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Cargill Global Trading v. Applied Development Co.

April 21, 2010


The opinion of the court was delivered by: Walls, Senior District Judge



Defendant, Essex & Sussex Associates, L.P. ("Essex"), obtained a mortgage from Berkshire Mortgage Finance Bethesda Limited Partnership ("Berkshire") to finance an independent living rental facility for senior citizens. The mortgage note, backed by a security ultimately purchased by plaintiff, Cargill Global Trading Company ("Cargill"), contained a rider limiting Essex‟s right to pay the loan before December 31, 2006 (the "prepayment restriction"). It also contained a provision permitting the Department of Housing and Urban Development ("HUD"), which insured the loan, to override the prepayment restriction to avoid a mortgage insurance claim in the event of a default.

In 2003, Essex defaulted on the loan and HUD overrode the prepayment restriction. Essex prepaid the balance of the loan and, released from the loan‟s restrictive terms, converted the property to condominiums -- a move which turned the facility into a successful and lucrative project. Because Essex prepaid the loan, Cargill did not receive the full amount of interest that it had expected under the loan‟s terms, to the tune of about $4 million.

Cargill now sues Essex for breach of contract, conversion, and tortious interference with the security, and Applied Development Company ("ADC") for conversion and tortious interference with the security and the loan. Cargill also asserts that Applied Senior Living Corporation ("ASLC"), Essex‟s general partner, is liable to the full extent of Essex‟s liability. The success of all three claims turns on whether any of the defendants behaved wrongfully, maliciously, or in bad faith by seeking the override from HUD instead of paying Cargill a premium in exchange for Cargill‟s consent to prepayment.

A bench trial to resolve this controversy was held intermittently between September 1, 2009 and October 23, 2009. After the conclusion of the trial, Cargill and Essex submitted proposed findings of fact and conclusions of law. The Court has reviewed these proposals and compared them to the Court‟s recollection, notes, and trial transcripts. Most of the proposed findings submitted by the parties are irrelevant to the issues immediately before the Court and need not be addressed. The Court makes only those findings and draws only those conclusions that are relevant to, and supportive of, the causes of action at issue.

In short, this opinion finds those facts and draws those legal conclusions that are responsive to, and answer, the following question: Did Cargill prove, by a preponderance of the believable evidence, that (1) Essex breached a contract to which Cargill was a third party beneficiary; (2) Essex or ADC tortiously interfered with a security between Cargill and Berkshire or a loan between Essex and Berkshire; or (3) Essex or ADC is liable for conversion of Cargill‟s property? Defendants assert various defenses such as the Knorr-Pennington Doctrine, and argue that ADC is not a legal entity and not subject to liability for any of the above claims.

Because the Court finds that Cargill has failed to prove any of its causes of action by a preponderance of the believable evidence, the Court need not reach defendants‟ defenses.

The Court‟s findings and conclusions do not merely reflect the trial transcript. Rather, the Court has fulfilled its duties as factfinder by evaluating the credibility of each witness and all evidence. The Court does not, and is not obliged to, accept all testimony as fact. Instead, the Court finds only the following enumerated paragraphs to be the facts. To the extent that a numbered finding of fact is more properly characterized as a conclusion of law, it shall be deemed as such, and vice versa.


I. The Parties

1. Plaintiff Cargill is a corporation formed under the laws of the Cayman Islands, with a principal place of business in Minnesota. (Final Pretrial Order at 5 (Stipulation of Facts) ¶ 2, June 3, 2009 ("Stipulation of Facts").)

2. Defendant Essex is a limited partnership organized under the laws of New Jersey, whose partners are citizens of states other than Minnesota. (Stipulation of Facts ¶ 1.)

3. Defendant ASLC is the general partner of Essex. (Stipulation of Facts ¶ 3.) Allen F. Goldman was, at all times relevant to this action, an officer of ASLC. (Stipulation of Facts ¶ 4.)

4. Defendant ADC is a residential development company. (Tr. Sept. 2, 2009 at 8:13-17.) Goldman worked for ADC between 1991 and 2004 on a variety of real estate development projects in New Jersey. (Tr. Sept. 8, 2009 at 83:7-24; 84:8-16.)

II. Acquisition of the Essex & Sussex Property and the HUD loan.

5. The Essex and Sussex Property (the "Property"), which is at the heart of this lawsuit, was built in 1914 and operated as a beachfront hotel until 1985. The hotel was unoccupied for approximately six years, until Goldman learned about it in 1991, at which time the Property was lying fallow. (Tr. Sept. 8, 2009 at 84:19-85:11.)

6. Essex purchased the Property in 1993, with plans to develop it as a residence for independent seniors. (Stipulation of Facts ¶ 5.) The Property had already been about 60% redeveloped, and then abandoned. When Essex purchased it, Essex made a formal application to the Borough of Spring Lake (the "Borough") to receive a zoning variance allowing it to develop and operate the Property as an independent living residence for seniors. Community members bitterly opposed the variance application, but, after extensive litigation, Essex won the right to go forward with the project in 1999. (Tr. Sept. 8, 2009 at 85:25-87:23.)

7. Based on Essex‟s agreement with the Borough, Essex was permitted to rent apartments subject to the following restrictions:

a. That no more than 168 living units, each unit consisting of no more than two bedrooms, a bathroom, and a living room with limited kitchen facilities, shall be located or occupied on the premises.

b. That no individual less that [sic] 62 years of age shall reside on the premises, except for the spouse of a resident who is 62 years of age or older.

c. That no kitchen facilities shall be installed or permitted to be installed by Essex and Sussex in any of the living units located on the premises except for a sink, a non-convection microwave oven, and a refrigerator which has a volume that does not exceed eight (8) cubic feet. All such kitchen facilities shall be installed by Essex and Sussex. The installation of stove tops and/or stove burners is specifically prohibited in any of the living units. No clothes washers or dryers shall be installed or permitted to be installed in any living unit except the two-bedroom units and the one penthouse unit permitted on the premises. . . .

j. Essex and Sussex shall not provide health care services on the premises of the Essex and Sussex Hotel.

(Tr. Sept. 8, 2009 at 90:16-23; Def.‟s Ex. 140 at LCS 00470-00475.) Although these requirements were quite restrictive, Essex agreed to them voluntarily and believed that it would be able to market the Property successfully despite them. (Tr. Sept. 8, 2009 at 96:14-98:7.)

8. To finance the development of the Property, on November 7, 2000, Essex closed on a forty-year, $24,360,100.00, 7.83% non-recourse mortgage loan made by Berkshire. (Stipulation of Facts ¶¶ 8, 14.) The loan was secured by a mortgage on the Property and insured by HUD. (Stipulation of Facts ¶¶ 8, 10.) Catherine Pharis, a Vice President of Berkshire, was Essex‟s principal contact at Berkshire. (Stipulation of Facts ¶ 9.)

9. The loan contract limited Essex‟s right to pay off its debt before December 2011. The contract contained a prepayment restriction, which provided that the loan could not be prepaid at all before December 2006. If Essex chose to prepay the loan at any time between December 2006 and December 2011, it would have to pay a premium to Cargill, representing the lost future income from the monthly loan payments. (Pl.‟s Ex. 10.) The general purpose of the prepayment restriction was to encourage investors to invest by locking in the interest rate stated in the contract for a certain period of time. Because Essex knew that Berkshire would obtain funding for the loan through the sale of a security backed by the loan, Cargill, the eventual investor in that security, was a third party beneficiary of the prepayment restriction of the loan contract. (Letter Order Granting Mot. for Partial Summ. J. 4-5, June 19, 2008.)

10. The loan contract offers an override exception to the prepayment restriction: Notwithstanding any prepayment prohibition imposed and/or penalty required by the Note prior to December 1, 2006, the indebtedness may be prepaid in part or in full without the consent of the Holder and without prepayment penalty if the Secretary of the Department of Housing and Urban Development ("HUD") determines that prepayment will avoid a mortgage insurance claim and is therefore in the best interest of the Federal Government.

(Pl.‟s Ex. 10.) The contract did not require Essex to attempt to negotiate with the investor before petitioning HUD for a release from the prepayment restriction.

11. Berkshire financed the loan through the issuance of a mortgage-backed security (the "Security"), pursuant to a program administered by the Government National Mortgage Association ("Ginnie Mae"). (Stipulation of Facts ¶ 11.)

12. The terms of the Security were set forth in an accompanying prospectus. The prospectus states that "[t]he mortgagor has the option to prepay the Mortgage on the terms described in the Annex." (Def.‟s Ex. 73 at CAR89.) It further specifies that the mortgagor had an option to prepay if the owner of the Security agreed to waive the prepayment restriction in the loan and to permit prepayment:

Termination by Agreement

The pool arrangement may be terminated at any time prior to the maturity date of the Securities, provided that the Issuer and all holders of the outstanding Securities have entered into an agreement for such termination. Upon formal notification with satisfactory evidence that all parties to the termination agreement have concurred, and return of the Securities to Ginnie Mae for cancellation, the guaranty will be terminated. (Def.‟s Ex. 73 at CAR00088.)

13. The clear terms of the loan and Security provided Essex with two viable options for paying before December 2006, without incurring a penalty: first, negotiation with the mortgagee; second, seeking and receiving a HUD override of the prepayment restriction. After the Security was issued, the terms of the loan were fixed. At and after that time, Essex and Berkshire could not modify or waive any provisions of the loan without taking one of those options. (Pl.‟s Ex. 169 (Dep. of Bernald Malone at 118-119).)

14. Cargill acquired the Security in November 2000. (Stipulated Facts ¶ 12.) Matthew Koeppen, a portfolio manager at Cargill who managed mortgage-backed securities, among other kinds of securities, made the decision to purchase and invest in the Security. (Tr. Sept. 14, 2009 at 18:2-8; Def.‟s Ex. 153 (Dep. of Matthew Koeppen at 22:24-23:2).)

15. Before Koeppen made the decision to purchase the Security, he investigated the project, acquainting himself with all the key terms of the Security. He also reviewed the prospectus, which contained the rider with the override provision. He described the override provision as "a standard term in all Ginnie Mae project loan mortgage backed securities." (Tr. Sept. 14, 2009 at 18:12-17, 111:18-112:1, 112:13-113:6; Def.‟s Ex. 153 (Dep. of Matthew Koeppen at 45:6-47:8; Koeppen Ex. 5).)

16. Koeppen also read a document called Mortgagee Letter 87-9 before deciding to purchase the Security. The purpose of Mortgagee Letter 87-9 was to provide guidance to mortgagees by clearly stating "the terms under which [HUD] will consider prepayment lockout overrides." (Def.‟s ...

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