Filed: April 21, 2016
Opinion by: Ronald B. Rubin
Holdings: (1) Sole managing member of a special purpose entity can establish privity through control of litigation sufficient to prevent escape from application of doctrines of res judicata or collateral estoppel to his person relative to the special purpose entity; (2) Guarantor of a satisfied loan remains personally liable for attorneys’ fees under a fee-shifting provision where Borrowers became purposefully insolvent; (3) Merger Doctrine does not bar Plaintiff from accrual of additional attorneys’ fees where Borrower was released from liability while claims against Guarantor remain outstanding.
Facts: Plaintiff judgment creditors (“Creditors”) seek to collect over $2.7 million in legal fees and costs awarded and reduced to final judgment from individual guarantor of a commercial real estate loan.
In the underlying 2004 transaction, affiliated real estate entities (“Borrowers”) agreed to borrow $35 million to improve an apartment complex. In the transaction’s guaranty, the president and sole managing member of the real estate entities (“Guarantor”) unconditionally guaranteed the payment of every recourse obligation without regard to release or discharge of the Borrowers from their liability under the loan documents.
Creditors securitized the loan in 2006, transferred it into a collateralized debt obligation (“CDO”), and made the requisite SEC filings memorializing the transaction.
After several loan modifications not relevant to the instant action, Creditors promised in 2010 to grant Borrowers a right of first refusal if it intended to sell the entire loan, with broad release and indemnification provisions in case of such an exit. In consideration, Borrowers contributed $4.2 million and agreed to numerous additional exit conditions. Guarantor signed the modification on behalf of all relevant parties and in his personal capacity as Guarantor.
Soon after, Creditors transacted with another commercial lender (“Servicer”) to sell a subordinated equity interest in the CDO and delegate servicing rights to the loan. Servicer timely made SEC filings memorializing its interest in that transaction.
Borrowers, mistakenly interpreting this as a sale in violation of their bargained-for right of first refusal, initially attempted to bargain for a discounted loan payoff. Rebuffed by Creditors, Borrowers thereafter sold the apartment complex, paid the loan in full, and duly paid their investors a distribution of approximately $13M. Guarantor himself pocketed at least $1M. The residue of $1M was transferred to Borrowers and earmarked for the upcoming litigation.
Litigation proved to be extensive. Borrowers sued both Creditors and Servicer in the Circuit Court for Montgomery County, seeking $25M in damages for Creditors’ breach of contract. In that first action, the court granted summary judgment for Creditors, finding that the SEC filings and contract documents clearly demonstrated that Servicer had not purchased Borrowers’ loan. The court also granted Creditors’ counterclaim for attorneys’ fees based on the loan modification’s release and fee-shifting provisions. Borrowers appealed.
The Court of Special Appeals affirmed on all counts except for the amount of attorneys’ fees and remanded for an evidentiary hearing. The Circuit Court duly complied, issuing an opinion awarding $2.7 million in fees and costs. This award was affirmed following a second appeal where Borrowers attempted to re-litigate liability rulings lost at the trial level and affirmed on appeal. Borrowers thereafter refused to pay or bond the judgment.
Analysis: In the instant suit, Plaintiff Creditors seek to enforce the judgment against Defendant, who was personal Guarantor for the 2004 $35M loan. Because Borrowers liquidated and distributed all assets in 2011, and consequently exhausted the remaining $1M in earmarked legal funds, Plaintiff Creditors maintained that the legal fee judgment constituted a recourse obligation under the loan agreement giving rise to personal liability.
- Whether Plaintiffs had standing to enforce the guaranty
- Whether merger doctrine extinguished Guarantor’s obligations to pay additional attorneys’ fees
- Whether the judgment constituted a Recourse Obligation under the guaranty
- Whether Borrowers were insolvent such that Guarantor became liable
- Whether Creditors are entitled to additional attorney fees incurred as of the second appeal
Accordingly, the court so found that fairness, judicial economy, and common sense each militated against Guarantor’s third attempt to re-litigate standing.…“parties” includes all persons who have a direct interest in the subject matter of the suit, and have a right to control the proceedings, make defense, examine the witnesses, and appeal if an appeal lies. Where persons…are so far represented by another that their interests receive actual and efficient protection, any judgment recovered therein is conclusive upon them to the same extent as if they had been formal parties.” Ugast v. LaFontaine, 189 Md. 227 (1947).
As to the second, the court instructed that only after all appeal rights are exhausted does a judgment become final and right to attorneys’ fees become extinguished. With the underlying litigation currently under appeal, attorneys’ fees would continue to accrue. And in any event, the court pointed to Guarantor’s personal obligation under the guaranty which was separate and apart from any release from liability applied to Borrowers.
As to the third, Guarantor’s primary argument was that the loan documents evidenced intent to consider amounts due as non-recourse obligations with narrowly drawn exceptions for recourse debt. Applying objective rules of contract interpretation, the court found no ambiguity: considered as a whole and afforded ordinary meaning, the commercially reasonable interpretation of the guaranty indicated Borrowers were subject to a recourse obligation on any attorneys’ fees, and the Guarantor was to assure Borrower’s performance if they sued and lost. Because this right was specifically bargained for and granted under the relevant loan modification, the court found Guarantor’s requested interpretation to be commercially unreasonable.
As to the fourth, the court determined that Borrowers had purposefully created a judgment-proof entity to pursue claims by setting aside only enough money to fund their side of the underlying case. With all funds withdrawn in pursuit of their own economic interests, Borrowers remained unable to pay debts in the ordinary course and were therefore insolvent as a matter of law. Accordingly, the court found no dispute of material fact that Borrowers breached contract by becoming insolvent and unable to pay attorney’s fees awarded in the underlying case, and therefore ascribed Plaintiff Creditors’ loss to Guarantor.
Finally as to the fifth, the court was persuaded that Plaintiff Creditors presented sufficient evidence to support an additional award with detailed, accurate, and informative billing statements evidencing reasonable rates, appropriate assignment of work, aggressive litigation, and a body of work reasonable in relation to the complex commercial real estate litigation involved.
In so finding, the court granted Plaintiff Creditors’ motion for summary judgment, imposing an additional award of attorneys’ fees for a total judgment of $3.14M against Guarantor.
The full opinion is available in PDF.