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CWCapital Asset Management LLC v. Chicago Properties

September 11, 2009

CWCAPITAL ASSET MANAGEMENT LLC SOLELY IN ITS CAPACITY AS SPECIAL SERVICER FOR LASALLE BANK NATIONAL ASSOCIATION AS TRUSTEE FOR THE REGISTERED JUDGE JAMES B. ZAGEL HOLDERS OF LB/UBS COMMERCIAL MORTGAGE TRUST 2001-C2, COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2001-C2, PLAINTIFF,
v.
CHICAGO PROPERTIES, LLC, JOE MCCRAY, DELORES MCCRAY, AND BLOCKBUSTER, INC., DEFENDANTS.



The opinion of the court was delivered by: James B. Zagel United States District Judge

MEMORANDUM OPINION AND ORDER

I. OVERVIEW

Plaintiff CWCapital, a mortgage servicer, filed a complaint against Defendant mortgagor Chicago Properties, its owners Joe and Delores McCray ("the McCrays") and Defendant tenant Blockbuster alleging the following counts: (1) breach of note by willful misconduct against Chicago Properties; (2) breach of note by acceptance of rent more than one month in advance against Chicago Properties; (3) breach of guaranty by willful misconduct against the McCrays; (4) breach of guaranty by acceptance of rent more than one month in advance against the McCrays; (5) breach of the Subordination, Non-disturbance and Attornment Agreement ("SNDA") by lease modification without consent against Blockbuster; and (6) breach of the SNDA by payment of rent more than one month in advance against Blockbuster.

Defendant Blockbuster filed a counterclaim against Plaintiff alleging breach of the SNDA, and a cross claim for indemnification under the lease against Chicago Properties and the McCrays. Defendants Chicago Properties and the McCrays filed a counterclaim against CWCapital alleging breach of note, tortious interference and fraud.

Over the course of two days in January 2009, I presided over a bench trial, and now I must determine whether the Defendants and Plaintiff are liable for breach, whether Plaintiff is entitled to fees regardless of whether it prevails, whether Blockbuster is entitled to fees if it prevails and whether Plaintiff has standing to bring its claim.

II. FINDINGS OF FACT

Plaintiff in this case, CWCapital, is a special servicer for LaSalle Bank National Association, Trustee for the Registered Holders of LB/UBS Commercial Mortgage Trust Commercial Mortgage Pass-Through Certificates, Series 2001-C2 ("the Trust"). The Trust is the current owner and holder of a mortgage note ("Note") dated January 3, 2001, in the amount of $618,000 and executed by Insite Chicago (Addison/Milwaukee), LLC ("Insite"). As security for the Note, Insite executed a mortgage granting a first priority security interest in property located at 3592 North Milwaukee Avenue, Chicago, Illinois. Beginning in 1999, Insite leased this property to Blockbuster, Inc. As part of the lease, Blockbuster executed an SNDA between itself, Insite, and the mortgage lender. The SNDA requires Blockbuster to pay rent directly to the mortgage holder upon written demand, prohibits payment of rent more than one month in advance, and states that the mortgagee is not "bound by any amendment or modification of the Lease which reduces the term of the Lease or Tenant's monetary obligations thereunder hereafter made without Lender's prior written consent."

In September of 2002, Chicago Properties assumed all of Insite's obligations under the loan. By July of 2006, before its lease ended, Blockbuster had vacated the property. On July 18, 2006, Bryan Stevenson, assistant general counsel for Blockbuster, called Michael McGregor, of CWCapital to notify him about a proposed settlement agreement between Blockbuster and Chicago Properties. McGregor told Stevenson that the terms of any such settlement would need to be submitted in writing. In response, Blockbuster sent a letter containing the proposed settlement terms to James Hilliard, counsel for Chicago Properties, and Hilliard immediately faxed the letter to McGregor. The letter confirmed that Blockbuster had agreed to pay the McCrays $161,233.13 in exchange for a full and final release of claims, the dismissal of a pending suit in Cook County, and signing of a lease termination agreement. Nowhere did the letter state that Blockbuster would provide a substitute tenant for the vacant space.

Once McGregor learned of the terms, he informed McCray by phone that the Trust would not consent to the settlement. By July 24, Hilliard acknowledged the Trust's objection in a letter sent to the Trust. On August 1, McGregor faxed a letter to Hilliard explaining that CWCapital would not consent to the settlement because it would decrease "the collateral value of the loan." That same day, the Trust received an email from McCray acknowledging receipt of the letter, and explaining that they were "going ahead" with the proposed settlement. On August 7, 2006, Blockbuster wired $161,233.13 to the McCrays as part of the settlement.

On August 9, 2006, Blockbuster received a letter from CWCapital stating its opposition to the settlement, and demanding that Blockbuster make all future payments under the Lease directly to the Trust, as required by the SNDA. The Trust also sent a letter to Chicago Properties demanding the immediate turnover of any amount paid by Blockbuster in excess of its usual monthly rent and asserting that failure to do so constituted a default under the Mortgage. On October 4, 2006, the Trust declared an event of default. Chicago Properties has continued to make its monthly mortgage payments.

In 2006, the gross annual rent due under the Lease was $122,760, resulting in a monthly obligation of $10,230. As of August 7, 2006, the Lease had 46 remaining monthly payments and a total remaining obligation of $470,580. Plaintiff claims that it is entitled to this sum, plus $383,500*fn1 from Chicago Properties, totaling $854,080.40. Plaintiff has elected it remedies pursuant to a breach of contract theory of damages, and presented no evidence that the collateral at issue was impaired.

In response to the complaint, Defendant Blockbuster filed a counterclaim against Plaintiff alleging breach of the SNDA by joining Blockbuster in this suit, and a cross claim for indemnification under the lease against Chicago Properties and the McCrays. Defendants Chicago Properties and the McCrays filed a counterclaim against CWCapital alleging breach of note, tortious interference and fraud.

III. CONCLUSIONS OF LAW

A. Blockbuster's Liability

CWCapital maintains that Blockbuster breached the SNDA by modifying the lease without CWCapital's consent and paying rent more than one month in advance. However, Blockbuster cannot be held liable under the SNDA. Although the SNDA contains a provision that states that CWCapital is not bound by the settlement agreement, the contract does not vest Plaintiff with substantive rights to enforce the lease between Blockbuster and the McCrays in the context of this case. Indeed, the SNDA specifically provides for limited circumstances when CWCapital can enforce the lease and can pursue damages against Blockbuster. Pursuant to the SNDA, the only occasions in which CWCapital can step into the McCrays' shoes is: (a) if CWCapital becomes owner of the property; (b) if the property is sold by reason of foreclosure and CWCapital then becomes the owner; or (c) if the property is transferred to CWCapital by deed in lieu of foreclosure. It is then, but only then, that CWCapital obtains the right to collect rent or otherwise enforce the lease against Blockbuster. From the time the lease termination agreement went into effect through the time of trial, the McCrays have continued to make their monthly mortgage payment, and CWCapital has neither become owner nor transferee. Under the contract, CWCapital cannot enforce the lease against Blockbuster at this time.

It should be noted that the Mortgage requires the assignment of all Mortgagor's rights and interests in all current and future leases and rents. Upon an Event of Default, license granted to Mortgagor to manage the mortgaged property is revoked, and Mortgagee is immediately entitled to possession of all rents, regardless of whether the Mortgagee enters upon or takes control of the mortgaged property. Under the SNDA, the lease is subordinate to the Mortgage, and the Mortgagee is not "bound by any amendment or modification of the Lease which reduces the term of the Lease or Tenant's monetary obligations thereunder [ ] made without Lender's prior written consent." This however, does not affect CWCapital's substantive rights under the SNDA. Even were Mortgagee bringing suit pursuant to the Mortgage as an assignee of Mortgagor's rights, there is nothing left for the Trust to step in and enforce. The lease was effectively terminated with Blockbuster's payment, leaving Chicago Properties with no enforceable rights. The Mortgagee may not be bound by the lease termination agreement, but Chicago Properties is, and the Mortgagee as assignee of Mortgagor's rights can only enforce the rights of the Mortgagor.

Furthermore, Blockbuster did not violate CWCapital's August 7 directive to pay all future rent to it. First, the wire transfer was made two days prior to receiving the written instruction and therefore was not made in the face of the instruction. Second, the payment was in settlement of litigation -- a lease termination payment and not a rent payment, as discussed infra. After the settlement, no more rent payments were made. For these reasons, Blockbuster is not liable to CWCapital under the SNDA.

B. Chicago Properties' Liability

CWCapital maintains that Chicago Property and the McCrays breached the Note and Guaranty by committing willful misconduct where they collected rent more than one month in advance, terminated the lease without prior written consent, and failed to turn over the money paid to them by Blockbuster. CWCapital also claims that Chicago Properties and the McCrays breached the Note and Guaranty by accepting rent made ...


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