Orix Capital Mkts., LLC v. Cadlerocks Centennial Drive, LLC, Civil Case No. 10–12019–NMG.

Citation922 F.Supp.2d 130
Decision Date15 January 2013
Docket NumberCivil Case No. 10–12019–NMG.
PartiesORIX CAPITAL MARKETS, LLC in its Capacity as Special Servicer and Attorney–in–Fact for Wells Fargo Bank, N.A. Formerly Known as Wells Fargo Bank Minnesota, N.A., as Trustees for Registered Holders of Salomon Brothers Mortgage Securities VII, Inc., Commercial Mortgage Pass–Through Certificate Series 2000 C–2, Plaintiff, v. CADLEROCKS CENTENNIAL DRIVE, LLC, Daniel Cadle, Defendants.
CourtU.S. District Court — District of Massachusetts

OPINION TEXT STARTS HERE

Armando E. Batastini, Nixon Peabody LLP, Providence, RI, for Plaintiff.

David H. Rich, Benjamin J. Wish, Todd & Weld LLP, Boston, MA, for Defendant.

MEMORANDUM OF DECISION

GORTON, District Judge.

This case involves a dispute between a lender and the borrower and guarantor, with respect to a loan and a mortgage on commercial property in Peabody, Massachusetts.

This Court, sitting without a jury, presided over a three-day trial of this case in December, 2012. The Court now announces its findings of fact and conclusions of law.

I. Findings of FactA. The Parties

1. Defendant Cadlerocks Centennial Drive, LLC (“Cadlerocks” or “Borrower”) is a Massachusetts limited liability company.

2. Cadlerocks' sole asset is a 4.63 acre mixed-use commercial and industrial property located at One Centennial Drive, Peabody, Massachusetts (“the Property”). A 50,000 square foot warehouse built in 1964 is located on the Property.

3. Defendant Daniel Cadle (Cadle) is the President of The Cadle Company, the sole manager of Cadlerocks. The Cadle Company is not a party to this case. Cadle is an experienced banker and debt collector, with over 40 years experience with financial matters.

4. Wells Fargo Bank, N.A., f/k/a Wells Fargo Bank Minnesota, N.A., as Trustee for the registered holders of Salomon Brothers Mortgage Securities VII, Inc., Commercial Mortgage Pass–Through Certificates, Series 2000 C–2 (“the Trust”) is the current holder of a promissory note reflecting a loan to Cadlerocks, and is the senior secured lien holder with respect to Cadlerocks and the Property.

5. ORIX Capital Markets LLC (ORIX) is the special servicer of the Trust and acts pursuant to a Limited Power of Attorney from the Trust to ORIX.

B. The Loan

6. Cadlerocks entered into a loan with lender Salomon Brothers Realty Corp. (“Original Lender”) in the principal amount of $1,925,000. A Promissory Note with an effective date of December 14, 1999 (“the Note”) memorialized that loan.

7. The Note was secured by a Mortgage, Assignment of Rents and Security Agreement from Borrower to Original Lender (“the Mortgage”), along with an Assignment of Leases and Rents, Exceptions to Non–Recourse Guaranty (“the Guaranty”) and an Environmental Indemnity Agreement.

8. Cadle signed both the Guaranty and Environmental Indemnity Agreement in his personal capacity and was assisted with respect to the origination of the subject loan by his in-house counsel, Victor Buente.

9. At the time of the loan the building on the Property was over 35 years old.

10. The Original Lender assigned the Mortgage, Note, Assignment of Leases and Rents, Guaranty, Environmental Indemnity Agreement and all other loan documents to the Trust on August 21, 2000.

C. Environmental Indemnity Agreement and Environmental Insurance Policy

11. As a part of the closing documents Cadlerocks executed an Environmental Indemnity Agreement agreeing to indemnify the lender for all costs and damages related to any “suspected” or actual presence of “Hazardous Materials” at the Property.

12. Cadle also executed the Environmental Indemnity Agreement in his personal capacity.

13. The Environmental Indemnity defines “Hazardous Substance” to include any

hazardous air pollutants, hazardous substances, hazardous materials, regulated substances, restricted hazardous wastes, ... hazardous chemical substances, ... toxic substances, pollutants or contaminants or terms of similar import, as such terms are defined in any Environmental Law ... [and] any substance or material which now or in the future is known to constitute a threat to health, safety ... or exposure to which is prohibited, limited or regulated by any Environmental Law or Governmental Entity, including all of those materials, wastes and substances designated now or in the future as hazardous or toxic by any Governmental Entity.

14. A Phase I Environmental Site Assessment (“Phase I”) conducted prior to the closing of the loan revealed the presence of airborne tetrachloroethylene, also known as perchloroethylene (“PCE”) at the Property, likely caused by the use of degreasing agents by a long-past tenant, New England Carbide.

15. At the time that defendants entered into the loan agreement they were also aware of historic inspections that had revealed the presence of PCE on the Property.

16. PCE is a known carcinogen and is listed as a hazardous substance in the Massachusetts Contingency Plan, 310 CMR 40.1600 (2012).

17. Instead of paying for a more comprehensive “Phase II” inspection, Cadlerocks paid $20,945 at the time of closing for an environmental insurance policy (“the Insurance Policy”). Original Lender was the insured under the policy but Cadlerocks did not receive a copy of that policy.

18. Cadle testified that, he took no steps to obtain a copy of the Insurance Policy, other than having his in-house counsel, Victor Buente, call the brokerage company that had placed the policy but only after the trial in this case had commenced.

19. At trial, Cadle produced an unexecuted “Secured Creditor Impaired Property Policy” on the Property dated October 29, 1999 with a ten-year policy term.

D. Default

20. In December, 2009, the subject loan was assigned to ORIX just before the maturity default which occurred on January 1, 2010.

21. The balance due on the Note at the Maturity Date was $1,464,935 and, because Borrower failed to make that payment, it defaulted on the Note.

22. Cadlerocks continued to make monthly principal and interest payments on the Note of $24,889 until August 2010 after which no further payments were made.

23. As of April 2, 2012, the balance due on the loan was $2,151,058, which included $1,739,494 in principal.

24. After the maturity default and unsuccessful discussions with Cadlerocks regarding a loan modification, the Trust decided to foreclose on the Property.

E. Receivership

25. In order to settle all claims, Cadle twice offered ORIX the Property via a so-called “deed-in-lieu”, meaning a transfer of title without recourse.

26. As part of ORIX's routine due diligence prior to foreclosure it ordered a Phase I Environmental Site Assessment (“Phase I”) from EBI Consulting (“EBI”). Zeba Ansari (“Ansari”), the ORIX employee who processed the subject loan, testified that ORIX's practice and policy is to conduct a Phase I before any property is acquired by a deed-in-lieu.

27. The Phase I in this case identified the presence of PCE.

28. ORIX rejected the offer of a deed-in-lieu, cancelled the foreclosure sale and sought the appointment of a Receiver for the Property.

29. Cadlerocks assented to the appointment of a Receiver on December 8, 2010 (Docket No. 12) and this Court appointed Francis Morrissey, Esq. as Receiver on December 15, 2010 (Docket No. 13).

F. Environmental Testing

30. Based upon the results of the Phase I, ORIX ordered follow-on Limited Subsurface Investigation (“Phase II”) of the Property by EBI.

31. The Phase II, which was conducted in December, 2010, consisted of two components: a) testing the tank integrity of an underground storage tank (“UST”) on the Property and b) conducting a soil vapor investigation on the exterior of the subject building. The purpose of an exterior soil vapor test was to determine whether there was potential vapor intrusion into the interior of the building on the Property.

32. The UST passed the tank integrity test but the soil vapor testing identified PCE present in the soil exterior to the building.

33. As a result of the Phase II, EBI recommended a test of the indoor air quality. Mark Germano, the Licensed Site Professional who supervised the earlier EBI testing, testified that he believed follow-on air testing was necessary in view of results of EBI's tests.

34. EBI conducted follow-on indoor air quality testing in the building at the Property on several days in March, 2011. A so-called “grab” test was performed to determine whether certain hazardous substances were present but not the rate of exposure of an occupant over an extended period of time.

35. EBI's indoor air testing indicted the presence of PCE in an area of the building that houses a daycare center. The testing showed a concentration of 1.65 µg/m3 of PCE which is above the Massachusetts Department of Environmental Protection (“MADEP”) advisory limit for residential indoor air quality of 1.4 µ g/m3.

36. In response to the results indicating an indoor presence of PCE, the Receiver engaged his own team of professionals including Licensed Site Professional James Young (“Young”) and environmental counsel, McGregor and Associates. The Court approved the Receiver's engagement of McGregor & Associates (Docket No. 33).

37. Young conducted follow-on indoor air testing on June 24, 2011. He collected 8–hour air samples, a time period chosen to approximate the exposure of occupants of the building.

38. The results from Young's 8–hour tests showed the presence of PCE in the daycare space but not in concentrations that exceeded MADEP regulations.

39. On July 9, 2011, Young collected 24–hour air samples in the daycare center with the ventilation turned off. Those conditions were created to simulate the “worst case” scenario to which occupants might be exposed. The results showed the presence of PCE in the daycare space but, again, not in concentrations that violated MADEP regulations.

40. The Receiver engaged in follow-on environmental testing in the fall of 2012 as part of his effort to market and sell the Property. That testing was performed to satisfy concerns of...

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2 cases
  • VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC
    • United States
    • U.S. Court of Appeals — First Circuit
    • 12 Noviembre 2013
    ...majority of the costs associated with the environmental testing under the Indemnity Agreement. ORIX Capital Mkts., LLC v. Cadlerocks Centennial Drive, LLC, 922 F.Supp.2d 130, 137 (D.Mass.2013). The court did not award ORIX the costs of the 2010 Phase I, which ORIX conducted as part of its r......
  • VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC
    • United States
    • U.S. Court of Appeals — First Circuit
    • 12 Noviembre 2013
    ...of the costs associated with the environmental testing under the Indemnity Agreement. ORIX Capital Mkts., LLC v. Cadlerocks Centennial Drive, LLC, 922 F. Supp. 2d 130, 137 (D. Mass. 2013). The court did not award ORIX the costs of the 2010Phase I, which ORIX conducted as part of its routine......

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