SJ Props. Suites v. Specialty Fin. Grp., LLC, Case No. 10-C-00198

CourtUnited States District Courts. 7th Circuit. United States District Court of Eastern District of Wisconsin
Docket NumberCase No. 10-C-00198
Decision Date30 March 2012

and, ASKAR CAPITAL, HF, Plaintiffs,

Case No. 10-C-00198


Dated: March 30, 2012


This Decision and Order addresses Defendant Specialty Finance Group, LLC's ("SFG") motion to dismiss the Amended Complaint (the "Complaint") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Problems related to an ill-timed construction loan agreement for a 14-story mixed-use real estate development project located at 1150 North Water Street, in downtown Milwaukee, Wisconsin (the "Project") are at the core of this litigation commenced by the Plaintiffs, SJ Properties Suites; BuyCo, ehf ("BuyCo"); SJ-Fasteignir, ehf ("Fasteignir"); and Askar Capital, hf, ("Askar") (collectively the "Icelandic Entities" or the "Plaintiffs").

The 49-page, 239-paragraph Complaint asserts claims for unjust enrichment (Count I), promissory estoppel (Count II), violations of Subchapter III of Wisconsin Statutes

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Chapter 224 (Count III), unclean hands (Count IV), a declaration of rights under Wisconsin Statutes § 840.03 (Count V), a declaration of rights under Wisconsin Statutes § 841.01 (Count VI), and interference with interest and physical injury to real property (Count VII).

The factual allegations underlying this action span a four-year period and involve a number of entities and contracts. However, in a nutshell, the claims are based on allegations that SFG failed to fully fund its construction loan for the Project and SFG subsequently coerced the Icelandic Entities to advance monies for the Project. The Icelandic Entities maintain that SFG notified them of events of default due to cost overruns, caused them to provide emergency cash to the Project, and that, when the Project eventually collapsed, SFG refused to allow them to continue making payments on the loan.

Motion to Dismiss

SFG seeks dismissal of the entire Complaint. SFG contends that the Icelandic Entities' claims for unjust enrichment (Count I), promissory estoppel (Count II), and most of the claim alleging violations of Subchapter III of Wisconsin Statutes Chapter 224 (Count III) are barred, and that all counts fail to state a cause of action.

For purposes of the pending motion to dismiss, the Court accepts the factual allegations in Icelandic Entities' Complaint as true and draws all reasonable inferences in favor of the Plaintiffs. See Ray v. City of Chicago, 629 F.3d 660, 662 (7th Cir.) cert. denied, _ U.S. _, 132 S.Ct. 100 (2011). To survive a 12(b)(6) motion to dismiss, "a complaint must contain sufficient factual material, accepted as true, to 'state a claim to relief that is

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plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. As the court of appeals for this circuit has stated "the plaintiff must give enough details about the subject-matter of the case to present a story that holds together." Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010).

"Determining whether a complaint states a plausible claim for relief . . . [is] a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 129 S.Ct. at 1950. In performing this analysis, courts need not accept as true any legal conclusions or conclusory statements included in the complaint. Id. at 1949-50. The Court will, however, accept as true all well-pleaded factual allegations, and will draw all reasonable inferences in the plaintiff's favor. Ray, 629 F.3d at 662. If the allegations of the complaint "fail[ ] to state a claim upon which relief can be granted," the complaint will be dismissed. Fed. R. Civ. P. 12(b).

Background 1

BuyCo and Fasteignir are Icelandic private limited companies, referred to as an einkahlutafelag ("ehf"), whose principal offices are located in Reykjavik, Iceland. (Compl. ¶¶ 1-3.) (ECF No. 44.) Askar is an Icelandic limited company, referred to as a

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hlutafelag ("hf"), whose principal office is also located in Reykjavik, Iceland. (Id. at ¶ 3.) BuyCo and Fasteignir advanced funds for the Project. (Id. at ¶¶ 1-2.) Askar provided "mezzanine financing" for the loan. (Id. at ¶ 3.)

SFG is a Georgia unchartered limited liability company whose principal office is located in Atlanta, Georgia. (Id. at ¶¶ 4, 23.) SFG was, and is, a wholly owned subsidiary of Silverton Bank N.A ("Silverton").2 (Id. at ¶ 23.) SFG was created to target the financing needs of the hospitality industry. (Id.)

Neither Silverton nor SFG ever submitted to any type of regulation by the State of Wisconsin, including, without limitation, regulation by the Wisconsin Department of Financial Institutions ("DFI"), Division of Banking, as of the date SFG issued the loan commitment or at any other time. (Id. at ¶ 36.) SFG has not registered as a mortgage banker or broker in Georgia or any state. (Id. at ¶ 35.) In Specialty Finance Group LLC v. DOC Milwaukee LP et al., No. 10-C-315 (E.D. Wis.) (the "315 action"), SFG alleged that it is a "mortgage banker" under Wisconsin Statutes §§ 706.11(1)(f) and 224.71(3). (See id. at ¶ 41(citing the 315 action Compl. (ECF No. 1), ¶¶ 39 & 50).)

On approximately November 9, 2006, DOC Milwaukee, LP ("DOC Milwaukee") was created to acquire and develop the property located at 1150 North Water Street (the"Property"). (Id. at ¶ 26.) When DOC Milwaukee was formed, its partners were

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as follows: (1) DOC Milwaukee II, LLC, as the initial general partner; (2) Development Opportunity Corp., as a limited partner; (3) EP Milwaukee, LLC, as a limited partner; and (4) BuyCo, as a limited partner. (Id.)

DOC Milwaukee received a loan commitment on March 29, 2007, from SFG to advance a $20,900,000 loan for the Project. (Id. at ¶ 37.) Under the terms of the loan commitment, SFG was to fund a loan amount "Not to Exceed $20,900,000.00," provided that DOC Milwaukee made equity contributions equal to 25% of the Project's cost, with a minimum equity contribution of $6,993,302.00. (Id. at ¶ 32.) The minimum equity contribution however, established a 33.4% loan to value ratio. (Id.) When the loan commitment was issued, the loan to value ratio exceeded the 20% loan to value ratio for commercial construction required under the Interagency Guidelines for Real Estate Lending Policies ("Interagency Guidelines") by 13.4%. (Id. at ¶ 33.) At the time of the loan commitment's execution, it was contemplated that the loan documents would be immediately forthcoming and that the loan would close on or before April 6, 2007. (Id. at ¶ 34.)

On April 2, 2007, three days after the issuance of the loan commitment, Silverton submitted an application to the Office of the Comptroller of the Currency (the "OCC") requesting permission to convert from a Georgia chartered commercial bank to a national association. (Id. at ¶ 56.) Silverton's conversion application disclosed SFG as its wholly owned subsidiary. (Id.) It did not identify SFG as a registered or licensed mortgage banker in any jurisdiction, including Georgia or Wisconsin. (Id.)

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Silverton's subsequent periodic regulatory disclosures made to the OCC did not identify SFG as a registered or licensed mortgage banker in any jurisdiction, including Georgia or Wisconsin. (Id. at ¶ 59.) As a result of Silverton's attempt to convert to a national association, it was required to submit to the OCC's jurisdiction and rules, as the OCC was Silverton's primary regulator. (Id.) National Banks and National Associations also must be members of the Federal Reserve System ("Federal Reserve") and the FDIC. (Id. at ¶ 10.)

By submitting to the OCC's regulation, Silverton and its subsidiaries, including SFG, also agreed to submit to the internal loan to value ratio established by 12 C.F.R. § 34, including the Interagency Guidelines that are incorporated by reference, 12 U.S.C. § 1828(o), and the Comptroller's Commercial Real Estate and Construction Lending Handbook (the "Comptroller's Handbook"). (Id. at ¶ 60.) Regulation by the OCC also prohibits insolvent banks from using federal foreclosure procedures if a receiver is appointed to administer assets of an insolvent national association. (Id. at ¶ 61.) The loan to value ratio established by the loan commitment exceeded those established by the Interagency Guidelines by 13.4%. (Id. at ¶ 62.)3

On May 14, 2007, the OCC began its pre-conversion evaluation. (Id. at ¶ 65.) On June 5, 2007, in an internal memorandum, OCC examiners expressed concerns with

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Silverton's credit risk management processes, strategic planning, and capital planning. (Id. at ¶ 68.) At about the same time, the OCC determined that there were significant weaknesses in Silverton's banking practices, including compliance with regulatory capital requirements and statutory loan criteria. (Id. at ¶ 69.)

On June 18, and June 26, 2007, the OCC officials met with Silverton's management to discuss their concerns. (Id. at ¶ 70.) The OCC reported to Silverton that its investigation noted unsafe...

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