Court of Appeals of Illinois, First District, Third Division
EDWARD J. JOYCE, Not Individually but, Derivatively on Behalf of Neighborhood Rejuvenation Partners, L.P., Plaintiff-Appellant,
FIDELITY REAL ESTATE GROWTH FUND II, L.P., and NEIGHBORHOOD REJUVENATION PARTNERS, L.P., Defendants-Appellees.
Appeal from the Circuit Court of Cook County No. 10 CH 05321, Honorable Raymond W. Mitchell, Judge Presiding.
Presiding Justice Neville and Justice Sterba concurred in the judgment and opinion.
¶ 1 While the real estate tumble over the past several years may have doomed many real estate projects and investments, it also caused a mini-boom for lawsuits by disgruntled developers, owners, and investors. This is one of those cases. In 2005, a limited liability company, the owner and developer of a highly touted luxury condominium, borrowed $18 million in exchange for a second loan on the property and a pledge of 100% of its ownership interest. Four years later, the project agreed to a forbearance agreement to stave off foreclosure. But, almost immediately after the forbearance failed, plaintiff, Edward T. Joyce, on behalf of Neighborhood Rejuvenation Partners, L.P. (NRP), sued defendant Fidelity Real Estate Growth Fund II, L.P., claiming that Fidelity breached the forbearance agreement by filing a deed in lieu of foreclosure in the absence of a material default by NRP. Except, the trial court concluded NRP committed a material default, and entered an order granting Fidelity summary judgment. We affirm.
¶ 2 Background
¶ 3 The Columbian, LLC, a Delaware limited liability company, owned and developed a luxury condominium building at 1160 S. Michigan Avenue in Chicago's South Loop neighborhood. The Columbian was wholly owned by NRP, a Delaware limited partnership. The general partner of NRP, Allison Davis, managed the Columbian project. In September 2005, the Columbian obtained a $92 million loan from Corus Bank in exchange for a first mortgage lien on the Columbian property. The Columbian also executed a loan agreement with Fidelity Real Estate Growth Fund II, L.P., for $18 million in exchange for a second lien on the property and a pledge of a 100% ownership interest in the Columbian. Davis, individually and on behalf of Neighborhood Rejuvenation Partners, L.P., signed a guaranty and non-competition agreement with Fidelity.
¶ 4 In March 2009, the Columbian defaulted on both the Corus Bank loan and the Fidelity loan. The Corus Bank loan was fully paid off in May 2009. Fidelity wrote Columbian's managers and the loan's guarantors notifying them of the default, as well as reserving Fidelity's rights and remedies, and offering to negotiate a forbearance agreement. On March 10, 2009, the parties signed an interim letter agreement stating their mutual interest in negotiating a forbearance agreement. After four months of negotiations, on July 9, 2009, the Columbian, NRP, and Davis, individually and on behalf of the Columbian and NRP (collectively borrowers), entered into a forbearance agreement with Fidelity. Under the terms of the forbearance agreement, which stated Massachusetts law governed, the borrowers acknowledged that existing defaults had occurred and were continuing, and that they had no disputes, defenses, or counterclaims with respect to the defaults. The borrowers also acknowledged Fidelity had the right to immediately enforce its security interest in the property and any other collateral.
¶ 5 To induce Fidelity to forgo exercising its rights and remedies, the borrowers agreed to use their best efforts to repay the loan in full by selling any unsold condominium units before the expiration of the forbearance period on September 30, 2012. To ensure the borrowers would make progress in selling condominium units to repay the loan, the borrowers had to achieve "aggregate sales goals" every three months, as set forth in schedule II of the forbearance agreement. The aggregate sales goal for December 31, 2009, was $5 million. Schedule II stated that "the sales goals are measured by the gross sales price of Units."
¶ 6 The forbearance agreement provided that the borrowers would be in default if they "fail[ed] to achieve any of the Aggregate Sales Goals as and when specified in Schedule II, " if "such failure *** continue[d] for thirty (30) days after the time specified for the applicable Aggregate Sales Goal." The agreement further provided that, "Upon the occurrence of any Forbearance Default, Lender may by notice to Borrower, immediately terminate the Forbearance Period and/or declare all of the Obligations immediately due and payable. In the event that all outstanding Obligations shall not be paid in full promptly upon the expiration or termination of the Forbearance Period, Lender shall be entitled to exercise all of its rights and remedies hereunder, under the other Forbearance Documents, under the Loan Documents or otherwise available to Lender at law and equity, including, without limitation, the right to enforce its liens on, and security interests to, the Collateral."
¶ 7 The borrowers agreed to deliver into escrow a "deed in lieu of foreclosure" and related documents necessary to transfer unsold units to Fidelity, which would be released from escrow if any further event of default occurred. The borrowers further agreed "not to interfere with the exercise of any right or remedy by Lender under [the Forbearance] Agreement or the Loan Documents after the occurrence of a Forbearance Default." In particular, the borrowers agreed "not to seek to enjoin, hinder, delay or impair Lender's exercise of any such rights or remedies."
¶ 8 On January 4, 2010, less than six months after the parties entered into the forbearance agreement, Fidelity sent a letter to the borrowers notifying them of several defaults, including the failure to achieve the aggregate sales goal of $5 million by December 31, 2009. (Fidelity also claimed the borrowers were in default for failing to prepare and submit for approval an operating budget for 2010 and failing to timely deliver quarterly financial statements for the quarter ending September 30, 2009. Neither of those alleged defaults is raised in this appeal.) The letter included a chart summarizing the closed sales for 2009 and showing that nine units had been sold for a "total purchase price" of $4, 497, 000, a shortfall of $503, 000. Fidelity informed the borrowers they had 30 days to cure the default, as permitted by the forbearance agreement.
¶ 9 During the cure period, Fidelity corrected some errors in its $503, 000 shortfall calculation. Specifically, Fidelity reduced the amount by $415, 000 to reflect the January 19, 2010, closing on a condominium unit and a parking space, and corrected the purchase price on two other units that had been sold for a higher amount than was reflected on Fidelity's summary chart. After those corrections were made, the borrowers were still $75, 500 short of the $5 million aggregate sales goal. Fidelity sent two letters to the borrowers, dated February 1, and February 2, 2010, requesting the borrowers "provide any corrected information with respect to the Borrower's achievement of the Aggregate Sales Goals." The borrowers provided no additional corrections to Fidelity's shortfall calculation. On February 3, in response to the borrowers' uncured default, Fidelity filed a deed in lieu of foreclosure conveying the unsold Columbian condominium units to a subsidiary of Fidelity.
¶ 10 Two days later, Edward T. Joyce, a limited partner in NRP, filed a derivative complaint on NRP's behalf, claiming Fidelity breached its duty of good faith and fair dealing regarding the loan and forbearance agreements and seeking a declaration that Fidelity's notices of default under the agreements were improper and invalid. Fidelity filed a motion to dismiss under section 2-619.1 of the Illinois Code of Civil Procedure (Code) (735 ILCS 5/2-619.1 (West 2008)). On July 13, 2010, the trial court granted the motion to dismiss with leave to file an amended complaint.
¶ 11 Joyce filed an amended derivative complaint on August 4, 2010. The amended derivative complaint sought to recover damages caused by Fidelity's breaches of the forbearance agreement (count I), the loan agreement (count II), and the implied covenants of good faith in both agreements. In count I, Joyce claimed, for the first time, that the borrowers had cured any purported shortfall in the $5 million aggregate sales requirement due to a January 6, 2009, transaction involving the exchange of parking spaces by an existing condominium owner. The Columbian had originally sold parking units 618 and 619 in October 2007, in conjunction with the purchase of condominium unit 3901. The unit owners paid $70, 000 for the two parking spaces. In January 2009, the owners exchanged parking spaces 618 and 619 for parking spaces 303 and 304. At the closing of the parking space exchange, the owners received a debit of $70, 000, reflecting the original price for spaces 618 and 619, and paid $25, 000 for the higher priced parking spaces 303 and 304. In August 2009, the Columbian resold parking spaces 618 and 619 to the owners of condominium units 2702 and 2902 for $40, 000 each. Fidelity applied an $80, 000 credit toward the borrowers' aggregate sales goal. Joyce argued, however, that the borrowers should also be ...