VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC

• Decision Date: 12 November 2013
• Docket Number: No. 13–1128.,13–1128.
• Citation: 735 F.3d 25
• Parties: VFC PARTNERS 26, LLC, Plaintiff, Appellee, v. CADLEROCKS CENTENNIAL DRIVE, LLC and Daniel Cadle, Defendants, Appellants.
• Court: U.S. Court of Appeals — First Circuit

735 F.3d 25

VFC PARTNERS 26, LLC, Plaintiff, Appellee,

v.CADLEROCKS CENTENNIAL DRIVE, LLC and Daniel Cadle, Defendants, Appellants.

No. 13–1128.

United States Court of Appeals, First Circuit.

Nov. 12, 2013.

David H. Rich, with whom Benjamin J. Wish and Todd & Weld, LLP were on brief, for appellants.

Armando E. Batastini, with whom Nixon Peabody LLP was on brief, for appellee.

Before HOWARD, STAHL, and THOMPSON, Circuit Judges.

STAHL, Circuit Judge.

This lawsuit concerns a dispute between a borrower (along with its guarantor) and a lender over various expenses associated with a foreclosure on a parcel of real estate following a loan default. After a bench trial, the district court entered judgment in favor of the lender. For the following reasons, we reverse in part.

I. Facts & Background

Defendant Cadlerocks Centennial Drive, LLC (“Cadlerocks”) is a Massachusetts limited liability company whose single asset is a mixed-use commercial and industrial property located at One Centennial Drive, Peabody, Massachusetts (“Property”). A warehouse located on the Property, built in 1964, was occupied during the time period relevant to this lawsuit by a daycare center and other tenants. Defendant Daniel Cadle (“Cadle”) is President of The Cadle Company, which is the sole manager of Cadlerocks.

A. The Original Loan and Cadlerocks's Default

In December 1999, Cadlerocks entered into a loan with lender Salomon Brothers Realty Corporation (“Original Lender”) in the principal amount of $1,925,000 (“Loan”). A Promissory Note (“Note”) with an effective date of December 14, 1999, memorialized the Loan. The Note was secured by a Mortgage, Assignment of Rents, and Security Agreement (“Mortgage”) on the Property, along with a separate Assignment of Leases and Rents, Exceptions to Non–Recourse Guaranty (“Guaranty”) and an Environmental Indemnity Agreement (“Indemnity Agreement” or “Agreement”). Cadle executed the Guaranty in his personal capacity, and both Cadlerocks and Cadle executed the Indemnity Agreement.

The Original Lender conducted a Phase I Environmental Site Assessment (“1999 Phase I”) prior to the closing of the Loan, which revealed the possible presence of tetrachloroethylene, also known as perchloroethylene (“PCE”), on the Property. PCE is a known carcinogen that is listed as a hazardous substance in the Massachusetts Contingency Plan, 310 Mass.Code Regs. 40.1600 (2012). The likely source was New England Carbide, a tenant prior to Cadle's acquisition of the Property, who used a degreasing agent containing PCE. Instead of following the Phase I test with a more comprehensive Phase II test, Cadlerocks decided to obtain an environmental insurance policy naming the Original Lender as the insured. At trial, Cadle was unable to produce an executed, authenticated copy of that policy.

On August 21, 2000, the Original Lender assigned the Mortgage and all related loan documents and agreements to Wells Fargo Bank as Trustee for the registered holders (“Trust”). ORIX Capital Markets, LLC (“ORIX”) was the special servicer of the Trust and acted pursuant to a Limited Power of Attorney.¹ ORIX began servicing the Loan in December 2009.

The balloon balance due on the Note at its maturity date of January 1, 2010, was $1,464,935. Cadlerocks failed to make that payment, defaulting on the Note, although it continued making payments on the interest and principal until August 2010. During that period, the parties discussed the possibility of a loan modification. After these discussions proved unsuccessful, the Trust decided to commence foreclosure proceedings.

B. Environmental Testing on the Property

Cadle offered a “deed-in-lieu,” meaning a transfer of title without recourse, in settlement of the Trust's claims prior to foreclosure. As part of ORIX's routine due diligence during these negotiations, ORIX engaged EBI Consulting (“EBI”) to conduct a new Phase I test (“2010 Phase I”), which, like the 1999 Phase I, revealed the possible presence of PCE on the Property. ² Because of the results of the test, ORIX rejected the offer of the deed-in-lieu, postponed the foreclosure sale, and sought the appointment of a receiver. Cadlerocks did not oppose the appointment motion, and on December 15, 2010, the district court appointed Francis Morrissey (“Receiver”) to serve as receiver for the Property.

Meanwhile, ORIX ordered EBI to conduct a Phase II test of the Property, consisting of an integrity test of an underground storage tank on the Property and a soil vapor investigation of the exterior of the warehouse. The tank passed the integrity test, but the soil vapor investigation identified the presence of PCE in the soil outside of the building. As a result, EBI recommended a test of the indoor air quality of the warehouse.

On March 20, 2011, Mark Germano, the Licensed Site Professional (“LSP”) overseeing EBI's testing, conducted a “grab” test ³ that detected PCE in concentrations of 1.65 micrograms per cubic meter (µg/m ³) in the portion of the building occupied by the daycare center. On March 23, 2011, ORIX notified the Receiver of these results. The Receiver immediately authorized EBI to perform a second air quality test and retained its own independent environmental professionals, LSP James Young and attorneys McGregor & Associates. Young advised the Receiver that the result of the March 20 grab test, even if accurate, did not represent an imminent health or safety risk.

Thereafter, on March 25, 2011, EBI conducted a second air quality test, which revealed PCE in concentrations of 1.16 µg/m ³. The following day, the Receiver provided the daycare center with Young's assessment of these results, which explained that “the concentration[s] measured are two to five orders of magnitude below available short-term guidelines and do not represent an acute (short-term) risk. To evaluate the risk of chronic (long-term) risk, a more thorough investigation is required.”

In April 2011, Young walked through the building in an effort to “better assess the possible origin of the PCE vapors.” He also conducted follow-up air tests to determine whether the levels of PCE were hazardous over an extended period of time. He collected eight-hour samples on June 24, 2011, and twenty-four-hour samples on July 9, 2011, but none of the tests showed concentrations of PCE at hazardous levels.

The Receiver sought reimbursement from Cadlerocks for the expenses he incurred related to the 2011 environmental tests. Cadlerocks did not respond, and the Receiver therefore requested payment from ORIX. ORIX agreed that the Receiver could draw down on income and sales proceeds generated from the Property that otherwise would have been applied to pay down Cadlerocks's debt.

There was no further testing until the fall of 2012, when a prospective buyer insisted on more recent data than the previous test results provided. At the Receiver's request, ORIX paid EBI to conduct a new round of tests. These 2012 tests included groundwater testing, soil borings, and indoor air testing. No testimony indicates that these tests revealed a hazardous level of PCE.

C. Litigation

On November 22, 2010, ORIX filed this lawsuit against Cadlerocks and Cadle, alleging breaches of the various agreements related to the Loan. The district court partially granted ORIX's motion for summary judgment on October 18, 2012, holding that Cadle was personally liable for $33,438 in misappropriated rent. The court held a three-day bench trial on the remaining claims on December 18–20, 2012. At the conclusion of the trial, the court entered an order awarding ORIX $1,520 in damages related to the condition of the property and $102,536 for expenses related to the environmental testing on the Property under the Indemnity Agreement. In a separate order, the court awarded ORIX $50,000 in attorney's fees and $5,609.75 in costs. Appellants appeal the award of expenses related to the environmental testing, and ask this court to remand the award of attorney's fees and costs for reconsideration.

II. Analysis

The Indemnity Agreement provides in relevant part that Cadle and Cadlerocks would indemnify the Original Lender and its assignees and successors (“Indemnitees”) “from and against all ... costs, ... demands, ... expenses” and other liabilities “of any kind or nature whatsoever ... sought from or asserted against Indemnitees in connection with, in whole or in part, directly or indirectly, ... the presence, suspected presence, release, suspected release, or threat of release of any Hazardous Material” on or around the Property. ⁴ It further specifies that “[s]uch Liabilities shall include” seven particular categories of liability, only one of which is arguably applicable here: “the cost required to take necessary precautions to protect against the release of any Hazardous Materials in, on, or under the Property, the air, any ground water, waterway or body of water, any public domain or any surrounding areas to the Property.”

The district court held that ORIX was entitled to recover the 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 routine due diligence. “Because ORIX would have conducted a Phase I regardless of any previous knowledge of the presence of PCE at the Property, that testing was not conducted in response to suspected environmental hazards and thus is not covered” by the Indemnity Agreement. Id. But it held Appellants liable for the remainder of the environmental testing costs ⁵ because the testing conducted after the 2010 Phase I “was reasonable and necessary, particularly given the Receiver's need to ensure that conditions were safe for the occupants of the day care facility on the premises.” Id.

Appellants argue that all of the costs for environmental testing fall...