ORIX Capital Markets, LLC v. Cadlerocks Centennial Drive

United States Court of Appeals
For the First Circuit
No. 13-1128
VFC PARTNERS 26, LLC,
Plaintiff, Appellee,
v.
CADLEROCKS CENTENNIAL DRIVE, LLC and DANIEL CADLE,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Howard, Stahl, and Thompson,
Circuit Judges.
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.
November 12, 2013
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
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("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
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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
1
This Court granted ORIX and VFC Partners 26, LLC's Motion to
Substitute on July 24, 2013, substituting VFC for ORIX as
Plaintiff-Appellee as a result of an assignment of the Loan and
Judgment that are the subject of this appeal. For convenience,
however, we will continue to refer to ORIX as appellee throughout
the opinion, because ORIX was the loan servicer during the relevant
time period.
2
A Phase I test is a visual inspection of the Property and
review of the Property's history, including records of prior
environmental tests or government action related to environmental
hazards. The 2010 Phase I test did not definitively reveal the
presence of PCE on the Property, only the possibility of its
presence based on the past usage of New England Carbide.
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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"
test3 that detected PCE in concentrations of 1.65 micrograms per
cubic meter (µg/m³) 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
3
A "grab" test detects whether hazardous substances are
present in the air, but does not determine the rate of exposure
over a period of time.
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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/m³.
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.
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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.
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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
4
The Agreement also covers liabilities arising "in connection
with . . . the breach of any representation, covenant or agreement
of either of the Indemnitors contained in this Agreement." ORIX
has not claimed any such breach, however.
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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 costs5 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 outside of the scope of the plain terms of the
Indemnity Agreement, while Appellee urges this Court to affirm the
district court's broad reading of the Agreement. Neither party
argues that the Agreement is ambiguous, or attempts to introduce
extrinsic evidence regarding its interpretation. Thus, the issue
before us is whether the district court correctly determined the
scope of the Indemnity Agreement. "Contract interpretation, when
based on contractual language without resort to extrinsic evidence,
is a question of law that is reviewed de novo." OfficeMax, Inc. v.
Levesque, 658 F.3d 94, 97 (1st Cir. 2011) (internal quotation marks
omitted).
5
These costs included both the testing itself and the fees
and expenses of the environmental consultant and attorneys.
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Under Massachusetts law, we interpret contracts "in a
manner which will effectuate the intent of the parties." Bukuras
v. Mueller Grp., LLC, 592 F.3d 255, 262 (1st Cir. 2010) (quoting
Kingstown Corp. v. Black Cat Cranberry Corp., 839 N.E.2d 333, 336
(Mass. App. Ct. 2005)). "[T]he parties' intent must be gathered
from a fair construction of the contract as a whole and not by a
special emphasis on any one part." Id. (internal quotation marks
omitted). "'Words that are plain and free from ambiguity must be
construed in their usual and ordinary sense,' and the agreement
should be read 'in a reasonable and practical way, consistent with
its language, background, and purpose.'" Id. (quoting Cady v.
Marcella, 729 N.E.2d 1125, 1129–30 (Mass. App. Ct. 2000)).
In its findings of fact, the district court held that
Cadlerocks agreed to "indemnify the lender for all costs and
damages related to any 'suspected' or actual presence of 'Hazardous
Materials' at the Property." ORIX, 922 F. Supp. at 132. The
court's decision to deny ORIX relief for the 2010 Phase I, but
award it the costs for all subsequent testing, shows that the
district court interpreted the Indemnity Agreement as covering all
"reasonable and necessary" expenses "conducted in response to
suspected environmental hazards." Id. at 137. We believe this
interpretation of the Agreement is too broad.
The district court's interpretation of the Indemnity
Agreement is erroneous in two respects. First, it overlooks the
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term of the Agreement limiting coverage to those liabilities
"sought from or asserted against" the Indemnitees. Second, it
ignores the sentence that limits coverage to certain specified
categories of liability.
A. Coverage Limited to Claims by Third Parties
By its plain terms, the Agreement only covers liabilities
"sought from or asserted against" the Indemnitees. Grammatically,
this phrase requires the existence of a third party imposing some
type of liability on the Indemnitees; ORIX cannot seek costs from
or assert claims against itself. Therefore, any costs that ORIX
incurred on its own behalf, for its own purposes, do not fall
within the scope of the Indemnity Agreement.
ORIX argues that "the Receiver plainly made demand upon
ORIX for all the costs and expenses related to the environmental
testing." This statement is only partially true. The Receiver did
not begin to seek any costs from ORIX or incur his own expenses
related to environmental testing until after he received the
results of EBI's tests on March 23, 2011. Prior to that date, ORIX
ordered the tests from EBI and paid for them itself. These were
costs that ORIX incurred on its own; there was no third party
seeking or asserting any liabilities against it. Thus, they do not
fall within the scope of the Indemnity Agreement. The district
court therefore erred in awarding ORIX the costs associated with
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the Phase II test and the subsequent grab test conducted by Mark
Germano on March 20, 2011.
B. Coverage Limited to Specified Liabilities
The next question is whether the second sentence of
paragraph four (beginning "Such Liabilities shall include . . .")
functions as a limitation on the much broader preceding sentence,
or rather provides non-exclusive examples of certain types of
liabilities covered. The district court's approach to this
question is unclear. On one hand, it specifically found that the
Receiver's tests were "reasonable and necessary." The first
sentence of paragraph four does not require that the covered
expenses be necessary or reasonable. The word "necessary" only
appears in subclause (iv) of the second sentence, which extends
coverage to "the cost required to take necessary precautions to
protect against the release of any Hazardous Materials" in or
around the Property. Thus, the district court appears to interpret
the second sentence as limiting the first, at least to some extent.
But while the district court appears to have read the
second sentence as requiring the tests to be necessary, it did not
address whether the tests were necessary for the purpose specified
in subclause (iv): as a precaution against the release of hazardous
materials. On appeal, ORIX argues that the second sentence "does
not limit the scope of indemnification, but rather expands
liability by defining certain specific instances wherein rights to
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indemnification attach." Further, ORIX argues that even if the
second sentence does apply as a limitation, the tests conducted in
this case were necessary because of the undisputed presence of PCE
on the Property. Appellants argue that the tests were not
necessary, because "there was never a recognized immediate threat
to public health at the Property." They also ask us to define the
word "necessary" as it is used in the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. §§
9601–75.
Neither party's arguments are persuasive. The parties'
contract makes no mention of CERCLA as the defining touchstone for
the Agreement, and nothing in the Agreement provides that the
testing must be in response to an immediate public threat. But the
Agreement is not as broad as ORIX attempts to define it.
We begin by holding that the second sentence limits the
terms of the first. It is a well-established principle that "a
subsequent specification impliedly limits the meaning of a
preceding generalization." G. T. Schjeldahl Co., Packaging Mach.
Div. v. Local Lodge 1680 of Dist. Lodge No. 64 of Int'l Ass'n of
Machinists, 393 F.2d 502, 504 (1st Cir. 1968); see also McDowell v.
von Thaden, 2006 Mass. App. Div. 148 (Dist. Ct. 2006) ("Specific
and exact contractual terms are accorded greater weight than
general language."); 11 Williston on Contracts § 32:10 (4th ed.)
("Even absent a true conflict [between the general and specific
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provisions of a contract], specific words will limit the meaning of
general words" when the specific words are consistent with the
purpose of the agreement as a whole). This principle is applicable
here.
Unless the second sentence operates as a limit, the first
sentence would expose Appellants to liability even for
environmental testing that was completely unreasonable or
unnecessary. The Receiver in this case acted responsibly, but had
he ordered tests arbitrarily, without any reasonable basis,
Appellants would still be liable for those costs under ORIX's
reading of the Agreement, as long as the tests were at least
indirectly related to the suspected presence of a hazardous
material. Nothing in the first sentence prevents such a result.
But we do not think that Cadlerocks and the Original Lender
intended this result when they negotiated the Agreement. "Common
sense is as much a part of contract interpretation as is the
dictionary or the arsenal of cannons [sic]." Bukuras, 592 F.3d at
262 (internal quotation marks omitted). It makes more sense to
read the second sentence as imposing reasonable limitations on the
first.
We also note that the second sentence does not include
the typical language parties often use to introduce a list of non-
exclusive examples, such as "shall include but not be limited to,"
or "without limiting the foregoing, [the term] shall include."
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See, e.g., In re Complaint of Martin, 596 F. Supp. 2d 142, 153 (D.
Mass. 2009); Signet Elec. Sys., Inc. v. Taylor, No. Civ. 03-280-P-
C, 2003 WL 22948035, at *1 n.1 (D. Me. Dec. 9, 2003) (unpublished).
Although such language is of course not obligatory, its absence
does weigh against reading the second sentence as a list of non-
exclusive examples.
We must determine, therefore, whether the Receiver's
expenses fall within the enumerated categories of liability listed
in the second sentence. As we pointed out above, the only one that
is arguably applicable is subclause (iv). Appellants are only
liable for the Receiver's expenses related to environmental testing
if those expenses were "required to take necessary precautions to
protect against the release of any Hazardous Materials."
The test results that ORIX gave to the Receiver on March
23, 2011, did not indicate the possibility of a release of
hazardous materials into the atmosphere (or anywhere else).
Instead, the testing indicated a detectible presence of PCE already
in the air, but at a level unlikely to pose a health threat to the
building's occupants. And in fact, the amount of PCE detected
declined slightly in the second grab test that EBI conducted on
March 25, 2011. No one testified that they understood any of the
test results as showing that a hazardous level of PCE was likely to
be released into the air. There was never a point at which ORIX or
the Receiver took steps to prevent such a release. Therefore, we
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cannot conclude that the tests conducted by the Receiver were
"necessary precautions to protect against the release of any
Hazardous Materials."
Instead, the testimony and exhibits all indicate that the
purpose of the Receiver's additional testing was to confirm that
the known presence of PCE in the air was at a safe level, in order
to ensure the building was safe for the daycare center and to
facilitate the foreclosure sale. The propriety of the tests for
that purpose is not actually in question. It was undoubtedly
necessary for ORIX and the Receiver to ensure that the Property was
free from harmful contaminants before selling it. The question is
how the Indemnity Agreement allocates the cost of those tests.
Cadlerocks agreed to indemnify "necessary precautions to protect
against the release of any Hazardous Materials." The Agreement
does not extend to tests conducted for the purpose of confirming
the safety of tenants or attracting buyers in a foreclosure sale,
however necessary those tests may be. Accordingly, those cost fall
on ORIX.
In sum, the cost of the tests that ORIX conducted prior
to March 23, 2011, falls outside of the scope of the Indemnity
Agreement because they were not liabilities "sought from or
asserted against" ORIX by a third party. The Receiver's expenses
related to environmental testing fall outside of the scope of the
Agreement because they were not costs "required to take necessary
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precautions to protect against the release of any Hazardous
Materials." Accordingly, we reverse the district court's order
awarding ORIX the costs associated with environmental testing.
III. Conclusion
For the foregoing reasons, we reverse the part of the
district court's order awarding costs associated with environmental
testing. We award the costs of the appeal to Appellants. We
remand the district court's order awarding costs and attorneys'
fees to ORIX for reconsideration in light of our decision.
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