Travelers Ins. Co. v. Corporex Properties, Inc.

• Decision Date: 26 August 1992
• Docket Number: Civ. A. No. 91-110.
• Citation: 798 F. Supp. 423
• Parties: The TRAVELERS INSURANCE CO., Plaintiff, v. CORPOREX PROPERTIES, INC., et al., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

798 F. Supp. 423

The TRAVELERS INSURANCE CO., Plaintiff, v. CORPOREX PROPERTIES, INC., et al., Defendants.

Civ. A. No. 91-110.

United States District Court, E.D. Kentucky, at Covington.

August 26, 1992.

L. Clifford Craig, Taft, Stettinius & Hollister, Cincinnati, Ohio, for plaintiff.

William R. Jacobs, Strauss & Troy, Covington, Ky., for defendant Corporex.

William R. Jacobs, Strauss & Troy, Covington, Ky., for defendant Terrae Tutela.

Larry Crigler, Burlington, Ky., for defendant Boone County.

Chris Gorman, Office of Atty. Gen., Frankfort, Ky., for defendant Com. of Ky.

MEMORANDUM OPINION & ORDER

BERTELSMAN, Chief Judge.

In this diversity action, the mortgagee of commercial real estate seeks, among other things, foreclosure. The matter came before the court for hearing on the plaintiff's motion for partial summary judgment and order of sale. Robert A. Winter, Jr., L. Clifford Craig, and Michael J. Zavatsky appeared on behalf of Travelers Insurance Company hereinafter Travelers. Martin C. Butler and William R. Jacobs appeared on behalf of the defendants, Corporex Properties, Inc. hereinafter Corporex, and Terrae Tutela Corporation hereinafter Terrae.

For the reasons set forth at the hearing on this matter and for the additional reasons set forth below, IT IS ORDERED THAT PLAINTIFF'S MOTION BE GRANTED IN PART.

A. Background

The material facts are undisputed. On September 12, 1985, Corporex and Travelers executed a Mortgage Note in the amount of $6,400,000 hereinafter Note, and a Mortgage Deed and Surety Agreement hereinafter Mortgage. The Note contains an acceleration clause for failure to make payments of interest or principal when due. The Mortgage contains a similar acceleration clause in addition to the remedy of foreclosure for failure to make payments when due or for other breaches enumerated in the Mortgage. Transfer of any or part of the mortgaged property without prior written consent of Travelers would constitute a default under the Mortgage and Note. Mortgage ¶¶ 14, 18; Note at 2-3. Finally, both documents contain "no waiver" provisions: that is, failure of Travelers to exercise any of its rights does not constitute a waiver of any continuing or future default. Mortgage ¶ 20; Note at 5. The Note is a nonrecourse instrument.

Beginning October 1, 1990, Corporex failed to pay monthly installments of principal, interest and late charges when due. By late 1990, Corporex approached Travelers in an attempt to discuss a "workout." From January until July the parties attempted to negotiate a workout, without success, and Travelers filed this action on July 12, 1991.

B. Plaintiff is Entitled to Foreclosure since Defendants' Estoppel/Waiver/Inequitable Conduct Argument is without Merit

Corporex contends that Travelers engaged in certain "inequitable conduct" that may defeat Travelers' right to demand foreclosure. Corporex also argues that Travelers breached a duty to act reasonably and in good faith.

Corporex's argument derives from the premise that Travelers was under an obligation to reach an agreement on the terms of a workout. Corporex, however, cites no authority supporting this premise. A statutory duty applied to farm loans is the only circumstance in which a court has found any mention of an obligation on the part of the mortgagee to attempt to restructure. See, e.g., Farm Credit Bank of Spokane v. Debuf, 757 F.Supp. 1106, 1109 (D.Mont.1990). The statute and regulation relevant to those cases do not apply here.

Although it is recognized that implied in each contract is a covenant of "good faith and fair dealing," such a covenant does not preclude a party from enforcing the terms of the contract. See, e.g., K.M.C. Co. v. Irving Trust Co., 757 F.2d 752, 759 (6th Cir.1985); Ranier v. Mount Sterling Nat'l Bank, 812 S.W.2d 154, 156 (Ky.1991). It is not "inequitable" or a breach of good faith and fair dealing in a commercial setting for one party to act according to the express terms of a contract for which it bargained. Terry A. Lambert Plumbing, Inc. v. Western Sec. Bank, 934 F.2d 976, 983 (8th Cir.1991); Kham & Nates Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357-58 (7th Cir.1990).

Corporex cites two lines of cases discussing waiver, estoppel and inequitable conduct. The first line of cases holds that a mortgagee who repeatedly accepts late and/or partial payments is not entitled to accelerate the loan based on those payments. See, e.g., Karas v. Wasserman, 91 A.D.2d 812, 458 N.Y.S.2d 280, 282 (1982). These cases are inapplicable because there is no evidence that Travelers accepted such payments prior to issuing the letter of default and acceleration in January, 1991.

The second line of cases holds that a mortgagee may be estopped from pursuing a foreclosure either because its conduct was such that the mortgagor could have reasonably assumed that the mortgagee would not foreclose or because the mortgagee orally agreed to give the mortgagor time to negotiate a voluntary sale. E.g., Citibank, N.A. v. Nyland (CF8) Ltd., 878 F.2d 620, 623 (2d Cir.1989) (applying New York law); First Texas Sav. Ass'n v. Comprop Inv. Properties, Ltd., 752 F.Supp. 1568, 1575 (M.D.Fla.1990) (applying Florida law).

Without considering the viability of these doctrines under Kentucky law, it is clear that neither line of authorities applies to this case. It is undisputed that a private sale in lieu of foreclosure was not contemplated by the parties. Corporex wanted a restructuring, or "workout," of the loan; Corporex agreed, in writing, that Travelers was not waiving any rights in attempting to negotiate a workout; and Travelers accepted Corporex's interest payments during this period upon the express condition that the payments did not cure the breach and were not a waiver of Travelers' rights.

For example, a letter dated January 10, 1991, from John Bond, Vice President and Account Manager of Travelers, to William Butler, President and CEO of Corporex and Terrae, provides:

"RE: Pre-Workout Agreement

* * * * * *

When signed by each of us, this letter constitutes an agreement between you ("Borrower") and the undersigned lender ("Lender").

1. Negotiations. We have commenced negotiations concerning certain obligations ("Obligations") you have to us. Without liability for failing to do so, we each plan to discuss various courses of action which may be in our mutual interests. Either of us, in our sole and absolute discretion, may terminate these discussions at any time and for any reason; and, upon such termination of discussions, our respective obligations to one another shall be only as set forth in executed written agreements, if any, as described below.

2. Description of Loan Documents and Borrower's Default. Borrower's obligations are incorporated within the loan documents executed and closed September 12, 1985, and subsequently funded pursuant to such documents. You hereby acknowledge that you are in default of certain monetary obligation sic as set forth on Exhibit `A'.

3. Only Written Agreements and Amendments. Our contemplated discussions may be lengthy and complex. While we may reach verbal agreement on one or more preliminary issues which we are trying to resolve, we have agreed that neither of us shall be bound by any agreement, verbal or written, on individual issues, and no rights or liabilities, either express or implied, shall arise on the part of the parties hereto, or any third party, until and unless (a) agreement is reached on all issues, and (b) our agreement on all issues has been reduced to a written agreement, signed by each of us, and approved by Lender's appropriate authorities. No verbal agreement shall be considered binding on either party. Furthermore, in order to avoid any confusion or misunderstanding, each of us also agrees that this agreement may only be amended in writing.

4. Approval Process. We do not have the authority to bind Lender to any modification of or changes in the loan document structure. If we reach a verbal agreement on proposed modifications to the Loan Documents, then we will summarize into a legal document, which will provide the basis for our recommendation to the appropriate authorities of Lender for a loan modification. If our recommendation is approved, you will be notified in writing of such approval.

* * * * * *

6. No Waivers. No negotiations or other actions undertaken pursuant to this agreement shall constitute a waiver of any party's rights under the Loan Documents, except to the extent specifically stated in a written agreement complying with the provisions of paragraphs 3 and 4 of this agreement.

* * * * * *

If the foregoing accurately summarizes the terms of our binding agreement, please sign this letter in the space provided below...."

Butler Dep., Ex. 8. Butler signed the agreement on January 11, 1991.

Travelers' acceptance of partial interest payments was made expressly without a waiver of rights, and Corporex acknowledged the same. For example, in a letter to Butler dated January 17, 1991, Travelers' Regional Counsel acknowledged receipt of a payment of $54,400.97. The letter states in part:

"The loan remains in default, and interest continues to accrue on the total unpaid amount due under the note at the default rate of 15.75% per annum.

This letter is to formally acknowledge receipt of this partial payment under the note and to notify you that, consistent with the Mortgage and other documents ..., Travelers' acceptance of this partial payment does not constitute and shall not be construed as a waiver of any of Travelers' rights and remedies as set forth in the loan documentation, or as otherwise provided by law."

Butler Dep., Ex. 9.

On June 10, 1991, after negotiations had proven unsuccessful, Travelers sent a letter to Butler, which provides in part:

"Our last substantive discussion on this matter occurred on May 8, 1991. To date, no agreement has been reached by the parties with respect to any such modification. After

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