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Wells Fargo Bank, N.A., As Trustee For the Certificateholders of Commercial Mortgage v. Lasalle Bank National Association

June 20, 2011

WELLS FARGO BANK, N.A., AS TRUSTEE FOR THE CERTIFICATEHOLDERS OF COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2006-MF2 AND 2006-MF3, ACTING BY AND THROUGH CROWN NORTHCORP, INC., AS SPECIAL SERVICER,
PLAINTIFF,
v.
LASALLE BANK NATIONAL ASSOCIATION, DEFENDANT.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Plaintiff Wells Fargo Bank, N.A. ("Wells Fargo"), as Trustee for the certificateholders of certain mortgage-backed securities, brought suit against Defendant LaSalle Bank National Association ("LaSalle"), for breaching warranties associated with the sale of eight loans. Wells Fargo seeks compensatory damages and specific performance. Each count of the eight-count Complaint alleges various breaches of warranty associated with a particular loan. LaSalle moves to dismiss in entirety Counts 1, 2, 5, 7, and 8, and to dismiss in part Counts 3, 4, and 6 for failing to state a proper claim under Rule 12(b)(6). In the alternative, LaSalle moves under Rule 12(e) for the Court to order Wells Fargo to "make a more definite statement" of its claims. For the following reasons, the Court grants in part and denies in part LaSalle's Motion to Dismiss. The Court also denies LaSalle's Motion for Wells Fargo to provide a more definite statement.

BACKGROUND

At this initial stage, the Court takes the allegations asserted in the Complaint as true. See Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995).

I. Securitization

LaSalle was the originator for eight commercial real estate loans. (Compl. ¶ 5.) LaSalle provided funding to owners of multi-family residential buildings, and a note signed by each borrower and payable to LaSalle accompanied each transaction. (Id. ¶¶ 21, 29, 38, 52, 60, 66, 74, 82.) The notes were each secured by a multifamily mortgage, assignment of rent, and a security agreement. (Id. ¶¶ 22, 30, 39, 53, 61, 67, 75, 83.)

LaSalle Commercial Mortgage Securities, Inc. ("LaSalle Commercial"), an entity affiliated with LaSalle, bought these loans from LaSalle under the Mortgage Loan Purchase Agreement ("MLPA"). (Id. ¶ 5.) The MLPA provided LaSalle Commercial with numerous warranties covering the quality of the loans. (Id. ¶ 6.) LaSalle Commercial then pooled these loans into a security interest and, as part of the securitization, moved the loans into two trusts, the MF2 and MF3. (Id. ¶¶ 1, 2.). Both the MF2 and MF3 trusts consisted of more than $400 million in commercial real estate mortgage loans. The legally operative document that created the MF2 and MF3 trusts was the Pooling and Servicing Agreement ("PSA") between LaSalle Commercial and Wells Fargo. (Id. ¶¶ 1-3.) Through the PSA LaSalle Commercial sold Wells Fargo its interests in the loans and also assigned to Wells Fargo its warranties covering the eight loans; that is, via the PSA LaSalle Commercial passed along some, but not all, of its rights under the MLPA to Wells Fargo. (Id. ¶ 5.)

The MF2 trust was created as a result of two transactions. (Id. ¶ 8.) LaSalle Commercial bought the loans from LaSalle through the MF2 MLPA, and as part of the securitization process LaSalle Commercial then sold the loans to Wells Fargo pursuant to the MF2 PSA, both of which were dated March 30, 2006. (Id.) The arrangement was the same for the MF3 trust but occurred on a different date, June 29, 2006: the MF3 MLPA governed the sale from LaSalle to LaSalle Commercial and the MF3 PSA controlled LaSalle Commercial's sale later that same day to Wells Fargo.*fn1 Out of the eight loans at issue, two comprised the MF2 trust and the other six were included in the MF3 trust. (Id. ¶¶ 8, 9.)

The MF2 and MF3 trusts are considered to be a Real Estate Mortgage Investment Conduit ("REMIC") under the Internal Revenue Code. (Id. ¶ 3.) A REMIC trust is a pool of mortgages that sells ownership interests to investors, who receive certificates representing their fractional interest. (Id.) These certificateholders depend on loan originators, sellers, and servicers to make accurate representations and warranties as to the character of the loans that comprise the total mortgage pool. (Id. ¶ 4.)

The eight loans were packaged into the pool of mortgages despite being defective under numerous warranty clauses. (Id. ¶ 10.) The securitization and transfer of these loans to Wells Fargo via the PSA resulted in a devaluation of the mortgaged property and the value of the loans, which harmed the certificateholders. (Id. ¶¶ 27, 36, 50, 58, 64, 72, 80, 93.) As a result, Wells Fargo seeks to invoke PSA § 2.03(b) and MLPA § 6(e), which require LaSalle to repurchase the loans.

II. Warranties

Under the MLPA, as the seller of the mortgage loans, LaSalle made representations and warranties as to certain qualities of the loans. (Id. ¶ 19.) These are the relevant provisions*fn2

! MLPA Section 6(a)(viii) -- Misrepresentations: "[At the Closing Date, the Seller] has no actual knowledge that any statement, report, officer's certificate or otherdocument prepared and furnished or to be furnished by the Seller in connection with the transactions contemplated hereby (including, without limitation, any financial cash flow models and underwriting file abstracts furnished by the Seller) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under with they were made, not misleading." ! MLPA Section 6(d) -- Notice of Breach/Defect: "[T]he Seller and the Purchaser shall be given notice of any Breach or Defect that materially and adversely affects the value of a Mortgage Loan, the value of the related Mortgaged Property or any interest of any Certificateholder in the Mortgage Loan or the related Mortgaged Property." ! MLPA Section 6(g) -- Notice of Warranty Breach: "Each party hereby agrees to promptly notify the other party of any Breach of a representation or warranty contained in this Section 6." ! Warranty 6 -- Mortgaged Property Unencumbered: "[At the Closing Date] [n]o Mortgaged Property secures any mortgage loan not represented on the Mortgage Loan Schedule; no Mortgage Loan is cross-collateralized or cross-defaulted with any other mortgage loan other than one or more Mortgage Loans as shown on the Mortgage Loan Schedule; no Mortgage Loan is secured by property which secures another mortgage loan other than one or more Mortgage Loans as shown on the Mortgage Loan Schedule." ! Warranty 10(a) -- Enforceable: "The Mortgage Loan documents for each Mortgage Loan contain enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the practical realization against the Mortgaged Property of the principal benefits of the security intended to be provided thereby, including realization by judicial or non-judicial foreclosure . . . ." ! Warranty 10(b) -- Enforceable: "[S]uch Mortgage Loan documents taken as a whole are enforceable to the extent necessary and customary for the practical realization of the principal rights and benefits afforded thereby." ! Warranty 13 -- No Material Default, Breach: "[At the Closing Date] [t]here exists no material default, breach, violation or event of acceleration . . . under the documents evidencing or securing the Mortgage Loan, in any such case to the extent the same materially and adversely affects the value of the Mortgage Loan and the related Mortgage Property . . . ." ! Warranty 16 -- Restrictive Covenants/Zoning: "To the Seller's knowledge . . . as of the date of origination of the Mortgage Loan, based on inquiry customary in the industry, the related Mortgaged Property was, and to the Seller's actual knowledge . . . as of the Closing Date, the related Mortgaged Property is, in all material respects, in compliance with, and is used and occupied in accordance with, all restrictive covenants of record . . . and applicable zoning laws and all inspections, licenses, permits and certificates of occupancy required by law, ordinance or regulations to be made or issued . . . have been obtained and are in full force and effect, except to the extent the failure to obtain or maintain such inspections, licenses, permits or certificates of occupancy does not materially impair or materially and adversely affect the use and/or operations of the Mortgaged Property . . . ." ! Warranty 18 -- Material Improvements: "To the Seller's knowledge based on surveys or the Title Insurance Policy, (i) none of the material improvements that were included for the purpose of determining the appraised value of the related Mortgaged Property at the time of the origination of such Mortgage Loan lies outside the boundaries and building restriction lines of such Mortgaged Property, or encroach over any easements, except to the extent they are legally nonconforming . . . ." ! Warranty 19(a) -- Good Repair: "[T]o Seller's knowledge as of the Closing Date, the related Mortgaged Property is either in good repair, free and clear of any damage that would materially adversely affect the value . . . or the use and operation of the Mortgaged Property as it was being used or operated as of the origination date. Since the origination date, to the Seller's knowledge, such Mortgaged Property has not been damaged by . . . physical condition . . .which damage has not been fully repaired or fully insured, or for which escrows in an amount consistent with the standard utilized by the Seller with respect to loans it holds for its own account have not been established." ! Warranty 23 -- Industry Standards: "The origination, servicing and collection practices used by the Seller . . . with respect to such Mortgage Loan have been in all material respects legal and have met customary industry standards." ! Warranty 35 -- Appraisal: "An appraisal of the related Mortgaged Property was conducted in connection with the origination of such Mortgage Loan, and such appraisal satisfied the guidelines in Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ['FIRREA'], as in effect on the date such Mortgage Loan was originated."

III. Warranty Breaches

Each of the eight loans at issue is a separate count and within each count Wells Fargo alleges that LaSalle breached multiple warranties. The Complaint covers loans to the following borrowers: Count I -- Kathryn Goodman ("Goodman Loan"); Count II -- Adam Cress ("Cress Loan"); Count III -- Harry and Elise Glavin ("Glavin Loan"); Count IV -- Victor, Vanessa, and Guillermo Gutierrez ("Gutierrez Loan"); Count V -- Chowdhury Place II, LLC ("Chowdhury Loan"); Count VI -- 5GX, LLC ("5GX Loan"); Count VII -- Bret Hunter ("Hunter Loan"); and Count VIII -- Windwood Apartments SG, LLC ("Windwood Loan").

While most of the eight loans breached different combinations of the applicable warranties, the two warranties common to all the claims are Warranty 23 (Industry Standards) and Warranty 35 (Appraisal). Wells Fargo pleads both of these breach of warranty allegations in an identical manner for all of the loans, so the Court will summarize these allegations at the outset to avoid needless repetition. For all eight of the loans, Wells Fargo alleges that LaSalle breached Warranty 23 (Industry Standards) as a result of "origination, servicing, and collection practices" that did not "meet customary industry standards." (Id. ¶¶ 25, 34, 48, 56, 62, 70, 78, 91.) Similarly, for the claim that LaSalle breached Warranty 35 (Appraisal), Wells Fargo alleges that the appraisal reports for each of the mortgaged properties were not ordered in accordance with FIRREA procedures, contained material errors, and, in general, did not conform to FIRREA; these defects collectively resulted in a "misleading opinion of value." (Id. ¶¶ 26, 35, 49, 57, 63, 71, 79, 92.)

Wells Fargo also alleges, for all of the counts, that LaSalle breached its obligations under the PSA Section 2.03(b) and MLPA Section 6(e) for failing to repurchase the loans within ninety days of receiving notice of the alleged warranty breaches.(Id. ¶¶ 98, 104, 110, 116, 122, 128, 134, 140.)

A. Goodman Loan

LaSalle loaned Kathryn Goodman $2,500,000 and the mortgaged property is a 56-unit apartment complex in Clearwater, Florida. (Id. ¶¶ 20, 21.) Wells Fargo alleges that the Goodman Loan violated four provisions or warranties under the MLPA.

First, Wells Fargo claims that LaSalle breached MLPA Section 6(a)(viii) because the Loan Underwriting Submission, dated November 28, 2005, "contains misrepresentations and omissions." (Id. ¶ 23.) Second, LaSalle breached Warranty 6 (Mortgage Property Unencumbered) because on the Closing Date for the Goodman Loan, the mortgaged property was "encumbered by a second lien." (Id. ¶ 24.) Wells Fargo also alleged breach of Warranties 23 (Industry Standards) and 35 (Appraisal). (Id. ¶ 25, 26.)

B. Cress Loan

LaSalle loaned Adam Cress $2,630,000 and obtained as collateral a 48-unit apartment complex located in Blaine, Minnesota. (Id. ¶¶ 28, 29.) LaSalle breached five warranties with respect to this loan: (1) Warranty 13 (No Material Default/Breach) because the borrower had failed to make necessary repairs as required by the City of Blaine and therefore the loan was in default; (2) Warranty 16 (Restrictive Covenants/Zoning) because the repairs were not finished and on the Closing Date the mortgaged property did not have a valid Rental License; (3) Warranty 19(a) (Good Repair) since the mortgaged property was not in "good repair"; (4) Warranty 23 (Industry Standards); and Warranty 35 (Appraisal). (Id. ¶¶ 31-35.)

C. Glavin Loan

Harry and Elise (now deceased) Glavin borrowed $1,252,000 from LaSalle. (Id. ¶ 37.) The mortgaged property included ten two-story residential buildings that contained a total of 58 rental units in Garland, Texas. (Id. ¶ 38.) The City of Garland inspected the property in 2006 and 2007, found numerous code violations, and required the borrowers to make certain repairs to the property. (Id. ¶ 42.) Thus, there was a Repair Agreement in this loan, which set aside $93,750 in escrow to fund these repairs. (Id. ¶ 41.) These repairs, however, were never made, and LaSalle did not undertake efforts to ensure their successful completion. (Id.) On August 28, 2007, the City of Garland closed the mortgaged property because of these defects. (Id.)

LaSalle breached five warranty provisions related to the Glavin Loan. Wells Fargo alleges a breach of Warranty 13 (No Material Default, Breach) because the loan was in default on the Closing Date as a result of the borrowers not implementing repairs correcting its code violations. (Id. ¶ 43.) Similarly, LaSalle was aware of these defects in the property but "failed to inquire" whether the borrowers had taken action to fix them, in breach of Warranty 16 (Restrictive Covenant/Zoning). (Id. ¶ 44.) Along similar lines, LaSalle's knowledge that the property was in disrepair, along with the release of escrow funds without assurance that the required repairs were complete, constituted a breach of Warranty 19(a) (Good Repair). (Id. ¶¶ 46, 47.) Finally, LaSalle breached Warranty 23 (Industry Standards) and Warranty 35 (Appraisal). (Id. ¶¶ 48, 49.)

D. Gutierrez Loan

LaSalle loaned Victor, Vanessa, and Guillermo Gutierrez $1,720,000. (Id. ¶ 52.) The mortgaged property was an 86-unit apartment in Tulsa, Oklahoma. (Id. ¶ 51.) Wells Fargo alleges that LaSalle breached Warranty 10(a) and (b) (Enforceable). Specifically, Warranty 10(a) requires that the mortgages contain provisions protecting "the practical realization against the Mortgaged Property of the principal benefits of the security intended to be provided thereby, including realization by judicial or non-judicial foreclosure . . . ." Because this loan did not contain sufficient "power-of-sale" language to allow for a non-judicial foreclosure, it breached this warranty. (Id. ¶ 54.) LaSalle also breached Warranty 13 (No Material Default, Breach) because the Gutierrez Loan was in default at the closing date because, contrary to the language in the mortgage, the borrowers transferred ownership of the mortgaged property to 3V Apartments, LLC by quit claim deed. (Id. ¶ 55.) Finally, LaSalle breached Warranty 23 (Industry Standards) and Warranty 35 (Appraisal). (Id. ¶¶ 56, 57.)

E. Chowdhury Loan

Chowdhury Place II, LLC was the borrower on the $424,000 Chowdhury Loan. (Id. ¶¶ 59, 60.) The mortgaged property was a three-story building with ten residential units in Hartford, Connecticut. (Id. ¶ 59.) LaSalle breached Warranties 23 (Industry Standards) and 35 (Appraisal). (Id. ¶¶62, 63.)

F. 5GX Loan

5GX, LLC is the borrower on the 5GX Loan in the amount of $1,200,000 and the mortgaged property is a one-story 48-unit apartment complex in Geneva, Ohio. (Id. ¶¶ 65, 66.) LaSalle breached Warranty 6 (Mortgaged Property Unencumbered) because, on the Closing Date, the mortgaged property was encumbered by two liens executed on February 21, 2006 in the amount of $150,000 each. (Id. ¶ 68.) Moreover, LaSalle breached Warranty 13 (No Material Default, Breach) because the loan was in default on the Closing Date. (Id. ¶ 69.) A provision of the 5GX Mortgage states that "Without Lendor's prior written permission, Borrower shall not allow any lien inferior to this Instrument to be perfected against the Property." (Id.) On the Closing Date the 5GX Loan was in default because 5GX had two additional liens to be perfected against the mortgaged property without LaSalle's written permission. (Id.) LaSalle also breached Warranties 23 (Industry Standards) and 35 (Appraisal). (Id. ¶¶ 70, 71.)

G. Hunter Loan

Bret Hunter is the borrower on the Hunter Loan of $480,000. (Id. ¶¶ 73, 74.) The mortgaged property is a 28-unit multifamily complex in Muskogee, Oklahoma. (Id. ¶ 73.) Because this loan did not contain sufficient "power-of-sale" language to allow for a non-judicial foreclosure, it breached Warranty 10(a) and (b). (Id. ¶ 76.) LaSalle breached Warranty 18 (Material Improvements) "because exceptions to the LandAmerica Lawyers Title Policy dated May 12, 2006 include various encroachments of fencing [and] parking." (Id. ¶ 77.) A provision in the policy also states "Encroachment of two 2-story apartment buildings into 25 ...


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