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Cache Private Capital Diversified Fund, LLC v. Cove at Sandy Landing, LLC

Court of Chancery of Delaware

January 17, 2019

Cache Private Capital Diversified Fund, LLC
v.
Cove at Sandy Landing, LLC, et al.

          Draft Report: July 26, 2018

         Date Submitted: November 29, 2018

          Jamie C. King, Esquire Tunnell & Raysor, P.A.

          Dean A. Campbell, Esquire Law Office of Dean A. Campbell, LLC

          Patricia W. Griffin Master in Chancery

         Dear Counsel:

         Pending before me is an action filed by a creditor seeking personal and in rem judgments on a note secured by a mortgage on property owned by debtors, which are limited liability companies, and a personal guaranty executed by the individual who is the sole member and manager of those limited liability companies. Subsequent to the execution of those documents, the parties entered into a forbearance agreement. Creditor alleges that the debtors defaulted on the note and the forbearance agreement, and seeks to foreclose on lots and boat slips it alleges are secured by the mortgage and to enforce the terms of the forbearance agreement. Debtors admit default on the note but deny default on the mortgage and, in their counterclaim, argue that the mortgage is unenforceable because it was not executed by the actual property owner, and that the boat slips are not subject to the mortgage. Creditor filed a motion for summary judgment. For the reasons below, I recommend that the Court grant the creditor's motion for summary judgment, dismiss the debtors' counterclaim with prejudice, and order the entry of personal and in rem judgments against the debtors, and other relief, following supplemental proceedings. This is a final report.

         I. Background

         On March 19, 2014, Cove at Sandy Landing LLC, a foreign limited liability company organized under the laws of Maryland ("Cove MD") and Meris Properties LLC ("Meris"), a limited liability company organized under the laws of Delaware, executed a note (the "Note") with Cache Private Capital Diversified Fund, LLC ("Cache"), obligating them to pay a principal amount of $1, 192, 500.00, plus interest, charges and costs.[1] A mortgage and security agreement (the "Mortgage") on real properties in The Cove at Sandy Landing community ("Sandy Landing") in Sussex County, Delaware, was executed, on the same date, to secure the debt.[2] The Mortgage was not under seal. In addition to listing Meris as a borrower, the Mortgage listed Cove MD as a borrower at the beginning of the document and, alternatively, Cove at Sandy Landing LLC, a limited liability company organized under the laws of Delaware ("Cove DE") as borrower and signatory at the end of the document. Michael Daniels ("Daniels"), who is the sole member of Cove MD, Cove DE and Meris, signed the Mortgage as sole member and manager of Meris and of Cove DE.

         The Note obligated Cove MD and Meris to make monthly interest payments beginning April 15, 2014, with a single balloon payment of the principal and all accrued and unpaid interest due in full upon maturity on December 19, 2014.[3] It also provided for late charges for delinquent payments, additional late charges based upon the remaining principal balance every 30 days that the payment remains unpaid, a post-maturity date or acceleration interest rate upon default, and acceleration of all amounts due and owing under the Note, without notice, upon default. The makers of the Note are Cove MD and Meris, with Daniels executing the Note for both entities. In addition, on March 19, 2014, Daniels executed a personal guaranty for payment of the loan debt and for performance under the Note.[4]

         On December 15, 2014, Cove MD and Meris entered into an Inducement, Forbearance and Security Agreement ("Forbearance Agreement") with Cache.[5] In the Forbearance Agreement, they acknowledged that Cove MD executed and delivered the Mortgage and other loan documents dated March 19, 2014; the loan was fully drawn; Cove MD and Meris have "failed to make payment of either principal or interest when due on the Loan," or anticipatory breach has occurred; Cache has declared default on the loan and Cove MD and Meris have received notice of default; and Cache has the present right to declare the indebtedness under the loan due and to exercise the remedies available to it against the security or Meris or Cove MD. In return for Cache's agreement not to exercise its rights and remedies because of the default during the forbearance period (until January 15, 2015), Cove MD and Meris agreed to post a $82, 120.50 cash bond with the Delaware Department of Transportation ("DelDOT"), pay Cache $45, 000.00 as soon as it receives proceeds from cash bonds that they have posted with DelDOT and with the Department of Finance of Sussex County, Delaware ("Sussex County"), and grant Cache a security interest in those bonds. The Forbearance Agreement preserved Cache's right to pursue its rights and remedies with respect to the Loan, and noted that Cove MD's and Meris's liabilities remain "in full force and effect."

         On June 28, 2016, Cache filed a complaint pursuant to 10 Del. C. § 3901 against Cove MD, Cove DE, Meris, and Daniels.[6] Other parties were joined for notice purposes only.[7] Cache alleges that Cove MD and Meris are in default under the Note and Forbearance Agreement for failing to make payments as required in those documents, and seek payment of $1, 690, 674.90, including principal and cash bond amounts[8] totaling $1, 041, 275.11, $642, 360.54 in interest as of May 15, 2016 and interest at 36% per annum from that date, late charges of $7, 039.25, and reasonable attorneys' fees and costs. It seeks in rem judgment on the Mortgage in that amount against Cove MD, Cove DE, and Meris and personal judgment on the Note in that amount against Cove MD, Cove DE, Meris and Daniels, as guarantor of the Note. It also seeks to foreclose on eight lots and 20 boat slips it claims are secured property under the Mortgage and to obtain an order for a sheriff's sale, and that DelDOT, Sussex County and the Association be enjoined from sending money to Daniels, and Cove MD be enjoined from enjoying proceeds from the sale of boat slips, pending resolution of this case.

         In their July 20, 2016 answer and counterclaim for declaratory judgment, Defendants deny default under the Mortgage, but admit that Cove MD and Meris are in default on the Note.[9] Defendants argue that the mortgage is unenforceable because it was not executed by the actual property owner and the Mortgage, if valid, does not identify the boat slips as security and, therefore, does not create a lien on the boat slips. And, they claim Cache has unclean hands because it has interfered with the marketing of the property and has overreached in its calculations of amounts due and claims of a lien.[10]

         Cache's response to the counterclaim reiterates that the boat slips are collateralized property, Cove MD is identified as the mortgagor, and defendants have unclean hands because they misrepresented their application and use of loan proceeds and the completion of the development, and fraudulently retained monies from the sale of collateralized property.[11]

         On February 28, 2018, Cache filed a motion for summary judgment claiming that there is no genuine issue of material fact in dispute and it is entitled to judgment as a matter of law. Cache argues that the Mortgage, Note and Forbearance Agreement were executed by Cove MD and Meris, because Cove MD was identified on the first page of the Mortgage as the borrower and, in the Forbearance Agreement, Cove MD and Meris admitted they entered into the mortgage regarding the property and that the loan was in default.[12] Further, Cache alleges that the Mortgage covers the boat slips, which are secured property owned by Cove MD, as evidenced by the conveyance by deed of a boat slip by Cove MD.[13] It seeks personal and in rem judgments against Cove MD and Meris, and a personal judgment against Daniels, other relief as requested, and dismissal of defendants' counterclaim with prejudice.

         Defendants respond that Cove MD and Cove DE are separate entities.[14]They claim that the Mortgage is invalid because it was signed by Daniels as sole member and manager of Cove DE, and Cove MD is the entity that is obligated under the Note for the debt. And, the Forbearance Agreement was not recorded so it does not modify the Mortgage to correct the borrower's signature.[15] They also argue that, even if the Mortgage is valid, it does not include the boat slips as part of the security. The boat slips are not located or erected on land; the land upon which the boat slips are built is owned or controlled by the State of Delaware, consistent with the subaqueous lands lease through which the boat slips were built; and neither Cove MD nor Cove DE is a party to the subaqueous lands lease.[16]Defendants also claim that two of the lots and two of the boat slips subject to this action are owned by non-parties to the case.[17]

         I issued a draft report on July 26, 2018, and the defendants filed a notice of exceptions on July 30, 2018, which were briefed.[18] I have either modified the report to address the exceptions taken, or consider them adequately addressed in this report.

         II. Standard of Review

         The standard for reviewing a motion for summary judgment under Court of Chancery Rule 56 is well-known. Summary judgment is appropriate only where "the moving party demonstrates the absence of issues of material fact and that it is entitled to a judgment as a matter of law."[19] The moving party bears the burden of demonstrating that no material issues of fact are in dispute and that it is entitled to judgment as a matter of law.[20] Once the moving party has satisfied that burden, it falls on the non-moving party to show that there are factual disputes. It may not rest upon the mere allegations or denials contained in its pleading, but must present specific facts showing that there is a genuine issue for trial.[21] Evidence must be viewed "in the light most favorable to the non-moving party."[22]

         III. Analysis

         A. Enforceability of the Mortgage

         Defendants argue that the defect in execution of the Mortgage makes it unenforceable. They claim that the proper party - Cove MD, the real property owner - did not execute the Mortgage, and that the Forbearance Agreement was not recorded so it is not effective under 25 Del. C. § 2101(b). Cache asserts that the Mortgage is enforceable because Cove MD was identified in the Mortgage as the borrower initially, and that the Forbearance Agreement, in which Cove MD and Meris admitted they entered into the Mortgage and executed the Note and acknowledged the debt and default on the loan, confirmed Cove MD's intent to obligate itself on the Mortgage and the loan.

         There are two types of mortgages: legal and equitable.[23] Foreclosure of an equitable mortgage is within the jurisdiction of the Court of Chancery.[24] A mortgage "is a conveyance of an estate, by way of pledge for the security of debt, and to become void on payment of it."[25] "The sine qua non of a 'mortgage' is not the form of the document but the intention of the parties to secure a debt with a pledge of real property."[26] The Delaware Supreme Court recognized the Court of Chancery's "equitable power to disregard defects in the execution of a mortgage," based upon the principles that "(1) equity regards substance rather than form," and (2) "equity regards that as done which in good conscience ought to be done."[27] Further, Delaware's "form of mortgage" statute expressly states that "documents not conforming with its prescribed pattern may nevertheless be valid and fully effectual."[28] The key to establishing an equitable mortgage is the intent of the parties to create a mortgage or lien on secured property.[29] Substance transcends form and instruments intended as mortgages to pledge property to secure debts are enforceable as equitable mortgages, even if they are not regarded as legal mortgages because of defects.[30]

         In this case, there are no genuine issues of material fact regarding the Mortgage, Note or Forbearance Agreement. The Mortgage listed Meris and Cove MD as borrowers at the beginning of the document and listed Meris and Cove DE as borrower and signatory at the end of the document. Daniels signed to execute the Mortgage in March 2014. Meris and Cove MD are the makers of the Note, and Daniels executed that document for those entities. On December 15, 2014, a few days before the balloon payment under the Note was due, Meris and Cove MD executed a Forbearance Agreement, in which they acknowledged that they had executed the Mortgage and Note, received the full amount of the loan proceeds, the loan was in default, their liabilities remained, and Cache's rights and remedies under the loan documents were preserved, and agreed to a waiver of claims.[31]They also agreed to comply with certain payments and conditions in order to prevent Cache from pursuing its rights and remedies under the loan documents during the forbearance period.

         The issues relate to the parties' differing interpretations of how the law applies to these facts. The Mortgage is defective, both because it is not under seal, which is a technical defect, and because the mortgagor, Cove MD, did not formally sign the Mortgage as the borrower.[32] Under this Court's equitable power to disregard defects in the execution of the Mortgage in order to enforce an equitable mortgage, I find that the Mortgage is enforceable as an equitable lien. The evidence presented shows that Meris and Cove MD intended to create a mortgage lien on the property. The Mortgage designated Meris and Cove MD as the borrower at the inception of the Mortgage document, although another entity, Cove DE, was listed as the signatory under the Mortgage. Daniels executed the document and he was the sole member for all entities. And, the loan documents ...


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