255 Fifth St. Holdings, L.L.C. v. 255 Fifth Ltd. Partnership

[Cite as 255 Fifth St. Holdings, L.L.C. v. 255 Fifth Ltd. Partnership, 2022-Ohio-851.]
IN THE COURT OF APPEALS
FIRST APPELLATE DISTRICT OF OHIO
HAMILTON COUNTY, OHIO
255 FIFTH STREET HOLDINGS, LLC, : APPEAL NO. C-210325
TRIAL NO. A-1607098
Plaintiff-Appellee, :
vs. :
O P I N I O N.
255 FIFTH LIMITED PARTNERSHIP, :
TIC CHEMED SISLIN, LLC, :
TIC CHEMED PAULSON, LLC, :
TIC CHEMED ANDERSON, LLC, :
TIC CHEMED ROSDEN, LLC, :
TIC CHEMED LEUNG, LLC, :
TIC CHEMED MYERS, LLC, :
TIC CHEMED HUECKEL, LLC, :
TIC CHEMED OJONG, LLC, :
TIC CHEMED 350, LLC, f.k.a. :
CHEMED MARGULIES, LLC,
:
TIC CHEMED COMET, LLC, f.k.a. TIC
CHEMED MANDEL, LLC, :
TIC CHEMED MALL, LLC, f.k.a. TIC :
CHEMED LIEBERMAN, LLC,
:
TIC CHEMED BERKOVICH, LLC,
:
TIC CHEMED DESERPA ONE, LLC,
TIC CHEMED DESERPA TWO, LLC, :
OHIO FIRST DISTRICT COURT OF APPEALS
TIC CHEMED WALLMAN, LLC, :
TIC CHEMED RUTNER, LLC, :
TIC CHEMED GRIMM, LLC, :
TIC CHEMED POXON-TURNER, LLC, :
TIC CHEMED WESTERN, LLC, f.k.a. :
TIC CHEMED FOLKMAN, LLC,
:
TIC CHEMED D BARBEE, LLC,
:
TIC CHEMED KOHL, LLC,
:
TIC CHEMED ZARO, LLC,
:
TIC CHEMED UHLMAN, LLC,
:
TIC CHEMED FLYNN, LLC,
:
TIC CHEMED BROWN, LLC,
:
TIC CHEMED J BARBEE, LLC,
:
TIC CHEMED NUSSBAUM FLP, LLC,
:
TIC CHEMED HARRIS, LLC,
:
TIC CHEMED BERGEN, LLC,
:
TIC CHEMED WRNTSMITH, LLC,
:
TIC CHEMED NEWCOMER, LLC,
:
TIC CHEMED STAUFFER, LLC,
:
TIC CHEMED STULIK, LLC,
:
MRI CHEMED, LLC,
:
and
:
HAMILTON COUNTY TREASURER,
Defendants-Appellants. :
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OHIO FIRST DISTRICT COURT OF APPEALS
Civil Appeal From: Hamilton County Court of Common Pleas
Judgment Appealed From Is: Reversed and Case Remanded
Date of Judgment Entry on Appeal: March 18, 2022
Porter Wright Morris & Arthur LLP and James P. Botti, Dickinson Wright PLLC
and Christopher D. Cathey, for Plaintiff-Appellee,
Robbins, Kelly, Patterson & Tucker, LPA, Michael A. Galasso, Cohen, Todd, Kite &
Stanford, LLC, and Donald J. Rafferty, for Defendants-Appellants.
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OHIO FIRST DISTRICT COURT OF APPEALS
BOCK, Judge.
{¶1} Defendants-appellants 255 East Fifth Limited Partnership,
(“borrowers” or “leasehold owners”), as tenants in common, appeal the trial court’s
entry of a partial summary judgment in favor of plaintiff-appellee 255 East Fifth
Street Holdings, LLC, (“lender”).
Relevant Facts and Procedural History
A. The Loan Documents
{¶2} This appeal involves a nonrecourse loan that encumbered real estate at
255 East Fifth Street in Cincinnati, Ohio (“the property”). The original lender,
Wachovia Bank, National Association and MRI Chemed, LLC, (“MRI”) executed a
promissory note where Wachovia Bank lent MRI $76,000,000. The parties later
signed a “Severance and Modification Agreement,” which divided the original note
into two notes (collectively, “notes”).
{¶3} In the “Open-End Mortgage, Security Agreement and Fixture Filing”
(“the mortgage”), the borrowers assigned as security to Wachovia Bank:
(H) All leases * * * and all rents, royalties, issues, profits, bonus
money, revenue, income, rights and other benefits (collectively the
‘Rents and Profits’) of the [the property], now or hereafter arising
from the use or enjoyment of all or any portion thereof or from any
present or future Lease or other agreement pertaining thereto * * * and
all cash or securities deposited to secure performance by the tenants *
* * subject to the provisions contained in Section 2.7 * * *.
{¶4} Section 2.7 of the mortgage provided:
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OHIO FIRST DISTRICT COURT OF APPEALS
As additional and collateral security for the payment of the Debt * * *
Borrower hereby absolutely and presently assigns to Lender all
existing and future Rents and Profits. Borrower hereby grants to
Lender the sole, exclusive and immediate right, without taking
possession of the Property, to demand, collect * * * receive and give
valid and sufficient receipts for any and all of said Rents and Profits * *
* However, until the occurrence of an Event of Default * * * Borrower
shall have license to collect, receive, use and enjoy the Rents and
Profits when due and prepayments thereof of not more than one (1)
month prior to the due date thereof. Upon the occurrence of an Event
of Default, Borrower’s license shall automatically terminate * * * and
lender may thereafter * * * collect the Rents and Profits * * *.
{¶5} The mortgage also provided that rents were to be deposited into an
account for the borrowers’ benefit. Within one month after receiving a rent payment,
the asset manager was required to pay the borrowers in proportion to their interests,
minus amounts retained for improvements or reserves.
{¶6} An “Assignment of Leases and Rents” restated the lender’s security
interest in the rents and profits “whether now due or hereafter becoming due.”
Further, it stated that the borrowers had “a revocable license * * * to retain
possession of the Leases and to collect and retain the Rents unless and until there
shall be an Event of Default * * *. In the event of such Event of Default, the
aforementioned license granted to Borrower shall automatically terminate * * * and
Lender may thereafter * * * take possession of the Leases and collect the Rents.”
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶7} The notes matured on May 11, 2016 (“maturity date”). The borrowers’
failure to pay the principal amount in full by the maturity date constituted an “Event
of Default,” making the full principal under the leasehold notes immediately due.
One day before the maturity date, the borrowers’ asset manager withdrew $4.39
million from the borrowers’ operating account. That money consisted of funds that
were generated from rents that the borrowers had collected before the maturity date
(“prematurity rents”). The asset manager deposited the prematurity rents into a
separate Wells Fargo account that was maintained for the borrowers’ benefit. The
asset manager left approximately $860,000 in the operating account.
B. The Foreclosure
{¶8} In December 2016, the lender sued for foreclosure, alleging that it was
entitled to the prematurity rents.
{¶9} In April 2017, after the parties failed to negotiate a loan restructuring,
the asset manager disbursed $2,000,000 into the borrowers’ individual accounts
based on the contention that the parties’ contract no longer required that a “reserves
balance” be maintained to support loan restructuring negotiations. The asset
manager left $835,000 in the Wells Fargo account.
{¶10} In May 2017, the lender sought an injunction, asserting that
prematurity rents were part of the collateral that secured the notes. The trial court
granted the temporary injunction and enjoined the borrowers from transferring
$2,830,723.66 from prematurity rents into the borrowers’ names. Various borrowers
returned approximately $1.1 million thereafter.
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OHIO FIRST DISTRICT COURT OF APPEALS
C. Motion for Partial Summary Judgment
{¶11} The lender moved for partial summary judgment, seeking foreclosure
and the prematurity rents. The borrowers opposed the motion as to the prematurity
rents and cross-moved for summary judgment.
{¶12} The magistrate granted the lender’s motion for partial summary
judgment. The magistrate found that the prematurity rents were collateral under the
loan documents.
{¶13} The trial court adopted the magistrate’s decision. Citing the first three
pages and section 2.7 of the mortgage, the court found that the prematurity rents
that were disbursed to the borrowers were the lender’s collateral. Relying on the
“four corners” of the “loan documents at issue,” the court found that, while section
2.7 of the mortgage granted the borrowers a license to “use and enjoy the Rents and
Profits collected from the Property,” the section did not state that the borrowers were
entitled to keep the prematurity rents. Rather, the court found that the section
permitted the borrowers to use the rents and profits only until an event of default
occurred. Finding that the borrowers had defaulted, the court granted the lender’s
motion for partial summary judgment and ordered the borrowers to pay the lender
$2,830,723.66.
{¶14} The borrowers now appeal.
Law and Analysis
{¶15} We review a summary-judgment ruling de novo. Anderson v. WBNS-
TV, Inc., 158 Ohio St.3d 307, 2019-Ohio-5196, 141 N.E.3d 192, ¶ 77. Summary
judgment is appropriate where the moving party shows that (1) there is no genuine
issue of material fact left to be litigated, (2) it is entitled to judgment as a matter of
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OHIO FIRST DISTRICT COURT OF APPEALS
law, and (3) it appears from the evidence that reasonable minds can come to but one
conclusion and that conclusion is adverse to the nonmoving party. Id. Courts view
the evidence in a light most favorable to the nonmoving party. Wilson v. Lawrence,
150 Ohio St.3d 368, 2017-Ohio-1410, 81 N.E.3d 1242, ¶ 33.
{¶16} The interpretation of a written contract is a question of law that we
review de novo. Hyde Park Circle, L.L.C. v. Cincinnati, 2016-Ohio-3130, 66 N.E.3d
99, ¶ 15 (1st Dist.). Contracts that are clear and unambiguous will be enforced
according to their terms. Retirement Corp. of Am. v. Henning, 1st Dist. Hamilton
No. C-180643, 2019-Ohio-4589, ¶ 18.
Prematurity Rents
{¶17} In Prudential Ins. Co. of Am. v. Three Flint Hill Ltd. Partnership, 202
B.R. 706 (Bankr.MD.1995), the issue before the bankruptcy court was whether
predefault rent receipts were subject to a lien that was held by the plaintiff under the
loan documents and applicable Virginia law. The court held that the creditor’s right
to collect rents did not give it an interest in predefault rents because the loan
documents required an event of default before the creditor’s right to collect rents
became effective. Thus, the documents gave the creditor a mere security interest
rather than an absolute assignment of rents.
{¶18} The deed of trust in Three Flint Hill used language similar to section
2.7 of the mortgage: “ * * * so long as no Event of Default shall exist hereunder,
Grantor shall have the right to collect and retain said rents, issues, and profits.” Id. at
*8. The section further provided that, until an event of default occurred, “ * * *
Grantor shall be permitted to possess and enjoy the property and receive the rents,
issues, and profits thereof * * *.” Id.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶19} The Three Flint Hill assignment of leases stated that the borrower
assigned the lender “each and all of the LEASES” and “all other LEASES upon or
affecting the premises now or hereafter during the existence of this Assignment
executed, together with any extensions or renewals thereof, and all rentals and
income arising from said premises, whether accruing under existing LEASES or
under LEASES hereinafter made. * * * Until an Event of Default * * * OWNER may
receive, collect and enjoy the rents, issues and profits accruing under said LEASE.”
Id. at *9.
{¶20} The loan documents in this case are clear—the lender’s right to
prematurity rents is prospective only. The mortgage provided security in rents “now
or hereafter arising,” subject to section 2.7. Section 2.7 restated the lender’s interest
in the rents, but qualified that right: “However, until the occurrence of an Event of
Default * * * Borrower shall have license to collect, receive, use and enjoy the Rents
and Profits * * *. Upon the occurrence of an Event of Default, Borrower’s license shall
automatically terminate * * * and lender may thereafter * * * collect the Rents and
Profits * * *.” That qualification gave the borrowers the right to “use and enjoy” the
prematurity rents until they defaulted, without giving the lender a prerogative to
reach back. Indeed, the documents required the asset manager to transfer those
funds to the borrowers within one month of their receipt.
{¶21} Moreover, once collected and deposited into the borrowers’ accounts,
rents are no longer rents. Instead, they are converted into cash for the benefit of the
borrowers. In a nonrecourse loan, a lender has no right to a borrower’s noncollateral
assets. And here, there is no dispute that the borrowers’ operating account was not
collateral securing the loan.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶22} We therefore hold that the lender’s rights to rents were only those
rents that were collected after the maturity date. Any other conclusion would be
contrary to the language of the loan documents.
Conclusion
{¶23} Based on the foregoing, we find that the trial court erred in granting
the lender’s motion for summary judgment. The borrowers’ sole assignment of error
is sustained. We therefore reverse the trial court’s judgment and remand the matter
for the trial court to enter a judgment consistent with this opinion.
Judgment reversed and case remanded.
MYERS, P.J., and ZAYAS, J., concur.
Please note:
The court has recorded its entry on the date of the release of this opinion
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