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U.S. Bank National Association, A National Banking Association v. Builders Bank

March 25, 2011

U.S. BANK NATIONAL ASSOCIATION, A NATIONAL BANKING ASSOCIATION, PLAINTIFF,
v.
BUILDERS BANK, AN ILLINOIS BANKING CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Judge Feinerman

MEMORANDUM OPINION AND ORDER

Plaintiff U.S. Bank National Association filed this diversity action against Builders Bank, alleging breach of contract. After the court denied Builders Bank's motion to dismiss, see 2009 WL 2985952 (Sept. 16, 2009) (Dow, J.), the parties conducted discovery, and now have filed cross-motions for summary judgment. Docs. 51, 57. U.S. Bank's motion is granted in part (as to breach) and denied in part (as to damages), and Builders Bank's motion is denied.

Background

The following facts are undisputed, either by the parties' agreement or because a party's objection to the fact failed to comply with Local Rule 56.1(b)(3). In 2006, U.S. Bank and Builders Bank jointly loaned $5,190,000 to non-party Gaviota Partners II, LLC. The loan is guaranteed by, among others, non-parties Robert Abassi and Scott Ayres. The banks' relationship with respect to the loan is governed by a Participation Agreement, which obligates each bank to fund fifty percent of the loan and designates Builders Bank as the "lead lender," according it certain rights and obligations regarding the loan's administration. The Participation Agreement incorporates the loan's terms, which at its inception called for a maturity date of September 16, 2007, and a minimum interest rate of 8.25 percent.

Section 4.2 of the Participation Agreement requires Builders Bank to obtain U.S. Bank's written consent prior to changing the loan's interest rate or maturity date:

Notwithstanding Section 4.1, Lead Lender [Builders Bank] shall not take the following actions (each a "Major Decision") with respect to the Loan without the prior written consent of Participant [U.S. Bank].

Amend, modify or waive any provision of the Loan Documents so as to (a) reduce or forgive the amount of any interest or principal payable required under the Loan Documents; (b) change or modify the interest rate under the Loan Documents; (c) extend the maturity date of the Loan; (d) postpone or defer any date for payment of principal or interest under any Loan Document; or (e) increase the principal amount of the loan except for (x) Advances to be made after the date hereof pursuant to the Loan, and (y) any Protective Advances.

Participation Agreement (Doc. 1-2) at 6 (emphasis added). Pursuant to Section 4.2, Builders Bank twice asked for and received U.S. Bank's consent to extend the maturity date. With those extensions, the new maturity date became March 16, 2008.

Gaviota failed to repay the loan by March 16, 2008, and shortly thereafter Builders Bank sent a letter formally notifying Gaviota and its guarantors of the default. On May 13, 2008, U.S. Bank informed Builders Bank of its view that foreclosure proceedings should be commenced. Builders Bank met with Abassi, one of the guarantors, on May 22, 2008. On May 29, 2008, a Builders Bank employee sent a U.S. Bank employee an email that read in part as follows:

As we discussed, [Builders Bank] had a meeting at the end of last week with Robert Abassi, one of the Sponsors on the Gaviota . loan. At that meeting, a plan was agreed upon which would require Mr. Abassi to start making payments to the Bank, beginning June 15th of 2008. The first payment is in the amount of $250,000. Per the agreement with the Borrower, there are four (4) payments due for the balance of the year which approximate $1.1 mm (an additional $250,000 due July 15th, $310,440 due September 15th and another payment estimated at $310,440 due December 15th - payment amount required will be sufficient to maintain the LTV [loan to value] at 80%).

Provided that the first payment in the amount of $250,000 is made to [Builders Bank], it is [Builders Bank's] intention to buy back the participation with US Bank. In the event that the payment is not made, [Builders Bank] will begin foreclosure proceedings, as we discussed with you earlier.

Builders Bank received the initial payment of $250,000 on June 15, 2008. Contrary to the "intention" expressed in the May 29 email, however, Builders Bank did not "buy back" U.S. Bank's participation in the loan. Instead, without obtaining U.S. Bank's written consent (prior or otherwise), Builders Bank entered into another extension agreement with Gaviota, dated July 8, 2008, that extended the loan's maturity date to August 5, 2011, and reduced the minimum interest rate to six percent.

The parties agree that Builders Bank entered into the July 2008 extension agreement in an effort to avoid the immediate and certain loss associated with a foreclosure and to preserve the possibility that Gaviota would repay the loan in full. In July 2008, U.S. Bank's participation in the loan amounted to $2,345,000. Since then, Gaviota has made payments on the loan, reducing U.S. Bank's participation to $2,008,590.58 as of September 10, 2010.

U.S. Bank filed this action on October 3, 2008. The complaint alleges that Builders Bank breached Section 4.2 of the Participation Agreement by extending the loan's maturity date and lowering the interest rate without U.S. Bank's consent. U.S. Bank asks the court to require Builders Bank to purchase U.S. Bank's participation in the loan, to pay a ...


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