pmi-by-and-through-its-special-servicer-orix-capital-markets-llc-v-palm ( 2015 )

DISTRICT COURT OF APPEAL OF THE STATE OF FLORIDA
FOURTH DISTRICT
WELLS FARGO BANK, N.A., as Trustee for the REGISTERED
HOLDERS of J.P. MORGAN CHASE COMMERCIAL MORTGAGE
SECURITIES CORP., COMMERCIAL MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 2003-PMI, by and through its special servicer,
ORIX CAPITAL MARKETS, LLC,
Appellants,
v.
PALM BEACH MALL, LLC, a Delaware Limited Liability Company;
SIMON PROPERTY GROUP, L.P., a Delaware Limited Partnership, also
known as SIMON PROPERTY GROUP, L.P., a Delaware Limited
Partnership doing business as DeBARTOLO REALTY PARTNERSHIP,
LTD.; and SIMON PALM BEACH, LLC, a Delaware Limited Liability
Company,
Appellees.
Nos. 4D13-4808 and 4D14-24
[September 30, 2015]
Consolidated appeals from the Circuit Court for the Fifteenth Judicial
Circuit, Palm Beach County; Meenu Sasser, Judge; L.T. Case No. 502009
CA013088XX.
Matthew R. Chait, Alfred A. LaSorte, Jr., and Jonathan P. Hart of
Shutts & Bowen LLP, West Palm Beach; Jessica L. Ellsworth and Neal
Kumar Katyal of Hogan Lovells US LLP, Washington, D.C.; and Ira M.
Feinberg of Hogan Lovells US LLP, New York, NY, for appellants.
David P. Ackerman of Ackerman, Link & Sartory, West Palm Beach,
and Paul Vizcarrondo and Ben M. Germana of Wachtell, Lipton, Rosen &
Katz, New York, NY, for appellees.
PER CURIAM.
Appellant Wells Fargo Bank, N.A., as Trustee for the Registered Holders
of J.P. Morgan Chase Commercial Mortgage Securities Corp., Commercial
Mortgage Pass-Through Certificates, Series 2003-PMI, by and through its
special servicer Orix Capital Markets, LLC (“Wells Fargo”), appeals four
separate orders in favor of appellees Palm Beach Mall, LLC (“PBM”), Simon
Property Group, L.P., also known as Simon Property Group, L.P., doing
business as DeBartolo Realty Partnership, LTD., and Simon Palm Beach,
L.L.C. (collectively, “Simon”). This case concerns PBM and Simon’s liability
to Wells Fargo in light of PBM’s alleged breach of certain provisions of an
agreement initially executed by PBM and JP Morgan Chase Bank (“JP
Morgan”). Wells Fargo raises multiple issues on appeal. We affirm the
judgment of the trial court in all respects.
The Loan Documents
In the mid-1990s, Simon acquired the Palm Beach Mall (the “Mall”) and
subsequently created PBM as a limited liability company (“LLC”) for the
sole purpose of owning and operating the property. The terms of the LLC
agreement named Simon as an equity member of PBM and expressly
permitted, but did not require, members to make capital contributions to
PBM.
In September of 2002, JP Morgan issued a loan to PBM in the amount
of $55,350,000. The loan was secured by a mortgage, which was later
assigned to Wells Fargo on October 23, 2003. Prior to the assignment, JP
Morgan also entered into a loan agreement (the “Loan Agreement”) with
PBM, and a guaranty agreement (the “Guaranty”) with Simon, both of
which are governed by New York law.
In the Loan Agreement, PBM pledged to maintain the status of a
“special purpose entity,” defined in pertinent part as follows:
“Special Purpose Entity” shall mean a corporation, limited
partnership or limited liability company which at all times
prior to, and on and after, the date hereof:
....
(i) is and will remain solvent and pay its debts and liabilities
(including, as applicable, shared personnel and overhead
expenses) from its assets as the same shall become due, and
is maintaining and will maintain adequate capital for the
normal obligations reasonably foreseeable in a business of its
size and character and in light of its contemplated business
operations;
....
2
(q) has paid and will pay its own liabilities and expenses,
including the salaries of its own employees, out of its own
funds and assets, and has maintained and will maintain a
sufficient number of employees in light of its contemplated
business operations[.]
(Emphasis added).
PBM also acknowledged that JP Morgan had “a valid interest in
maintaining the value of [the Mall] so as to ensure that, should Borrower
default in the repayment of the Debt or the performance of the obligations
contained in the Loan Documents, Lender can recover the Debt by a sale
of [the Mall].”1 Finally, the Loan Agreement contained the following
exculpation provision:
Section 9.4. Exculpation. Subject to the qualifications
below, Lender shall not enforce the liability and obligation of
Borrower to perform and observe the obligations contained in
the Note, this Agreement, the Mortgage or the other Loan
Documents by any action or proceeding wherein a money
judgment shall be sought against Borrower, except that
Lender may bring a foreclosure action, an action for specific
performance or any other appropriate action or proceeding to
enable Lender to enforce and realize upon its interest under
the Note, this Agreement, the Mortgage and the other Loan
Documents, or in the Property, the Rents, or any other
collateral given to Lender pursuant to the Loan Documents;
provided, however, that, except as specifically provided
herein, any judgment in any such action or proceeding shall
be enforceable against Borrower only to the extent of
Borrower’s interest in the Property, in the Rents and in any
other collateral given to Lender, and Lender, by accepting the
Note, this Agreement, the Mortgage and the other Loan
Documents, agrees that it shall not sue for, seek or demand
any deficiency judgment against Borrower or its members,
partners, officers, directors, employees or agents (collectively,
the “Exculpated Parties”) in any such action or proceeding
under, or by reason of, or in connection with, the Note, this
1 PBM is referred to as “Borrower” throughout the Loan Agreement.
3
Agreement, the Mortgage or the other Loan Documents.[2] The
provisions of this Section shall not, however . . . (g) constitute a
waiver of the right of Lender to enforce the liability and
obligation of Borrower, but not against any Exculpated Party,
by money judgment or otherwise, to the extent of any loss,
damage, cost, expense, liability, claim or other obligation
incurred by Lender (including attorneys’ fees and costs
reasonably incurred) arising out of or in connection with the
following:
....
(ii) the gross negligence or willful misconduct of
Borrower[.]
....
Notwithstanding anything to the contrary in this
Agreement, the Note or any of the Loan Documents . . . (B) the
Debt shall be fully recourse to Borrower, but not to any
Exculpated Party . . . (iii) if Borrower fails to maintain its status
as a Special Purpose Entity . . . .
(Emphasis added).
Thus, under the terms of the Loan Agreement, PBM was liable to JP
Morgan for “any loss, damage, cost, expense, liability, claim or other
obligation . . . arising out of or in connection with . . . [its own] gross
negligence or willful misconduct.” Additionally, in the event PBM failed to
maintain its status as a “special purpose entity” as defined in the Loan
Agreement, the loan would become a full recourse loan.3
According to the provisions of the Guaranty, Simon agreed to pay
certain obligations and liabilities owed by PBM under the terms of the Loan
Agreement in the event PBM defaulted or engaged in certain proscribed
actions. Specifically, the Guaranty stated:
2 Because Simon was listed as an equity member of PBM in the LLC agreement,
it is, under the terms of the Loan Agreement, an “exculpated party.”
3A recourse loan is defined as “[a] loan that allows the lender, if the borrower
defaults, not only to attach the collateral but also to seek judgment against the
borrower’s (or guarantor’s) personal assets.” Black’s Law Dictionary 1021 (9th
ed. 2009).
4
NATURE AND SCOPE OF GUARANTY
1.1 Guaranty of Obligation. Guarantor hereby
irrevocably and unconditionally guarantees to Lender and its
successors and assigns the payment and performance of the
Guaranteed Obligations as and when the same shall be due
and payable, whether by lapse of time, by acceleration of
maturity or otherwise. Guarantor hereby irrevocably and
unconditionally covenants and agrees that it is liable for the
Guaranteed Obligations as a primary obligor.
1.2 Definition of Guaranteed Obligations. As used
herein, the term “Guaranteed Obligations” means (a) the
obligations and liabilities of Borrower[4] to Lender for any loss,
damage, cost, expense, liability, claim and any other obligation
incurred by Lender (including attorneys’ fees and costs
reasonably incurred) arising out of or in connection with the
following:
....
(ii) the gross negligence or willful misconduct of
Borrower[.]
....
(b) the entire amount of the Debt . . . (iii) if Borrower fails to
maintain its status as a Single Purpose Entity . . . .
(Emphasis added).
Thus, according to the Guaranty, Simon was liable for any loss incurred
as a result of PBM’s gross negligence or willful misconduct, and for the
entire amount of any outstanding debt owed by PBM if PBM failed to
maintain its status as a “single purpose entity,” rather than a “special
purpose entity” as indicated in the Loan Agreement.
4 PBM is referred to as “Borrower” throughout the Guaranty as well.
5
PBM’s Management of the Mall
In August 2003, Midland Loan Services (“Midland”) became the servicer
for PBM’s loan. As servicer, Midland conducted regular annual
inspections of the Mall property to make sure that the collateral (the Mall
property) was in the same physical shape from year to year. Midland’s
reports show that the Mall was in “good” condition from 2004-2007, “fair”
condition in March 2009, and “average” condition in April 2009. In May
2009, a separate property condition report prepared by EBI Consulting on
behalf of Wells Fargo indicates that the Mall appeared to be in “good”
condition at that time.
Midland’s reports also reflect that in 2007 Simon undertook plans to
redevelop the Mall and attract new tenants to increase its competition with
other retail stores in the area. From 2007 to 2009 Simon made payments
of over $2,000,000 to PBM5 and also engaged in a practice known as “de-
leasing”6 to avoid negotiating lease buyouts once the redevelopment
process began.
During the economic downturn between 2007 and 2009, many tenants
left the Mall. For example, Macy’s closed its doors in January 2009,
stating that the decision to leave was made for economic reasons and not
because of the planned redevelopment. In fact, a Macy’s representative
testified that the redevelopment plans were a reason why the store
remained open at the Mall until 2009. In another example IKEA, which
had been participating in negotiations to open a location at the Mall, cited
the poor economy as the reason for withdrawing from those plans.
According to appellees, the financial crisis and the loss of tenants caused
their redevelopment plans to fall apart. This is corroborated by a
December 2009 asset status report prepared by Orix Capital Markets, LLC
(“Orix”), which took over as servicer from Midland. In the report, Orix
stated that Simon spent approximately $1,200,000 pursuing
redevelopment plans, which eventually stalled out along with the economy.
In March 2009, PBM defaulted on its loan. According to the deposition
testimony of David Simon, the chairman and chief executive officer (“CEO”)
5Reports prepared by Ernst and Young show that PBM operated at a loss during
2007 and 2008 and correspondence among Simon employees show that PBM
received these funds from Simon during this time.
6 The practice of “de-leasing” involves intentionally declining to extend new leases
to tenants and limiting the terms of existing leases in anticipation of planned
redevelopment.
6
of Simon, Simon could not keep the Mall leased because the property was
unable to sustain itself. As such, he made the decision to transfer the
deed to the Mall to Wells Fargo.
To dispute appellees’ claim that they were attempting to redevelop the
Mall during the global recession, Wells Fargo asserted that the Mall’s
failure was due to PBM’s mismanagement. Specifically, Wells Fargo
claimed that: 1) the redevelopment plans never “got past the development
stages” (a point conceded by Simon); 2) as part of the “de-leasing” process,
appellees intentionally offered month-to-month leases, allowed tenants to
terminate leases without contractually-required cancellation fees, and
replaced large national chain tenants with local “mom-and-pop” stores on
short-term leases; 3) appellees allowed a rodent problem to develop in
various locations in the food court; 4) appellees never obtained the
approval or financing required to make the IKEA deal a reality; and
5) Simon removed all of its signage from the property because it no longer
wanted its “brand” associated with the Mall.
The Proceedings Below
After PBM’s default, Wells Fargo filed a four-count foreclosure action
and subsequently bought the Mall at auction. Following the purchase,
Wells Fargo sold the property for $25,000,000.7
Proceeding on its causes of action apart from foreclosure, Wells Fargo
claimed under Count I that PBM breached the Loan Agreement by
engaging in gross negligence or willful misconduct in its management of
the Mall that caused Wells Fargo to suffer a loss. Specifically, Wells Fargo
alleged that PBM drove out tenants, operated the mall at a sub-standard
level, withheld details concerning the planned redevelopment,
intentionally destroyed the property, and violated various covenants from
the mortgage and Loan Agreement which amounted to a reckless disregard
for Wells Fargo’s rights and interest in preserving the Mall property.
According to Wells Fargo, these actions, along with the deferral of routine
maintenance, the “de-leasing” process, and the failure to follow through
on the redevelopment of the Mall, amounted to gross negligence and/or
willful misconduct which entitled it to a money judgment under section
9.4 of the Loan Agreement.
7Both parties agreed that any money judgment rendered in favor of Wells Fargo
should be reduced by this amount.
7
In Count II, Wells Fargo argued that, pursuant to section 1.2(a) of the
Guaranty, Simon was liable for PBM’s alleged negligence or willful
misconduct described under Count I.
In Count III, Wells Fargo claimed a breach of the contractual
requirement that PBM maintain its status as a “special purpose entity” by
remaining solvent, as described in section (i) of the “special purpose entity”
covenant. Further, Wells Fargo argued that PBM breached subsection (q)
of the “special purpose entity” covenant because PBM began receiving
money from Simon in 2007, and was thus paying its liabilities and
expenses from sources other than its own funds and assets.
Finally, in Count IV, Wells Fargo claimed that PBM failed to maintain
its status as a “single purpose entity,” rendering Simon liable under the
Guaranty for the entire outstanding amount of the debt owed by PBM.
In January 2013, Wells Fargo filed a motion seeking summary
judgment on Count III and Count IV, and appellees responded by filing a
competing motion for summary judgment on all four counts. In November
2013, the trial court issued an order denying Wells Fargo’s motion but
granting appellees’ motion for summary judgment on Count I and Count
II. As it pertained to the allegations of PBM’s gross negligence and willful
misconduct in its management of the Mall in those counts, the trial court
held that Wells Fargo’s arguments failed “as a matter of law based on New
York cases which have interpreted the terms gross negligence and willful
misconduct in the context of a liability-limitation provision to entail a
deliberate act beyond a party acting out of its economic self-interest.”
Therefore, there were no genuine issues of material fact to show that
appellees’ “actions [were] the type of conduct that would overcome the
broad protection afforded by the exculpation provision in the Loan
Agreement.”
For Count III, the trial court denied summary judgment and found that
Wells Fargo did not show an absence of material fact pertaining to PBM’s
alleged failure to remain solvent, and that Wells Fargo’s claim pertaining
to the legal significance of Simon’s infusions of cash into PBM was
unpersuasive.
Regarding Count IV, Wells Fargo argued that the term “single” should
be read as “special,” thus subjecting Simon to liability for PBM’s failure to
maintain “special purpose entity” status as defined in the Loan Agreement.
The trial court noted that the language of the Guaranty rendered Simon
liable only for PBM’s failure to maintain status as a “single purpose entity,”
8
and that Wells Fargo had “repeatedly stated it sought plain language
enforcement of the Loan Agreement and accompanying Guaranty,”
characterizing the discrepancy between the use of the terms “special” and
“single” as unimportant and as a typographical error. According to the
court, Wells Fargo was seeking, “without outright requesting, that the
Court reform the Guaranty to match the term in the Loan Agreement.” On
this point, the trial court found that Wells Fargo failed to meet the high
burden for reformation under New York law, and that Wells Fargo’s
arguments were “unpersuasive in light of the language of the documents
memorializing the loan, the evidence of the parties’ intent, and the
sophistication of the parties to the agreement.”
Additionally, the court noted that under Count IV Wells Fargo claimed
that the use of the term “single” was a scrivener’s error, stating:
[Wells Fargo] requests the Court proceed as if this was a
scrivener’s error, ignore the plain language of the contract,
and yet simultaneously assert it is not seeking a reformation
of the contract. These positions are inconsistent and
unavailing in light of the clear language of the contract and
the evidence submitted by [appellees].
Indeed, according to the parties involved in negotiating the
Loan Agreement and Guaranty, an event in which [Wells
Fargo] was not involved, the parties understood these terms
to have distinct meanings. . . . In addition to the evidence of
intent of the parties to the Loan Agreement and Guaranty, the
usage and custom in the commercial lending industry of the
term “special purpose entity” and “single purpose entity”
shows that [Wells Fargo’s] argument is untenable. In light of
the sophistication of the parties who entered into the Loan
Agreement and the Guaranty, the Court finds that the parties
knew these terms to have distinct meanings, and negotiated
the risk accordingly.
(Emphasis added).
After the trial court issued this order, appellees filed a motion for
reconsideration pertaining to Count IV. Upon reconsideration, the trial
court issued an order granting summary judgment on Count IV in
appellees’ favor, based upon the analysis contained in its previous order.
9
At trial on the sole remaining count, Count III, Wells Fargo presented
the testimony of an expert appraiser who stated that, as of December 31,
2008, the Mall’s market value had dropped to $14,700,000. It also
presented the testimony of an expert accountant who stated that, based
on this figure, PBM’s liabilities exceeded its assets by $36,024,277 using
a market value basis as of that date. Wells Fargo argued that under a
definition of solvency known as “balance-sheet insolvency,” found in both
Federal Bankruptcy law and the Uniform Commercial Code (“U.C.C.”),
PBM was insolvent because PBM’s liabilities exceeded its assets. As a
result, it failed to fulfill its contractual obligation to maintain its status as
a “special purpose entity,” rendering the outstanding debt fully recourse
against PBM.
At the close of Wells Fargo’s case, appellees moved for involuntary
dismissal pursuant to Florida Rule of Civil Procedure 1.420(b). Appellees
argued that Wells Fargo had not offered any evidence that in order to
remain “solvent,” as described in the Loan Agreement, PBM’s assets must
exceed its liabilities. Rather, they maintained that because “solvent” and
“insolvent” were not defined in the Loan Agreement, New York law required
that the court apply the New York common law definition of insolvency
known as “equity insolvency,” meaning “the inability to pay debts and
obligations as they become due in the regular course of business.” The
trial court agreed with appellees and dismissed Count III, rejecting Wells
Fargo’s balance-sheet definition of insolvency for two reasons:
First, if the parties to the Loan Agreement intended for the
UCC definition of “insolvent” to apply, the parties would have
referenced the UCC in the relevant section of the Loan
Agreement. Likewise, if the parties to the Loan Agreement
intended for the bankruptcy law definition of “insolvent” to
apply, they would have referenced the bankruptcy law in the
relevant section of the Loan Agreement. That the bankruptcy
law is mentioned elsewhere in the Loan Agreement but is not
mentioned in the relevant section at issue before the Court
cuts against plaintiff’s interpretation.
Second, as a matter of New York law, Article 9 of the UCC,
by its terms, does not apply to “transactions involving real
property.” See Hawkins-El III v. AJG Sav. Bank, 2006 WL
2008573, at *7 (E.D.N.Y. July 13, 2006) (“[T]he UCC is
inapplicable as it does not cover transactions involving real
property.”); In re Churchill Mortg. Inv. Corp., 233 B.R. 61, 70
(Bankr. S.D.N.Y. 1999) (“[T]he UCC does not apply to security
10
interests in real estate . . . .”); N.Y. U.C.C. § 9-109(d)(ll).
Simply put, as a matter of law, the UCC does not apply in
these circumstances.
As a result, the trial court rendered final judgment for appellees. This
appeal ensued.
Analysis
On appeal, Wells Fargo raises issues relating to each count alleged in
its complaint.
On Counts I and II, Wells Fargo claims that the trial court erred by
granting summary judgment in favor of appellees because it presented
undisputed evidence from which a reasonable finder of fact could have
concluded that PBM acted with reckless or deliberate disregard for Wells
Fargo’s rights in the Mall. Specifically, Wells Fargo contends that even if
PBM was acting in its own economic interest, it was not immunized from
liability under New York law.
On Count III, Wells Fargo maintains that the trial court erred by
rejecting its balance-sheet insolvency definition and granting appellees’
motion for involuntary dismissal. Moreover, Wells Fargo claims that the
trial court should have granted its initial motion for summary judgment
on Count III because PBM breached the “special purpose entity” covenant
in the Loan Agreement by using the funds from Simon to pay its debt on
the loan.
On Count IV, Wells Fargo argues that the trial court again misapplied
New York law by granting appellees’ motion for summary judgment. Wells
Fargo asserts that because the Loan Agreement and the Guaranty were
executed as part of the same transaction, they must be read as one, and
the term “single purpose entity” in the Guaranty should have been
interpreted to have the same definition as “special purpose entity” in the
Loan Agreement.
We address each issue in turn.
a. Count I and Count II
This court reviews orders granting summary judgment de novo. Dennis
v. Kline, 120 So. 3d 11, 20 (Fla. 4th DCA 2013).
11
When reviewing a ruling on summary judgment, an appellate
court must examine the record in the light most favorable to
the non-moving party. If the record reflects the existence of
any genuine issue of material fact, or the possibility of any
issue, or if the record raises even the slightest doubt that an
issue might exist, summary judgment is improper.
Id. (citations and quotations omitted).
As discussed above, section 9.4(ii) of the Loan Agreement makes PBM
liable to Wells Fargo only for losses “arising out of or in connection with”
PBM’s “gross negligence or willful misconduct” in its management of the
Mall. Likewise, section 1.2(a) of the Guaranty renders Simon liable for
losses incurred as a result of PBM’s “gross negligence or willful
misconduct.”
The trial court relied upon the New York Court of Appeals’ decision in
Metropolitan Life Insurance Co. v. Noble Lowndes International, Inc.
(MetLife), 84 N.Y.2d 430 (N.Y. 1994), for granting summary judgment in
favor of appellees on Count I and Count II. Wells Fargo claims that the
trial court misread this case and erred by relying on it to hold that gross
negligence and willful misconduct, in the context of a liability-limitation
provision, requires a deliberate act beyond a party merely acting out of its
economic self-interest.
MetLife involved a dispute over a provision in a contract that absolved
the defendant from liability “resulting from . . . performance or
nonperformance,” but made the defendant liable “for intentional
misrepresentations, or damages arising out of [defendant’s] willful acts or
gross negligence.” Id. at 433 (alteration in original). After the defendant
began performing under the contract, it “demanded an upward adjustment
of the contract ceiling for enhancements, failing which it announced it
would withdraw from the project.” Id. The plaintiff refused the defendant’s
demand, and the defendant ceased “further performance.” Id.
The New York trial court excluded “merely deliberate or intentional
nonperformance” from the definition of willful act when instructing the
jury, over the plaintiff’s objection. Id. at 434. The jury then found that
the “defendant’s acts were willful and awarded [the] plaintiff $3,961,000
in damages.” Id. The Appellate Division reduced this award to $204,000,
and “interpreted the willful act exception to the limitation of liability
provision in the contract as requiring acts constituting the commission of
a tort.” Id. The court stated that, “as a matter of law . . . the proof did not
12
establish any such tortious conduct, but merely an intentional
abandonment which [it] held insufficient to invoke the exception.” Id. The
plaintiff appealed, arguing that the Appellate Division “erred in refusing to
attribute the common, ordinary meaning of willful acts as merely
deliberate or intentional conduct.” Id. at 434-35.
The New York Court of Appeals framed the issue as follows:
The issue here is not how we and other courts have construed
“willful” in other contexts, such as in interpreting statutes
using that term or in formulating or applying legal principles
in tort or contract law. Rather, the issue is what the parties
intended by “willful acts” as an exception to their contractual
provision limiting defendant’s liability for consequential
damages arising from its “non-performance under this
agreement”. Thus, to the extent that the Appellate Division
opinion holds that tort law principles apply in all cases in
which the word willful is at issue or thereby limits the legal
meaning of the word, we do not agree. However, because the
law of contracts as pertinent and applied to this contractual
dispute leads us to the same result, we now affirm.
Id. at 435.
The court noted that “[g]enerally in the law of contract damages, as
contrasted with damages in tort, whether the breaching party deliberately
rather than inadvertently failed to perform contractual obligations should
not affect the measure of damages.” Id. The court ultimately held:
In excepting willful acts from defendant’s general immunity
from liability for consequential damages under section 7 of the
Agreement, we think the parties intended to narrowly exclude
from protection truly culpable, harmful conduct, not merely
intentional nonperformance of the Agreement motivated by
financial self-interest. Under the interpretation tool of
ejusdem generis applicable to contracts as well as statutes,
the phrase “willful acts” should be interpreted here as referring
to conduct similar in nature to the “intentional
misrepresentation” and “gross negligence” with which it was
joined as exceptions to defendant’s general immunity from
liability for consequential damages (see, Bers v. Erie R.R. Co.,
225 N.Y. 543, 546, 122 N.E. 456[, 457 (1919)]; Krulewitch v.
National Importing & Trading Co., 195 A.D. 544, 546,186
13
N.Y.S. 838[, 839 (1921)]). We, therefore, conclude that the
term willful acts as used in this contract was intended by the
parties to subsume conduct which is tortious in nature, i.e.,
wrongful conduct in which defendant willfully intends to inflict
harm on plaintiff at least in part through the means of breaching
the contract between the parties.
Id. at 438 (emphasis added).
Like the contract provision at issue in MetLife, the relevant portions of
section 9.4(g)(ii) of the Loan Agreement and section 1.2(a)(ii) of the
Guaranty join “willful conduct” and “gross negligence.” Therefore, the trial
court was correct in interpreting this case to mean that appellees would
be liable only if PBM performed deliberate acts beyond acting out of its
economic self-interest. Examining the record “in the light most favorable”
to Wells Fargo, as we must, Dennis, 120 So. 3d at 20, it is clear the court
did not err by finding that appellees were not engaged in such deliberate
acts.
Wells Fargo also claims that the trial court erred in granting summary
judgment to appellees on Count I and Count II because it raised triable
questions of fact regarding the reasonableness of the “de-leasing” and “de-
hancing”8 of the Mall in the midst of an economic crisis, and whether this
strategy was grossly negligent in light of Wells Fargo’s rights in the Mall as
collateral. Specifically, Wells Fargo argues that appellees intentionally “de-
hanced” the property by failing to make repairs and conduct certain
maintenance, and intentionally “de-leased” the property. It also cites the
rodent problem as evidence that PBM failed to properly sanitize the Mall.
Wells Fargo maintains that these actions constituted grossly negligent
conduct, again rendering the outstanding debt fully recourse against PBM.
In Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 384-85 (N.Y.
1983), the New York Court of Appeals established the standard for a
finding of gross negligence under an exculpatory clause. The court stated:
But an exculpatory agreement, no matter how flat and
unqualified its terms, will not exonerate a party from liability
under all circumstances. Under announced public policy, it
will not apply to exemption of willful or grossly negligent acts
8 It appears Wells Fargo intends to use this word to be akin to “de-enhancement,”
or the reverse of “enhancement,” by implying that affirmative steps were taken
for the purpose of degrading and diminishing the Mall property.
14
(cf., e.g., Gross v Sweet, 49 N.Y.2d 102, 106[, 400 N.E.2d 306,
308 (N.Y. 1979)], with Ciofalo v Vic Tanney Gyms, 10 N.Y.2d
294, 297[, 177 N.E.2d 925, 926 (1961)]; see, generally, 15
Williston, Contracts [3d Jaeger ed.], § 1750A; 5 Corbin,
Contracts, § 1068; Restatement, Contracts 2d, § 195).
More pointedly, an exculpatory clause is unenforceable
when, in contravention of acceptable notions of morality, the
misconduct for which it would grant immunity smacks of
intentional wrongdoing. This can be explicit, as when it is
fraudulent, malicious or prompted by the sinister intention of
one acting in bad faith. Or, when, as in gross negligence, it
betokens a reckless indifference to the rights of others, it may
be implicit (Matter of Karp v. Hults, 12 A.D.2d 718[, 209
N.Y.S.2d 128 (1960)], affd 9 N.Y.2d 857[, 175 N.E.2d 465 N.Y.
(1961)]).
Id. at 384-85 (emphasis added) (footnotes omitted).
The record, viewed in the light most favorable to Wells Fargo, reflects
that appellees “de-leased” the Mall and delayed repairs in anticipation of a
planned redevelopment. Even the correspondence among PBM and
Simon’s employees cited by Wells Fargo in support of its argument
suggests that a redevelopment plan was being contemplated. As such,
Wells Fargo has not shown that appellees’ actions amounted to “a reckless
indifference to the rights of others.” Id. Additionally, while the Mall may
have had rodents in certain areas of the food court at one point in time,
the record does not support Wells Fargo’s contention that this was a result
of appellees’ “reckless indifference” to its rights, as described by the New
York Court of Appeals in Kalisch-Jarcho. Id.
b. Count III
We review the trial court’s ruling on a motion for involuntary dismissal
pursuant to rule 1.420(b) de novo. Deutsche Bank Nat’l Trust Co. v. Huber,
137 So. 3d 562, 563 (Fla. 4th DCA 2014).
i. The Definition of Insolvency
Wells Fargo next argues that the trial court erred by rejecting the
balance-sheet insolvency definition in favor of equity insolvency. Balance-
sheet insolvency is defined as “[i]nsolvency created when the debtor’s
liabilities exceed its assets.” Black’s Law Dictionary 867 (9th ed. 2009)
15
(emphasis added). This definition has been adopted by the Federal
Bankruptcy Code, see 11 U.S.C. § 101(32)(A) (defining insolvency as a
“financial condition such that the sum of such entity’s debts is greater
than all of such entity’s property”), and by New York’s version of the U.C.C.
then in effect, as one of three possible definitions. See N.Y. U.C.C. Law
§ 1-201(23) (McKinney 2013) (stating that “[a] person is ‘insolvent’ who
either has ceased to pay his debts in the ordinary course of business or
cannot pay his debts as they become due or is insolvent within the meaning
of the federal bankruptcy law”) (emphasis added).
In contrast, equity insolvency is defined as “[i]nsolvency created when
the debtor cannot meet its obligations as they fall due.” Black’s Law
Dictionary 867 (9th ed. 2009) (emphasis added); see also N.Y. U.C.C. § 1-
201(23) (listing the inability to “pay [one’s] debts as they become due” as
one of three definitions of insolvency).
The common law test for insolvency in New York is defined as “‘whether
there is a general inability on the part of the debtor to pay its obligations
as they become due in the regular course of business.’” Silsby v. Icahn, 17
F. Supp. 3d 348, 361 n.2 (S.D.N.Y. 2014) (emphasis added) (quoting In re
Comp III, Inc., 136 B.R. 636, 639 (Bankr. S.D.N.Y. 1992)); see also In re
Gordon Car & Truck Rental, Inc., 59 B.R. 956, 960 (Bankr. N.D.N.Y. 1985)
(quoting Abrams v. Manhattan Consumers Brewing Co., 126 N.Y.S. 844,
846 (App. Div. 1911), for same proposition); Am. Castype Corp. v. Niles-
Bement-Pond Co., 42 N.Y.S.2d 638, 639 (App. Div. 1943) (citing Brouwer
v. Harbeck, 9 N.Y. 589, 594 (1854) (stating that “[u]nder our common law
‘insolvent’ means inability to meet obligations as they mature in the
ordinary course of business”). In other words, New York’s common law
definition of insolvency is the same as the definition of equity insolvency.
In fact, Wells Fargo even conceded at trial that equity insolvency was the
common law definition of insolvency in New York.
In In re Gordon Car & Truck Rental, Inc., the Federal Bankruptcy court
for the Northern District of New York was faced with the question of
whether to apply the balance-sheet definition or the New York common
law definition of insolvency in a contract dispute. 59 B.R. at 960. The
court noted that “[t]here is no sound answer to the question of which
insolvency test should be applied,” and cited American Castype Corp. for
the proposition that “the meaning of ‘insolvent’ [is] a question of law” for
the court to decide. Id. (citing Am. Castype Corp., 42 N.Y.S.2d at 639).
The court ultimately held that, in the absence of a statutory provision
requiring application of one of the two definitions, the New York common
law definition of insolvency controls. Id. at 961. In the instant case, as in
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In re Gordon, “neither party [has] cite[d to] any statutory provision[] which
require[s] application of either insolvency test.” Id. As such, the trial court
was correct in concluding that the equity insolvency definition controls.
Despite this, Wells Fargo maintains that the trial court should have
adopted the balance-sheet definition of insolvency because, when the
equity insolvency definition is used, several provisions of the Loan
Agreement are rendered meaningless, redundant, and superfluous. As
mentioned above, subsection (i) of the “special purpose entity” covenant
states, in pertinent part, that PBM:
is and will remain solvent and pay its debts and liabilities . . .
from its assets as the same shall become due, and is
maintaining and will maintain adequate capital for the normal
obligations reasonably foreseeable in a business of its size and
character and in light of its contemplated business
operations[.]
(Emphasis added).
Wells Fargo argues: 1) that if the equity insolvency definition is used,
the second and third italicized portions of subsection (i) become
redundant; and 2) that the equity insolvency definition also renders
section 9.4(B)(i)(e) of the Loan Agreement and section 1.2(b)(i)(E) of the
Guaranty superfluous and meaningless. Section 9.4(B)(i)(e) contemplates
the consequences of PBM declaring bankruptcy, and states, in pertinent
part, that the debt will become fully recourse against PBM, but not as to
an exculpated party (i.e. Simon), “in the event of . . . [PBM] admitting, in
writing or in any legal proceeding, its insolvency or inability to pay its debts
as they become due.” (emphasis added). Section 1.2(b)(i)(E) also
contemplates the consequences of PBM declaring bankruptcy, and states
that Simon will be liable for the full amount of the debt in the event that
PBM “admit[s], in writing or in any legal proceeding, its insolvency or
inability to pay its debts as they become due.” (emphasis added).
Notwithstanding the New York cases cited above which hold that the
equity insolvency definition applies in situations such as the one presented
in the instant case, Wells Fargo has not shown how this purported
redundancy renders these provisions of the Loan Agreement and the
Guaranty meaningless or inconsistent.9 Moreover, while it is true that
9Wells Fargo cites to Lawyers’ Fund for Client Protection of the State of N.Y. v.
Bank Leumi Trust Co. of N.Y., 727 N.E.2d 563 (N.Y. 2000), to support its
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“[a]n interpretation of a contract that has the effect of rendering at least
one clause superfluous or meaningless . . . is not preferred and will be
avoided if possible,” LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital
Corp., 424 F.3d 195, 206 (2d Cir. 2005) (internal quotation marks omitted)
(quoting Shaw Grp. Inc. v. Triplefine Int’l Corp., 322 F.3d 115, 124 (2d Cir.
2003)) (applying New York law), adopting Wells Fargo’s proposed balance-
sheet definition of insolvency may have a serious and deleterious effect on
the commercial mortgage-backed securities market.
Applying the balance-sheet insolvency definition as Wells Fargo
proposes would allow a lender to accelerate a loan balance, foreclose, and
sue for a deficiency any time the market value of a collateral property,
along with the value of the borrower’s other assets, slips below the value
of the borrower’s liabilities. However, one can easily imagine a situation
where the total market value of a collateral property and other assets drops
below that of a borrower’s liabilities, but the borrower still is able to make
scheduled loan payments from other sources, such as capital
contributions from a parent company. In such a situation, a borrower who
is current on loan payments, and able to keep making scheduled
payments, still would be considered insolvent under Wells Fargo’s
theory.10 Regardless, Wells Fargo has not cited to any persuasive
authority from New York or elsewhere adopting its balance-sheet
insolvency definition to impose recourse liability upon a debtor.
argument. There, two provisions in a subrogation contract were at issue. Id. at
566. The first provision listed stated that the claimant “subrogates to the
Lawyers’ Fund for Client Protection, to the extent of the award, all rights, claims,
judgments, and causes of action . . . .” Id. The second provision began:
“Claimant(s) also subrogates to the Lawyers’ Fund for Client Protection all claims,
demands, and causes of action . . . .” Id. (emphasis added). The New York Court
of Appeals held that the use of the word “also” in the second provision “indicat[ed]
that what follows is a separate, additional provision, not merely a reiteration of
what came before.” Id. Based on this case, Wells Fargo argues that because the
three phrases italicized above in subsection (i) of the “special purpose entity”
covenant are separated by “and,” each should be given a distinct meaning, as the
two provisions separated by “also” were given in Lawyers’ Fund. However, while
the second provision in Lawyers’ Fund was clearly intended to subrogate
additional things to the Lawyers’ Fund for Client Protection by using “also,” it is
not at all clear that the parties inserted the word “and” between the underlined
phrases in subsection (i) in order to incorporate different definitions of “solvent.”
10 As appellees point out, Wells Fargo has not reconciled its proposed
interpretation with the realities of commercial transactions.
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Wells Fargo alleges two additional errors made by the trial court in its
decision to dismiss Count III pursuant to rule 1.420(b). First, it claims
that the trial court erred by engaging in fact-finding before it determined
that the term “solvent” had two or more reasonable definitions in the
context of the agreement, and was therefore ambiguous. Wells Fargo
maintains that because the parties proposed two distinctly different
definitions, under New York law the trial court first had to determine
whether one or both definitions were reasonable in the context of the entire
agreement. Richard Feiner & Co. v. Paramount Pictures Corp., 941 N.Y.S.2d
157 (App. Div. 2012) (“Where the parties dispute the meaning of particular
contract clauses, the task of the court is to determine whether such
clauses are ambiguous when ‘read in the context of the entire agreement.’”
(quoting W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 163 (N.Y. 1990)).
Even though the record reflects that the trial court believed the term
“solvent” was ambiguous as used in the contract, this issue has not been
preserved for appellate review. Sunset Harbour Condo. Ass’n v. Robbins,
914 So. 2d 925, 928 (Fla. 2005) (“‘In order to be preserved for further
review by a higher court, an issue must be presented to the lower court
and the specific legal argument or ground to be argued on appeal or review
must be part of that presentation if it is to be considered preserved.’”
(quoting Tillman v. State, 471 So. 2d 32, 35 (Fla. 1985))). We therefore
decline to address it further.
Second, Wells Fargo claims that the equity insolvency definition is not
the New York common law definition of insolvency. As discussed above,
the definition of equity insolvency from Black’s Law Dictionary is nearly
identical to the New York common law definition of insolvency. Moreover,
the record reflects that Wells Fargo expressly agreed at trial that this was
the correct definition under New York common law.
The trial court did not err by adopting the equity insolvency definition
of insolvent. Under this definition, PBM did not breach subsection (i) of
the “special purpose entity” covenant in the Loan Agreement, and neither
PBM nor Simon is liable for the outstanding debt owed on the loan.
ii. Simon’s Capital Contributions to PBM
Wells Fargo also claims that the trial court should have granted
summary judgment in its favor on Count III because PBM breached the
“special purpose entity” covenant in the Loan Agreement by using funds
from Simon to pay its debt on the loan. As stated above, subsection (q) of
the “special purpose entity” covenant required PBM to “pay its own
19
liabilities and expenses . . . out of its own funds and assets.” Wells Fargo
maintains the trial court erred by categorizing these payments as capital
contributions that became part of PBM’s funds and assets, and argues
that Simon’s contributions of $2,000,000 to PBM to allow it to pay its
operating expenses, without the expectation of repayment or return,
clearly violated the “special purpose entity” covenant.
A capital contribution is defined as “[c]ash, property, or services
contributed by partners to a partnership.” Black’s Law Dictionary 237
(9th ed. 2009). Because Simon was a member of PBM, the trial court was
correct in categorizing Simon’s outlays to PBM as capital contributions.
Additionally, the record reflects that the funds were accounted for as
equity contributions from Simon to PBM, and were given to PBM with the
expectation that the planned redevelopment of the Mall would be
successful. Although the infusion of cash served to increase Simon’s
equity in PBM, appellees contend that once the cash capital was received,
it became part of PBM’s assets. We agree. Wells Fargo has not offered any
authority in support of its argument to persuade us to the contrary. E &
I, Inc. v. Excavators, Inc., 697 So. 2d 545, 547 (Fla. 4th DCA 1997) (“The
appellant has the burden of making ‘any reversible error clearly, definitely,
and fully appear.’” (quoting Strate v. Strate, 328 So. 2d 29, 30 (Fla. 3d DCA
1976))).
As such, PBM did not breach the “special purpose entity” covenant by
using these funds to make loan payments or meet other operating
expenses.
c. Count IV
As stated above, section 1.2(b)(iii) of the Guaranty renders Simon liable
for the full amount of PBM’s debt in the event that PBM failed to maintain
its status as a “single purpose entity.” Wells Fargo argues that the use of
“single purpose entity” in the Guaranty was a mistake, and that this term
should either be interpreted to have the same meaning as “special purpose
entity” in the Loan Agreement, or that it should be treated as a scrivener’s
error, and the Guaranty should be reformed to replace the word “single”
with “special.” Wells Fargo maintains that the two documents must be
read as one, and that if “single purpose entity” means something other
than “special purpose entity,” the transaction would have been patently
absurd. It claims that the trial court had the power to reform the Guaranty
to correct this “obvious error,” and that it erred by refusing to do so.
20
These arguments are unavailing. First, as the trial court pointed out,
Wells Fargo was not a party to the negotiations which gave rise to the loan
documents, and as such it is not in a position to argue whether or not the
use of “single” rather than “special” in the Guaranty was intentional.
Moreover, PBM did not violate the “special purpose entity” covenant in the
Loan Agreement. Therefore, even if we agreed with Wells Fargo that “single
purpose entity” in the Guaranty should be interpreted to have the same
meaning as “special purpose entity” in the Loan Agreement (which we do
not), Simon still would not be liable for the outstanding debt.
Conclusion
Based on the foregoing, we affirm the trial court’s summary judgment
in favor of appellees on Counts I, II and IV, and affirm its involuntary
dismissal of Count III.
Affirmed.
CIKLIN, C.J., FORST and KLINGENSMITH, JJ., concur.
* * *
Not final until disposition of timely filed motion for rehearing.
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