MRPC Christiana LLC v. Crown Bank

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
MRPC CHRISTIANA LLC, )
et al., )
) C.A. No. N15C-02-010 EMD
Plaintiffs/Counterclaim Defendants , )
)
v. )
)
CROWN BANK, )
)
Defendant/Counterclaim Plaintiff. )
)
DECISION AFTER TRIAL
John G. Harris, Esq., Michael W. McDermott, Esq., and David B. Anthony, Esq., Berger Harris
LLP, Wilmington, Delaware. Attorneys for Plaintiffs/Counterclaim Defendants MRPC
Christiana LLC, Krishnas, LLC, BWI MRPC Hotels, LLC, Paresh Patel, Ranjan Patel, Chirag
Patel and Paresh Patel and Ranjan Patel Irrevocable Trust.
Daniel A. Griffith, Esq., Chad J. Toms, Esq., and Kaan Ekiner, Esq., Whiteford, Taylor &
Preston, LLC. Attorneys for Crown Bank.
I. INTRODUCTION
This is a commercial civil action. The action arises out of a $12,988,000.00 construction
loan (the “Loan”) by and between Crown Bank (“Crown”), MRPC Christiana, LLC (“MRPC”).
The Loan is secured by various guarantees and collateral, including the primary collateral which
is a hotel located at 56 South Old Baltimore Pike, Parcel Numbers 09-035.00-019 and 09-
035.00-12, Newark Delaware (the “Hotel”).
The complaint (the “Complaint”) initiating this civil action was filed on January 31,
2015. The named Plaintiffs were MRPC, Krishnas, LLC (“Krishnas”), Ganesa, LLC (“Ganesa”),
BWI MRPC Hotels, LLC (“BWI”), Paresh Patel (“Mr. P. Patel”), Ranjan Patel (“Ms. R. Patel”),
Chirag Patel (“Mr. C. Patel”), and Ranjan Patel Irrevocable Trust (the “Trust”, and collectively
with other Plaintiffs, the “Plaintiffs”). The Complaint set forth five (5) causes of action against
Crown: (i) Count I – Negligence; (ii) Count II – Breach of Contract; (iii) Count III –Breach of
Covenant of Good Faith and Fair Dealing; (iv) Count IV – Tortious Interference with Contract;
and (v) Count V – Unjust Enrichment.
On February 25, 2015, Crown filed an Answer to the Complaint. The Answer also
asserted twenty-one counterclaims (the “Counterclaims”) , which sets forth 21 counts for
affirmative relief: (i) Count I – Money Damages – Note #1 (Permanent Note); (ii) Count II –
Money Damages – Note #2 (Interim Note); (iii) Count III – Money Damages - Chirag Guaranty
#1; (iv) Count IV – Money Damages - Chirag Guaranty #2; (v) Count V – Money Damages -
The Trust Guaranty #1; (vi) Count VI – Money Damages - The Trust Guaranty #2; (vii) Count
VII – Money Damages - Krishnas Guaranty #1; (viii) Count VIII – Money Damages - Krishnas
Guaranty #2; (ix) Count IX – Money Damages - Ganesa Guaranty #1; (x) Count X – Money
Damages - Ganesa Guaranty #2; (xi) Count XI – Money Damages - BWI Guaranty #1; (xii)
Count XII – Money Damages - BWI Guaranty #2; (xiii) Count XIII – Money Damages - Paresh
Guaranty #1; (xiv) Count XIV – Money Damages - Paresh Guaranty #2; (xv) Count XV –
Money Damages - Ranjan Guaranty #1; (xvi) Count XVI – Money Damages - Ranjan Guaranty
#2; (xvii) Count XVII – Judgment in Possession – Security Agreement #1; (xviii) Count XVIII –
Judgment in Possession – Security Agreement #2; (xix) Count XIX –In Rem Levy on Hotel
Property; (xx) Count XX – In Rem Levy on Second Hotel Property; and (xxi) Count XXI – In
Rem Levy on the Hockessin Property. Counterclaims I through XVI, that seek in personam
remedies, and Counterclaims XVII through XXI seek in rem relief. On March 23, 2015,
Plaintiffs filed their Answer to the Counterclaims.
On July 28, 2015, Plaintiffs filed a Motion for Administrative Consolidation (the
“Consolidation Motion”), seeking to consolidate, under Superior Court Civil Rule 42(a), seven
(7) separate matters pending in the Delaware Superior Court.
2
On March 16, 2016, the Court entered the Amended Trial Scheduling Order (the
“Amended Trial Scheduling Order”), setting forth a trial date of August 1, 2016. [D.I. 62].
On May 20, 2016, Crown filed a Motion to Strike Jury Demand. On June 20, 2016, the
Court granted Crown’s Motion to Strike Jury Demand.
On June 7, 2016, Crown filed four motions for partial summary judgment (the “Partial
Summary Judgment Motions”). The Partial Summary Judgement Motions sought relief under
Civil Rule 5 on Plaintiffs’ Count I, Count IV and Count V. One of the Partial Summary
Judgement Motions moved for judgement on all of Plaintiffs’ breach of contract claims. On June
27, 2016, Plaintiffs filed their Responses in Opposition to the Partial Summary Judgment
Motions.
On June 29, 2016, Plaintiffs filed a Motion for Leave to File an Amended Complaint. On
July 5, 2016, Crown filed a Response in Opposition to Plaintiffs’ Motion for Leave to File an
Amended Complaint.
The Court held a hearing on the Partial Summary Judgment Motions on July 11, 2016.
During the hearing, Plaintiffs withdrew their opposition to the Partial Summary Judgment
Motions as to Counts I and V. On July 20, 2016, the Court granted Crown’s Partial Motion for
Summary Judgment as to Count IV. The Court also denied Crown’s Motion for Partial
Summary Judgment as to all breach of contract claims, holding that there were genuine questions
as to material facts. Accordingly, the Plaintiffs’ only remaining claims were Count II for Breach
of Contract and Count III for Breach of the Covenant of Good Faith and Fair Dealing.
At the hearing, the Court also granted in part and denied in part Plaintiffs’ Motion for
Leave to File an Amended Complaint. On July 25, 2016, Plaintiffs filed the First Amended
Complaint. On July 27, 2016, Crown filed its Answer to the First Amended Complaint.
3
On July 22, 2016, the pretrial conference was held before the Court. After the pretrial
conference, the Court entered the joint proposed pretrial stipulation and order (the “Pretrial
Stipulation”).
II. THE TRIAL
A bench trial on Plaintiffs’ Counts II and III and Crown’s Counterclaims was held on the
following dates: August 1, 2016 through August 5, 2016; September 21, 2016 through
September 23, 2016; October 21, 2016; November 7, 2016; and January 6, 2017 (collectively,
the “Trial”).1 The Court then had both parties submit their closing arguments in written form,
receiving the final post-trial paper on or about June 16, 2017.2
A. WITNESSES
During the Trial, the Court heard from and considered testimony from the following
witnesses:
Chirag P. Patel
Paresh Patel
Daniel Lesser
Thomas Deignan
Kevin Friedrich
John Burgess
Peggy Lane
Lawrence Kneip
Anthony Mirandi
Jacinto Rodrigues
Warren Feldman
William Santora
Brian Casey
Keith Madigan
1
Super. Ct. R. Civ. P. 39(b)
2
Although in all the Briefing Orders, the parties did not submit word versions of their post-trial briefs until after the
Court made a request late in September 2017.
4
All the witnesses testified on direct and were available for cross-examination. The fact
witnesses in this civil action were Mr. C. Patel, Mr. P. Patel, Mr. Deignan, Mr. Friedrich, Mr.
Burgess, Ms. Lane, Mr. Kneip, Mr. Mirandi, and Mr. Rodrigues. The expert witnesses were Mr.
Lesser, Mr. Feldman, Mr. Madigan, Mr. Casey and Mr. Santora. Normally, the Court would list
the witnesses in the order they testified and which party called the witness; however, because the
Trial was a bench trial, the Court took witnesses out of order and used Rule 611 of the Delaware
Rules of Evidence to allow for examination of the witness for both parties cases-in-chief.
B. EXHIBITS
The parties submitted an extensive number of exhibits. Most of these exhibits were
admitted without objection. The parties provided the Court with the exhibits in the form of joint
exhibits (“JX”).
III. APPLICABLE LAW
The Court will be applying the following general legal principles:
A. GOVERNING SUBSTANTIVE LAW
The Agreement provides that New Jersey law applies to the substantive issues relating to
governance, construction and interpretation.3
B. STANDARD OF LAW FOR BREACH OF CONTRACT
In New Jersey, a party must allege three elements to state a breach of contract claim: “(1)
a valid contract, (2) breach of that contract, and (3) damages resulting from that breach.”4 If the
terms of a contract are clear, “it is the function of a court to enforce it as written and not to make
a better contract for either of the parties.”5 Absent ambiguity, the intention of the parties is to be
3
JX84 at Art. 8, sec. 8.1(h) (“This Agreement shall be governed by and construed and interpreted in accordance
with the laws of the State of New Jersey.”).
4
EnviroFinance Group, LLC v. Environmental Barrier Co., LLC, 113 A.3d 775, 787 (N.J. Super. App. Div. 2015).
5
Kampf v. Franklin Life Ins. Co., 161 A.2d 717, 720-21 (N.J. 1960).
5
ascertained by the language of the contract.6 If the language is plain and capable of legal
construction, the language alone must determine the agreement's force and effect.7
One of the elements that the party must prove is the other party’s breach of the contract.8
Failure to perform a contract in accordance with its terms and conditions constitutes a breach of
contract. It does not matter if the failure to perform was purposeful or inadvertent.
C. MATERIAL BREACH
A breach may be material or minor. If a breach “goes to the essence of the contract,”
then the breach is material.9 The New Jersey Supreme Court adopted Section 241 of the
Restatement (Second) of Contracts to determine if a breach is material.10 The Court must
consider:
(a) the extent to which the injured party will be deprived of the benefit which he
reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part
of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer
forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure
his failure, taking account of all the circumstances including any reasonably
assurances; and
(e) the extent to which the behavior of the party failing to perform or to offer to
perform comports with standards of good faith and fair dealing.11
6
Dontzin v. Myer, 694 A.2d 264, 267 (N.J. Super. App. Div. 1997).
7
Royal Ins. Co. v. Rutgers Casualty Ins. Co., 638 A.2d 924, 927 (N.J. Super. App. Div. 1994).
8
Taken from New Jersey Model Jury Charge (Civil) 4.10 “Bilateral Contracts” (May 1998); New Jersey Model Jury
Charge (Civil) 4.10 L “Claims of Breach” (May 1998).
9
Roach v. BM Motoring, LLC, 155 A.3d 985, 991 (N.J. 2017) (citing Ross Sys. v. Linden Dari-Delite, Inc., 173 A.2d
258 (N.J. 1961)).
10
Id. at 991-92.
11
Id. (quoting Restatement (Second) of Contracts, § 237 (1981)).
6
Whether conduct is a breach of contract or a material breach of contract is ordinarily a
question for the trier of fact.12
If a party materially breaches the contract, the other party may treat the contract as void
or proceed on the contract.13 If the non-breaching party continues to perform on the contract,
then the contract remains valid.14 The non-breaching party’s indication that it intends “to
perform will operate as a conclusive choice, not in deed depriving him of a right of action for the
breach which has already taken place, but depriving him of any excuse for ceasing performance
on his own part.”15
D. MODIFICATION OF A CONTRACT
Parties can show modifications to contracts through explicit agreements to modify or
actions and conduct of the parties, but “the intention to modify [must be] mutual and clear.”16
“Ambiguous course of dealing from which one party might reasonably infer that the original
contract was still in force, and the other that it had been changed, will not support
modification.”17 Further, modification of a contract requires new or additional consideration.18
E. IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING19
In addition to the express terms of a contract, the law provides that every contract
contains an implied covenant of good faith and fair dealing. This means that, even though not
specifically stated in the contract, it is implied or understood that each party to the contract must
12
Magnet Resources, Inc. v. Summit MRI, Inc., 723 A.2d 976, 982 (N.J. Super. App. Div. 1998).
13
Merchants Indem. Corp. v. Eggleston, 179 A.2d 505, 513 (N.J. 1962).
14
Id; see also Frank Stamato & Co. v. Borough of Lodi, 71 A.2d 336, 339 (N.J. 1950).
15
Twin Crest Group v. Del. Valley Urology, LLC, 2013 WL 6508241, at *8 (D.N.J. Dec. 12, 2013) (quoting Frank
Stamato, 71 A.2d at 339).
16
County of Morris v. Fauver, 707 A.2d 958, 967 (N.J.1998).
17
Id. (quoting 17A C.J.S. Contracts § 375 (1963)) (international quotations omitted).
18
Segal v. Lynch, 48 A.3d 328, 342 (N.J. 2012) (citing County Of Morris, 707 A.2d at 967).
19
Taken from New Jersey Model Jury Charge (Civil) 4.10 “Bilateral Contracts” (February 2011); New Jersey
Model Jury Charge (Civil) 4.10 J “Implied Terms—Covenant of Good Faith and Fair Dealing” (February 2011).
7
act in good faith and deal fairly with the other party in performing or enforcing the terms of the
contract.20
To act in good faith and deal fairly, a party must act in a way that is honest and faithful to
the agreed purposes of the contract and consistent with the reasonable expectations of the parties.
A party must not act in bad faith, dishonestly, or with improper motive to destroy or injure the
right of the other party to receive the benefits or reasonable expectations of the contract.
There can be no breach of the implied covenant of good faith and fair dealing unless the
parties have a contract.21 Additionally, the implied covenant of good faith and fair dealing may
not override an expressly granted right under the contract.22
In order for there to be a breach of the implied covenant of good faith and fair dealing in
this case, a party must demonstrate that the other contracting party, with no legitimate purpose:
1) acted with bad motives or intentions or engaged in deception or evasion in the performance of
contract; and 2) by such conduct, denied the party of the bargain initially intended by the
parties.23 In considering what constitutes bad faith, a number of factors can be considered,
including the expectations of the parties and the purposes for which the contract was made. The
fact finder should also consider the level of sophistication between the parties, whether the
20
See Sons of Thunder, Inc. v. Borden, Inc., 690 A.2d 575 (N.J. 1997); Pickett v. Lloyd’s, 131 N.J. 457, 467 (N.J.
1993); Onderdonk v. Presbyterian Homes, 425 A.2d 1057, 1062 (N.J. 1981); Bak-A-Lum Corp. v. Alcoa Bldg. Prods.
Inc., 351 A.2d 349, 352-53 (N.J. 1976); Ass’n Group Life, Inc. v. Catholic War Veterans, 293 A.2d 382, 383 (N.J.
1972); Palisades Properties, Inc. v. Brunetti, 207 A.2d 522, 531 (N.J. 1965).
21
Wade v. Kessler Institute, 798 A.2d 1251, 1262 (N.J. 2002) (expressly emphasizing there can be no breach of the
implied covenant of good faith and fair dealing in the absence of a contract).
22
Id.
23
See Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Assoc., 864 A.2d 387, 396 (N.J. 2005)
(clarifying the proof standards for a breach of good faith and fair dealing claim stating that: (i) “Proof of ‘bad motive
or intention’ is vital to an action for breach of the covenant….;” (ii) the party claiming a breach “must provide
evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some
conduct that denied the benefit of the bargain originally intended by the parties.”).
8
parties had equal or unequal bargaining power, and whether the party’s act involved the exercise
of discretion.
The fact finder must keep in mind, however, that bad faith is not established by simply
showing that a party’s motive for the actions did not consider the best interests of the other party.
New Jersey contract law does not require parties to behave thoughtfully, charitably or unselfishly
toward each other.24
In order for a party to prevail on a breach of implied covenant of good faith and fair
dealing, the fact finder must specifically find that bad faith motivated a party’s actions. A party
who acts in good faith on an honest, but mistaken, belief that the actions were justified has not
breached the covenant of good faith and fair dealing.25
F. LEGAL STANDARD FOR GUARANTEES
When resolving questions as to the interpretation of contracts of guarantee, New Jersey
courts look to the rules governing construction of contracts generally.26 The terms of a guarantee
agreement must be read in light of commercial reality and in accordance with the reasonable
expectations of persons in the business community involved in transactions of the type
involved.27
G. GENERAL DAMAGES – BREACH OF CONTRACT28
A plaintiff who is awarded a verdict for breach of contract is entitled to compensatory
damages for such losses as may fairly be considered to have arisen naturally from the
24
Wilson v. Amerada Hess Corp., 773 A.2d 1121, 1130 (N.J. 2001).
25
Silvestri v. Optus Software, Inc., 814 A.2d 602 (N.J. 2003).
26
Center 48 Ltd. P’ship v. May Dept. Stores Co., 810 A.2d 610, 618-19 (N.J. Super. App. Div. 2002) (citing
Garfield Trust Co. v. Teichmann, 95 A.2d 18, 21-22 (N.J. Super. App. Div. 1953)).
27
Center 48 Ltd. P’ship, 810 A.2d at 819 (citing Mt. Holly State Bank v. Mt. Holly Washington Hotel, Inc., 532 A.2d
1125, 1127-28 (N.J. Super. App. Div. 1987)).
28
Taken from New Jersey Modern Jury Charge (Civil) 8.45 (December 2014); see also Donovan v. Bachstadt, 453
A.2d 160 (N.J. 1982); 525 Main Street Corp. v. Eagle Roofing Co., 168 A.2d 33 (N.J. 1961); Coyle v. Englander’s,
488 A.2d 1083 (N.J. Super. App. Div. 1985).
9
defendant’s breach of contract. Alternatively, a party may be entitled to such damages as may
reasonably be supposed to have been contemplated by both parties, at the time they made the
contract, as the probable result of the breach of such contract.
Compensatory damages for breach of contract are designed under the law to place the
injured party in as good a monetary position as he/she would have enjoyed if the contract had
been performed as promised. What that position is depends upon what the parties reasonably
expected at the time they made the contract. A party is not liable for a loss that the parties did
not have reason to foresee as a probable result of any breach. While the loss must be a
reasonably certain consequence of the breach, the exact amount of the loss need not be certain.
H. BURDEN OF PROOF BY A PREPONDERANCE OF THE EVIDENCE29
In a civil case, the burden of proof is by a preponderance of the evidence. Proof by a
preponderance of the evidence means proof that something is more likely than not. It means that
certain evidence, when compared to the evidence opposed to it, has the more convincing force
and makes the Court believe that something is more likely true than not. Preponderance of the
evidence does not depend on the number of witnesses. If the evidence on any particular point is
evenly balanced, the party having the burden of proof has not proved that point by a
preponderance of the evidence, and the Court must find against the party on that point.
In deciding whether any fact has been proved by a preponderance of the evidence, the
Court may consider the testimony of all witnesses regardless of who called them, and all exhibits
received into evidence regardless of who produced them.
In this particular case: (i) MRPC must prove all the elements of Count II for Breach of
Contract and Count III for Breach of the Covenant of Good Faith and Fair Dealing by a
29
Taken from Superior Court Civil Pattern Jury Instruction 4.1.
10
preponderance of the evidence; and (ii) Crown must prove all the elements of the Counterclaims
by a preponderance of the evidence.30
I. EVIDENCE—DIRECT OR CIRCUMSTANTIAL31
Generally speaking, there are two types of evidence from which a jury may properly find
the facts. One is direct evidence—such as the testimony of an eyewitness. The other is indirect
or circumstantial evidence—circumstances pointing to certain facts.
As a general rule, the law makes no distinction between direct and circumstantial
evidence, but simply requires that the Court find the facts from all the evidence in the case: both
direct and circumstantial.
J. EVIDENCE EQUALLY BALANCED32
If the evidence tends equally to suggest two inconsistent views, neither has been
established. That is, where the evidence shows that one or two things may have caused the event
(e.g., a material breach): one for which MRPC was responsible and one for which Crown was
not. The Court cannot find for MRPC if it is just as likely that the event was caused by one thing
as by the other.
In other words, if the Court finds that the evidence suggests, on the one hand, that Crown
committed a breach, but on the other hand, that Crown did not commit a breach, then the Court
must not speculate about the suggested causes of MRPC’s injury; in that circumstance the Court
must find for Crown.33
30
See, e.g., Reynolds v. Reynolds, 237 A.2d 708, 711 (Del. 1967)(defining preponderance of the evidence); Oberly
v. Howard Hughes Medical Inst., 472 A.2d 366, 390 (Del. Ch. 1984)(same).
31
Taken from Superior Court Civil Pattern Jury Instruction 23.1.
32
Taken from Superior Court Civil Pattern Jury Instruction 4.3.
33
See, e.g., Eskridge v. Voshell, 593 A.2d 589 (table), 1991 WL 78471, *3 (Del. 1991).
11
K. MULTIPLE PARTIES34
The Court notes that there are several parties in this case with claims and counterclaims.
Some may be liable while others are not. The Court will engage in a fair consideration of all of
the parties’ arguments and defenses. If the Court finds against one party, that shouldn't affect the
Court’s consideration of other parties.35
L. CREDIBILITY OF WITNESSES—WEIGHING CONFLICTING TESTIMONY36
Here, the Court is the sole judge of each witness's credibility. That includes the parties.
The Court considers each witness' means of knowledge; strength of memory; opportunity to
observe; how reasonable or unreasonable the testimony is; whether it is consistent or
inconsistent; whether it has been contradicted; the witnesses' biases, prejudices, or interests; the
witnesses' manner or demeanor on the witness stand; and all circumstances that, according to the
evidence, could affect the credibility of the testimony.
If the Court finds the testimony to be contradictory, the Court may try to reconcile it, if
reasonably possible, so as to make one harmonious story of it all. But if the Court cannot do this,
then it is the Court’s duty and privilege to believe the testimony that, in the Court’s judgment, is
most believable and disregard any testimony that, in the Court’s judgment, is not believable.
M. PRIOR SWORN STATEMENTS37
If the Court finds that a witness made an earlier sworn statement that conflicts with
witness’s trial testimony, the Court may consider that contradiction in deciding how much of the
trial testimony, if any, to believe. The Court may consider whether the witness purposely made a
false statement or whether it was an innocent mistake; whether the inconsistency concerns an
34
Taken from Superior Court Civil Pattern Jury Instruction 5.5.
35
See Travelers Ins. Co. v. Magic Chef, Inc., 483 A.2d 1115 (Del. Super. 1984)
36
Taken from Superior Court Civil Pattern Jury Instruction 23.9.
37
Taken from Superior Court Civil Pattern Jury Instruction 23.2.
12
important fact or a small detail; whether the witness had an explanation for the inconsistency;
and whether that explanation made sense to the Court.
The Court’s duty is to decide, based on all the evidence and the Court’s own good
judgment, whether the earlier statement was inconsistent; and if so, how much weight to give to
the inconsistent statement in deciding whether to believe the earlier statement or the witness’s
trial testimony.
N. PRIOR INCONSISTENT STATEMENT BY WITNESS38
A witness may be discredited by evidence contradicting what that witness said, or by
evidence that at some other time the witness has said or done something, or has failed to say or
do something, that is inconsistent with the witness's present testimony.
The Court, as the fact finder, will determine whether a witness has been discredited, and
if so, to give the testimony of that witness whatever weight that the Court think it deserves.
O. EXPERT TESTIMONY39
The parties presented expert witnesses during the course of the Trial. Expert testimony is
testimony from a person who has a special skill or knowledge in some science, profession, or
business. This skill or knowledge is not common to the average person but has been acquired
by the expert through special study or experience.
In weighing expert testimony, the Court may consider the expert's qualifications, the
reasons for the expert's opinions, and the reliability of the information supporting the expert's
opinions, as well as the factors previously mentioned for weighing the testimony of any other
witness. Expert testimony should receive whatever weight and credit the Court thinks
appropriate, given all the other evidence in the case.
38
Taken from Superior Court Civil Pattern Jury Instruction 23.3
39
Taken from Superior Court Civil Pattern Jury Instruction 23.10.
13
IV. DISCUSSION
The Court heard from a number of witnesses—both fact and expert. Before detailing the
findings of fact and conclusions of law, the Court is going to address the credibility and
effectiveness of the witnesses.
A. CREDIBILITY OF WITNESSES
Here, the Court is the sole judge of each witness's credibility, including the parties. The
Court finds that—based on their testimony at the Trial, their manner or demeanor on the witness
stand, and all circumstances that, according to the evidence, could affect the credibility of the
testimony—Mr. P. Patel, Mr. Deignan, Mr. Kneip and Mr. Mirandi were very credible witnesses.
The Court noted that Mr. P. Patel, Mr. Deignan, Mr. Kneip and Mr. Mirandi were responsive to
the questions asked even when the question was difficult and may have solicited information that
did not support the position espoused by the party they supported. The Court also finds that Mr.
Kneip, Mr. Deignan and Mr. Mirandi provided testimony that was helpful to the Court on the
issues to be decided in this civil action.
The Court did not find the testimony of Mr. C. Patel to be overly credible or helpful. Mr.
C. Patel was not always responsive to the questions asked by the lawyers or the Court. In fact,
the Court cautioned Mr. C. Patel during the Trial that he needed to respond the questions that
were asked. Moreover, some of the testimony of Mr. C. Patel seemed contrary to the evidence
adduced at the Trial and the plain language of controlling documents. Mr. C. Patel’s testimony
surrounding the use of the $1,500,000 cash collateral held in an account at Crown on or about
December 8, 2014 is just one example of why the Court finds Mr. Patel not to be a credible
witness. JX649; TT:8/2, 51:13-84:10; TT:8/3 147:10-149:15.
14
The Court finds that some of the testimony of Mr. Rodrigues was credible and/or helpful.
Mr. Rodrigues was not as responsive as he could be and that made it difficult to follow some of
his responses. To the Court, Mr. Rodrigues seemed to be “trying to hard” to present the position
of Crown as opposed to responding to the question. Because of this, the Court discounted some
of Mr. Rodrigues’ testimony.
Mr. C. Patel and Mr. Rodrigues were the representatives at trial of MRPC and Crown
respectively. As such, Mr. C. Patel and Mr. Rodrigues have a strong interest in the outcome of
this civil action, i.e., bias. This showed through unreasonable testimony, inconsistency of
testimony, convenient memory failure and their demeanor on the stand.
The Court finds the remaining witnesses—Mr. Lesser, Mr. Friedrich, Mr. Burgess, Ms.
Lane, Mr. Feldman, Mr. Santora, Mr. Casey and Mr. Madigan—to be credible witnesses.
B. FINDINGS OF FACT
1. The Parties
MRPC is a Delaware limited liability company, maintaining its principal place of
business at 56 S. Old Baltimore Pike, Newark, Delaware. JX726 at 3, Ans. No. 3. MPRC is the
owner of the primary collateral in this litigation—the Hotel.
MRPC made a decision to expand and re-flag the Hotel as a Sheraton Four Points Hotel
“towards the end of 2010, beginning of 2011.” TT:8/1, 27:9-28:1. Sheraton Four Points is part
of the Starwood Hotel conglomerate. TT:8/1, 25:16-18.
Crown is a New Jersey chartered bank. Crown’s principal place of business is located at
27 Prince Street, Elizabeth Union County, New Jersey, 07276. JX84.
Mr. P. Patel and Ms. R. Patel are husband and wife residing at of 181 Thompson Drive,
Hockessin, Delaware. JX726 at 3-4, Ans. Nos. 9, 10. Mr. C. Patel is an individual residing at
15
the same address. Mr. C. Patel is the manager of MRPC. TT:8/1, 23:23-24:7; 26:14-23. The
residence of Mr. P. Patel and Ms. R. Patel (the “Patel Residence”) is secondary collateral for the
Loan. TT:8/1, 76:11-77:5.
The Trust is a Delaware trust formed with an address location of 181 Thompson Drive,
Hockessin, Delaware. Mr. P. Patel and Ms. R. Patel are the grantors and beneficiaries of the
Trust. JX726 at 3, Ans. No. 5. The Trust is a member of MRPC. TT:8/1, 74:2-12. Mr. C. Patel
is the sole trustee of the Trust. TT:8/1, 30:5-8.
Krishnas is a Delaware limited liability company with a business address of 1024
Churchmans Road in Newark, Delaware. Krishnas owns and operates the Country Inn and
Suites located at 1024 Old Churchmans Road, Newark DE, 19713 (“The Country Inn Hotel”).
JX726 at 3, Ans. No. 6; TT:8/2, 160:19-161:2. The Country Inn Hotel is also collateral for the
Loan. TT:8/1, 76:11-77:5. Mr. C. Patel is Krishnas’ manager. JX94 at 4.
BWI is a Maryland limited liability company with a Delaware address location of 181
Thompson Drive, Hockessin, Delaware. JX726 at 3, Ans. No. 7. Mr. P. Patel is BWI’s
managing member. JX100 at 4. On December 19, 2012, BWI owned an undeveloped parcel of
land located at 1200 Old Elkridge Landing Road, Linthicum, Maryland (the “Maryland Parcel”).
TT:8/2, 175:9-17. Crown already foreclosed on the Maryland Parcel. TT:8/2, 154:9-155:5.
Ganesa is a Delaware limited liability company with an address location of 181
Thompson Drive, Hockessin, Delaware. JX726 at 3, Ans. No. 8. Ganesa owns an undeveloped
parcel of land located at 630 South Pennsville Auburn Road, Carneys Point, Salem County, New
Jersey (the “New Jersey Parcel”). TT:8/2, 163:21-164:4. Mr. C. Patel is Ganesa’s manager.
JX109 at 4.
16
2. The Hotel and Decision to Renovate and Reflag
In 1991, Mr. P. Patel purchased the unimproved real property located at 56 S. Old
Baltimore Pike, Newark, Delaware (the “Property”). TT: 8/1, 22:19-22. In 1996-97, Mr. P.
Patel developed the Property into a 65-unit Comfort Suites hotel, defined here as the Hotel. Id.
at 100:13-14. In the years that followed, Mr. P. Patel’s son, Mr. C. Patel, worked at the Hotel in
virtually every facet of its business operations. Id. at 114:18-19; 145: 14-16; 23:13-22.
In 2011, MRPC closed the Hotel so that it could be renovated and reflagged. JX779 at 3;
TT: 8/1, 65:7-9. At about the same time, Mr. C. Patel, on behalf of MRPC, engaged DelVal
Financial Business Corp. (“DelVal”) for the purpose of originating, underwriting, processing,
and servicing the SBA component of the financing needed for rebranding and renovating the
Property. TT: 8/1, 46:14-21; 8/1 104:6-8; 8/1 118:3-14.
MRPC weighed two renovation and rebranding scenarios. One option was to renovate
the existing 65-room hotel and rebrand it as La Quinta Inn and Suites (“La Quinta”), which
would require $400,000 of financing. TT: 8/1, 31:9-32:3; 8/1 46:17-21. MRPC had lined-up
funds to refinance existing debt for the La Quinta option through Evolve Bank and Trust. 8/1
44:5-15; 102:7-10; JX779 at 134. The second option was to renovate, expand, and rebrand the
Hotel as a Four Points by Sheraton, which entailed adding three floors to the Property.
In 2012, MRPC commissioned a report from HVS, a hotel consulting firm, to evaluate
both renovation options. TT: 10/21, 97:12; JX6; JX779. MRPC ultimately decided to move
forward with the Four Points option (the “Project”). TT: 8/1, 33:1-20. MRPC negotiated the
PIP, procured new furniture, fixtures and equipment (“FF&E”) and obtained the necessary
building permit for the Project from New Castle County. JX073.
17
MRPC sought out a lending source for the additional financing needed to complete the
Project. In or around early March of 2012, a financing agent, CLC Lending, introduced MRPC
to Crown. TT: 8/1, 47:16-23. The parties entered into a Letter of Intent on or about March 5,
2012, which required that MRPC pay Crown a fee of approximately $20,000. TT: 8/1 49:2-4;
JX785.
3. The Loan Commitment, as Modified
MRPC and Crown entered into a loan commitment letter dated May 31, 2012 (the “Loan
Commitment”), outlining the terms and conditions of Crown’s commitment to lend nearly $13
million to MRPC through a construction loan and a bridge loan. JX23. Senior Vice President
and SBA Director, Mr. Kneip, signed the Loan Commitment for Crown, and Mr. C. Patel signed
the document for MRPC. JX23. MRPC paid Crown $95,082.00 to obtain the Loan
Commitment. JX23.
The Loan Commitment, among other things, provides:
 the term of the Loan was to be 12 months from closing (p. 2);
 a list of “Collateral Security” (p. 3-4);
 an entity entitled Tetra Tec was to provide a performance Bond, complete a
plan and cost review to determine acceptability prior to closing and conduct site
inspections and review all draw requests. Crown was to review and approve
the plan and cost review prior to closing. (p. 4);
 Crown Bank would not make the Loan with the SBA 504 Lender issuing a
commitment to refinance the Bridge Loan (p. 6).
Exhibit A to the Loan Commitment provides for the use of the Loan proceeds (the
“Sources and Uses”). The Sources and Uses were reviewed and approved by Crown, MRPC and
DelVal before the Loan closed. JX23; JX82. Mr. Kneip presented the Sources and Uses to
Crown’s Board Loan Committee (“BLC”), which approved them without modification. JX22 at
18
4. The Sources and Uses were also provided to HVS, who used them in determining the
feasibility and expected profit of the Project. JX779 at 39.
Exhibit E to the Loan Commitment is entitled “Construction Addendum.” JX23 at
Exhibit E. The Construction Addendum provides a lengthy list of “Required documentation for
construction disbursement.” JX23 at 1-2. Exhibit E also provides that:
Disbursements will occur within five business days of the receipt of a satisfactory
CONSTRUCTION MANAGER. Retainage of 10% for each advance will be
withheld. This retainage will be released when the construction management
company signs off on the project, the borrower accepts the project, final lien
waivers have been received and the permanent certificate of occupancy has been
issued and confirmed.
JX23 at 2. While Tetra Tec is mentioned in the Loan Commitment, Tetra Tec is not defined
as or designated as the “Construction Manager” anywhere in the Loan Commitment.
The Court finds that the evidence at Trial indicates that, with respect to the Loan, the
“CONSTRUCTION MANAGER” means a process beginning with Mr. Mirandi’s inspection
report as submitted to and reviewed by Crown, see, e.g., JX212 and JX221, and JX228 and
JX237, and ending in a Construction Loan Advance Authorization Sheet. See, e.g., JX301
(prepared by Vanessa Fernandes, verified by Ms. Ross, signed by Mr. Kniep and officer
approved by John Young). The Court does not find that Mr. Rodrigues explanation was very
credible on this point. Instead, the Court finds the wording of Exhibit “E” and testimony from
Ms. Lane and Mr. Kneip demonstrates that more than Mr. Mirandi’s site inspection would be
necessary for disbursement. JX23 at 18-19. For example, the CONSTRUCTION MANAGER
includes “review of retainage status,” “verify disbursement math,” “review…lien waivers.”
JX23 at 18-19.
The Court, as fact finder, used the word “indicates” because the Court does not believe
either party fully demonstrated or proved by a preponderance of the evidence what was meant by
19
CONSTRUCTION MANAGER. Crown drafted the term and the ambiguity rests with Crown.
In any event, the evidence adduced at the Trial provides that Crown did not always make a
disbursement within five (5) business days after: (i) Mr. Mirandi submitted an inspection report;
or (ii) Construction Loan Advance Authorization Sheet had been executed by all necessary
parties.
The parities modified the Loan Commitment after May 31, 2012. On August 9, 2012, the
parties modified the Loan Commitment to extend the expiration date to November 30, 2012.
JX47. In addition, the parties modified the Loan Commitment on December 9, 2012 to extend
the expiration date to December 31, 2012 (the “December LC Modification”). JX72.
The December LC Modification required that Mr. P. Patel and Ms. R. Patel put up their
personal residence as collateral for the Loan. TT: 1/6, 148:12-19; JX47; JXE 72. The December
LC Modification also removed Tetra Tec. JX47. The December LC Modification, in part,
provides:
Tetra Tec was originally approved to complete a plan and cost review, review draw
requests and perform site inspections, and to provide a performance bond. The
Bank will engage its own construction consultant and Tetra Tec will not be used.
The Borrower also obtained a performance bond separately, which must be
approved by the Bank prior to closing. The hard cost budget will be adjusted and
$50,000 will be funded from the hard cost contingency line item to cover the
$59,000 bond cost and $11,000 budget and draw request review fee being charged.
JX47; JX72.
MRPC was to obtain the performance bond. JX72 at 2; JX182 at Attachment C
(letter from Liberty Mutual Surety). Crown was to fund $50,000. Crown funded the
$50,000 for the performance bond at closing but it is unclear whether MRPC ever used
that money to obtain a performance bond or used the funds elsewhere. JX437.
20
On or about December 10, 2012, Crown and the various borrowers and guarantors
executed the December LC Modification.
Crown employed Mr. Mirandi as its construction consultant. Mr. Mirandi was a part-
time employee. JX72. Mr. Mirandi worked in construction his entire life, ascending from
laborer to owning and managing engineering firms and construction companies. TT:9/23, 56:19-
60:17. Mr. Mirandi retired from his construction business in 2001 but continued working as a
consultant to various architects and engineers. TT:9/22, 133:14-21. Mr. Mirandi also began
serving as an advisor or consultant to fellow professionals, including engineering firms.
TT:9/22, 133:10-21. Mr. Mirandi was familiar with the inspection process for commercial
construction projects through his experience working through companies he owned or co-owned.
TT:9/23, 60:18-61:10. Mr. Mirandi had experience conducting inspections for architectural
firms and engineering firms, including those certified on AIA documents. TT:9/23, 61:12-62:12.
Mr. Mirandi’s responsibility pertained to performing construction inspections and
preparing reports relating to construction draw requests for Crown. TT:9/22, 140:14-141:2.
With respect to the draw practice, Crown would notify Mr. Mirandi by telephone that an MRPC
draw application was ready for review. TT: 9/22, 149. Next, Mr. Mirandi would usually pick-up
a hard copy of the MRPC draw application at Crown’s headquarters. TT:9/22, 149. Mr. Mirandi
would visit the Project and undertake the inspection. Mr. Mirandi would return to Crown’s
office to hand-deliver his inspection reports, typically at least a few days after he completed and
signed his inspection report. TT: 9/22, 166: 20-23; 9/22, TT:9/22, 176: 1-2. Mr. Mirandi had no
supervisor, TT: 9/22, 143, and was given no deadlines for scheduling a site inspection or
completing his inspection reports for an MRPC draw request. TT:9/22, 152:1-17 Mr. Mirandi
21
testified that he was to submit a completed inspection report within a “reasonable time,” which to
him, meant whenever he was done with it. TT: 9/23, 19 :48.
Mr. Mirandi did not have the authority to approve change orders on behalf of Crown.
TT:9/22, 196:19-22. The Plaintiffs went to great lengths at the Trial and in the post-Trial briefs
to denigrate and discount Mr. Mirandi and his testimony at the Trial. Despite these efforts, the
Court found Mr. Mirandi’s testimony during the Trial on his inspection reports and the amount to
be approved for disbursement to be credible and helpful. This is especially true when contrasted
with Mr. C. Patel’s testimony on the same issues.
4. The Agreement
On December 19, 2012, Crown and MRPC executed and entered into a Construction
Loan Agreement (the “Agreement”) in the original principal amount of up to Twelve Million,
Nine Hundred Eighty-Eight Thousand ($12,988,000.00) and 00/100 Dollars (the “Loan”). JX84.
MRPC was to use the proceeds from the Loan for the acquisition of the Hotel, with its then
existing 65 room hotel, from an entity affiliated with or owned by Paresh and Ranjan. JX23 at 1.
MRPC also was to use the proceeds to expand and re-flag the Hotel as a Sheraton Four Points
Hotel. JX 23 at 1; JX84; TT:8/1, 30:9-15.
The Agreement governs the Loan furnished by Crown to MRPC. As defined in the
Agreement, Crown is the “Bank” and MRPC is the “Borrower.” JX84 at 1. The Agreement
defines “Completion Date” as December 2, 2013 “unless the Borrower exercises its right to
extend the construction period for an additional six (6) months” pursuant to the Permanent
Note’s terms. JX84 at 1 (Art. I, sec. 1.1(d)). The “Improvements” are the planned
improvements to be made to the Hotel. JX84 at 2 (Art. I, sec. 1.1(i)). The “Loan Documents”
are the Commitment Letter (as modified), the Notes, the Construction Mortgage, the Mortgage,
22
the Guarantees, the Agreement and “all other documents executed and delivered to the Bank in
connection with the Notes.” JX84 at 2 (Art. I, sec. 1.1(l)).
The Agreement is an arms-length transaction between two business entities. JX84 at 1
and 18. The Agreement provides that it will be “governed by and construed and interpreted in
accordance” with New Jersey law. JX84 at 16 (Art. VIII, sec. 8.1(h)). The Agreement is a loan
agreement and does not create a business partnership between Crown and MRPC. The
Agreement, at Article VII, section 8.1(i), states:
It is hereby acknowledged by Bank and Borrower that the relationship between
them created hereby and by the Loan Documents is that of creditor and debtor and
is not intended to be and shall not in any way be construed to be that of a
partnership, a joint venture, or principal and agent; and it is hereby further
acknowledged that any control or supervision over the construction of the
Improvements by Bank or disbursement of any Loan proceeds to any one other than
Borrower shall not be deemed to make Bank a partner, joint venture, or principal
or agent of Borrower, but rather shall be deemed to be solely for the purpose of
protecting Bank’s security for the indebtedness evidenced by the Notes and other
indebtedness of Borrower to Bank.
JX84 at 16-17.
Crown must exercise good faith and act reasonably when approving, being
satisfied or when exercising its discretion. JX84 at 15 (Art. VIII, sec. 8.1(a)).
The Agreement and its provisions cannot be changed except by an instrument in
writing signed by both Crown and MRPC. JX84 at 16 (Art. VIII, sec. 8.1(c)). Moreover,
the Agreement cannot be waived, discharged or terminated except through written
instrument signed by both parties. JX84 at 16 (Art. VIII, sec. 8.1(c)).
Article II provides for the various representations and warranties of MRPC. Specifically,
Article II, section 2.1 lists the MRPC’s representations and warranties. JX84 at 2-3 (Art. II, secs.
2.1(a)-(h)).
23
Article III provides for “Certain Covenants of Borrower.” JX84 at 4-6 (Art. III, secs. (a)-
x)). Article III, section (a) provides that:
Borrower has or will commence and shall hereafter diligently pursue construction
of the Improvements, and Borrower shall complete the erection of the
Improvements with due diligence on or before the Completion Date in compliance
in all material respects with the Plans and this Agreement.
JX84 at 4.
Article III, section (b) governs modifications or amendments to Plans, providing that no
material modifications can be made without first obtaining the written approval of Crown. JX84
at 4 (Art. III, sec. (b)).
Article III, section (n), provides the following covenant entered into by MRPC:
[b]orrower shall duly perform and observe all of the covenants, agreements and
conditions on its part to be performed and observed hereunder and under any and
all other agreements and instruments herein mentioned to which Borrower is a
party, or is subject, and Borrower will not, without the prior written consent of
Bank, surrender, terminate, cancel, rescind, supplement, alter, revise, modify or
amend any such other agreement or instrument or permit any such other agreement
or instrument or permit any such action to be taken.
JX84 at 5-6.
Through Article III, section (o), MRPC agreed that the terms and conditions of the Loan
Commitment are incorporated into the Agreement. Moreover, MRPC agreed that in the event
that the terms of the Loan Commitment and the Agreement conflict then the Agreement controls.
JX84 at 6 (Art. III, sec. (o)).
Article IV of the Agreement provides the relevant obligations of both parties as to the
funding or disbursement of the proceeds. Article IV, section 4.1 provides:
Subject to the terms and conditions set forth in this Agreement, including, without
limitation, the conditions set forth in Article V and VI hereof, Bank agrees to make
disbursements to Borrower of the Loan funds up to the full amount set forth herein,
in accordance with the Construction Cost Estimate set forth in Exhibit “C” pursuant
to and subject to Borrowers’ compliance with the following procedures….
24
JX84 at 7. Article IV, section 4.1(a)-(e) goes on provide that Crown agrees to make
disbursements of funds to MRPC so long as MRPC complies with certain procedures:
 prior to a disbursement, MRPC needs to complete, execute and deliver an
application for an advancement (on Crown’s standard form draw request) with
copies of all valid building permits, approvals, and bring down of title and such
other information requested by Crown (defined as a “Draw Request”);
 if requested by Crown, the Draw Request must provide information regarding
subcontractors to be paid through the Draw Request;
 the Draw Request must be in a form satisfactory to Crown, submitted at least
five working days before the date when MRPC wants the funds and that there
be no more than one Draw Request per month unless Crown elects otherwise;
 at Crown’s discretion, each Draw Request is subject to an inspection report by
Crown’s consulting architect, engineer or representative certifying as to the
progress of construction, the conformity of the construction to the plans, the
quality and value of the work completed and the percentage of work completed,
and certifying that the costs to be paid are costs set out in the trade cost
breakdown and are costs incurred in connection with the planned construction;
and
 special procedures for additional disbursements after initial disbursements of
(i) $3,143,000 for purchase of the Hotel; (ii) $55,000 for eligible closing costs;
(iii) $539,780 for eligible soft costs; and (iv) $9,250,000 for balance of
construction and site improvements.
In addition, Crown would only be advancing 90% of any approved Draw Request with the
remaining 10% paid upon completion as evidenced by a permanent Certificate of Occupancy.
JX84 at 7-8 (Art. IV, sec. 4.1(f)).
Article IV goes on to govern the amount of funds to cover the construction
($9,250,220);40 that funds will be made in accordance with Exhibit B (“Plans and
Specifications”); how the advances can be made and credited. JX84 at 8 (Art. IV, secs. 4.4, 4.5
40
Article IV, section 4.4 provides that the $9,250,220 would be broken down as follows: (i) $7,963,720 for
construction at the Hotel; (ii) $611,500 to fund an additional cash reserve account; (iii) $50,000 to fund a
performance bond; and (iv) $625,000 for an interest reserve demand account for the initial 12 month construction
period to be debited monthly.
25
and 4.6). Crown goes on to reserve its rights to make disbursements without complying with
Article IV to protect the collateral, or that any advancement of Loan proceeds does constitute a
waiver of Crown’s rights with respect to future advances. JX84 at 8-9 (Art. IV, secs. 4.7 and
4.8).
MRPC and/or Crown failed to attach Exhibit B to the Agreement. Testimony at Trial
demonstrated that the Plans and Specifications for the Hotel are attached to the AIA contract
between MRPC and BCD as Attachments “B” and “F.” JX182. Exhibit B is the Drawing List,
dated August 17, 2012. JX182 (Art. 9, secs. 9.1.4 and 9.1.5 and Attachment B). Exhibit F is the
Schedule of Values for the work to be done and totals $7,315,665. JX182 (Art. 4, sec. 4.1 and
Attachment F).
Article IV, section 4.14 relates to cash collateral, a certificate of deposit, and provides as
follows:
Certificate of Deposit: The Borrower shall fund a certain Certificate of Deposit in
the amount of $1,500,000 at the Bank, which shall be assigned to the Bank pursuant
to the terms of that certain Security Agreement and Assignment of even date
herewith. This Certificate of Deposit shall be released at the time the Interim Note
is paid in full. The P&I Reserve Account as set forth in Section 4.13 shall be funded
from this Certificate of Deposit with the balance being returned to the Borrower.
JX84 at 9. The $1,500,000 in cash collateral was provided; however, Crown put it into a money
market account instead of Certificate of Deposit. The evidence at Trial demonstrates that MRPC
knew that Crown held the $1,500,000 in a money market and not a Certificate of Deposit.
JX649.
Article V sets out the conditions precedent to Crown making of the initial advancement
of funds, and Article VI relates to subsequent conditions precedent to Crown making subsequent
advances. In addition, Article VII governs Default and Remedy. Article VII, section 7.1 asserts,
26
in relevant parts, that the Borrower shall be in default under either of the following
circumstances:
(a) any default or event of default shall occur under any of the other Loan
Documents or Borrower shall breach or fail to perform, observe or meet any
covenant or condition made in any of the other Loan Documents and such default,
event of default, breach or failure shall not have been cured prior to the expiration
of any applicable cure period expressly provided in any of the Loan Documents; or
(b) Borrower breaches or fails to perform, observe or meet any covenant or
condition made in this Agreement; or
****
(n) Borrower fails to close the SBA Loan and cause the SBA Loan to be funded to
payoff the Interim Note on or before the Maturity Date…
JX84 at 13-14. Article VII, section 7.2 states that the occurrence of any default or event of
default constitutes a default under each of the Loan Documents. JX84 at 14. Importantly,
Article VII, section 7.5 provides that in the occurrence of default by the Borrower, Bank:
[s]hall be entitled to enter upon and assume possession of the Premises and protect,
maintain, construct, install, and complete the Improvements in accordance with the
Plans and such changes thereto as Bank may, from time to time, in its sole
discretion, deem appropriate, all at the risk, cost and expense [sic] of Borrower…
[f]or this purpose Borrower hereby irrevocably constitutes and appoints Bank its
true and lawful attorney-in-fact with full power of substation to complete the
Improvements in the name of Borrower and hereby empowers Bank, as said
attorney, to take all action necessary in connection therewith…
JX84 at 14.
5. The Notes
The Loan is divided into two (2) notes—the Permanent Note and the Interim Note. The
Permanent Note is in the principal sum of Seven Million, Six Hundred Forty Thousand and
00/100 ($7,640,000.00) Dollars. JX85. The Interim Note is in the amount of Five Million Three
Hundred and Forty Eight Thousand and 00/100 ($5,348,000.00) Dollars. JX134. The Interim
Note was to be paid off upon the closing and funding of a Small Business Administration
27
(“SBA”) loan. JX134. MRPC and Crown executed the Permanent Note and Interim Note
(collectively, the “Notes”) on December 19, 2012. JX85 at 1; JX134 at 1.
As developed at the Trial, the Interim Note was structured in a way so that it could be
converted into a SBA qualified second mortgage loan (the “SBA Loan”). The SBA Loan would
be from the Community Development Program (referenced by the parties as the “CDC”). The
CDC is a quasi-governmental nonprofit organization. TT:9/21, 244:13-17. The CDC does
second mortgages but not construction loans. As such, the Interim Note was a bridge loan during
construction that would get paid off by proceeds from the SBA Loan. This would have meant
that Crown would be the lender only on the Permanent Note. The lender on the SBA Loan was
to be DelVal, a SBA 504 lender. TT:9/22, 93:14-94:6; TT:9/21, 247:4-8.
The Permanent Note is in the principal sum of $7,640,000.00. JX85 at 1. Pursuant to the
Permanent Note, the Borrower promises to pay Bank: the “principal sum of Seven Million Six
Hundred Forty Thousand and 00/100 ($7,640,000.00) Dollars, at the per annum rate of interest as
set forth below…” JX85 at 1. The Permanent Note makes reference to the Agreement. JX85 at
1. The Permanent Note defines the term “Principal” as the amount actually advanced pursuant to
the Agreement. JX85 at 1. The Permanent Note then defines “Loan” as the entire Principal and
all accrued interest. JX85 at 1.
The Permanent Note has been executed by MRPC as the Borrower. JX85 at 5. The
Permanent Note was also executed by the Guarantors. JX531 at 3. Specifically, Mr. C. Patel’s
signature appears above his name as well as above that for the Trust. JX531 at 3; TT:9/23 3:13-
4:2. Mr. P. Patel and Ms. R. Patel executed the Permanent Note as well, their signatures
appearing above their respective names, as Guarantors, for the bridge period. JX531 at 3;
TT:9/23 4:4-6. Mr. C. Patel also executed the Permanent Note during bridge and income
28
stabilization period on behalf of Krishnas, BWI, and Ganesa. JX531 at 3; TT:9/23 4:7-10.
With respect to MRPC’s obligation under the Permanent Note, it states that MRPC will
pay—
[t]he Principal and unpaid interest as follows: From the date hereof until December
2, 2013 (the “Construction Phase”): Payments during the Construction Phase on the
Loan of interest only shall commence on February 2, 2013 and shall be due and
payable on the second (2nd) day of each consecutive month thereafter until the end
of the Construction Phase and upon conversion to the Permanent Phase or if the
Extension (as hereinafter defined) is exercised, the Extended Construction Phase as
hereinafter set forth.
At the end of the Construction Phase, subject to the Extension, and pursuant to the
terms of the Loan Agreement on conversion to the Permanent Phase (as hereinafter
defined): Payment over the immediately following ten (10) year period (the
“Permanent Phase”), based on a twenty-five (25) year amortization, subject to the
Interest rate adjustments set forth below of Principal and Interest.
JX85 at 1.
MRPC had the option of extending the term of the Construction Phase for an additional
six (6) month period until June 2, 2014 or until the funding of the SBA Loan (the “Extension”).
JX85 at 1. If MRPC opted for the Extension, MRPC was to pay Crown an extension fee in an
amount equal to 1/2% of the Loan. JX85 at 1.
The Permanent Note provides how to calculate interest during the term of the Agreement.
The Permanent Note, at “Interest Rate,” states that interest during the Construction Term accrues
at the per annum rate of the Wall Street Journal Prime Rate plus 375 basis points (3.75%), with a
minimum per annum interest rate (a floor) of seven percent (7%) per annum. JX85 at 2. Interest
during the Permanent Term, as defined in the Permanent Note, accrues for the first five (5) years
of the Permanent Term at the then prevailing Federal Home Loan Bank Five Year Advance Rate
(the “NYFHLB”) plus 400 basis points (4%), or at Crown’s option, the Wall Street Journal
Prime Rate plus 375 basis points (3.75%), with a minimum per annum interest rate (a floor) of
29
seven percent (7%). JX85 at 2. Interest for the second five (5) years of the Permanent Term is
fixed to the then prevailing NYFHLB rate plus 400 basis points (4%), or at Crown’s option, the
Wall Street Journal Prime Rate plus 375 basis points (3.75%), with a minimum per annum
interest rate (a floor) of seven percent (7%). JX85 at 2.
Payments of interest only were due and payable monthly under the Permanent Note
during the Construction Phase, commencing on February 2, 2013 and continuing on the second
(2nd) day of each month thereafter, until the end of the Construction Phase and upon conversion
to the Permanent Phase as defined therein, or if the Extension as defined therein is exercised, the
Extended Construction Phase, as also defined therein. JX85 at 2. The Permanent Note provides
that in the event any payment is not made thereunder within 10 days of the date it is due, then a
late charge of five percent (5%) of the overdue payment shall also be due and payable to Bank.
JX85 at 1.
Under the “Prepayment” section, the Permanent Note also provides for a two percent
(2%) prepayment premium in the event the Loan does not convert to the Permanent Term Loan
after the Construction Phase, subject to the Extension. JX85 at 2. Moreover, the Permanent
Note also sets forth a provision governing collateral, with states, in pertinent part:
[t]he indebtedness evidenced by this Note and the obligations created hereby are
secured, inter alia, by that certain first lien Mortgage, Security Agreement and
Fixture Filing (Construction) dated even date herewith (hereinafter referred to as
the “Mortgage”), between the Borrower, as “Mortgagor”, and Bank, as
“Mortgagee”, encumbering and mortgaging the Borrower’s right, title and interest
in properties lying and being in the City of Newark, County of New Castle and
State of Delaware located at 56 South Old Baltimore Pike … as the same is more
particularly described in the Mortgage (hereinafter referred to as the “Premises”),
an Assignment of Leases and Rents on the Premises, all property fixed or to be
affixed on the Premises, and all business assets of the Borrower; as security for the
performance by the Borrower of its obligations hereunder.
JX85 at 3.
30
The “Event of Default” section of the Permanent Note provides that it shall constitute a
default, if any payment is not made when due thereunder or under any of the Loan Documents as
defined in the Agreement, which includes the Permanent Note, or if MRPC fails to comply with
any of its covenants, conditions or undertakings contained in the Agreement. JX85 at 3.
With respect to costs of collection, under the section titled “Event of Default”, the
Permanent Note mandates that MRPC “shall pay the cost of collection of any and all sums due
and owing hereunder and not paid, including without limitation court costs and reasonable
attorney’s fees in connection with the collection of any such sums.” JX85 at 3. The Permanent
Note also provides that the “failure to satisfy the post closing requirements of the Loan
Agreement, shall, at the sole discretion of Bank, be an event of default.” JX85 at 3.
Upon a default under the Permanent Note, interest is increased thereunder by five percent
(5%) per annum. JX85 at 3. In addition, Crown is entitled to be reimbursed for its attorneys’
fees and costs it incurred in collecting the Loan upon a default of the Permanent Note. JX85 at
3.
The Interim Note is in the amount of $5,348,000.00. JX134 at 1. The Interim Note has
been executed by MRPC. JX595 at 2; TT:10/21, 53:16-54:5. The Interim Note has also been
executed by the Guarantors. JX595 at 3. Mr. P. Patel executed the Permanent Note as well, his
signatures appearing above his respective names, as Guarantor, for the bridge period. JX595 at
3; TT:10/21, 54:6-11. Mr. C. Patel also executed the Permanent Note during bridge and income
stabilization period on behalf of Krishnas, BWI, and Ganesa. JX595 at 3; TT:10/21, 53:16-54:5.
The Interim Note states that MRPC shall pay the Principal as follows:
[p]ayments on the Loan of interest only shall commence on February 2, 2013 and
shall be due and payable on the second (2nd) day of each consecutive month
thereafter until the Maturity Date (as hereinafter defined), or if the Extension is
exercised, the Extended Maturity Date, as hereinafter set forth. The entire unpaid
31
principal balance and all accrued and unpaid interest outstanding shall be due and
payable upon the funding of SBA Loan #55286950-00, approved October 31, 2012,
and in no event at a date later than December 2, 2013 (the “Maturity Date”), subject
to the Extension (as hereinafter defined). Interest will be calculated on the amount
of the Principal that is outstanding.
JX134 at 1. MRPC’s obligations under the Interim Note are:
[t]he Borrower shall have the option to extend the term of the Maturity Date for an
additional six (6) month period (the “Extension”), until June 2, 2014 (the “Extended
Maturity Date”) provided that (i) the Borrower exercises its right to extend by
providing the Bank with written notice of its intention to extend on or before thirty
(30) days prior to the Maturity date; (ii) no event which is or, with the passage of
time or giving of notice or both, could become an Event of Default, shall have
occurred or be continuing; and (iii) the Borrower shall have paid to the Bank an
extension fee in an amount equal to ½% of the Principal balance at the Maturity
Date.
JX134 at 1.
The Interim Note, in the section titled “Interest Rate”, provides how to calculate interest.
Interest accrues under the Interim Note at the per annum rate of the Wall Street Journal Prime
Rate plus 375 basis points (3.75%), with a minimum per annum interest rate (a floor) of seven
percent (7%). JX134 at 1. Payments of interest only were due and payable monthly under the
Interim Note commencing on February 2, 2013, and continuing on the second (2nd) day of each
month thereafter until December 2, 2013, or if the Extension is exercised, on or before June 2,
2014. JX134 at 1. Further, the Interim Note provides that in the event any payment is not made
thereunder within ten (10) days of the date it is due, then a late charge of five percent (5%) of the
overdue payment shall also be due and payable to Crown. JX134 at 1.
The Event of Default section provides that MRPC shall be in default, if, among other
things, it fails to: (1) make payment in accordance to the plain terms and conditions, as set forth
above; (2) close the SBA Loan; (3) comply with any of its covenants, conditions or undertakings
32
contained in the Agreement; or (4) enters into default under any other of the Loan Documents,
which includes the Permanent Note. JX134 at 2.
Similar to the Permanent Note, with respect to costs of collection, the Interim Note
mandates that the MRPC “shall pay the cost of collection of any and all sums due and owing
hereunder and not paid, including without limitation court costs and reasonable attorney’s fees in
connection with the collection of any such sums.” JX134 at 2. The Interim Note also provides
that the “failure to satisfy the post closing requirements of the Agreement, shall, at the sole
discretion of the Bank, be an event of default.” JX134 at 2. Notably, upon default under the
Interim Note, interest is increased thereunder by five percent (5%) per annum. JX134 at 2.
6. The Security Agreement
On December 19, 2012, MRPC executed a Security Agreement (the “Security
Agreement”) in favor of Crown as part of the consideration for the loan under the Permanent
Note. JX89. MRPC is defined as the “Debtor” or “Borrower” in the Security Agreement and
Crown is defined as the “Lender.” Under Section 1.2(c) of the Security Agreement, MRPC
granted Crown, the Lender, a security interest in a first lien on and pledge and assignment of the
“Collateral,” as defined as MRPC’s:
[f]uture right, title, and interest in and to any and all of the personal property of
Debtor whether such property is now existing or hereafter created, acquired or
arising and whatever located from time to time, including without limitation: (i)
accounts; (ii) chattel paper; (iii) goods; (iv) inventory; (v) equipment; (vi) fixtures;
(vii) farm products; (viii) instruments; (ix) investment property; (x) documents;
(xi) commercial tort claims; (xii) deposit accounts; (xiii) letter-of-credit rights;
(xiv) general intangibles; (xv) supporting obligations; and (xvi) proceeds and
products of the foregoing.
JX89 at 1-2. Section 3.1 of the Security Agreement, governing payments and performance,
states that MRPC covenanted to “duly and punctually pay all Obligations becoming due under
33
the Note and Loan Documents and … duly and punctually perform all Obligations on its part to
be done or performed under this Agreement, the Note, and the Loan Documents.” JX89 at 5.
Section 4 of the Security Agreement governs default. The governing provision under
subsection 1 defines an “Event of Default” as follows:
(a) default of any liability, obligation, covenant or undertaking of the Debtor to the
Lender, hereunder, under the Note, the Loan Documents or any other loan
documents, including, without limitation, failure to pay in full and when due any
installment of principal or interest or default of the Debtor under any other Loan
Document or any other agreement of Debtor or Debtor with the Lender;…
(c) default of any material liability obligation or undertaking of the Debtor to any
other Person, continuing for 10 days.
JX89 at 6-7. Section 4.2 provides for an acceleration clause:
[i]f an Event of Default shall occur, which continues beyond any notice and cure
periods, if any, at the election of the Lender, all Obligations shall become
immediately due and payable without notice or demand, except with respect to
Obligations payable on DEMAND, which shall be due and payable on DEMAND,
whether or not an Event of Default has occurred.
JX89 at 7.
7. The Guaranty Agreements
Mr. C. Patel, the Trust, Krishnas, BWI, Ganesa, Mr. P. Patel, and Ms. R. Patel
(collectively, the “Guarantors”), executed certain guaranty agreements (collectively referred to as
the “Guaranty Agreements”) in favor of Crown in connection with the Agreement. The
Guaranty Agreements are comprised of guarantees of payment (the “Guarantees of Payment”)
and guarantees of completion (the “Guarantees of Completion”). Crown required MRPC and
related parties to provide extra collateral and guarantees to back the Loan and secure funding for
the Project.
The Guaranty Agreements absolutely and unconditionally guarantee payment and
performance, as was required by Crown to enter into the Loan. TT:8/1, 75:18-78:4.
34
The language found in the Guaranty Agreements is identical in each of the contracts. The
Guarantees of Payment41 expressly provide that Crown, referred to as the “Bank,” is unwilling to
lend to MRPC without execution of the Guarantees of Payment. Section 2 of the Guarantees of
Payment states, in pertinent part:
[G]uarantor hereby absolutely and unconditionally guarantees the Bank the prompt
payment, when due, whether by maturity, acceleration or otherwise, of all present
or future obligations or liabilities of the Borrower to the Bank, whether now
existing or arising after the date of this Guaranty … together with all modifications,
extensions, or renewals of the obligations or liabilities. This Guaranty covers
obligations and liabilities incurred by the Borrower in any capacity … All such
obligations and liabilities set forth herein, together with interest and all reasonable
fees, costs, expenses, attorneys’ fees and other costs of collection incurred or paid
by the Bank, are together referred to as the “Indebtedness.”
Guarantees of Payment at 1. Section 3 of the Guarantees of Payment, titled “Guaranty Absolute
and Unconditional” states, in pertinent part:
[t]he liability of the Guarantor under this Guaranty is absolute and unconditional
irrespective of: (a) any lack of validity or enforceability of any of the Loan
Documents … or (f) any other circumstances which might otherwise constitute a
defense available to, or a discharge of, the Borrower, any guarantor or other obligor
in respect of the Indebtedness or the Guarantor in respect of this Guaranty…
This Guaranty is a continuing guarantee and shall remain in full force and effect
until all of the Indebtedness has been paid in full and will continue to be effective…
Guarantees of Payment at 1.
The Guarantors each also executed a Guaranty of Completion.42 Section 2 of the
Guarantees of Completion set forth the Obligations of the Guarantors, including but not limited
to: (a) Completion of the Improvements, free and clear of all Liens on or before the Completion
41
Each Guarantor’s respective Guaranty of Payment (the “Guarantees of Payment”) for the Permanent Note and the
Interim Note is found in the record as follows: Krishnas (JX94, JX141); BWI (JX100, JX146); Ganesa (JX109,
JX153); Mr. P. Patel (JX116, JX158); Ms. R. Patel (JX119, JX160); Mr. C. Patel (JX122, JX162); and the Trust
(JX124, JX164).
42
Each Guarantor’s respective Guaranty of Completion (the “Guarantees of Completion”) for the Permanent Note
and the Interim Note is found in the record as follows: Krishnas (JX95); BWI (JX101); Ganesa (JX110); Mr. P.
Patel (JX117); Ms. R. Patel (JX120); Mr. C. Patel (JX123); and the Trust (JX125).
35
date; (b) the complete and timely performance of Borrower’s obligations; and (c) payment in full
of any and all reasonable expenses that may be paid or incurred by the Lender in collection.
Guarantees of Completion at 2. The Guarantees of Completion are an absolute, unconditional,
present and continuing guaranty of payment and performance. Guarantees of Completion at 2-3.
8. The MRPC Mortgages
As further security, MRPC and Crown entered into the Open-End Mortgage, Security
Agreement and Fixture Filing (Construction) (the “Permanent Note Mortgage”). JX86. The
Permanent Note Mortgage was recorded on December 21, 2012 in the Office of the Recorder of
Deeds, New Castle County, beginning at Instrument No. 20121221-0075519 becoming a first
position lien upon certain real and personal property held by MRPC. JX87 at Exhibit A and
Schedule B. Crown also recorded numerous UCC and fixture filings. JX90-93.
Similarly, MRPC and Crown entered into an Open-End Mortgage, Security Agreement
and Fixture Filing (Construction) (the “Interim Note Mortgage”, and collectively with the
Permanent Note Mortgage, the “MRPC Mortgages”). JX135. The Interim Note Mortgage was
recorded on December 21, 2012 in the Office of the Recorder of Deeds, New Castle County,
beginning at Instrument No. 20121221-0075526 becoming a second position lien upon certain
real and personal property held by MRPC. JX135 at Exhibit A and Schedule B. Crown also
recorded numerous UCC and fixture filings. JX137-140.
The MRPC Mortgages are identical in their terms, with exception to the mortgage note
being secured. The MRPC Mortgages define MRPC as the “Mortgagor” and Crown as the
“Mortgagee.” JX86 at 2; JX135 at 2. Under Section 1, the MRPC Mortgages state the
obligation secured therein:
[m]ortgagor shall pay promptly to Mortgagee the principal of and interest upon the
Note according to the terms of the Note and all other amounts owing by Mortgagor
36
to Mortgagee under the [sic] Note secured hereby, including all other amounts
secured hereby from time to time or expended by Mortgagee, with interest thereon
at the rate set forth in the Note, and shall keep and perform every other term,
provision, covenant and agreement of the Note and this Mortgage, subject to
applicable notice, grace and cure periods set forth therein, if any.
JX86 at 3; JX135 at 3. The maximum unpaid principal balance for the MRPC Mortgages is the
loan amounts, or $7,640,000.00 and $5,348,000.00, respectively. JX86 at 2; JX135 at 2.
The MRPC Mortgages also create “a security interest in the personal property and
fixtures” included in the term “Premises,” which is defined as the Hotel. JX86 at 2; JX135 at 2.
Section 11 of the MRPC Mortgages governs “Events of Default,” which defines events
that constitute default under the agreement:
A. The failure of Mortgagor to pay any installment of interest, or principal, under
the terms of the Note and this Mortgage within ten (10) days of their due date;
B. The failure of Mortgagor to duly observe or perform any covenant, condition or
agreement with respect to the payment of moneys on the part of Mortgagor to be
observed or performed pursuant to the terms of the loan documents other than the
payment of principal and interest which shall be governed by Subsection (A) above,
and such default shall have remained uncured for a period of ten (10) days after
notice thereof to Mortgagor;…
H. If an Event of Default as defined in the Loan Agreement shall occur and shall
not be cured within the grace period provided herein.
JX86 at 6; JX 135 at 6.
Section 12 of the MRPC Mortgages, titled “Remedies,” sets forth the relief contractually
available to Crown should one of the defined Events of Default occur, in that:
[t]he entire unpaid balance of the principal, the accrued interest, and all other sums
secured by the Mortgage, shall, at the option of the Mortgagee, become
immediately due and payable without further notice or demand, and in any such
Event of Default, Mortgagee may forthwith undertake any one or more of the
following, to the extent permitted by applicable law:
A. Recover judgment against Mortgagor for the entire unpaid principal balance,
accrued interest, and all other sums secured by this Mortgage; and neither the
recovery of judgment nor the levy of execution thereof on any property, including
the Premises, shall affect Mortgagee’s rights hereunder or the lien hereof;
37
B. Enter upon and take possession of the Premises, or have a receiver of the rents,
issues and profits thereof appointed…;
C. Assume full control of the Premises and complete the construction thereof as it
sees fit in its absolute discretion;
D. Take such other action to protect and enforce Mortgagee’s rights hereunder and
the lien hereof, as Mortgagee deems advisable, including:
(1) The foreclosure hereof, subject, at Mortgagee’s option, to the rights of
tenants and other persons in the Premises; and/or
(2) The sale of the Premises in a foreclosure proceeding in one or several
parcels, at Mortgagee’s option, and without obligation to have the
Premises marshaled.
JX86 at 7; JX135 at 7.
Section 13 governs Counsel Fees and provides:
If Mortgagee becomes a party (by intervention or otherwise) to any action or
Proceeding affecting the Premises or the title thereto or Mortgagee’s interest under
this Mortgage, or employs an attorney to collect any of the indebtedness or to
enforce performance of the obligations, covenants and agreements secured hereby,
or to advise Mortgagee with respect to its rights and remedies hereunder and under
the Note in case of an Event of Default or threatened Event of Default, Mortgagor
shall reimburse Mortgagee, forthwith upon written notice and without further
demand, for all reasonable costs, charges and counsel fees incurred by Mortgagee,
in any such case, whether or not suit be commenced, and the same shall be added
to the principal sum secured hereby as further charge and lien upon the Premises
and shall bear interest at the rate provided for in the Note, to the maximum extent
permitted by applicable law.
JX86 at 7; JX135 at 7.
Section 23 governs use of the premises after default. This provision of the MRPC
Mortgages states, that, after an Event of Default occurs, and the expiration of any applicable
grace period, “Mortgagor … shall, upon the demand of Mortgagee, become a month-to-month
tenant of Mortgagee…” JX86 at 9; JX135 at 9.
38
9. The Guaranty Mortgages
As a means of additional guaranty for the Loan, the Guarantors, with the exception of Mr.
C. Patel, executed and delivered their own Guaranty Mortgage, Security Agreement, and Fixture
Filings (“Guaranty Mortgages”)43 pertaining to the Notes. The Guaranty Mortgages have
identical governing provisions as previously set forth as applicable in the MRPC Mortgages,
with the exception that the respective Guarantor is defined as the “Mortgagor” in the Guaranty
Mortgages. Moreover, the Guaranty Mortgages provide security as additional collateral, as
owned by the Guarantors and as defined in the Guaranty Mortgages and appended as Exhibit
“A”.
Specifically, Krishnas provided the Country Inn Hotel as collateral under its Guaranty
Mortgage (the “Krishnas Guaranty Mortgage”). JX96 at Ex. A. Mr. P. Patel and Ms. R. Patel
provided a lien upon their personal residence, the Patel Residence, under their Guaranty
Mortgage (the “Patel Guaranty Mortgage”). JX118 at Ex. A; TT:8/1, 76:11-78:4. BWI provided
a first mortgage upon the BWI Property as collateral under its Guaranty Mortgage (the “BWI
Guaranty Mortgage”). JX105 at Ex. A. Ganesa provided a first mortgage upon the New Jersey
Collateral as collateral under its Guaranty Mortgage (the “Ganesa Guaranty Mortgage”). JX111
at Ex. A; TT:8/2, 163:21-164:8.
10. Assignments of Leases and Rents
MRPC, along with the Guarantors that own property that was offered as collateral, each
respectively executed an Assignment of Leases and Rents with respect to the Notes.44 The
43
Each Guarantor’s respective Guaranty Mortgage for the Notes (Permanent Note and Interim Note) is found in the
record as follows: Krishnas (JX96, JX142); BWI (JX105, JX146); Ganesa (JX111, JX154); Mr. P. Patel (JX118,
JX159); Ms. R. Patel (JX121, JX160); and the Trust (JX127, JX165).
44
Each Assignors’ respective Assignment for the Notes (Permanent Note and Interim Note) is found in the record as
follows: MRPC (JX88, JX136); Krishnas (JX97, JX143); BWI (JX106, JX150); and Ganesa (JX112, JX155).
39
Assignments were all executed on December 19, 2012. Specifically, MRPC provided
assignment of any and all leases and rents related to the Property, Krishnas provided assignment
of any and all leases and rents related to the Second Hotel Property, BWI provided assignment of
any and all leases and rents related to Maryland Property, and Ganesa provided assignment of
any and all leases and rents related to the New Jersey Collateral.
The Assignments are identical in terms of operative language, with the exception of
differing language pertaining to the Assignor, identification of the Assignor, and the description
of the mortgaged property, as identified in detail in Exhibit “A” to the Assignments. The
Assignments provide that the Assignor, in consideration of the Loan, “assigns, transfers, and sets
over to the Bank all of its rights, title, and interest in and to all those leases, tenancies, rental
agreements, occupancy agreements, and subleases (the “Leases”) now or hereafter existing and
affecting all or any portion of the Mortgaged Property, and any and all extensions thereof…”
Assignments at 3. The Mortgaged Property is defined therein as the property owned by the
Assignor. Assignments at 2.
Section 2 of the Assignments sets forth that the Assignor covenants and agrees:
(a)(i) To duly and timely observe, perform, and discharge all the obligations, terms,
covenants, conditions, and warranties of the Loan Documents and each Lease on
the part of the Assignor to be kept, observed and performed, and (ii) to give
immediate written notice to the Bank of any failure on the part of the Assignor to
do so under a Lease and of any default notice received from a lessee…
Assignments at 4. Moreover, Section 6 of the Assignment provides that in the Event of Default,
as defined in the Loan Documents or under the Assignment itself, Crown shall have the right and
power to exercise and enforce its rights as follows:
(a) To revoke the license granted to the Assignor pursuant to the terms of this
Assignment to collect the Rents, and then thereafter, without taking possession, in
the Bank’s own name, to demand, collect, receive, sue for, attach and levy the
Rents…;
40
(b) To declare all sums evidenced by the Note and secured by the Assignment and
by the Mortgage immediately due and payable and, at its option, exercise any and
all of the rights and remedies provided in any of the Loan Documents, or at law or
in equity and/or;
(c) Without regard to the adequacy of any security, and with or without any action
or proceeding through any person or by agent or court-appointed receiver and
irrespective of the Assignor’s possession, then or thereafter to enter upon, take
possession of, manage and operate the Property, or any part thereof…
Assignments at 6-7.
Crown advanced all of the loan proceeds to or for the benefit of MRPC. JX662. At the
Loan closing on December 19, 2012, Crown made four (4) disbursements, to include the initial
$3,733,280.00 wire advance, $611,500.00 for the credit cash contingency account, $625,000.00
for the credit interest reserve account, and $54,500.00 for closing costs. JX662. The Loan had
an original Completion Date of December 2, 2013, which could be extended until June 2, 2014 if
MRPC exercised the Extension. JX84 at 1.
11. MRPC Hires BCD as it General Contractor
In August of 2012, MRPC hired BCD Associates, LLC (“BCD”) as its general contractor.
TT: 8/1, 37:22-38:5. MRPC and BCD executed an AIA contract, later revised on October 9,
2012 (as revised, the “AIA Contract”). JX44. The AIA Contract was revised because Crown
required that MRPC remove the bond from the hard cost budget and move the bond expense to
soft costs so it could be paid at closing. JX38; TT: 8/1, 59:13-23. Crown is not a party to the
AIA Contract.
BCD is a joint venture between Bancroft Construction Company (“Bancroft”) and
Carrollton Design Build (“Carrollton”). TT: 8/4, 4:12-14. Bancroft is an established Delaware
general contracting firm with over 20 years of construction experience. TT: 8/4, 4:17-5:2; JX774
41
at 11. Before the Project, Carrollton had built “dozens of comparable hotels” involving third-
party lenders. TT: 8/4, 10:8-17.
Mr. Deignan, the president of Carrollton, acted as “project executive” for the Project.
TT: 8/4, 6:14-15. BCD assigned James DiPaolantonio to oversee construction on the Project.
TT: 8/4, 6:22-7. Bruce Bachman, who reported directly to Mr. DiPaolantonio, was BCD’s onsite
superintendent in charge of the day-to-day construction for the Project. TT: 8/4, 33:3-5. Mr.
Bachman had worked for Carrollton for over 20 years. TT: 8/4, 33:8-15.
Generally, the construction entailed removing the roof of the Hotel, constructing floors 4-
6, adding a penthouse to house the HVAC units, reconfiguring the first-floor lobby, and making
certain site improvements. TT: 8/1, 30:22-31:4. The Project also involved some renovations to
the 2nd and 3rd floor. Id.; JX778. The AIA Contract fixed the price for the scope of work at
$7,330,056.00. JX44 at 3.
The date of commencement of construction under Section 3.1 of the AIA Contract
between MRPC and BCD was to be thirty-days post-settlement, i.e., January 19, 2013. JX182 at
2. BCD projected eight (8) months for construction, rendering the projection completion date in
September of 2013. JX36; JX84. The AIA Contract fixed the price for the scope of work at
$7,330,056.00. JX44 at 3; JX207. Combined with contingency and an interest reserve, Crown
committed to fund an additional $9,250,220.00. JX 84 at 8; JX23 at Ex. A. The Agreement
provides how the $9,250,220.00 was to be allocated, of which up to $7,350,000.00 was for
construction costs under the AIA Contract. JX84 at 8; JX23 at Ex. A.
On September 11, 2012, Mr. C. Patel for MRPC, Mr. Deignan, Mr. DiPaolantonio, and
Jack Barr for BCD, and Mr. Kneip and Mr. Mirandi for Crown, met at the Hotel (the “Pre-
Closing Site Visit”). TT: 8/1, 59:3-9. During this visit, Crown reviewed the construction plans
42
and budget for adequacy, which Mr. Mirandi would document in a report he submitted to Crown
before Closing. JX33.
12. Construction at the Hotel
On January 24, 2013, a sprinkler pipe freeze and burst occurred at the Hotel (the
“Sprinkler Incident”). The following day, Kevin Crumlish of BCD sent an e-mail to Mr. C. Patel
providing notice that the Sprinkler Incident will have an impact on the construction schedule:
“[b]ecause the contract specifies an end date, we are obligated to notify you that we will request
a new end date once the impact on the schedule can be determined.” JX198.
On Monday, January 28, 2013, at 1:44 p.m., Mr. C. Patel forwarded the BCD Delay
Notification to Crown. JX199. Crown (Mr. Kneip) responded by e-mail just ten minutes later, at
1:54 p.m., advising that “[a]t this time the Bank will not consider a construction loan extension,
however as the job proceeds and we get closer to completion, we will of course consider an
extension (which must be approved by DelVal as well) at that time.” JX199 (emphasis added).
Mr. C. Patel and Mr. Kneip discussed Crown’s decision. TT: 8/1, 105:8-23; 128:14-17.
BCD agreed with MRPC because redrawing and rebidding the Project would have allowed
MRPC and BCD to “hit the pause button,” and assess the increased scope of work and time. TT:
8/5, 16:6-17; TT: 8/4, 19:7-9 (Mr. Deignan testified that redrawing and rebidding the Project
would have provided “a better global view of what we were in for financially, in terms of cost of
reconstruction.”); TT: 8/4, 23:1-7 (Mr. Deignan testifying that rebidding and redrawing would
have mitigated construction costs and avoided “hundreds of pages of change orders”); JX768 at
13.
Crown reaffirmed that MRPC was “on the clock so just get started.” TT: 8/1, 105:21;
136:10-11. Mr. Rodrigues confirmed that “. . . [Mr. Kneip] did tell [Charlie] we cannot extend
43
the maturing now when it’s [MRPC] should start . . .” Ex. A at 162:9-11. Crown not take over
control of the project at the Hotel, and did not instruct MRPC and BCD that the project must
proceed or that it could not be rebid or redrawn. TT:9/21, 272:8-13.
MRPC and BCD agreed to address the Sprinkler Incident by creating construction change
orders for additional construction work and costs. TT:8/1, 132:6-134:5; JX200.
MRPC submitted 23 draw requests (the “Draw Requests) during the lifetime of the
Project. The Draw Requests are as follows:
Draw Req. # Period Rec’d Insp. Disburse Amount Insp. Amt. Difference Days Days
Ending by Report Date Req’d Recommended Disbursed from from
Crown Date Amt. Draw Insp.
Req. to Report
Disburse to
Disburse
1 1/31/13 2/18/13 2/21/13 3/11/13 $86,363.21 $64,466.85 $65,466.85 $20,896.36 21 18
2 2/28/13 3/19/13 3/19/13 4/1/13 $108,801.82 $108,801.82 $108,801.82 0 13 13
3 3/31/13 4/5/13 4/12/13 4/17/13 $136,265.86 $136,265.88 $136,265.8 +$.02 12 5
4 4/30/13 5/7/13 5/17/13 6/11/13 $480,759.59 $480,759.62 $478,571.73 $2,187.86 35 25
5 5/31/13 6/14/13 7/1/13 7/2/13 $650,486.82 $650,486.86 $650,486.85 +$.03 18 1
6 6/30/13 7/9/13 7/16/13 7/29/13 $727,008.87 $625,396.39 $687,982.54 $39,026.3345 20 13
7 7/31/13 8/19/13 8/28/13 9/5/13 $796,317.47 $604,613.90 $604,613.90 $191,703.5746 17 8
8 8/31/13 9/24/13 10/2/13 10/4/13 $850,749.66 $850,749.64 $850,749.64 $.02 10 2
9 9/3/13 10/10/13 10/22/13 10/23/13 $859,970.06 $859,970.06 $850,749.06 0 13 1
10 10/31/13 11/7/13 11/14/13 11/21/13 $557,237.69 $557,237.68 $557,237.68 $.01 14 7
11 11/30/13 12/3/13 12/17/13 12/18/13 $622,562.63 $603,683.90 $622,562.64 +$.01 15 1
12 12/21/13 1/2/14 1/21/14 2/4/14 $354,718.06 $183,385.51 $183,385.51 $171,332.55 33 14
1347 1/3/14 2/10/14
14 3/31/14 4/22/14 4/22/14 5/7/14 $782,552.96 $782,552.97 $782,552.97 +.01 15 15
15 5/31/14 6/6/14 6/13/14 6/18/14 $86,126.23 $86,126.23 $86,126.23 0 12 5
16 6/30/14 7/7/14 7/11/14 7/21/14 $177,508.44 $177,508.41 $177,508.41 $.03 14 10
17 7/31/14 8/12/14 8/14/14 8/20/14 $223,847.46 $223,847.47 $177,508.41 46,339.0548 8 6
18 8/31/14 9/16/14 10/7/14 10/8/14 $221,760.21 $221,760.47 $126,440.96 $95,319.25 22 1
19 9/30/14 10/11/14 10/2/14 10/23/14 $353,328.93 $353,328.96 $353,328.96 +$.03 10 2
20 10/31/14 11/13/14 12/10/14 12/22/14 $374,455.73 $119,083.13 $103,725,.57 $270,730.16 39 12
21 11/30/14 12/4/14 $297,079.74 $297,079.74
22 12/31/14 12/30/14 $128,677.91 $128,677.91
23 12/31/14 2/3/15 $955,000.00 $955,000.0049
Total $7,847,602.00
Disbursed
45
Crown disbursed an additional $39,026.33 on August 8, 2013. As such, the amount requested and the amount
disbursed on Draw Request 6 are the same.
46
Crown disbursed an additional $148,500.00 on October 4, 2013. As such, the amount requested and the amount
disbursed on Draw Request is a difference of $43,203.57.
47
Replaced by Draw Request 14
48
Crown paid an additional $46,789.06 on September 26, 2014. Crown was correcting a wire authorization amount
that mirrored the payment on July 21, 2014. In the end, MRPC received the total amount requested in Draw Request
17.
49
Draw Request 23 represents the amount of unpaid retainage.
44
MRPC tracked the change orders for Sprinkler Incident costs and revisions to the
construction project, which eventually increased the cost of the project by $2,219,944.00.
JX703. In addition, MRPC incurred an additional $2,150,000.00 from a different lender. JX493.
Thus, by completion of the construction project, construction and renovation costs expanded by
$4,369,944.00, or approximately 50% of the original budget of $9,250,220.00.
13. The Modifications
By November of 2013, as the project neared the Original Completion Date as defined in
the AIA Contract, the contingency amounts allowed under the Loan had been exhausted to cover
change orders. JX414. Yet, by the December draw application, MRPC had approved change
orders totaling $1,172,418.96. JX439 at CB014384.
To cover the additional construction costs, Mr. C. Patel proposed, via e-mail, that the
furniture fixture and equipment (“FF&E”) in the budget be released and used for change orders
and that MRPC be permitted to obtain a third-party lender to cover the FF&E. JX360. Mr.
Kneip responded via e-mail: “[i]f you are to consider a new additional loan, we would have to be
convinced cash flow based on the original projections would cover all payments. I am not sure
that is the case.” Mr. C. Patel responded that cash flows “aren’t my concern, it is getting
done…” JX360. Further explaining his response, Mr. Kneip testified that cash flow generated
on a recurring basis from the business would need to be sufficient to cover Crown’s first
mortgage, the SBA second mortgage, and then if any remained for FF&E or working capital.
TT:9/22, 55:12-20-56:9. Moreover, the proposal from Mr. C. Patel would place an FF&E lender
in third position. TT:9/22, 56:10-13.
The parties negotiated, and ultimately reached an agreement to extend the Loan. JX531;
JX595. On May 2, 2014, Crown and MRPC, with the consent of the Guarantors, executed and
45
entered into a Modification of Note Agreement (the “May Modification”), which in part
extended the maturity date of the Notes to October 31, 2014 upon payment of a $69,940.00
extension fee, $5,000.00 modification fee, and $1,000.00 plan and cost review fee. JX531 at 1.
Under the May Modification, all amounts owed under the Loan were to be paid on
October 31, 2014, and the prepayment penalty was increased to ten percent (10%) during the
Construction Phase, subject to certain exclusions provided for therein, and in the event the
Permanent Note converted to the Permanent Phase, the prepayment penalty of ten percent (10%)
was to be reduced one percent (1%) each year during its stated term.50 JX531 at 1.
Following the May Modification, MRPC entered into a new loan with Access Point
Financial, Inc. JX493. With respect to Crown’s commitment to the process:
[w]e were told once it funded and got information that - - and at one point we
notified the borrower that we would have to hold up funding because, again, of the
issue of insufficient funds to complete the project until we knew that this lender
was in place. And the bank agreed - - the decision makers approved to allow for
this third lender to have a first lien on the FF&E, so we released that collateral.
TT:9/22, 57:10-23. The FF&E loan closed at the end of 2014. TT:9/22, 58:6-8.
Subsequent to the May Modification, Crown advanced an additional $2,483,215.5351 in
disbursements to MRPC.
At MRPC’s request, the parties agreed to extend the loan again to allow the construction
to continue. JX595. On September 29, 2014, Crown and MRPC, with the consent of the
Guarantors, executed and entered into a Modification of Note Agreement (the “September
Modification”), which in part extended the maturity date of the Notes to January 31, 2015 when
50
Mr. Rodrigues testified that the ten percent (10%) prepaid penalty was agreed upon between Crown and MRPC as
the compensation that Crown will receive for the loss of interest during the term of the Loan, should the Loan be
repaid prior to the maturity. TT:11/7, 227:17-228:4.
51
This monetary value includes a May 7, 2014 disbursement for $300,000.00 to replenish the Credit Interest
Reserve Account, an August 30, 2014 disbursement of $280,000.00 to replenish the Credit Interest Reserve
Account, and $44,234.94 pursuant to an interim payment. JX662.
46
all amounts owed thereunder were to be paid. JX595. The September Modification also granted
MRPC the option to request an additional three-month extension. JX595 at 1.
While negotiating the May Modification, Mr. Kneip sent an e-mail to Mr. C. Patel stating
the following:
[w]ith regard to the extension, we can NOT use a portion of the $1.5MM CD. You
may recall we needed that as cash collateral to be under our legal lending limit. We
need to retain it until the bridge loan is paid off by DelVal (after construction). So
replenishing the interest reserve must come from another source.
Interest reserve replenishment should be addressed when you analyze and request
an interim loan to finance cost overruns created by the water main break and flood,
which should be covered by insurance. Be sure to explain the request to cover
change orders in the 504 loan and the new requested loan for FF&E. This needs to
be done soon as both Crown Bank Board Loan Committee and DelVal/SBA must
approve.
JX385.
Mr. C. Patel testified that he disagreed with Crown treating the $1,500,000.00 as a
deposit rather than as cash collateral. TT:8/2, 51:13-15. Mr. C. Patel did acknowledge that the
cash collateral, held in a certificate of deposit, was necessary to offset the legal lending limit for
Crown. TT:8/2, 83:12-84:10. The Court finds that the $1,500,000 held in MRPC’s bank account
was cash collateral under the Agreement’s Article IV, section 4.14 and that this money was
subject to the Security Agreement. JX84 (Art. IV, sec. 4.14).
Despite being reminded again on December 5, 2014 that the CD needed to be held until
the “bridge loan is paid off,” on or about December 8, 2014, Mr. C. Patel transferred the
$1,500,000 cash collateral to MRPC’s bank account at TD Bank. JX649; JX650; JX706; JX732.
Crown reversed the transfer. The evidence indicates that Mr. C. Patel had an understanding that
this was a breach of the Agreement. The Court finds that Mr. C. Patel’s testimony at trial
demonstrated that he understood that the withdrawal of the $1,500,000 cash collateral would
47
serve as a substantial adverse material change in the borrower’s financial strength and constitute
a breach of the Loan Documents, as not contemplated under the SBA 504 contract. TT:8/3,
147:10-149:15. Mr. C. Patel memorialized this understanding in an e-mail to Mr. Kneip dated
March 7, 2014, stating: “[t]he contractor will not accept to wait for their final payment to come
from insurance proceeds. The CDC for the SBA 504 believes also that there could be a
substantial adverse material change in borrower’s financial strength if the liquidity (the $1.5MM
CD) is compromised in any fashion.” JX483.
As the January 31, 2015 Loan maturity approached, the parties negotiated toward a
further extension and a process that would allow a certificate of occupancy to issue and the SBA
Loan to close. On December 22, 2014, Crown sent a wire advance to Real Hospitality Group, on
MRPC’s behalf, as part of the negotiation process. JX662; TT:11/7, 223:3-15. The
disbursement was made after an in-person meeting with Mr. C. Patel, to resolve any issues
related to funding. TT:11/7, 223:16-22.
On or about January 6, 2015, the Hotel received its temporary certificate of occupancy.
Pre-Tr. Stip. at 13 at ¶24. On or about January 8, 2015, the Hotel received its final certificate of
occupancy. Pre-Tr. Stip. at 13 at ¶25. On or about that same date, the Hotel received franchise
approvals to open for business and opened for business to the general public. Pre-Tr. Stip. at 13
at ¶26.
Upon receiving its certificates of occupancy, MRPC cut off communication with Crown
and initiated the present suit on January 30, 2015. Pre-Tr. Stip. at 13 at ¶27.
The Loan matured on January 31, 2015. MRPC did not close on the SBA Loan. MRPC
did not make payment to Crown upon maturity of the Notes.
48
C. CONCLUSIONS ON CLAIMS OF PLAINTIFFS AND CROWN
1. Plaintiffs’ Claims
A. Count II – Breach of Contract.
After considering all of the evidence and the applicable law, the Court does not find a
material breach of contract by MRPC.
As more fully stated above in Section III.B-H, the Plaintiffs must prove, by a
preponderance of the evidence, the following to succeed on Count II: (1) a valid contract, (2)
breach of that contract, and (3) damages resulting from that breach. Failure to perform a contract
in accordance with its terms and conditions constitutes a breach of contract. It does not matter if
the failure to perform was purposeful or inadvertent.
A breach may be material or minor. If a breach “goes to the essence of the contract,”
then the breach is material. Here, the Court must consider facts that demonstrate:
(a) the extent to which the injured party will be deprived of the benefit which he
reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part
of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer
forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure
his failure, taking account of all the circumstances including any reasonably
assurances; and
(e) the extent to which the behavior of the party failing to perform or to offer to
perform comports with standards of good faith and fair dealing.
Whether conduct is a breach of contract or a material breach of contract is ordinarily a
question for the trier of fact—the Court.
49
If a party materially breaches the contract, the other party may treat the contract as void
or proceed on the contract. If the non-breaching party continues to perform on the contract, then
the contract remains valid. Continuing to perform in the face of a material breach does not
deprive the non-breaching party of a right of action for the breach which has already taken place.
If the non-breaching party continues to perform, then the non-breaching party is deprived of any
excuse for ceasing performance on its own part.
The Court finds that the parties did not modify the Agreement, or any other related loan
document, though actions and conduct. Under New Jersey law, the Plaintiffs (most specifically
MRPC) and Crown could have modified the Agreement by an explicit agreement, or through the
actions and conduct of the Plaintiffs and Crown if the intention to modify is mutual and clear.
The parties presented evidence that MRPC and Crown attempted to work together to get the
remediation and renovation work done at the Hotel; however, the evidentiary record does not
support a conclusion that MRPC and Crown mutually and clearly intended to modify the
Agreement through a course of conduct. When the Plaintiffs and Crown intended to modify the
Agreement, the evidence demonstrates that the parties negotiated and executed modification
agreements—i.e., the May Modification and the September Modification. JX531; JX595.
The Plaintiffs rely too heavily on what happened in the first few months after the
Sprinkler Incident to demonstrate that Crown and MRPC modified the Agreement though a
course of conduct. BCD sent a delay notification to MRPC. MRPC forwarded that delay
notification to Crown. Crown responded and stated that “at this time [Crown] will not consider a
construction loan extension, however as the job proceeds and we get closer to completion,
[Crown] will of course consider an extension (which must be approved by DelVal as well) at that
time.” MRPC and BCD agreed to address the Sprinkle Incident through construction change
50
orders. Crown did not indicate that Crown agreed to a change in Article IV, or any other part, of
the Agreement. Crown, as a lender, did work with MRPC and BCD with respect to the Sprinkler
Incident.
The Plaintiffs attempted, during the Trial and afterwards, to disparage the efforts of
Crown’s personnel to address the Sprinkler Incident and its ramifications, and Crown’s work
with BCD and MRPC. MRPC argues that these efforts demonstrate that Crown and MRPC
modified the Agreement through a course of conduct. The Court, as fact finder, is unimpressed
by the Plaintiffs’ attempts. The Court viewed the conduct of Crown to be reasonable under the
circumstances and not a manifested intent to modify the Agreement. As the Agreement
expressly provides, Crown is not MRPC’s partner. JX84, Art. VIII, sec. 8.1(i). Moreover,
unless there is default, Crown does not control construction at the Hotel. JX84, Art. VII, sec.
7.5(a)-(e). Crown is the lender in this transaction. Crown, however, did have a responsibility in
certain circumstances to act reasonably and in good faith. JX84, Art. VIII, sec. 8.1(a). Instead of
viewing Crown’s efforts to work with MRPC as modifying the Agreement or actions taken in
bad faith, the Court finds those actions to be reasonable in light of the serious nature of the
Sprinkler Incident.
The Sprinkler Incident was MRPC’s issue and MRPC’s responsibility. BCD took steps
to protect its role and MRPC and BCD modified the AIA. The Agreement provided flexibility
without modification to its terms and conditions to address change orders and alike. Crown
responded to MRPC’s request by stating that it would not, at that time, agree to a modification of
the Agreement. The Court finds for these reasons that Crown never mutually and clearly
intended to modify the Agreement through a course of conduct. When Crown wanted to modify
51
the Agreement, Crown entered into written modifications signed by all the necessary parties—
i.e., the May Modification and the September Modification.
The Court does find that Crown breached the timing requirements on funding. The Loan
Commitment and the Agreement talk in terms of Crown funding Draw Request within five (5)
business days of approval by the Bank. JX84, Art. IV, sec. 4.1(c); JX23, Exhibit “E;” JX79,
Exhibit “E.” The Court does not find that either party succeeded in explaining what a
“satisfactory CONSTRUCTION MANAGER” meant—whether it was Mr. Mirandi’s site
inspection or the process described by Mr. Rodrigues. The Court does not believe that this
matters. The evidence at Trial demonstrates that Crown did not, on a number of occasions, fund
within five (5) business days after: (i) Mr. Mirandi submitted an inspection report; or (ii)
execution of the Construction Loan Advance Authorization Sheet.
The Court finds that Crown breached Article IV, section 4.14 of the Agreement. The
Agreement provides that MRPC was to fund a Certificate of Deposit at Crown in the amount of
$1,500,000 as cash collateral. Instead, MRPC funded the $1,500,000 and Crown put it in a
money market account.
The Court finds that Crown breached Article IV, section 4.1(a) of the Agreement because
Crown did not provide a “standard form draw request.”
The Court finds that Crown breached other parts of Article IV during the renovation of
the Hotel.
The Court finds that Crown breached Article VI, section 6.2 because Crown made
advance proportionally under both the Permanent Note and the Interim Note.
The Court does not find that any one of these breaches constitutes a material breach of
the Agreement, or any other related agreement. Arguably, only Crown’s failure to fund all of
52
the Draw Requests within five (5) business days of Mr. Mirandi submitting an inspection report
or execution of the Construction Loan Advance Authorization Sheet could possibly constitute a
material breach. The Court finds that the other breaches in no way go to the very essence of the
Agreement. For example, the use of a money market account instead of a certificate of deposit
does not go to the very essence of the Agreement which is a construction loan agreement.
Moreover, the Court does not find that the Plaintiffs demonstrated how Crown’s breach of
Article VI, section 6.2 of the Agreement deprived MRPC of the benefit of the Agreement. The
Court does not find that Crown’s legal lending limit was a source of any breach of the
Agreement.
As for the Draw Requests and Crown’s breach of the five day requirements, the Court
does not find that the Plaintiffs proved by a preponderance of the evidence that Crown’s failure
to pay every Draw Request, in the amount requested by MRPC, within five (5) business
constitutes a material breach. The Court heard the testimony of Mr. C. Patel, Mr. Mirandi and
others as to the various Draw Requests. The Court finds that Mr. Mirandi’s testimony on the
amounts approved were credible and valid. Moreover, in certain circumstances, Crown
disbursed more than what Mr. Mirandi approved in his site inspection report. See, e.g., Draw
Requests #6 and #11.
More importantly, Crown only failed to disburse on a Draw Request within thirty (30)
days of the Draw Request twice and never over thirty (30) days from the date of an inspection
report. The Agreement expressly provides that disbursement shall not be made more than one
time per month. JX84, Art. IV, section 4.1(c). The Court does not find that failing to fund
within five (5) business days under the circumstances constitutes a material breach going to the
very essence of the Agreement. Moreover, while MRPC and BCD complained of the timing of
53
the Draw Requests, MRPC never communicated to Crown that MRPC felt Crown was in default
(material or non-material) under the Agreement. While the Agreement does not require any
written notice, the Court, as fact finder, took note of the absence of any such communication
prior to the filing of this civil action by way of the Complaint.
The Court does not find that the evidence supports the Plaintiffs’ damage argument. By
seeking $12,188,089.89 in damages for Crown’s breaches, the Plaintiffs are essentially arguing
that Crown’s non-material breaches warrant forfeiture. Under the Agreement, the evidence
demonstrates that Crown advanced $12,754,322.09 in funds to MRPC. In addition, the evidence
shows that the Hotel was successful renovated and opened. Despite this, MRPC is contending
that Crown so materially breached the Agreement in various ways that Crown is not entitled to
anything but a very modest return (under $500,000) for funding the purchase of the Hotel and
approximately $7,800,000 in construction costs. The Court finds that Plaintiffs failed to adduce
evidence that demonstrates, by a preponderance of the evidence, any of Crown’s non-material
breaches support such a damage claim.
The Court also does not find that the Plaintiffs proved damages with a reasonable degree
of certainty. The Court, as discussed in Section III.C.1.A, does not find that Crown is—as the
Plaintiffs characterize Crown—a “wrongdoer.” In addition, the Court does not find that a
number of underlying assumptions, about funding (timing and amount) and prospective profits,
of the Plaintiffs’ damage claim are supported by the evidence. To come to the $12,188,089.89
amount, the Court would need to disregard all of the testimony of Mr. Mirandi and Mr. Kniep
and find credible the testimony of Mr. C. Patel, Mr. Santora and Mr. Lesser on damages. The
Court, for reasons discussed above, cannot do that as the Court finds, after observing their
54
testimony, Mr. Mirandi and Mr. Kneip to be credible witnesses and Mr. C. Patel not to be a
credible witness.
The Court may have entertained a lesser amount for the various non-material breaches,
but the Plaintiffs did not provide such evidence.
B. Plaintiffs’ Count III – Breach of Covenant of Good Faith and Fair Dealing
After considering all of the evidence and the applicable law, the Court does not find that
Crown breach the covenant of good faith and fair dealing.
As set forth above, New Jersey does recognize a claim for the breach of the covenant of
good faith and fair dealing. In order for there to be a breach of the implied covenant of good
faith and fair dealing in this case, the Plaintiffs must demonstrate that Crown, with no legitimate
purpose: 1) acted with bad motives or intentions or engaged in deception or evasion in the
performance of contract; and 2) by such conduct, denied the party of the bargain initially
intended by the parties.
In considering what constitutes bad faith, a number of factors can be considered,
including the expectations of the parties and the purposes for which the contract was made. The
fact finder should also consider the level of sophistication between the parties, whether the
parties had equal or unequal bargaining power, and whether the party’s act involved the exercise
of discretion. The Court, as the fact finder, must keep in mind, however, that bad faith is not
established by simply showing that a party’s motive for the actions did not consider the best
interests of the other party. New Jersey contract law does not require parties to behave
thoughtfully, charitably or unselfishly toward each other.
In order for a party to prevail on a breach of implied covenant of good faith and fair
dealing, the fact finder must specifically find that bad faith motivated a party’s actions. A party
55
who acts in good faith on an honest, but mistaken, belief that the actions were justified has not
breached the covenant of good faith and fair dealing.
The Plaintiffs contend that Crown failed to: (i) negotiate the May Modification in good
faith; (ii) keep regular and ordinary accounting of all funds; and (iii) partner with another lender
when additional funds were needed after Crown went up to its legal lending limit. The Court
took in evidence on all of these issues. As the finder of fact, the Court cannot conclude that
Crown acted with bad motives or intentions or engaged in deception or evasion in the
performance of contract and denied the Plaintiffs the bargain initially intended by the parties.
At the time of the May Modification, the improvements at the Hotel were, by everyone’s
testimony, not complete. The May Modification did not provide Crown with additional
collateral. The May Modification extended the maturity date of the Notes to October 31, 2014
after payment of an extension fee, modification fee and plan and cost fee. The May Modification
required a final general contractor contract not to exceed $9,326,559.62 (in reality this number
grew to $9,550,000), replenishment of the Interest Reserve with $100,000 from loan proceeds
and change the prepayment penalty.
MRPC, and the various guarantors, borrowers and alike, signed the May Modification.
Crown, after approval by the BLC, signed the May Modification.
The Court does not find that this negotiation and the terms of the May Modification were
motivated by bad faith on the part of Crown. The testimony and exhibits demonstrated a logical
business negotiation based on the situation presented in the Spring of 2014.
In addition, the Court does not find that Crown’s way of regularly and ordinarily
accounting records of all funds demonstrates the type of bad faith intent necessary to support the
claim made in Count III. Whether another bank or lending institution would have kept records
56
differently does not demonstrate that Crown’s record keeping method with respect to the Loan
demonstrated bad faith or intentions. The Plaintiffs failed to demonstrate at the Trial that Crown
or anyone at Crown maintained Crown’s accounting records in a manner (whether with ill will or
good will) to disadvantage MRPC.
As for the final contention regarding legal lending limits and partnering with another
lender, the Plaintiffs have failed to carry their burden of proof in demonstrating to the Court how
this demonstrates that Crown violated the covenant of good faith and fair dealing. Throughout
the Trial, the Plaintiffs tried to demonstrate that Crown’s legal lending limit restricted Crown’s
obligations under the Loan. The Plaintiffs argue that Crown acted unreasonably at the outset of
the Loan by extending its entire legal lending limit and tying up all of the Plaintiffs’ collateral
and that this prevented another lender from coming in to assist the funding of construction costs.
The Court finds this contention to be “far-fetched.” The Plaintiffs needed the Loan. The
Plaintiffs found Crown. The Plaintiffs, in an arms-length negotiation, agreed to the collateral
package. The Court just cannot find that Crown’s action at the very outset of the Loan with
respect to the collateral package or the terms of the Loan Commitment and the Agreement were
so unreasonable as to constitute bad faith or ill intent.
In fact, the Court is at a loss even now as to what is Crown’s ill intent towards the
Plaintiffs. Crown is a bank and as a bank must protect the Loan. Mostly due to the Sprinkler
Incident, the project ran into difficulty. The Agreement expressly provides that Crown and
MRPC are not partners. For the most part, Crown acted reasonably when MRPC made requests
to address issues caused by the Sprinkler Incident. The Court finds that Crown’s conduct, while
not perfect, from December 19, 2012 through January 31, 2015 was reasonable, explainable and
not done in bad faith or with improper intentions.
57
2. Crown’s Counterclaims
The Court finds that Crown has carried its burden of proof with respect to the
Counterclaims.
The Court has already stated the standard for breach of contract, including what
constitutes a material breach, under New Jersey law. See Section III.B-H.
A. Counterclaims I and II—Money Damages—Note #1 and Note #2
The Court finds that the evidence adduced during the Trial proves by a preponderance of
the evidence that MRPC breached its obligations under the Agreement and the Notes. There has
been no challenge to the validity of the Agreement or Notes. The Court holds that the
Agreement and the Notes are valid contracts under New Jersey law.
As discussed above, the Court did not find that Crown committed a material breach of the
Agreement or the Notes such that MRPC is excused from performance under these contracts.
The Court finds that Crown established that MRPC committed numerous material
breaches of the Loan Documents. First, MRPC breached the Agreement in December of 2014
when Mr. C. Patel transferred the $1,500,000 in cash collateral from an account at Crown to an
account at TD Bank. Article IV, section 4.14 of the Agreement states that the cash collateral
must remain with Crown “until the Interim Note is paid in full.” JX84 at 9. The Interim Note
had not been paid in full at the time MRPC transferred the cash collateral.
The Court also finds that MRPC breached the Permanent Note and Interim Note by
failing to make payments to Crown upon maturity of the Notes. The Permanent Note required
payments of principal and interest in accordance with the payment schedule set forth in the
Permanent Note, i.e., monthly payments due and owing on the second (2nd) day of each
58
consecutive month commencing on January 31, 2015. JX85 at 2; JX595. MRPC has failed to
make the required payments under the Permanent Note.
The Court finds that MRPC’s breach of the Permanent Note has caused Crown damages
in the sum of $7,640,000.00, plus interest, penalties, late charges, costs and attorney’s fees as
defined under the Permanent Note.
MRPC was obligated under the Interim Note to pay the “entire unpaid principal balance
and all accrued and unpaid interest…upon the funding of the SBA Loan…and in no event at a
date later than [January 31, 2015].” JX134 at 1; JX595. Article VII, section 7.1(n) of the
Agreement provides that a failure to close the SBA Loan on or before the Maturity Date is a
default. JX84 at 14. The evidence produced at the Trial demonstrates that the SBA Loan was
not funded by January 31, 2015. Crown demonstrated that MRPC has failed to make the
required payment under the Interim Note or cure its default.
The Court finds that Crown has incurred damages in the sum of $5,348,000.00, plus
interest, late charges, costs and attorney’s fees as defined under the Interim Note.
B. Counterclaims III Through XVI—Breach of Contract: Guaranty
Agreements
The Court finds that the Guaranty Agreements are valid contracts. The plain terms of the
Guaranty Agreements, executed by the Guarantors, set forth an unconditional guarantee of
payment of all amounts owed to Crown by MRPC under the Permanent Note and Interim Note as
well as all costs incurred by Crown. The Guaranty Agreements provide that the Guarantors
make payment to Crown should MRPC fail to pay all of the amounts owed under both Notes on
or before January 31, 2015. Moreover, the Guarantees of Payment state that the respective
guarantees cover all obligations and liabilities incurred by MRPC “in any capacity,” to include
59
“interest and all reasonable fees, costs, expenses, attorneys’ fees and other costs of collection
incurred or paid by Crown.” Guarantees of Payment at 1 (see fn 41 supra).
The Guaranty Agreements provide that the Guarantors had an obligation to make
payment of the principal and any and all interest, costs, and fees as set forth therein, to Crown
under the plain contractual provisions set forth in the Permanent Note and Interim Note, on or
before January 31, 2015. The evidence at the Trial demonstrates that all Guarantors knew they
were unconditionally guaranteeing amounts owed to Crown. TT:8/1, 75:18-78:4 (C. Patel). The
Guarantors have failed to make payment to Crown under the Notes. Under the terms of the
Guaranty Agreements, the Guarantors are in breach of contract.
C. Counterclaims XVII and XVIII—Judgment In Possession as to Security
Agreements
The Court finds that Crown had demonstrated by a preponderance of the evidence that
MRPC has breached the Security Agreements. Section 4.1(a) of the Security Agreements
provides that a “default of any liability, obligation, covenant or undertaking of MRPC owed to
Crown, under the Notes or any other Loan Documents, including the failure to pay in full and
when due any installment of principal or interest or default of MRPC under any other Loan
Document or any other agreement” constitutes a breach of the Security Agreements. JX89 at 6.
Moreover, Section 4.2 contains an acceleration clause which dictates that upon default any and
all obligations owed to Crown are immediately due and payable. JX89 at 7.
The Security Agreements provide that, upon breach, Crown is entitled to take possession
of the Collateral as identified in the Security Agreements in a commercially reasonable manner.
Consequently, Crown is entitled to possession of the Collateral, to include MRPC’s accounts,
equipment, and inventory.
60
D. Counterclaim XIX—In Rem Levy on the Hotel
As set forth herein, MRPC executed the Notes, as well as the MRPC Mortgages in
support of the Notes. JX85; JX135. The Permanent Note Mortgage in support of the Permanent
Note was recorded and became a first position lien upon the Property. JX86. The Interim Note
Mortgage in support of the Interim Note was recorded and became a second position lien on the
Property. JX135. Given MRPC’s default, as set forth above, MRPC owes Crown $7,640,000.00
under the Permanent Note, exclusive of interest, late charges, penalties, attorneys’ fees and costs,
and $5,348,000.00 under the Interim Note, exclusive of interest, late charges, penalties,
attorneys’ fees and costs. The Court finds that Crown is entitled to exercise its various rights
under the MRPC Mortgages.
E. Counterclaim XX—In Rem Levy on the Country Inn Hotel
Krishnas executed and delivered its particular Guaranty Mortgage in support of the
Notes. This Guaranty Mortgage recorded under the Permanent Note became a third position lien
upon the Country Inn Hotel and the Interim Note became a fourth position lien upon the Country
Inn Hotel. JX96: JX142.
MRPC has defaulted in payment of the Notes. Pursuant to the Guaranty Mortgages, the
Court finds that Crown is entitled to exercise its various rights under Krishnas’ Guaranty
Mortgage as to the Country Inn Hotel.
F. Counterclaim XXI—In Rem Levy on the Patel Residence
Mr. P. Patel and Ms. R. Patel executed and delivered their Guaranty Mortgage in support
of the Notes. This Guaranty Mortgage recorded under the Note became a third position lien
upon the Patel Residence, and the Guaranty Interim Note became a fourth position lien upon the
Patel Residence. JX118, 121, 159, 160.
61
MRPC has defaulted in payment of the Notes. Pursuant to the Guaranty Mortgages, the
Court finds that Crown is entitled to exercise its various rights under the Guaranty Mortgage of
Mr. P. Patel and Ms. R. Patel as to the Patel Residence.
G. Damages
Crown seeks a money judgment in its favor against all Plaintiffs in the principal sum of
$12,998,000.00 plus: (1) pre judgment interest at the per diem rate of $4,329.34 from April 14,
2015 through the date of judgment; (2) post judgment interest at the per diem rate of $4,329.34;
(3) prepayment penalties in the amount of $1,299,800.00, (4) late charges of $12,505.39, and (5)
attorneys’ fees and costs in a yet to be determined amount.
i. Monetary Relief Against MRPC
—Loan Principal
The Court finds that due to MRPC’s contractual breaches of the Loan Documents, Crown
is entitled to a money judgment in the principal sum of $12,988,000.00. As of December 22,
2014, Crown had advanced $12,754,322.09 in funds to MRPC, holding back only retainage as
permitted under Section 4.1(f) of the Agreement. JX662. In late December 2014, as the parties
were negotiating a possible solution to complete the project and fund remaining change orders,
the amount remaining available to pay retainage under the Loan was $233,677.91. JX662. On
January 30, 2015, MRPC initiated the instant litigation against Crown, contemporaneously
cutting off communication between the parties. Beyond that point, no further loan advances
were made by Crown to MRPC, nor were any requested by MRPC. Subsequently, interest
continued to accrue on a daily basis thereby reducing available Loan proceeds. By April 13,
2015, the accumulation of daily interest exceeded the $233,677.91 amount available under the
62
Loan. After April 13, 2015, interest began accruing, at a rate calculable per diem, on the
principal balance of $12,988,000.00.
Crown is entitled to judgment in its favor under the plain, unambiguous language of the
Loan Documents. As set forth in Section 7.2 of the Agreement a default thereunder “shall
constitute a default under each of the Loan Documents.” JX84 at 14. Moreover, under Section
7.3 of the Loan Agreement, upon MRPC’s default, Crown is entitled to declare the Loan and all
sums owing to Crown under the Agreement “due and payable” without exception. JX84 at 14.
—Interest and Penalties Under the Notes
The Court finds that due to MRPC’s breaches of the Loan Documents, Crown has been
subjected to significant economic loss and risks being unable to be made whole through the sale
of its collateral. Accordingly, the Court should award unto Crown all interest, fees and penalties
that were contractually agreed upon in the Loan Documents.
The Notes both bore interest at a minimal rate of seven percent (7%). JX85 at 2; JX134
at 1. Upon an Event of Default, the interest rate increases by five percent (5%), resulting in a
default rate of twelve percent (12%). JX 85 at 3; JX 134 at 2. Upon breach by MRPC in
December of 2014, Crown began to assess the default rate of twelve percent (12%). JX 754;
TT:10/7, 226:8-12 (Rodrigues). During the time period of December 3, 2014 through April 13,
2015, the Permanent Note accrued interest in the amount of $334,568.72, or $2,534.61 per diem,
and the Interim Note accrued interest in the amount of $226,621.45, or $1,716.83 per diem. As
of April 13, 2015, the accruing interest exceeded the principal Loan amount. TT:10/7, 226:13-
227:16 (Rodrigues). After April 13, 2015, the Permanent Note and Interim Note accrued interest
at the rate of $2,546.67 per diem and $1,782.67 per diem, respectively. JX 754
63
Both Notes are also subject to a prepayment penalty. JX85 at 2; JX531 at ¶10. Pursuant
to the terms of the May Modification the prepayment penalty percentage was increased from two
percent (2%) to ten percent (10%). JX531 at ¶10; TT:10/7, 227:17-228 (Rodrigues).
Consequently, when the Notes are paid, a prepayment penalty of $1,298,800.00 will be due and
owing.
Additionally, both Notes provide for a late charge of five percent (5%) as liquidated
damages on any amount not paid within 10 days. JX85 at 2; JX134 at 1. The amount of late
charges accrued on the Loan before default total $12,505.39, consisting $8,294.16 from the
Permanent Note and $4,211.23 from the Interim Note. JX754
ii. Judgment Against Guarantors
The plain language contained in Guaranty Agreements guaranties unto Crown the
“prompt payment, when due, whether by maturity, acceleration or otherwise, of all present or
future obligations or liabilities of the Borrower to the Bank, whether now existing or arising after
the date of this Guaranty … together with all modifications, extensions, or renewals of the
obligations or liabilities.” Guarantees of Payment at 1. The Guarantees of Payment cover
obligations and liabilities incurred by MRPC in any capacity. Guarantees of Payment at 1.
Therefore, the Court finds that the damages due to the breach of the Guaranty Agreements by the
Guarantors is in the same amount as the monetary relief against MRPC.
iii. Additional Relief
Crown asks for specific declarations regarding foreclosures, assignments, etc. The Court
will not provide specific judgments or declarations on these requests. Instead, the Court
concludes and holds that Crown is entitled to exercise its rights (i.e., foreclosure, assignment,
64
etc.) in accordance with the terms of the Agreement, the Notes, the Security Agreement, the
Guaranty Agreements, the Mortgages, and the Assignment of Leases and Rents.
iv. Attorneys’ Fees
Pursuant to the Loan Documents, as set forth in detail above, Crown is entitled to receive
attorneys’ fees for its successful prosecution of the Counterclaims. Specifically, the Notes
provide that “the Borrower shall pay all cost of collection of any and all sums due and owing
hereunder and not paid, including without limitation court costs and reasonable attorneys’ fees in
connection with the collection of any sums.” JX85 at 3; JX134 at 2. Moreover, the Guarantees
of Agreement cover all obligations and liabilities incurred by MRPC in any capacity; these
obligations and liabilities explicitly include “interest and all reasonable fees, costs, expenses,
attorneys’ fees and other costs of collection incurred or paid by [Crown].” Guarantees of
Payment at 1.
The broadest language governing attorneys’ fees is found in the MRPC Mortgages and
Guaranty Mortgages, specifically mandating that the Mortgagor, MRPC or the Guarantors, shall
reimburse Mortgagee, or Crown, for all reasonable costs and counsel fees incurred “[i]f
Mortgagee employs an attorney to collect any of the indebtedness or to enforce performance of
the obligations, covenants and agreements secured hereby, or to advise Mortgagee with respect
to its rights and remedies hereunder and under the Note in case of an Event of Default or
threatened Event of Default.” JX86 at 7; JX135 at 7; Guaranty Mortgages at 7-8. With respect
to supplemental litigation, Crown is involved in litigation with MRPC in New Jersey and
Maryland, as well, pertaining to disputes arising out of the Loan Documents. TT:10/7, 229:17-
230:12.
65
Crown Bank is directed to submit an affidavit detailing those costs within thirty (30) days
from the date of this Decision after Trial.
Dated: December 26, 2017
Wilmington, Delaware
/s/Eric M. Davis _
Eric M. Davis, Judge
66