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LLC v. Acadia Brandywine Holdings, LLC

Superior Court of Delaware

July 31, 2018

WILMINGTON - 5190 BRANDYWINE PARKWAY, LLC, Plaintiff,
v.
ACADIA BRANDYWINE HOLDINGS, LLC, Defendant. WILMINGTON - 5190 BRANDYWINE PARKWAY, LLC, Plaintiff,
v.
ACADIA REALTY LIMITED PARTERNSHIP, Defendant.

          Submitted: April 30, 2018

         Upon Motion to Dismiss of (i) Defendant Acadia Brandywine Holdings, LLC in C.A. No. N17C-04-060 and (ii) Defendant Acadia Realty Limited Partnership in C.A. No. N17C-04-061 DENIED

          Michael J. Barrie, Esq., Stephen M. Ferguson, Esq., William M. Alleman, Jr., Esq., Benesch, Friedlander, Coplan & Aronoff LLP, Helen Gavaris, Loeb & Loeb LLP, Attorneys for Plaintiff.

          Philip Trainer, Jr. Esq., Andrew D. Cordo, Esq., Ashby & Geddes, Adam C. Silverstein, Esq., Meaghan Millan, Esq., Otterbourg P.C., Attorneys for Defendants.

          Eric M. Davis, Judge.

         I. INTRODUCTION

         This contract action is assigned the Complex Commercial Litigation Division of the Court. Acadia Brandywine Holdings, LLC ("Holdings") borrowed money from Bear Stearns Commercial Mortgage, Inc. ("Original Lender"). The Original Lender and Holdings executed a Loan Agreement and a Promissory Note (collectively "Loan Documents").[1] Simultaneously with the execution of the Loan Documents, Acadia Realty Limited Partnership ("Acadia") executed and delivered a guaranty agreement (the "Guaranty") to the Original Lender. Subsequently, the Original Lender assigned its rights to collection under the Loan Documents to Wilmington - 5190 Brandywine Parkway, LLC ("Parkway").

         Parkway filed separate lawsuits against Holdings[2] and Acadia, [3] seeking recourse liability against Holdings and Acadia (collectively "Defendants"). The Court joined the related claims. Parkway also filed a claim in the Court of Chancery asserting that parcels were mistakenly left out of the Loan Documents and asks the Court of Chancery for reformation of the Loan Documents. Defendants filed a motion to dismiss the action under the Loan Documents and Guaranty (the "Motion"). The Court held a hearing on the Original Motion and requested additional briefing based on the Second Amended Complaints. The parties filed the additional briefing and the Court scheduled a subsequent hearing.

          After the second hearing, the Court took the Motion, as supplemented, under advisement. For the reasons that follow, the Court-applying the legal standard under Civil Rule 12-will DENY the Motion.

         II. RELEVANT FACTS[4]

         The Original Lender loaned Holdings $26, 250, 000. The Original Lender and Holdings executed the Loan Documents on June 2, 2006.[5] Additionally, Acadia executed the Guaranty, guaranteeing the debt as set forth in the Guaranty.[6] Under the Guaranty, Acadia is personally liable to Parkway for the Debt only if certain conditions are met (the "Guaranteed Obligations").[7]The Guaranteed Obligations include the entire outstanding debt if Holdings: (a) "admit[s], in writing or in any legal proceeding, its insolvency or inability to Pay its debts as they become due;" (b) "fails to maintain its status as a Single Purpose Entity . . ."; (c) "fails to obtain [Parkway's] prior written consent to any subordinate financing or other voluntary lien encumbering the Property;" or (d) "fails to obtain [Parkway's] prior written consent to any assignment, transfer, or conveyance of the Property or any interest therein as required by the Loan Agreement or the Security Instruments."[8]

         Further, the Guaranty states:

Guarantor hereby consents and agrees to each of the following, and agrees that Guarantor's obligations under this Guaranty shall not be released, diminished, impaired, reduced or adversely affected by any of the following, and waives any common law, equitable, statutory or other rights (including without limitation rights to notice) which Guarantor might otherwise have as a result of or in connection with any of the following:
2.13 Other Actions Taken or Omitted. Any other action taken or omitted to be taken or omitted to be taken with respect to the Loan Documents, the Guaranteed Obligations, or the security and collateral therefor, whether or not such action or omission prejudices Guarantor or increases the likelihood that Guarantor will be required to pay the Guaranteed Obligations pursuant to the terms hereof, it is the unambiguous and unequivocal intention of Guarantor that Guarantor shall be obligated to pay the Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, which obligation shall be deemed satisfied only upon the full and final payment and satisfaction of the Guaranteed Obligations.[9]

         The Loan Agreement also contains an exculpation provision limiting Holdings' liability.[10] The exculpation provision requires the lender to foreclose on the property rather than collect from Holdings individually for a failure to pay. However, recourse liability is triggered if certain conditions are met. Those conditions triggering recourse lability are substantially similar to those triggering liability under the Guaranty.[11]

         According to Parkway, on January 16, 2008, Holdings mortgaged its interest in any improvements on the Property to General Electric Capital Corporation.[12] Parkway alleges that Holdings did not obtain Parkway's consent for the transfer of interest.[13]

         The Loan matured on July 1, 2016 and Holdings failed to pay the principal, accrued interest, default interest, and late fees (collectively "Debt"). Holdings is insolvent and on April 6, 2016, Acadia and Parkway acknowledged that "(a) an Event of Default has occurred and is continuing under the Loan Documents due to Borrower's failure to pay all amounts when due as required under the Loan Documents; (b) the Debt is due and payable in full; and (c) the Loan Documents to which [Acadia] and [Holdings] are parties constitute the valid and legally binding obligations of [Acadia] and [Holdings], respectively, enforceable in accordance with their respective terms."[14]

         Additionally, on April 6, 2016 Acadia and Holdings agreed in writing that "there are not sufficient funds available to [Holdings] to timely pay such Third Party Expenses . . . ."[15] Defendants acknowledged insufficient funds again on May 6, 2016 and June 9, 2016. On November 21, 2017, Holdings sued Parkway in New York state court.[16] Holdings sought an injunction compelling Parkway to advance operating costs.[17] Holdings stated it could not pay other creditors because Parkway took all proceeds from Holdings' tenants and used the money to pay down the Loan.[18]

         On April 29, 2016, Holdings granted an easement to a third party[19] over a Parcel of the Property (the "Reciprocal Agreement").[20] Specifically, the Reciprocal Agreement states:

[Subsidiary] hereby grants to [Holding] an easement over all portions of Parcel C-1 which the existing improvements have been designed to support Parcel C-2, or any portion thereof for continuous, total, adequate and safe support of all portions of the improvements existing on Parcel C-2 as of the execution of this Reciprocal Agreement.
[Holdings] hereby grants to [Subsidiary] an easement over all portions of Parcel C-2 which the existing improvements have been designed to support Parcels C-2A or C-3, or any portion thereof for continuous, total, adequate and safe support of all portions of the improvements existing on Parcels C-2A and C-3 as of the execution of this Reciprocal Agreement.[21]

         Further, the Reciprocal Agreement grants:

a perpetual easement and right of access to all portions of [the shopping center] to the extent that such access is necessary or desirable to permit such Owner to maintain, repair or replace any portion of the property which such Owner is responsible to maintain, repair or replace, provided that: except for any emergency repairs necessary to prevent damage or injury to persons or property, such right of access shall not be exercised without prior consultation of the Owner of the area which is to be entered on; provided further that such right of access shall be exercised in such fashion as shall minimize any interference with the operation of the area entered upon.[22]

         According to the Defendants, the Original Lender consented to a similar agreement in 2006 (the "2006 Declaration").[23] The 2006 Declaration allowed Subsidiary a cross-easement "to install, repair, maintain, remove and replace any plumbing, heating, cooling, lighting or similar fixture or equipment . . . [as long as the improvement] shall not impair the structural integrity of the building or adversely affect any adjacent Lot."[24]

         Holdings also executed a ground lease estoppel certificate and consent (the "Ground Lease") on February 13, 2017.[25] The Ground Lease allows Subsidiary to mortgage Subsidiary's interest in the ground lease and any improvements on the property. Parkway asserts that it did not consent to the estoppel. Further, Parkway asserts that "[u]pon information and belief, [Parkway's] predecessors in interest, as applicable, did not consent to the Estoppel."[26]

         The description of the Ground Lease is "[t]hat certain Net Ground Lease dated as of December 11, 2006 with respect to the Premises between Ground Lessor and Borrower, as amended and supplemented by the following documents: None."[27] A previous ground lease was executed on December 11, 2006 (the "2006 Ground Lease").[28] That 2006 Ground Lease, gave Subsidiary rights in the Property. The 2006 Ground Lease provided Subsidiary an option to renew the 2006 Ground Lease for three additional five year terms.[29]

         Parkway filed two lawsuits with the Court to collect the principal, accrued interest, default interest, and late fees (collectively "Debt") from Defendants. Parkway filed suit against Holdings to collect on the Note. Parkway also filed suit against Acadia to collect on the Guaranty. The Court joined the cases.

         Additionally, Parkway filed a complaint in the Court of Chancery seeking to reform and foreclose on the mortgage (the "Chancery Action") on April 6, 2017.[30] Parkway asserts that parcels were mistakenly left out of the Loan Documents. Specifically, Parkway seeks: (1) reformation of the mortgage; (2) foreclosure upon the mortgage; and (3) appointment of a receiver to manage the mortgaged property in the interim.[31]

         After filing the various lawsuits, Parkway requested that Holdings replace the existing property manager as required upon request under the Loan Documents on June 8, 2017.[32]Parkway again requested that Holdings replace the property manager on September 29, October 13, and October 20, 2017.[33] As of January 16, 2018-the filing of the Second Amended Complaint-Holdings has not replaced the property manager.

         On June 9, 2017, Defendants jointly filed the Motion, arguing that none of the triggering conditions of the Loan Documents or the Guaranty had occurred. Defendants contend, therefore, that they are not responsible for the Debts through the Loan Documents and the Guaranty. Defendants state that Parkway is, instead, limited to recover against the Property.

         On September 15, 2017, the Court held a hearing on the Motion, Response, and Reply (the "Hearing"). On November 21, 2017, Holdings filed an action in New York (the "New York Action") seeking a temporary restraining order and preliminary injunction compelling Parkway to release rents to pay property expenses in order to preserve the Property.[34]

         On January 16, 2018, Parkway filed Second Amended Complaints in this civil litigation against Holdings and Acadia. On February 9, 2018, Defendants filed the Supplemental Brief in Further Support of Defendants' Motion to Dismiss Second Amended Complaints ("Supplemental Motion"). On March 5, 2018, Parkway filed the Answering Brief in Response to Defendants' Supplemental Brief in Further Support of Defendants' Motion to Dismiss Second Amended Complaints (the "Supplemental Response"). On March 19, 2018, Defendants filed the Supplemental Reply Brief in Further Support of Defendants' Motion to Dismiss Second Amended Complaints (the "Supplemental Reply").

         On April 30, 2018, this Court held a hearing (the "Supplemental Hearing") on the Motion, Response, Reply, Supplemental Motion, Supplemental Response, and Supplemental Reply. The Court took the matter under advisement.

         III. PARTIES' CONTENTIONS

         A. Original Motion and Supplemental Motion

         Defendants filed the Motion claiming that their liability under the Loan Documents and the Guaranty have not been triggered because: (1) Acadia's financial statements showing negative equity value are not admissions of insolvency; (2) the Reciprocal Agreement did not give any new rights to subsidiary because subsidiary already had an easement in the parcel; (3) Holdings did not own the property conveyed in the Estoppel; and (4) resolution of the Chancery Action will show that either Parcel C-2 becomes part of the Property under the Loan Documents or at the time of the Loan, Holdings had unencumbered Property and Holdings never satisfied the definition of a Special Purpose Entity.

         After the Hearing, Defendants filed the Supplemental Motion. In the Supplemental Motion, Defendants provide further arguments that the estoppels and the alleged admissions in the course of the New York action do not create recourse liability. Further, Defendants claim that failure to hire a new property manager did not trigger recourse liability. Finally, Defendants contend that the recourse liability under the Loan Documents and Guaranty has not been triggered because Parkway did not provide a proper Guaranty Notice.

         B. Original Response and Supplemental Response

         In the Original Response, Parkway argues that the Loan Documents and the Guaranty are triggered because: (1) Holdings made a written admission of its inability to pay debts as they became due; (2) Holdings granted an easement without Parkway's consent; (3) Holdings transferred interest in and encumbered the property without Parkway's consent; and (4) Holdings failed to maintain its status as a special purpose entity.

         In the Supplemental Response, Parkway reiterates that: (1) Holdings transferred its fee interest in a portion of Lender's collateral without Lender's consent; (2) Holdings consented to nearly $7.1 million in subordinate financing and liens against Lender's collateral without Lender's consent; (3) Holdings publicly declared that it cannot pay its ...


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