PMI, by and through its special servicer, Orix Capital Markets, LLC v. Palm Beach Mall, LLC, Simon Property Group, LP., a/k/a Simon Property Group, L.P., d/b/a DeBartolo Realty Partnership, LTD. and Simon Palm Beach, LLC

Citation: Not availableDocket: 4D13-4808 and 4D14-24-Wells Fargo Bank, N.A., as Trustee for the Registerd Holders of J.P. Morgan Chase Commercial Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 2003

Court: District Court of Appeal of Florida; September 30, 2015; Florida; State Appellate Court

Original Court Document: View Document

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Wells Fargo Bank, N.A., as Trustee for the Registered Holders of J.P. Morgan Chase Commercial Mortgage Securities Corp., appeals four orders favoring Palm Beach Mall, LLC (PBM), Simon Property Group, L.P., and Simon Palm Beach, LLC (collectively, Simon). The case revolves around PBM's alleged breach of an agreement with J.P. Morgan Chase Bank concerning a loan issued in 2002 for $55,350,000, secured by a mortgage later assigned to Wells Fargo. The Loan Agreement required PBM to remain a "special purpose entity," maintaining solvency and adequate capital for its business operations. The appellate court affirms the trial court's judgment in favor of the appellees, indicating that Wells Fargo's claims against PBM and Simon were unsuccessful. The original loan documents and agreements were governed by New York law, and the importance of maintaining the Mall's value to secure the loan was emphasized.

The Loan Agreement includes an exculpation provision (Section 9.4) stating that the Lender cannot enforce the Borrower's obligations through money judgments, with exceptions for foreclosure actions or specific performance. Any judgment against the Borrower is limited to its interest in the Property, Rents, and collateral, and the Lender cannot pursue deficiency judgments against the Borrower or its associated parties (collectively termed “Exculpated Parties”). However, the Lender retains the right to seek recovery from the Borrower for losses due to the Borrower's gross negligence or willful misconduct. If the Borrower fails to maintain its status as a Special Purpose Entity, the loan becomes fully recourse to the Borrower, not to the Exculpated Parties.

In connection with these provisions, Simon, as Guarantor, is irrevocably liable for PBM's obligations under the Loan Agreement, including any losses resulting from PBM's gross negligence or willful misconduct, and for the entire debt if PBM does not maintain its status as a Special Purpose Entity. The Guaranty specifies that the Guaranteed Obligations encompass all liabilities owed by PBM, including those related to legal fees incurred by the Lender.

Midland Loan Services became the servicer for PBM's loan in August 2003, conducting annual inspections of the Mall property. Reports from 2004 to 2007 indicated the Mall was in “good” condition, declining to “fair” in March 2009 and “average” in April 2009. A separate report in May 2009 confirmed it was in “good” condition. From 2007, Simon sought to redevelop the Mall, spending over $2,000,000 and engaged in “de-leasing” to avoid lease buyouts. However, many tenants left during the economic downturn, including Macy's and IKEA, citing economic reasons for their departures. Appellees claimed that the financial crisis derailed redevelopment plans, supported by a December 2009 report from Orix Capital Markets, which noted that Simon had spent about $1,200,000 on stalled redevelopment efforts. PBM defaulted on its loan in March 2009, leading David Simon to transfer the deed to Wells Fargo, who contended that the Mall's failure was due to PBM’s mismanagement. Wells Fargo alleged that PBM never progressed beyond initial redevelopment stages, engaged in poor leasing practices, allowed a rodent infestation, failed to secure financing for the IKEA deal, and removed its signage from the property. Following the default, Wells Fargo filed a foreclosure action, purchased the Mall for $25,000,000 at auction, and sought damages, claiming PBM's gross negligence and misconduct constituted a breach of the Loan Agreement, resulting in significant losses.

Wells Fargo claimed that actions such as deferring routine maintenance, the “de-leasing” process, and neglecting the Mall's redevelopment constituted gross negligence or willful misconduct, justifying a monetary judgment under section 9.4 of the Loan Agreement. In Count II, Wells Fargo asserted that Simon was liable for PBM's alleged misconduct under section 1.2(a) of the Guaranty. Count III involved claims of PBM breaching the requirement to maintain its status as a “special purpose entity” by remaining solvent, as outlined in the special purpose entity covenant. Wells Fargo also argued that PBM breached subsection (q) by receiving funds from Simon since 2007, thus not covering its liabilities with its own assets. In Count IV, Wells Fargo contended that PBM’s failure to maintain its “single purpose entity” status rendered Simon liable for PBM’s total debt under the Guaranty.

In January 2013, Wells Fargo sought summary judgment on Counts III and IV, while appellees filed a competing motion for summary judgment on all counts. The trial court denied Wells Fargo’s motion and granted appellees’ motion on Counts I and II, concluding that Wells Fargo's claims of gross negligence and willful misconduct did not meet the legal standards under New York law, which requires actions beyond mere economic self-interest. For Count III, the court found Wells Fargo had not demonstrated a lack of material fact regarding PBM’s solvency and rejected its claims about Simon's cash infusions. Regarding Count IV, the court noted the distinction between “single” and “special” purpose entity statuses, concluding that Simon's liability was limited to PBM’s failure as a “single purpose entity.” The court determined that Wells Fargo’s request for reformation of the Guaranty to align with the Loan Agreement was unsubstantiated under New York law, highlighting inconsistencies in Wells Fargo’s arguments and the distinct meanings attributed to the terms by the negotiating parties.

Wells Fargo's argument regarding the definitions of "special purpose entity" and "single purpose entity" was found to be untenable due to the sophistication of the parties involved in the Loan Agreement and Guaranty, who were presumed to understand the distinct meanings of these terms. The trial court granted summary judgment in favor of the appellees on Count IV after reconsideration. In the remaining Count III, Wells Fargo presented expert testimony indicating that as of December 31, 2008, the Mall's market value was $14,700,000, leading to a determination that PBM's liabilities exceeded its assets by $36,024,277, thereby asserting PBM’s insolvency under the “balance-sheet insolvency” definition applicable in federal bankruptcy law and the UCC. 

The appellees countered by claiming that the Loan Agreement did not define "solvent" or "insolvent," so the New York common law definition of "equity insolvency" should apply, which is based on the inability to pay debts as they become due. The trial court sided with the appellees, dismissing Count III for two primary reasons: the Loan Agreement did not reference the UCC or bankruptcy law in the relevant section, which suggested those definitions were not intended to apply; and Article 9 of the UCC does not cover real property transactions under New York law. Consequently, the trial court rendered a final judgment for the appellees. On appeal, Wells Fargo contends that the trial court erred in both granting summary judgment on Counts I and II and in dismissing Count III based on the insolvency definitions.

Wells Fargo contends that the trial court erred by not granting its initial motion for summary judgment on Count III, asserting that PBM violated the "special purpose entity" covenant in the Loan Agreement by using funds from Simon to pay its loan debt. In Count IV, Wells Fargo argues that the court misapplied New York law in granting the appellees' motion for summary judgment, claiming that the Loan Agreement and the Guaranty should be interpreted together as they were executed in the same transaction, thereby aligning the definitions of "single purpose entity" and "special purpose entity."

The court reviews summary judgment orders de novo, requiring an examination of the record in favor of the non-moving party. Summary judgment is inappropriate if any genuine issue of material fact exists. The Loan Agreement holds PBM liable for losses due only to its "gross negligence or willful misconduct," similar to the Guaranty’s stipulation regarding Simon's liability. The trial court based its ruling for Counts I and II on the New York Court of Appeals' decision in Metropolitan Life Insurance Co. v. Noble Lowndes International, Inc., which differentiated between liability for gross negligence and mere intentional conduct arising from self-interest. In this case, the court found that acts of intentional nonperformance did not meet the threshold for “willful acts” necessary to invoke an exception to a liability-limiting provision. The New York appellate court reduced damages awarded for willful acts, interpreting that only tortious conduct could trigger such liability, while the plaintiff argued for a broader interpretation of "willful acts."

The core issue pertains to the interpretation of "willful acts" as an exception within a contractual clause that limits the defendant's liability for consequential damages due to non-performance. The court rejects the notion that tort law principles universally apply to cases involving the term "willful," asserting that the law of contracts supports their conclusion. It clarifies that the parties intended "willful acts" to specifically exclude only truly culpable conduct, not merely intentional non-performance driven by self-interest.

The interpretation employs the principle of ejusdem generis, linking "willful acts" to similar terms like “intentional misrepresentation” and “gross negligence.” The court concludes that "willful acts" encompass tortious behavior where the defendant intentionally seeks to cause harm while breaching the contract.

In relation to specific claims by Wells Fargo against appellees, the trial court found no deliberate wrongful acts beyond economic self-interest, thus affirming summary judgment in favor of appellees. Wells Fargo argued that appellees engaged in gross negligence through actions like failing to maintain the Mall and allowing a rodent problem, which it contended justified full recourse against PBM. The court referenced established precedents indicating that exculpatory clauses do not protect against willful or grossly negligent acts.

An exculpatory clause is unenforceable if it permits immunity for intentional wrongdoing or gross negligence that demonstrates a reckless disregard for others' rights. This includes explicit misconduct such as fraud or malice, or implicit negligence. In the case at hand, Wells Fargo's claims regarding the appellees’ actions, which included delaying repairs in anticipation of redevelopment, do not constitute reckless indifference. The presence of rodents in the Mall’s food court at one time does not support Wells Fargo's assertion of the appellees' negligence, as defined by relevant case law. 

Wells Fargo challenges the trial court's preference for the equity insolvency definition over balance-sheet insolvency. Balance-sheet insolvency occurs when liabilities exceed assets, a definition recognized by both the Federal Bankruptcy Code and New York’s U.C.C. Conversely, equity insolvency arises when a debtor cannot meet obligations as they come due. New York common law aligns with the equity insolvency definition, emphasizing the inability to pay debts as they mature. Wells Fargo acknowledged at trial that equity insolvency reflects New York's common law definition, which was also considered in relevant bankruptcy cases.

The court faced a decision on which insolvency test to apply, ultimately concluding that the New York common law definition governs in the absence of a statutory requirement. The court cited American Castype Corp. to assert that the definition of "insolvent" is a legal question for the court. In this case, neither party referred to any statutory provision mandating a specific insolvency test, leading the trial court to correctly apply the equity insolvency definition. Wells Fargo contended that this definition rendered several provisions of the Loan Agreement redundant, specifically arguing that subsections of the “special purpose entity” covenant became superfluous under equity insolvency. They highlighted that sections 9.4(B)(i)(e) and 1.2(b)(i)(E) of the Loan Agreement, which address consequences of PBM declaring bankruptcy, would lose their significance if the equity definition is applied. Although the court noted that interpretations leading to redundancy in contracts are generally avoided, it emphasized that adopting Wells Fargo's proposed balance-sheet definition could adversely impact the commercial mortgage-backed securities market. This definition could allow lenders to act on a decline in property values even if borrowers can still meet payment obligations from other resources, raising concerns about the overall stability of the market.

A borrower current on loan payments is deemed insolvent under Wells Fargo’s theory, despite their ability to continue payments. Wells Fargo has failed to provide convincing authority from New York or elsewhere to support its definition of balance-sheet insolvency for imposing recourse liability on a debtor. The excerpt discusses a case involving a subrogation contract where the New York Court of Appeals interpreted the term “also” in a provision as indicating a separate, additional clause rather than a restatement. Wells Fargo argues that similar use of “and” in its agreement should result in distinct meanings for the italicized phrases. However, it remains unclear if the parties intended different definitions of “solvent” in their contract. 

Wells Fargo alleges that the trial court erred by making factual determinations regarding the ambiguity of the term “solvent” without first establishing whether the competing definitions were reasonable under New York law. Despite the trial court's belief in the term’s ambiguity, this issue was not preserved for appellate review, as it was not properly presented to the lower court. Moreover, Wells Fargo contends that its definition of equity insolvency diverges from New York common law, but the definitions are nearly identical according to Black’s Law Dictionary.

Wells Fargo agreed at trial that the equity insolvency definition under New York common law was appropriate, and the trial court correctly adopted this definition, concluding that PBM did not breach the "special purpose entity" covenant in the Loan Agreement. Consequently, neither PBM nor Simon is liable for the outstanding loan debt. Wells Fargo's assertion that PBM violated the covenant by using Simon's $2,000,000 contributions to pay debts was rejected. The trial court classified these funds as capital contributions, which are permitted under the covenant, as Simon was a member of PBM and contributed funds without expecting repayment. The funds were treated as equity contributions, bolstering Simon's stake in PBM, and became part of PBM's assets. Wells Fargo failed to provide legal support for its claims. 

Regarding Simon's liability under the Guaranty, Wells Fargo contended that the term "single purpose entity" was a mistake and should be interpreted as "special purpose entity." However, the trial court noted that Wells Fargo was not involved in the negotiation of the loan documents and thus could not assert this claim effectively. Furthermore, since PBM did not breach the covenant, Simon cannot be held liable for the debt. The trial court's summary judgment in favor of the appellees on Counts I, II, and IV was upheld, along with the dismissal of Count III. The ruling is affirmed, pending any timely filed motion for rehearing.