Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

1443 Chapin Street, Lp v. Pnc Bank

September 14, 2011

1443 CHAPIN STREET, LP, PLAINTIFF/COUNTER-DEFENDANT,
v.
PNC BANK, N.A., DEFENDANT/COUNTER- AND THIRD-PARTY PLAINTIFF,
v.
STEVEN F. SCHWAT, THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge

MEMORANDUM OPINION

(September 14, 2011) 1443 Chapin Street, LP ("Chapin Street") is the would-be developer of a condominium project in the Northwest Quadrant of the District of Columbia. Several years ago, Chapin Street, Chapin Street's principal, Steven F. Schwat ("Schwat"), and PNC Bank, N.A. ("PNC") entered into a series of related agreements pursuant to which PNC would provide construction financing to Chapin Street in connection with the project. When PNC later cut off funding, Chapin Street commenced this breach of contract action against PNC in the Superior Court for the District of Columbia. PNC subsequently removed the action to this Court, where it has defended on the basis that it properly withheld funding because Chapin Street was in default of the underlying loan. PNC has also filed a Counterclaim against Chapin Street and a Third-Party Claim against Schwat, who executed a guaranty on the loan, through which PNC seeks to recover all amounts allegedly due and owing. Presently before the Court are the following eleven motions: PNC's [107] Motion for Summary Judgment; Chapin Street and Schwat's [108] Motion for Summary Judgment; Chapin Street and Schwat's [125] Motion for Leave to File Out-of-Time; and PNC's [128], [129], [130], [131], [132], [133], [134], and [137] Motions to Strike. Upon consideration of the parties' submissions, the relevant authorities, and the record as a whole, the Court shall DENY PNC's [107] Motion for Summary Judgment; GRANT Chapin Street and Schwat's [108] Motion for Summary Judgment; DENY Chapin Street and Schwat's [125] Motion for Leave to File Out-of-Time; DENY PNC's [128], [129], [130], [131], [132], [133], [134], and [137] Motions to Strike; and DISMISS PNC's [24] Counterclaim against Chapin Street and [24] Third-Party Complaint against Schwat.*fn1

I. BACKGROUND

The dispute at the heart of this action began with a $7.77 million construction loan originally extended by PNC's predecessor to Chapin Street, a single purpose entity controlled by Schwat.*fn2 On December 30, 2005, the parties entered into the four central agreements governing their relationship: (1) the Construction Loan Agreement; (2) the Deed of Trust and Security Agreement; (3) the Deed of Trust Note; and (4) the Guaranty of Payment and Performance (collectively, "Loan Documents"). See PNC's Stmt. of Material Facts ("PNC's MSJPNC Stmt."), ECF No. [107], Exs. 5-8. Both sides agree that the Loan Documents are valid and binding contracts requiring, inter alia, PNC to lend to Chapin Street, subject to certain conditions (including the absence of a default), monies to use in constructing a condominium project in the Northwest Quadrant of the District of Columbia. Here, the locus of the parties' dispute is over which of them failed to perform under these agreements-or, more precisely, who first failed to perform under the agreements.

Through December 26, 2007, PNC funded sixteen separate draw requests from Chapin Street, advancing approximately half of PNC's total contractual funding obligations. Chapin Street/Schwat's Stmt. of Material Facts ("Chapin Street/Schwat's MSJC/S Stmt."), ECF No. [108-2], ¶ 104; PNC's MSJC/S Resp. Stmt. ¶ 104. PNC did not advance any funding beyond December 26, 2007. Chapin Street/Schwat's MSJC/S Stmt. ¶ 104; PNC's MSJC/S Resp. Stmt. ¶ 104. Chapin Street submitted its seventeenth draw request on or about January 16, 2008. PNC's MSJPNC

Stmt. ¶ 64. On January 24, 2008, PNC refused to fund the request. Chapin Street/Schwat's MSJC/S Stmt. ¶ 117; PNC's MSJPNC Stmt. ¶ 67.

On January 30, 2008, PNC sent Chapin Street a letter claiming that Chapin Street was in default ("January 30, 2008 Default Letter"). Chapin Street/Schwat's MSJC/S Stmt. Ex. 78 (January 30, 2008 Default Letter). In the letter, PNC (1) asserted its view that two "Events of Default," as defined under the applicable Loan Documents, had occurred, and (2) made it clear that it would not honor any draw requests going forward. PNC wrote:

As you know, the Project is significantly behind schedule and over budget. As a result, [Chapin Street] has been and shall continue to be unable to comply with the draw conditions and timing requirements of Section 4.2 of the [Construction Loan] Agreement (regarding certifications in compliance with Section 5.3(b) of the Agreement, which constitutes a Default under the Agreement, seven (7) days after the date hereof. In addition, [PNC] has made a reasonable determination, in good faith, that the condition of the Project set forth above, impairs the prospect of payment and the performance of [Chapin Street's] obligations under the Agreement, which constitutes an Event of Default under Section 9(k)(iii) of the Deed of Trust Note executed in connection with the Agreement.

We understand that [Chapin Street] is considering requesting the first of two extensions of the maturity date of [Chapin Street's] obligations to [PNC] under Section 2(c) of that certain $7,770,000 Deed of Trust Note . . . . This letter informs [Chapin Street] that [PNC] will not entertain any such requests while the above Defaults remain outstanding, and further, if [Chapin Street] seeks to force an extension to be granted during the current seven (7) day grace period, then [PNC] will demand full payment of all obligations immediately after the expiration of such seven (7) day period.

Id. at PNC568-60. It is undisputed that PNC's letter claims that Chapin was, as of January 30, 2008, in non-monetary default (that is, that Chapin Street had committed an Event of Default other than failing to pay the amounts due and owing on the loan). Chapin Street/Schwat's MSJC/S

Stmt. ¶¶ 166, 204, 213; PNC's MSJC/S Resp. Stmt. ¶¶ 166, 204, 213. PNC's January 30, 2008 Default Letter was reviewed by PNC's in-house counsel prior to being sent and was intended to assert all defaults known to PNC at the time. Chapin Street/Schwat's MSJC/S Stmt. ¶¶ 151, 153; PNC's MSJC/S Resp. Stmt. ¶¶ 151, 153; Dep. of Michael Gormley, ECF No. [135-6], at 101-02.

On May 21, 2008, PNC sent two substantively identical letters, one to Chapin Street and one to Schwat, claiming, without further explanation, that "[t]he loan . . . is in default" and demanding full payment of the principal, accrued interest, late charges, attorneys' fees, collection costs, and other sums it claimed were due and owing under the Loan Documents by no later than June 2, 2008 ("May 21, 2008 Default Letters"). PNC'S MSJPNC Stmt. Ex. 23 (May 21, 2008 Default Letter to Chapin Street) at Chapin00513 & Ex. 24 (May 21, 2008 Default Letter to Schwat) at Chapin00449.

On June 13, 2008, slightly more than a week after the deadline stated by PNC had elapsed, PNC brought suit against Schwat in the Circuit Court for Baltimore County, Maryland ("Baltimore County Circuit Court") based on Schwat's status as the guarantor on the loan ("Baltimore County Action"). Chapin Street/Schwat's MSJC/S Stmt. ¶ 1; PNC's MSJC/S Resp. Stmt. ¶ 1. In its Complaint in that action, PNC broadly asserted that (1) Chapin Street was "presently in default under the [Deed of Trust] Note" and (2) "[a]s a result of the defaults . . . , all amounts owed under the Note are immediately due and owing . . . ." Chapin Street/Schwat's MSJC/S Stmt. Ex. AA (PNC's Compl. in the Baltimore County Action) ¶¶ 8-9. According to PNC, Chapin Street's "defaults" rendered Schwat liable under the Guaranty of Payment and Performance in his role as the guarantor on the loan. Id. ¶¶ 10, 15.

Schwat filed an Answer to PNC's Complaint in the Baltimore County Action on October 2, 2008.*fn3 Chapin Street/Schwat's MSJC/S Stmt. ¶ 3; PNC's MSJC/S Resp. Stmt. ¶ 3. In his Answer, Schwat (1) denied PNC's allegations that Chapin Street was in default under the Loan Documents, and (2) countered that PNC had "wrongfully repudiated and breached" the Construction Loan Agreement. Chapin/Schwat's MSJC/S Stmt. Ex. BB (Schwat's Answer in the Baltimore County Action) at 4-5. More specifically, Schwat asserted a defense that PNC's claims against him were "barred because [of PNC's] prior breach and repudiation of the underlying loan documents excuse[d] performance by [Chapin Street] and thereby [him] as a matter of law." Id.

On December 8, 2008, PNC filed a Motion for Summary Judgment in the Baltimore County Action. Chapin Street/Schwat's MSJC/S Stmt. ¶ 4; PNC's MSJC/S Resp. Stmt. ¶ 4. In support, PNC argued that "Chapin defaulted on its obligations to PNC under the loan, which ha[d] matured and is due and payable." Notice of Pl.'s Mot. for Summ. J. at 1, PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct. Dec. 8, 2008).*fn4 PNC conceded that Chapin Street had a contractual right to extend the maturity date of the loan from its original maturity date of December 30, 2007, but argued that Chapin Street's "two rights of extension . . . were conditioned on the loan not being in default." Aff. of David A. Kennedy ¶ 3, PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct. Dec. 8, 2008). Referencing its January 30, 2008 Default Letter, PNC asserted that it had "declared a default under the material adverse change provision" on the basis that Chapin Street had allegedly "made little progress toward completing the improvements," "had fully exhausted the interest on the loan," and "for other [unspecified] reasons." Id. ¶ 5 (emphasis added). In other words, PNC argued that Chapin Street was in non-monetary default of the loan, just as it had in the January 30, 2008 Default Letter. In addition, PNC argued that Chapin Street's attempt to exercise its right to extend the maturity date of the loan on January 29, 2008 was "ineffective[]," which in its view meant that the loan had "matured in all events"-that is, PNC argued that the loan had matured and Chapin Street was in monetary default regardless of whether it was non-monetary default. Id. Because PNC has gone to lengths to gloss over this fact, the Court reiterates: PNC's Motion for Summary Judgment in the Baltimore County Action was unambiguously predicated on two bases-namely, "that the loan was both accelerated as a result of default and had matured in all events." Id.; see also Pl.'s Mem. in Supp of Pl.'s Mot. for Summ. J. at 2-3, PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct. Dec. 8, 2008) ("As of June 30, 2008, the loan was both accelerated as a result of the default and had matured in all events.").

On January 13, 2009, Schwat filed his opposition to PNC's Motion for Summary Judgment in the Baltimore County Action. See Def. Steven F. Schwat's Mem. in Opp'n to Pl. PNC's Mot. for Summ. J., PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct. Jan. 13, 2009).*fn5 Given the nature of PNC's arguments-specifically, its claims that Chapin Street was in both monetary and non-monetary default of the loan-it is unsurprising that the gravamen of Schwat's opposition was that there had been no default of any kind. He wrote:

Schwat is not liable to PNC because an essential prerequisite to such liability is proof of an actual default by the borrower, [Chapin Street]. * * * Because [Chapin Street] has fully complied with each and every one of its obligations to PNC, and because payment is not due since PNC's acceleration of the loan was improper, PNC's motion must be denied.

Id. at 1-2. As he did in his Answer, Schwat unequivocally stated that his defense would show (1) that it was PNC, and not Chapin Street, that was in breach of the Loan Documents and (2) that PNC's breach of its funding obligations to Chapin Street "long before . . . any possible legitimate allegation of default" excused Chapin Street's future performance under the Loan Documents. Id. at 7. Consistent with this statement of his defense, Schwat characterized one of the "key questions" for the Baltimore County Circuit Court as follows: "whether [Chapin Street] is in default of the loan." Id. at 6.

On February 2, 2009, the Baltimore County Circuit Court denied PNC's Motion for Summary Judgment in its entirety. See Mots. Ruling, PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct. Feb. 2, 2009).*fn6 In so doing, the Court plainly expressed its agreement with Schwat that one of the key questions was whether Chapin Street had defaulted on the loan. The Baltimore County Circuit Court reasoned:

Schwat is only liable on the guaranty if [Chapin Street] breached its agreement . . . . A world of difference exists as to the recollection of the facts between the parties and their respective views as to how the construction job was progressing in accord with contract responsibilities. There is more than one dispute of material fact.

Id. at 1. Despite the brevity of this explanation, there is no doubt that the Baltimore County Circuit Court's reference to "how the construction job was progressing" was a direct response to PNC's argument that Chapin Street "had made little progress" on the project. That is, the Baltimore County Circuit Court, quite reasonably, understood PNC to be litigating whether Chapin Street was in non-monetary default under the material adverse change clause in the Loan Documents and found that genuine disputes of material fact required a trial on the merits.

On February 22, 2010, on the eve of trial, PNC provided Schwat with a copy of its Pre-Trial Brief in the Baltimore County Action. See PNC's MSJC/S Resp. Stmt. Ex. 4 (Trial Br. of PNC, Bank, N.A, PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct. Feb. 22, 2009)). As framed therein, PNC's principal argument at trial would be that Chapin Street failed to effectively exercise its right to extend the maturity date of the loan and was, therefore, in monetary default as of the original maturity date of December 30, 2007. Id. at 4-5. PNC did not emphasize its argument (the one it had made in its Motion for Summary Judgment) that even assuming Chapin Street had effectively exercised its right of extension under the Loan Documents, the extension periods would nevertheless have elapsed by that point in time anyway and therefore Chapin Street would still be in monetary default. But neither did PNC abandon the argument. It its Pre-Trial Brief, PNC maintained that "[e]ven if [Chapin] had exercised both six month extension options, the loan would still have matured and be due and payable in full on December 30, 2008." Id. at 3 n.1.

On February 23, 2010, Schwat presented the Baltimore County Circuit Court with his Statement of the Case. See Chapin Street/Schwat's MSJC/S Stmt. Ex. GG (Def. Steven Schwat's Stmt. of the Case, PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct. Feb. 23, 2009)). Once again, Schwat reiterated his defense that it was PNC, and not Chapin Street, that first "committed a material breach of the loan agreements." Id. at 1. Thereafter, he posed a series of questions for the Baltimore County Circuit Court's consideration. Included among them were (1) whether PNC breached its obligations under the Loan Documents by refusing to advance funding beginning with Chapin Street's seventeenth draw request on January 24, 2008 and (2) whether Chapin Street effectively exercised its right to extend the maturity date of the loan on January 29, 2008. Id. at 3-4.

The Baltimore County Action proceeded to a full trial, held over three days from February 23, 2010 to February 25, 2010. At the conclusion of the evidence, the Baltimore County Circuit Court posed the following question: "If PNC believed that the loan was over and done with . . . and nothing could be done by Chapin Street to extend the loan after the date of maturity, why did PNC send the January 30, 2008 [Default Letter] . . . if it believed the loan was already in monetary default for failure to pay at maturity?" Chapin Street/Schwat's Reply to PNC's Resp. to Chapin Street/Schwat's Stmt. of Material Facts ("Chapin Street/Schwat's MSJC/S

Reply Stmt.") Ex. PP (Post Trial Br. of PNC Bank, N.A., PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct.)) at 6. Before, during, and after the trial was held, PNC consistently sought damages through the date of the trial. Chapin Street/Schwat's MSJC/S Stmt. ¶¶ 27, 29; PNC's MSJC/S Resp. Stmt. ¶¶ 27, 29.

In its Post-Trial Brief, PNC's leading argument remained that Chapin Street had failed to effectively exercise the option to extend the maturity date of the loan and was therefore in monetary default as of December 30, 2007. Chapin Street/Schwat's MSJC/S Reply Stmt. Ex. PP (Post Trial Br. of PNC Bank, N.A., PNC Bank, N.A. v. Schwat, Case No. 03-C-08-006454 (Balt. Cnty. Cir. Ct.)) at 21. PNC attempted to minimize the January 30, 2008 Default Letter, claiming that the letter was "an irrelevant mistake" and "should have noted the default caused by the failure to pay the loan on the maturity date, but it did not do so." Id. at 20-21. Nonetheless, as it had throughout the Baltimore County Action, PNC did not rely on this argument ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.