SJ Properties Suites v. Specialty Finance Group, LLC

• Decision Date: 25 August 2010
• Docket Number: Case No. 10-CV-00198
• Parties: SJ PROPERTIES SUITES, BuyCo, ehf, SJ-Fasteignir, ehf, and Askar Capital, hf, Plaintiffs, v. SPECIALTY FINANCE GROUP, LLC, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

733 F.Supp.2d 1021

SJ PROPERTIES SUITES, BuyCo, ehf, SJ-Fasteignir, ehf, and Askar Capital, hf, Plaintiffs,

v.SPECIALTY FINANCE GROUP, LLC, Defendant.

Case No. 10-CV-00198.

United States District Court,

E.D. Wisconsin.

Aug. 24, 2010.

As Revised Aug. 25, 2010.

Anthony K. Murdock, Joshua J. Roever, Scott R. Halloin, Halloin & Murdock SC, Milwaukee, WI, for Plaintiffs.

Christopher M. Meuler, S. Todd Farris, Friebert Finerty & St. John SC, Milwaukee, WI, J. Ben Vitale, Lewis E. Hassett, Morris Manning & Martin LLP, Atlanta, GA, for Defendant.

DECISION AND ORDER

RUDOLPH T. RANDA, District Judge.

This action relates to a construction loan agreement for a hotel and condominium real estate development project located at 1150 North Water Street, in downtownMilwaukee, Wisconsin (the "Milwaukee Project"). This Decision and Order addresses the motion for remand pursuant to 28 U.S.C. § 1447(c) (2006) filed by SJ Properties Suites, BuyCo, ehf ("BuyCo"); SJ-Fasteignir, ehf ("Fasteignir"); and Askar Capital, hf, ("Askar") (collectively, the "Plaintiffs"), and several additional motions filed by the parties.

MOTION TO REMAND

In moving to remand this matter to state court, the Plaintiffs maintain that this Court lacks subject matter jurisdiction over this matter because the action does not satisfy the jurisdictional requirement of 28 U.S.C. § 1332(a) that the amount in controversy exceed the sum or value of $75,000, exclusive of interest and costs. They also contend that the Court does not have jurisdiction over this action because the state court has already exercised its jurisdiction over the property that is the subject of the dispute between the parties.

Background ¹

This parties involved in this dispute are BuyCo, Fasteignir, and Askar and the defendant, Specialty Finance Group, LLC ("SFG"). BuyCo and Fasteignir are Icelandic private limited companies, referred to as an einkahlutafélag ("ehf"), whose principal offices are located in Reykjavík, Iceland. (Compl. ¶ ¶ 2, 3.) Askar is an Icelandic limited company, referred to as an hlutafélag ("hf"), whose principal office is also located in Reykjavík, Iceland. (Compl. ¶ 4.) SFG is a Georgia limited liability company whose principal office is located in Atlanta, Georgia. (Compl. ¶ 5.)

On approximately November 9, 2006, DOC Milwaukee, LP ("DOC Milwaukee") was created to develop the property located at 1150 North Water Street (the "Property"). (Compl. ¶ 8.) DOC Milwaukee received a loan commitment (the "Loan Commitment") on March 29, 2007, from SFG to advance a loan in the amount of $20,900,000 for the Milwaukee Project.² (Compl. ¶ 9.) DOC Milwaukee and SFG executed a construction loan (the "SFG Loan Agreement") for the Milwaukee Project on January 9, 2008. (Compl. ¶ 10.) The construction loan was secured by a mortgage. The Plaintiffs acknowledge that they are not in privity to the SFG Loan Agreement. (Compl. ¶¶ 18, 19, 42, 76.) Under the SFG Loan Agreement, it was stipulated that the Borrower would make an equity contribution of $12,993,302 or 25% of the total cost of the Milwaukee Project. (Compl. ¶ 12.) The Plaintiffs maintain that, in reliance on the March 29, 2007, Loan Commitment from SFG and upon the oral promises of SFG's loan officers, they advanced $7,286,802.98 to the Milwaukee Project as of September 2007. (Compl. ¶ 14.)

Under the SFG Loan Agreement, SFG had the right to demand additional equity contributions from DOC Milwaukee if SFG determined that the amount of the construction loan together with the agreedequity contribution from DOC Milwaukee was insufficient to complete the Milwaukee Project. (Compl. ¶ 16.) The Plaintiffs maintain that SFG had a duty to interpret the contract provision granting this right in good faith. ( Id.)

Approximately three months after the SFG Loan Agreement was executed, SFG notified DOC Milwaukee that it was in default, citing "unauthorized cost overruns." (Compl. ¶ 21.) At the time of the first default notice, April 2008, SFG had advanced $7,645,444.38.³ (Compl. ¶ 21.) DOC Milwaukee was not in default of the SFG Loan Agreement due to any delinquencies in payments on the interest or principal that SFG had advanced. (Compl. ¶ 23.)

SFG then threatened the Plaintiffs that if they did not agree to advance additional funds to DOC Milwaukee for the Milwaukee Project, SFG would accelerate the SFG Loan Agreement, forcing DOC Milwaukee into foreclosure proceedings on the mortgage and by implication, wiping out the Plaintiffs' investment in the Milwaukee Project. (Compl. ¶¶ 24, 25.) In return for the Plaintiffs' promise to advance additional funds to DOC Milwaukee, SFG promised to fund the remaining principal balance of the SFG Loan Agreement. (Compl. ¶ 27.) To avoid acceleration and foreclosure on the Milwaukee Project and to obtain the remaining loan proceeds, DOC Milwaukee entered into a forbearance agreement with SFG on approximately October 8, 2008. (Compl. ¶ 28.)

On about February 10, 2009, SFG again notified DOC Milwaukee that it was in default on the SFG Loan Agreement due to unanticipated cost increases for completing the Milwaukee Project with the result that the undistributed balance remaining on the SFG Loan Agreement and the equity contributions of DOC Milwaukee were insufficient to cover the cost of completing the Milwaukee Project. (Compl. ¶¶ 31, 32.) At the time of the second default notice, SFG had advanced $13,431,373.42 on the SFG Loan Agreement while the Plaintiffs had advanced $17,419,807.75 to DOC Milwaukee to complete the Milwaukee Project. (Compl. ¶ 33.) DOC Milwaukee was not delinquent in any payments on the principal or interest on the SFG Loan Agreement at the time of the second default. (Compl. ¶ 34.)

Once again, SFG demanded that the Plaintiffs inject additional funds into the Milwaukee Project, threatening that if the Plaintiffs did not agree to advance the funds to DOC Milwaukee, SFG would accelerate the SFG Loan Agreement and foreclose on the property, wiping out the Plaintiffs' investment in the Milwaukee Project. (Compl. ¶¶ 35, 36.) SFG also promised that if the Plaintiffs advanced additional funds to the Milwaukee Project, it would agree to advance the remaining undistributed principal balance on the SFG Loan Agreement. (Compl. ¶ 37.) To avoid acceleration and foreclosure on the Milwaukee Project and to obtain the remaining loan proceeds, DOC Milwaukee entered into a second forbearance agreement with SFG on approximately April 3, 2009. (Compl. ¶¶ 38, 39.)

The Plaintiffs allege that, during this period, SFG engaged in abusive lending practices, including repeated threats to sell the SFG Loan Agreement and a specific threat to "sell the loan to the loan shark," if the Plaintiffs did not take immediate action to complete the Milwaukee Project using their own funds. (Compl. ¶ 41.) ThePlaintiffs further allege that, even though the Plaintiffs are not parties to, or guarantors of the SFG Loan Agreement, they have made loans and other cash advances for the Milwaukee Project, and they have also made payments on the SFG Loan Agreement on behalf of DOC Milwaukee to avoid default and to keep the work on the property progressing towards completion. (Compl. ¶ 42.) The Plaintiffs maintain that despite these efforts, SFG has not fulfilled its promise to advance the remaining undistributed principal balance on the SFG Loan Agreement. (Compl. ¶ 43.) They allege that, due to SFG's breach of its promise to advance funds, there are a number of unpaid subcontractors who have placed liens on the Property, amounting to more than $3,453,888.20 in unpaid obligations. ( Id.)

The Plaintiffs allege that they have made payments on the SFG Loan Agreement directly to SFG to keep payments on the interest and principal current through June 30, 2009. (Compl. ¶ 44.) Despite these payments, SFG declared the SFG Loan Agreement in default a third time and notified the Plaintiffs that it would not accept any further payments on the SFG Loan Agreement after June 30, 2009, and that it intended to foreclose the Property and "wipe out" the Plaintiffs' interest in the Property as well as the lien interests of all subcontractors. (Compl. ¶ 45.)

The Plaintiffs maintain that the unanticipated cost overruns cited by SFG as reasons for default were the result of SFG's construction inspector's failure to properly inspect the Milwaukee Project. (Compl. ¶ 54.) SFG designated Broadlands Financial Group, LLC ("Broadlands") to serve as its agent, providing construction risk management services that included oversight of the Milwaukee Project and contract funds administration. (Compl. ¶¶ 47, 48.) Under the SFG Loan Agreement, DOC Milwaukee was required to submit payment applications in conformity with the procedure established by Broadlands. (Compl. ¶ 49.) Under this procedure, DOC Milwaukee was required to submit all payment applications to Broadlands' project finance manager. (Compl. ¶ 50.) The project finance manager was to request a site inspection to confirm the accuracy of the payment application against the actual status of construction so that the distributed payments were made for work that was actually performed. (Compl. ¶ 51.)

The Plaintiffs further allege that SFG, in reliance on Broadlands' payment procedure, distributed funds for payment applications that "overstated the actual status of construction and that requested payment for work that had not yet been performed." (Compl. ¶ 53.) Thus, the unanticipated cost overruns cited as reasons for default were caused in whole or in part by SFG's construction inspector's failure to accurately verify the payment applications against the actual status of construction. (Compl. ¶ 54.)

In addition, the Plaintiffs maintain that SFG's own financial troubles were a motivating factor in its decision to "improperly issue default notices, refusal to fully fund the SFG Loan Agreement and Loan Commitment, and fulfill oral promises to advance additional funds" to DOC Milwaukee to complete the Milwaukee Project. (Compl. ¶ 59.)...