R & G Properties v. Column Financial

• Decision Date: 22 August 2008
• Docket Number: No. 06-415.,06-415.
• Citation: 968 A.2d 286,2008 VT 113
• Court: Vermont Supreme Court
• Parties: R & G PROPERTIES, INC. v. COLUMN FINANCIAL, INC., Wells Fargo Bank Minnesota, N.A. and Capmark Finance Inc. f/k/a GMAC Commercial Mortgage Corp.

968 A.2d 286

2008 VT 113

R & G PROPERTIES, INC. v. COLUMN FINANCIAL, INC., Wells Fargo Bank Minnesota, N.A. and Capmark Finance Inc. f/k/a GMAC Commercial Mortgage Corp.

No. 06-415.

Supreme Court of Vermont.

August 22, 2008.

Lisa Chalidze, Benson, for Plaintiff-Appellant.

Heather Z. Cooper and Rodney E. McPhee of Kenlan, Schwiebert & Facey, P.C., Rutland, for Defendant-Appellee Capmark Finance Inc.

Present: DOOLEY, JOHNSON, SKOGLUND and BURGESS, JJ., and HOWARD, Supr. J., Specially Assigned.

DOOLEY, J.

¶ 1. Borrower, R & G Properties, Inc. (borrower), appeals an order of the superior court, granting summary judgment to lenders—Column Financial, Inc. (Column), Wells Fargo Banker Minnesota (Wells Fargo), and GMAC Commercial Mortgage Corp. (GMAC)—as to all of borrower's claims. On appeal, borrower argues that the court erred in concluding that the security agreement and mortgage on five of its mobile home parks did not create an unenforceable restraint on alienation. Borrower also argues that: (1) because the prepayment penalties described in the agreement were triggered by lenders' decision to accelerate payment of the loan, the penalties were unenforceable; (2) because Column lacked a license as required by 8 V.S.A. § 2201, borrower is entitled to withhold payment of interest, principal, and penalties; and (3) the court erred in granting lenders summary judgment as to borrower's contractual bad-faith claim. We affirm in all respects.

¶ 2. Borrower entered into the loan agreement at the heart of this case with Column on November 13, 2000. Pursuant to this agreement, borrower executed a promissory note in the amount of $2,150,000 to evidence the loan given to borrower for the purchase of five mobile home parks (the Loan). Column assigned its interest to Wells Fargo,¹ as trustee for Credit Suisse First Boston Mortgage Securities Corporation. The form of trust managed by Wells Fargo is known as a Real Estate Mortgage Investment Conduit, or REMIC. GMAC services the loans, pursuant to a servicing and pooling agreement with Wells Fargo. REMIC loans involve numerous multifamily and commercial property mortgage loans, pooled by a depositor and transferred to a trust. Purchasers may then acquire undivided interests in the trust, through either public offering or private placement. Certificate holders, the owners of these interests, receive a fixed rate of return on their investment. A REMIC is structured in such a way that the income generated is taxable only to certificate holders. See 26 U.S.C. §§ 860A-860G.

¶ 3. Because the trust requires a stable loan pool. REMIC agreements often prohibit or limit prepayment of individual loans. Section 1.02 of the loan agreement explained that collateral substitution was permitted:

Prior to the Lockout Expiration Date (defined below), this Note may not be prepaid, either in whole or in part, provided, however, Borrower shall have the right and option to release the Security Property (as hereinafter defined) from the lien of the Security Instrument (as hereinafter defined) in accordance with the terms and conditions of the defeasance provisions set forth in Section 1.26 of the Security Instrument. This Note may be prepaid in whole but not in part (except as otherwise specifically provided herein) at any time after the date six (6) months prior to the Maturity Date (the "Lockout Expiration Date").

Another prepayment provision, § 1.02(c), provided: "[p]artial prepayments of this Note shall not be permitted, except partial prepayments resulting from Lender applying insurance or condemnation proceeds to reduce the outstanding principal balance of this Note as provided in the Security Instrument." The agreement also contained a provision on collateral substitution, which the agreement called defeasance. Section 1.26 stated in pertinent part:

[T]he irrevocable deposit with Lender of an amount ("Defeasance Deposit") of U.S. Government Securities (hereinafter defined) which through the scheduled payment of the principal and interest in respect thereof in accordance with their terms will provide, not later than the due date of any payment, cash in an amount sufficient, without reinvestment, in the opinion of a nationally recognized firm of public accountants expressed in a written certification thereof delivered to independent certified Lender, to pay and discharge Scheduled Defeasance Payments (hereinafter defined)

Section 1.26 stated that collateral substitution was permitted any time two years after the startup date. This provision implements the IRS requirement that "[o]nly Treasury obligations can be substituted for prepaid mortgages, and only two years after the REMIC startup date." G. Lefcoe, Yield Maintenance and Defeasance: Two Distinct Paths to Commercial Mortgage Prepayment, 28 Real Estate L.J. 202, 208 (2000). Finally, the security agreement also contains a due-on-sale provision that gives the lender the option to declare the entire indebtedness "immediately due and payable" on sale of "all or any part of the [mortgaged] property."

¶ 4. The loan also included a provision specifying remedies available to lender if borrower violates the agreement. Section 3.1(a) addressed the issue of acceleration and its relationship to prepayment penalties, stating that: "[u]pon any such acceleration, payment of such accelerated amount shall constitute a prepayment of the principal balance of the Note and any applicable prepayment penalty provided for in the Note shall then be immediately due and payable."

¶ 5. In 2003, without the consent of the lenders, borrower entered into a purchase and sale agreement with a third party to sell Eastwood Park (Eastwood), one of the mobile home parks securing the loan, and accordingly sought a partial release from the terms of the mortgage. By letter of February 26, 2003 to GMAC, borrower's president sought "a release/payoff amount with a per diem" for the Eastwood property. GMAC did not reply. In response, borrower commenced an action in Chittenden Superior Court, and sought as emergency injunctive relief the release of the Eastwood property.

¶ 6. The complaint, filed May 5, 2003, recited the above facts and emphasized that borrower could sell Eastwood only if borrower obtained a release from the terms of the mortgage by May 25, 2003. In the complaint, borrower also noted that, while lender had assigned a loan value amount of $157,827 to the Eastwood property, borrower had nonetheless offered to pay $160,000 for its release. To support its claim for release, borrower alleged various theories of liability, including a restraint-on-alienation theory based on lender's refusal to grant borrower a partial release from the terms of the mortgage.

¶ 7. A subsequent motion for emergency relief filed by borrower contained the same allegations as the complaint, but added that borrower was required to comply with the Vermont Mobile Home Park Act by notifying park residents of the intent to sell and by giving them an opportunity to purchase. See 10 V.S.A. § 6242(a)-(b).² The motion further stated that borrower had given the required notice on February 22, 2002, that the residents had not indicated an intent to purchase, and thus that borrower had a year to sell according to 10 V.S.A. § 6242(f). According to the motion, borrower had sold on the last day before the expiration of the one year period and would have to start the notification process anew if the sale could not close in May 2003. Accordingly, borrower requested that the court order that "defendant(s) be ordered to discharge their mortgage as it relates to the Eastwood property within forty-eight (48) hours of placement into escrow of the sum of one hundred sixty thousand dollars ($160,000.00)."

¶ 8. The superior court heard the emergency motion on May 23, 2003. Although both Column and GMAC entered appearances, Column no longer had an interest in the mortgage, as it had effectively been transferred to GMAC. For its part, GMAC acknowledged that borrower had requested partial prepayment but insisted that the loan and security agreements prohibited it. GMAC also added that the security agreement allowed total, but not partial, collateral substitution, and that, in any event, borrower had not complied with the requirements for collateral substitution.

¶ 9. Borrower responded by changing its theory of relief. Borrower now stated that it did not want to prepay, but instead wanted partial defeasance by substitution of cash collateral in the amount of $175,000. Borrower further argued that the security agreement was silent as to partial collateral substitution, and that in the absence of a prohibition in the contract, borrower had a right to partial collateral substitution. Finally, borrower contended that a prohibition on partial collateral substitution constituted an unenforceable restraint on alienation, because borrower could never sell all five mobile home parks as the Mobile Home Act would effectively require. The court rejected these arguments and denied the motion for injunctive relief, finding that the mortgage agreement did not create a right of partial collateral substitution and that such a right could not be implied without effectively "reform[ing] the deal as a whole."

¶ 10. Even before borrower's action in superior court, borrower began missing loan payments, and on June 23, 2003. GMAC notified borrower that it was in default and that accelerated payment of the note would be required. GMAC thereafter filed a counterclaim demanding full payment of the note, with interest. On January 6, 2004, GMAC began foreclosure proceedings against borrower in Washington Superior Court and moved for the appointment of a receiver. The court denied this motion, because the parties agreed instead to arrange for payment by borrower into an escrow account. A further hearing on the escrow account was held on November 19, 2004.

¶ 11. Meanwhile, both borrower and Column moved for summary judgment in...