE REGISTERED HOLDERS OF THE CSAIL 2017- CX9 COMMERCIAL MORTGAGE TRUST, COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2017-CX9, and RIALTO CAPITAL ADVISORS, LLC Defendants.

Index No. 653775/2022, Motion Seq. No. 001

Supreme Court, New York County

July 14, 2023

Unpublished Opinion

MOTION DATE 12/12/2022

DECISION + ORDER ON MOTION

MARGARET CHAN, J.

The following e-filed documents, listed by NYSCEF document number (Motion 001) 9, 10, 11, 12, 13, 14, 15 were read on this motion to/for DISMISS.

Plaintiff Newage Garden Grove, LLC (Newage) brings this action against Defendants Wells Fargo Bank, N.A., as Trustee, on behalf of the registered Holders of the CSAIL 2017-CX9 Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2017-CX9 (Lender) and Rialto Capital Advisors, LLC (Rialto, and together with Lender, Defendants) asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory judgment, fraud, violations of the California Unfair Competition Law, Cal. Bus. & Prof. Code. §§ 1720 et seq., economic duress, and fraudulent inducement (NYSCEF # 1 — the Complaint or Compl.). Presently before the court is Defendants' partial motion to dismiss the Complaint pursuant to CPLR 3211(a)(1) and CPLR 3211(a)(7) (NYSCEF # 9). Newage opposes the motion. For the following reasons, Defendants' motion is granted in part and denied in part.

BACKGROUND^[1]

This action arises from a disputed payment by Newage of approximately $6.1 million in default interest and fees in connection with its payoff and refinancing of an approximately $20.5 million loan (Compl. ¶¶ 1, 53 56). Newage is a limited liability company formed in or around 2006 for purposes of developing and operating a Sheraton-branded hotel in Garden Grove, California (the Property) (id. ¶¶ 2, 11, 15). The Property is closely situated to Disneyland and generates substantial revenue from lodging Disneyland guests (id. ¶ 15)

The Loan Agreement

On May 31, 2017, Newage, as borrower, and Column Financial, Inc., as original lender, executed a series of documents, including a loan agreement, dated as of May 31, 2017 (the Loan Agreement), in connection with a $20,500,000.00 loan to Newage secured by the Property (the Loan) (Compl. ¶¶ 2, 16; NYSCEF # 11 — Agreement). Pursuant to the Loan Agreement, Newage would make monthly payments of $122,314.59 (the Monthly Payment), with interest on the Loan accruing at a rate of 5.18% per annum (the Interest Rate) (Compl. ¶ 18). Each Monthly Payment first applied to any accrued interest and the balance went towards the Loan's principal (Agreement § 2.3.1). The Loan Agreement also provided for certain Events of Default under Section 8.1. If an Event of Default occurred or was continuing, the interest on the Loan began accruing at a rate of 5% per annum on top of the Interest Rate, calculated from the date such payment was due" (the Default Rate) (Compl. ¶ 19; Agreement § 2.2.4). The maturity date on the Loan was June 6, 2022 (the Maturity Date), at which time Newage was to pay the full outstanding principal balance on the Loan, as well as any accrued and unpaid interest (Compl. ¶ 18; Agreement § 2.3.3).

There were several enumerated occurrences that would constitute an Event of Default, including, as is relevant here, Newage's failure to pay "any portion of the [Loan] when due" or breach "any covenant contained in Section 4.1.30" of the Loan Agreement, i.e., the Special Purpose Entity (SPE) Covenant (Agreement § 8.1[a][i], [x]). Pursuant to the SPE Covenant, Newage represented and warranted that it "is, has at all times since its formation been and shall continue to be" an SPE (Agreement § 4.1.30(a)). The Loan Agreement, in turn, defined an SPE as a limited liability company that has complied with a list of 44 different requirements (Compl. ¶ 24). Chief among them is a requirement that Newage would have "no Indebtedness other than (i) the Loan, (ii) liabilities incurred in the ordinary course of business relating to the ownership and operation of the Property and the routine administration of [Newage] . . . and (iii) such other liabilities permitted pursuant to" the Loan Agreement (Agreement at pp. 27-28).

As an SPE under the Loan Agreement, Newage further represented that other than capital contributions and distributions permitted under the terms of its organizational documents, [it] has not entered into or been a party to, and shall not enter into or be a party to, any transaction with any of its partners, members, shareholders or Affiliates except in the ordinary course of its business and on terms which are commercially reasonable terms comparable to those of an arm's-length transaction with an unrelated third party[.] (Agreement at 28). Newage alleges that this provision expressly permitted capital contributions by, and distributions to, Newage's members (Compl. ¶ 26).

Beyond the Default Rate, the Loan Agreement also contemplated certain late payment charges and Lender reimbursement rights in connection with an Event of Default, in addition to other rights and remedies (Compl. ¶¶ 20'23). For instance, Section 2.3.4 provided for a late fee charge to "defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate for the loss of the use of such delinquent payment" (the Late Fee) (Agreement § 2.3.4). And Sections 9.6 and 10.13(a) contemplated that Newage would "promptly reimburse Lender on demand" for certain fees and expenses stemming from special servicing of the Loan after an event of default (the Special Servicing Fees) (id. §§ 9.6, 10.13[a]).

Meanwhile, the Loan Agreement also addressed performance of the parties' obligations and any modifications to its contractual provisions. Specifically, under the Loan Agreement's plain terms, "[n]o modification, amendment, extension, discharge, termination or waiver of any provision of th[e] Agreement. . . shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought" (Agreement § 10.4). The Loan Agreement further provided that "[n]either any failure nor any delay on the part of Lender in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege hereunder . . . shall operate as or constitute a waiver thereof[.]" (id. § 10.5).

Finally, in addressing governing law, the Section 10.3 of the Loan Agreement provided that

in all respects, including . . . matters of construction, validity and performance, this agreement, the note and the other loan documents and the obligations arising hereunder and thereunder shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and performed in such state (without regard to principles of conflicts of laws) and any applicable law of the United States of America

(id. § 10.3(a)).

Rialto's Assertion of Nonmonetary Defaults under the Loan Agreement

Upon the Loan's origination, Column assigned its rights to Lender, and the Loan was concurrently securitized and pooled into a commercial mortgage-backed security pass-through trust (the Trust), with Lender serving as Trustee (Compl ¶¶ 2, 17). In or around May 2020, the Loan was then transferred to Rialto as Special Servicer (id. ¶ 17).

By March 2020, Newage faced financial hardships entering the third year of its five-year Loan term because of the COVID-19 pandemic and the resulting closure of Disneyland (Compl. ¶ 32). As a result, Newage failed to timely make its Monthly Payment under the Loan Agreement beginning around June 2020 (id. ¶ 33). Given its financial issues, Newage entered modification and forbearance discussions with Rialto, (id. ¶ 32). Newage alleges that, in May 2020 and December 2020, respectively, Rialto provided Newage with two separate pre-negotiation letters to govern modification and forbearance discussions (id. ¶ 33).

Newage avers that it believed the parties were engaging in "good faith forbearance and modification negotiations with Rialto" (Compl. ¶ 34). But then, around October 5, 2021, Rialto declared an Event of Default under Section 8.1(a)(x) of the Loan Agreement through a notice of default (id. ¶ 36; NYSCEF # 12 — Default Notice). The Default Notice, which was sent on behalf of Lender, stated that Newage had breached Section 4.1.30 of the Loan Agreement by taking on "nonpermitted debt," specifically pointing to Newage's August 31, 2021, balance sheet listing "Loan-PHE" as a liability in the amount of $2,085,000.00 (Default Notice at 1; Comp. ¶¶ 28-29, 36). The Default Notice further identified various other "partner loans" received by Newage between 2017'2020 (Default Notice at 1'2; Comp. ¶¶ 28, 36). For its part, Newage contends that these purported non-permitted debts were, in fact, capital contributions from its members that were expressly permitted by the Loan Agreement and about which Lender and Rialto were previously aware (Compl. ¶¶ 27, 31, 37).^[2] It further alleges that Rialto invoked these nonmonetary defaults to threaten Newage's principals with personal liability under Section 9.4(c)(II)(G) of the Loan Agreement (id. ¶ 38).

Three days later, on October 8, 2021, Rialto emailed a payoff demand statement to Newage (Compl. ¶ 39).^[3] As part of the payoff demand, Rialto sought retroactive default interest covering the life of the Loan, which amounted to more than $5 million (id). Then, on October 11, 2021, Rialto sent an acceleration notice declaring the Loan immediately due and payable and noting that interest would continue to accrue...