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Capitol Justice LLC v. Wachovia Bank

December 8, 2009

CAPITOL JUSTICE LLC, ET AL., PLAINTIFFS,
v.
WACHOVIA BANK, N.A., DEFENDANT.



The opinion of the court was delivered by: Royce C. Lamberth Chief Judge

MEMORANDUM OPINION

Before the Court is Wachovia Bank, N.A.'s ("Wachovia") Motion [81] for Summary Judgment. Wachovia argues that there are no genuine issues of material fact as to: (1) whether Wachovia breached its Loan Commitment Agreement with the American Association for Justice ("AAJ"); (2) whether AAJ suffered any damages as a result of the alleged breach; and (3) whether Wachovia provided a sufficient accounting of the rate lock agreement breakage costs. For the reasons discussed below, the Court finds that there are genuine issues of material fact as to whether Wachovia breached the Loan Commitment Agreement and whether AAJ suffered damages as a result of the alleged breach. The Court also finds that there is no genuine issue of material fact in dispute as to whether Wachovia provided a sufficient accounting of the rate lock agreement breakage costs. Accordingly, the Court will grant in part and deny in part Wachovia's motion for summary judgment.

I. BACKGROUND

This case concerns a breach of contract claim brought by AAJ against Wachovia. AAJ and Wachovia had entered into a Loan Commitment Agreement ("LCA") in which Wachovia agreed to provide financing for AAJ's purchase of a new office building in Washington, D.C. AAJ alleges that Wachovia breached the LCA when it invoked the LCA's material adverse change ("MAC") clause to terminate the LCA and seeks to recover damages.

A. AAJ Seeks Commercial Mortgage-Backed Security Financing

On March 30, 2007, AAJ entered into a Purchase and Sale Agreement to purchase a brand-new office building located at 777 6th Street in Washington, D.C., for $105 million. (Pls.' Opp'n Ex. 71 at 6 [hereinafter Pls.' Ex.].) The sale was to close on December 17, 2007. (Id. at 7.) AAJ paid a $5 million deposit for the building and determined it needed to obtain financing to complete the purchase. (Id. at 6.) As a result, AAJ, through its financial advisor the Staubach Company, began to solicit interest-only financing offers from several lenders, including Wachovia, Bank of America, and Suntrust. (Pls.' Ex. 93.) Specifically, AAJ sought commercial mortgage-backed security ("CMBS") financing because it offered favorable terms. (Am. Compl. ¶ 30.)

CMBS are debt instruments that are secured by one or more commercial mortgages. (Def.'s Mem. in Supp. of Summ. J. Ex. 9 [hereinafter Def.'s Ex.].) The lender makes a loan to a purchaser of commercial property and places the loan with other similar loans in a trust. (Id.) The lender then sells bonds, secured by the trust, to investors. (Id.) Thus, issuers of CMBS loans serve as a conduit between borrowers and investors. (Id.)

A loan may be sold into a CMBS securitization in one of two ways. It can either be sold in its entirety, or in part through the use of an A/B note structure. (Def.'s Ex. 12.) Through the A/B structure, the loan is split into an A-note and a B-note. (Id.) The A-note is included in the securitization, and the B-note is separately sold. (Id.) The A/B structure is commonly used to reduce CMBS investors' risk of nonpayment. (Id.)

B. AAJ Obtains CMBS Financing from Wachovia

In response to AAJ's solicitation, Wachovia offered AAJ a ten-year, interest-only loan for $89.5 million, which Wachovia intended to sell into a CMBS securitization. (Pls.' Ex. 12.) On April 27, 2007, AAJ and Wachovia executed a Term Sheet for the loan, which provided that AAJ could not seek financing from another lender and that any loan commitment would include a MAC clause. (Id.) Then, on May 2, 2007, the parties entered into a Rate Lock Agreement ("RLA"), which fixed the interest rate at 6.02% per annum through December 17, 2009. (Pls.' Ex. 16.) AAJ paid $1.81 million for the RLA.*fn1 (Id.) AAJ entered into the RLA because interest rates were increasing and Wachovia's loan officer assured AAJ that an RLA would eliminate the risk of a higher interest rate at closing. (Pls.' Exs. 6, 10.)

Following the execution of the RLA, the parties negotiated the LCA. On May 18, 2007, Wachovia sent a draft LCA to AAJ. (Pls.' Ex. 24.) The draft LCA contained a MAC clause, which provided that "Lender may, at its option, terminate its agreement to make the Loan... in the event of any material adverse change in the financial, banking or capital market conditions that could impair the sale of the Loan by Lender as contemplated in the Term Sheet." (Id.) AAJ expressed concerns about the MAC clause and asked for it be deleted because AAJ feared that the clause would allow Wachovia to renege on its obligations. (Pls.' Ex. 93.) Wachovia refused to delete the MAC, but did add a provision requiring Wachovia to offer substitute financing if Wachovia invoked the MAC to terminate the LCA. (Pls.' Ex. 33.)

In addition, Wachovia's loan officer stated that the MAC clause would only be invoked in the event of an unforeseeable, "9/11-type meltdown." (Pls'. Ex. 90.) Indeed, the loan officer stressed that he had never invoked a MAC, and that the industry had only ever invoked a MAC clause after 9/11. (Id.) He further represented that if the loan could not be securitized, Wachovia could hold the loan until it could be sold. (Pls.' Ex. 93.) Relying on these assurances, AAJ signed the LCA, which was executed on June 20, 2007. (Pls.' Exs. 33, 43; Def.'s Ex. 3.)

C. Before Executing the LCA, Wachovia Knew the CMBS Market Was in Decline and Began to Change

Its CMBS Financing Practices Early in 2007 and unknown to AAJ, Wachovia became aware that CMBS market was experiencing unrest. (Pls.' Ex. 8.) In February, one Wachovia loan officer noted that "the market's going to hell in a hand basket and that he should "pack [his] bags." (Pls.' Ex. 1.) In March and April, others at Wachovia expressed concerns over the increasing volatility of the CMBS market. (Pls.' Exs. 8, 39.) In addition, outside trade publications and investor reports expressed concerns over the CMBS market in April and May. (See, e.g.,Pls.' Exs. 40, 61 (reports issued by Moody's, a top credit rating agency for CMBS securities); Pls.' Ex. 61 (report issued by Standard & Poor's, another top credit rating agency); Pls.' Exs. 41, 105 (reports issued by Commercial Mortgage Alert, a trade publication); Pls.' Ex. 107 (an article in the New York Times); Pls.' Ex. 108 (an analyst report by Merrill Lynch).) Despite these concerns, the second largest monthly volume of CMBS issuances occurred in June 2007. (Def.'s Ex. 43.)

In response to CMBS market concerns, Wachovia informed its loan officers to take the following actions. First, on April 17, 2007, loan officers were instructed to "avoid forward rate locks." (Pls.' Ex. 7; see also Pls.' Ex. 11.) Then, on May 1, 2007, loan officers were encouraged to "re-trade" or "re-price" the loans, using the MAC clause as leverage. (Pls.' Ex. 13.) If the loan officer was unsuccessful, he or she should invoke the MAC clause to terminate the loan. (Id.; see also Pls. Ex. 3.)

In particular, Wachovia expressed concern over interest-only loans, which had become increasingly difficult to securitize (Pls.' Ex. 99). Indeed, Wachovia executives repeatedly instructed others to terminate or restructure ten-year interest-only loans. (See Pls.' Exs. 17, 19, 30, 31.) Nevertheless, as discussed above, Wachovia entered into the LCA with AAJ on June 20, 2007.

D. The CMBS Market Continues to Decline and Wachovia Terminates the LCA and RLA

Following the execution of the LCA, the CMBS continued to decline. A decrease in the liquidity of the capital markets meant that less funds were available for CMBS investment. (Def.'s Ex. 9.) The loss in liquidity also led to unprecedented increases in the spreads for CMBS securities. (Id.)

As a result of the continued decline of the CMBS market, Wachovia contacted AAJ to discuss restructuring the LCA on August 6, 2007. (Pls.' Ex. 124.) AAJ refused to "re-trade" or "re-price" the loan because AAJ paid for the RLA, which locked the interest rate at 6.02% per annum for ten years. (Pls.' Ex. 95.) Then, on October 22, 2007, Wachovia invoked the MAC clause to terminate the LCA because there had been "a material and adverse change in the fixed income sector of the capital markets." (Def.'s Ex. 44.) In its termination letter, Wachovia explained that "it would be unable to effect a Securitization of the Loan" under the loan's current terms because "the crisis in the sub-prime residential mortgage market has spread to the CMBS sector, and dramatically altered CMBS investor requirements have forced a sudden return to highly conservative underwriting standards among those commercial real estate lenders that make non-recourse loans for the purpose of securitization." (Pls.' Ex. 36.)

Wachovia's last CMBS securitization occurred on November 13, 2007. (Def.'s Ex. 19.) Other lenders, however, securitized CMBS loans into early 2008, but by the end of the second quarter of 2008, CMBS issuances ceased entirely. (Def.'s Ex. 43.)

E. AAJ Obtains Alternative Financing

Pursuant to the LCA, Wachovia provided an alternative financing proposal when it invoked the MAC. (Pls'. Ex. 37.) Wachovia offered a three-year bridge loan for up to $80.6 million with a floating interest rate. (Id.) AAJ declined this offer because it was not able to afford the terms. (Opp'n at 13.) As a result, AAJ sought alternative financing. (Def.'s Ex. 27.)

After soliciting several offers, AAJ entered into an LLC agreement with the Multi-Employer Property Trust ("MEPT") to purchase the building. (Pls. Ex. 74.) Under the agreement, AAJ, through its wholly owned entity, Capital Justice, contributed $27.5 million toward the purchase of the building, and MEPT contributed the remainder. (Id. at § 3.1.) The agreement further provides that AAJ does not have to make interest payments and that AAJ pays a below market rent. (Def.'s Exs. 49, 50.)

AAJ, however, has fewer rights under the MEPT deal because it is not the sole owner of the building. For example, MEPT has the right to sell the building at its discretion after January 2010, and controls the building's operations, including leasing. (Pls.' Ex. 74 §§ 2.6, 6.2.2, 8.1, 8.1.4.) In addition, AAJ will not receive income from the building, and if a sale were to occur, AAJ will receive proceeds only after MEPT is paid back its equity investment plus an annual 7.5% return. (Id. § 5.3.) Furthermore, AAJ is exposed to an increase in rent to market levels in the event of a sale. (Pls.' Ex. 75 §§ 1, 3.2) Last, AAJ cannot sell the naming rights to the building. (Id. § 4.23.)

F. Wachovia Terminates the RLA

On November 16, 2007, Wachovia terminated the RLA. (Am. Compl. ¶ 91.) Then on December 3, 2007, Wachovia refunded AAJ's rate lock fee minus certain expenses, including breakage costs, appraisal fees, and legal fees. (Id. ¶ 95.) In total, Wachovia refunded $1,781,895 of AAJ's $1,810,000 rate lock fee and deposit. (Pls.' Ex. ...


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