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Sun Secured Financing LLC v. Arcs Commercial Mortgage Co. LP

August 11, 2010

SUN SECURED FINANCING LLC ET AL., PLAINTIFFS,
v.
ARCS COMMERCIAL MORTGAGE CO. LP ET AL., DEFENDANTS.



The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge

Re Document Nos.: 11, 21

MEMORANDUM OPINION

DENYING THE DEFENDANTS'MOTION TO DISMISS; DENYING THE PLAINTIFFS'MOTION FOR LEAVE TO FILE A SUR-REPLY

I. INTRODUCTION

Plaintiff Sun Communities, Inc. ("Sun Communities") is the owner and operator of a number of manufactured housing communities scattered throughout the United States. Together with six of its subsidiaries, it has brought suit against defendants ARCS Commercial Mortgage Company LP ("ARCS") and PNC ARCS LLC ("PNC ARCS"), businesses involved in the mortgage industry, and the Federal National Mortgage Association ("Fannie Mae"), a federally chartered mortgage financing corporation based in the District of Columbia.

The dispute centers on a $390 million financing agreement between the plaintiffs and ARCS, which later assigned its rights under the agreement to Fannie Mae. The plaintiffs allege that in 2009, the defendants impermissibly increased one of the fees called for in the agreement. Through this action, they seek to recover their excess fee payments and to obtain a declaratory judgment that the fee increase was impermissible under the terms of the agreement. The matter is now before the court on the defendants' motion to dismiss for failure to state a claim. Because the court concludes that the allegations in the complaint set forth a plausible claim for relief, the court denies the defendants' motion.*fn1

II. FACTUAL & PROCEDURAL BACKGROUND*fn2

In May 2002, the plaintiffs*fn3 and ARCS*fn4 entered into a financing agreement under which ARCS agreed to lend more than $150 million to the plaintiffs through a combination of fixed and variable interest rate loan facilities. Compl. ¶¶ 22-23. Funds disbursed under the fixed interest rate facility were termed "Fixed Advances" while funds disbursed pursuant to the variable interest rate facility were referred to as "Variable Advances." Id. ¶ 29. In April 2004, the borrowers and ARCS executed an amended agreement, increasing the total amount of financing available to the plaintiff to $390 million. Id. ¶ 25.

The parties entered into the amended agreement with the understanding that ARCS was essentially an intermediary and that many of its rights under the agreement would be assigned to Fannie Mae. Id. ¶ 26. Specifically, each time ARCS would disburse an Advance to the plaintiffs, ARCS would assign its rights to repayment to Fannie Mae. Id. ¶ 26. Following such an assignment, Fannie Mae would convert the loan into a mortgage-backed security ("MBS"), a negotiable financial instrument backed by the loan. Id., Ex. A ("Am. Agreement") § 13.01. Fannie Mae would then provide the MBS to ARCS as consideration for the assignment of its repayment rights to the underlying loan. Id. ARCS, in turn, would sell the MBS to investors. Id. § 2.01(c).

In exchange for the financing, the plaintiffs agreed to pay not only interest on the loans, which ultimately went to the buyer of the MBS rather than to the defendants, id., but also a "facility fee" which compensated the defendants for the cost of securitizing and servicing the loans, id. § 1.04(b)(ii). The facility fee for Variable Advances, termed the "Variable Facility Fee," was fixed at fifty-eight basis points*fn5 for the original term of the agreement. Id., App. I at 28.

The $150 million loan commitment provided by the original financing agreement was set to expire in May 2007, but the plaintiffs had the right under the amended agreement to extend it twice: first through April 2009 and again, if they so chose, through April 2014. Id. § 1.07. Similarly, the additional loan commitment established through the amended agreement had a termination date of April 2009, but the plaintiffs had the right to extend it through April 2014. Id. The parties agree that the plaintiffs extended the original financing period through April 2009 without incident. Compl.¶ 43; Defs.' Mot. at 4. The plaintiffs then opted to extend the termination dates to April 2014 through a notification transmitted to the defendants in October 2008. Compl. ¶ 49.

On March 4, 2009, fifty-six days before the expiration of both the initial term of the amended agreement and the first extension period of the original agreement, the defendants orally informed the plaintiffs that they "proposed to increase the Variable Facility Fee" applicable during the period from April 2009 to April 2014 from fifty-eight basis points to 200 basis points. Id. ¶ 54. The defendants asserted that this modification would apply not only to Variable Advances disbursed during the extension period from April 2009 to April 2014, but also to all Variable Advances that had previously been disbursed to the plaintiffs. Id. When the plaintiffs objected that this retroactive rate increase was impermissible under the amended agreement, the defendants indicated that they would review the agreement and then discuss the issue with the plaintiffs. Id. ¶ 58. The plaintiffs heard nothing further from the defendants about the proposed rate increase until April 3, 2009, twenty-six days before the expiration of the initial term of the amended agreement, when the defendants again orally advised the plaintiffs that they proposed to increase the Variable Facility Fee to 200 basis points. Id. The plaintiffs assert that they received no written notice of this increase until April 17, 2009, twelve days before the expiration of the initial term of the amended agreement. Id. ¶ 59.

The plaintiffs contend that given the state of the mortgage financing market in April 2009, they had no choice but to agree to pay the increased Variable Facility Fee to obtain the extension of the amended agreement. Id. ¶ 61. To secure the extension, the plaintiffs signed an extension agreement providing for an increase in the Variable Facility Fee, but they did so "under protest." Id. ¶ 62. The parties agree that the extension agreement does not prejudice any of the plaintiffs' rights under the amended agreement. Id.

The plaintiffs commenced this action in November 2009, seeking reimbursement of the allegedly excessive Variable Facility Fee payments and a declaratory judgment that the fee increase was not permitted under the amended agreement. See generally id. In December 2009, the defendants filed this motion to dismiss the complaint for failure to state a claim for which relief can be granted, arguing that the plaintiffs cannot recover for their claims because the amended agreement unequivocally provided the defendants the right to increase the Variable Facility Fee during the extension period for all ...


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