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RTP LLC v. ORIX Real Estate Capital, Inc.

United States District Court, N.D. Illinois, Eastern Division

September 8, 2014

RTP LLC, a Michigan Limited Liability Company and INHERITANCE CAPITAL GROUP, LLC n/k/a REAL ESTATE OPPORTUNITY FUND I, LLC, a Michigan Limited Liability Company, Plaintiffs,
v.
ORIX REAL ESTATE CAPITAL, INC., Defendant.

MEMORANDUM OPINION

CHARLES P. KOCORAS, District Judge.

This matter comes before the Court on the cross-motions for summary judgment submitted by Plaintiffs' RTP LLC ("RTP") and Inheritance Capital Group LLC ("Inheritance"), d/b/a W&D Real Estate Opportunity Fund I, LLC ("W&D Real Estate Opportunity") ("collectively Plaintiffs") and Defendant ORIX Real Estate Capital, Inc., ("ORIX"), pursuant to Federal Rule of Civil Procedure 56. Plaintiffs have filed motions in limine and motions to strike. ORIX has also filed motions to strike. For the reasons set forth below, ORIX's motion for summary judgment is granted and the motion to strike is denied. Plaintiffs' motion for summary judgment is denied and their motions in limine and motions to strike are also denied.

BACKGROUND

The following facts are derived from the parties' respective statements and exhibits filed pursuant to Northern District of Illinois Rule 56.1 ("Local Rule 56.1"). The Court reviews each Local Rule 56.1 statement and disregards any argument, conclusion, or assertion unsupported by the evidence in the record.

This case involves a commercial real estate loan issued by ORIX to RTP. RTP and Inheritance are limited liability companies organized under the laws of Michigan. ORIX is a corporation organized under the laws of Delaware and authorized to do business in Illinois. On September 27, 2007 ("Closing Date"), ORIX and RTP executed a Loan Agreement in which RTP would borrow $41, 250, 000.00 ("Loan") for the purchase of a commercial property in Durham, North Carolina ("Property"). The Loan from ORIX to RTP was evidenced by a Purchase Money Note, Guaranty, Mortgage on the Real Property and Assignment of Rents (collectively "Loan Documents"). In conjunction with the loan closing, Inheritance executed a Guaranty in favor of ORIX, making Inheritance also liable for the Loan.

The Loan Documents laid out numerous contractual provisions that governed the ownership structure of the Plaintiffs. RTP was specifically formed to be a "Single Purpose Entity, " which requires that the business have no function other than to own zand operate the Property, which served as the collateral for the Loan. The Loan Agreement prohibited RTP from owning any assets, other than the Property, and from having any indebtedness other than the Loan. RTP did not have any employees and therefore it could not manage itself. Absent the ability to manage itself, additional layers of governing structure were required. The Operating Agreement of RTP dictated that it would be managed by a second limited liability company: ICG Ellis Road, LLC ("ICG Ellis Road").

Like RTP, ICG Ellis Road was formed as a "Single Purpose Entity." The ICG Ellis Road Operating Agreement specifies that its sole purpose is to "own an interest in RTP LLC and to serve as its manager." The ICG Ellis Road Operating Agreement also provided that the business affairs would be managed by two individuals, Robert Shumake ("Shumake") and Adrienne Lance Lucas ("Lucas"). The signatures of both Shumake and Lucas appear on the Note, the Loan Agreement and the Deed of Trust on behalf of ICG Ellis Road, acting as the managers of RTP.

ICG Ellis Road was not the only manager of RTP. RTP, through the authorization of ICG Ellis Road, entered into an additional management agreement with Redico. Redico was the asset manager of the Property and was given limited managerial duties. The Redico Management Agreement provided the specific services which Redico would provide in managing the Property. However, Redico did not have the ultimate control in making managerial decisions for RTP under the Redico Management Agreement. In some instances Redico had to seek approval from RTP to perform certain managerial functions, which required all requests for RTP's approval to be forwarded to ICG Ellis Road, who was the overarching manager of RTP.

The ownership structure of the corporate entities involved in the transaction were further delineated. As reflected in ICG Ellis Road's Operating Agreement, Inheritance owned 100% of ICG Ellis Road. The Loan Agreement provides in Article 5.1.5(b) that Inheritance, through its ownership and control of ICG Ellis Road, would manage the Property except to the extent that certain services were delegated to Redico. On the Closing Date, as indicated in the Inheritance Operating Agreement, Inheritance was managed by a separate entity, ICG Real Estate Advisors LLC ("ICG Real Estate Advisors"), which Shumake and Lucas also managed. The equity membership interest in Inheritance was owned by two pension funds: General Retirement System of the City of Detroit and the Police and Fire Retirement System of the City of Detroit ("PFRSCD") (collectively "Pension Funds"). Concisely, the ownership structure delineated in the Loan Agreement is as follows: (1) the Pension Funds owned Inheritance; (2) ICG Real Estate Advisors managed (through Shumake and Lucas) Inheritance; (3) Inheritance owned ICG Ellis Road; (4) ICG Ellis Road owned the majority interest in and was the manager (through Shumake and Lucas) of RTP; and (5) Redico managed the Property pursuant to the Redico Management Agreement, subject to the supervision of ICG Ellis Road. This highly structuralized system of ownership and management was reflected in a schematic diagram included in the Loan Agreement as Exhibit C.

The corporate structure established in the Loan Agreement was not limited to Exhibit C. The Loan Agreement required that none of the limited liability companies could amend their operating agreements without ORIX's prior written consent and none of the entities could file for bankruptcy protection without breaching the Loan Agreement. Additionally, the Loan Agreement dictated that the management of the Property, either directly or indirectly, could not be changed without ORIX's prior written consent. The prohibition against changing management also extended to the entities changing their names. The Loan Agreement mandated that each of these requirements must remain accurate until the loan was paid in full and any breach would be deemed an "Event of Default." If an Event of Default was deemed to have occurred, the Loan Agreement called for the exercise of a Cash Trap Event, which entitled ORIX to seize the rental payments provided by the tenant of the Property. When the loan was made, the Property was leased to Reichhold Inc. ("Reichhold"). The Loan Agreement defines a Cash Trap Event in pertinent part as "the occurrence of an Event of Default under Section 7.1(a) or any other Event of Default of a material non-monetary obligation of Borrower under the Loan Documents as determined by the Lender (ORIX)."

After the Loan Agreement was executed and the transaction was finalized, numerous changes occurred to the corporate structure established in the Loan Agreement, unbeknownst to ORIX. On September 2, 2010, the Secretary of State of North Carolina issued a Certificate of Revocation of Registration concerning RTP's ability to transact business in North Carolina. Unrelated to the North Carolina Secretary of State determination, on September 10, 2010, PFRSCD one of the two pension funds with an equity interest in Inheritance, filed a lawsuit in Michigan state court ("Michigan Lawsuit") against ICG Real Estate Advisors and Inheritance for breach of contract. The lawsuit was precipitated by Shumake, who managed the assets of Inheritance through ICG Real Estate Advisors. PFRSCD alleged that Shumake intended to transfer the assets of Inheritance into a real estate investment trust without their consent. On September 13, 2010, the Michigan state court entered a Temporary Restraining Order ("TRO") enjoining ICG Real Estate Advisors from transferring the Property. The following day on September 14, 2010, PFRSCD sent a written notice to ICG Real Estate Advisors advising that it was in material breach of the Inheritance Operating Agreement. The earlier TRO was replaced by a TRO Stipulation on September 23, 2010. On January 20, 2011, PFRSCD filed an amended complaint against ICG Real Estate Advisors and Shumake alleging that he had engaged in fraud during the course of his management of the Pension Funds. The initiation of the Michigan Lawsuit began more than eight months of litigation. During the pendency of the Michigan Lawsuit, Redico was unaware of the litigation involving ICG Ellis Road. Redico's agent Jackie Paul stated that Shumake and Lucas, while acting as the managers of ICG Ellis Road, were not responsive to Redico during this time. Redico first became aware of the Michigan Lawsuit on May 17, 2011.

In January and February 2011, the Pension Funds each passed resolutions removing ICG Real Estate Advisors as the manager of Inheritance and replacing it with W&D Real Estate Opportunity Fund I Manager, LLC ("W&D Real Estate"). With this change to W&D Real Estate, Shumake and Lucas were replaced with Paul Bernard ("Bernard") and W. Battle Williford ("Williford"). After the change was solidified in February 2011, the replacement was completed on May 9, 2011 when the Michigan court entered a final Enforcement Order.

In March 2011, W&D Real Estate executed an amendment to the Inheritance Operating Agreement in which the name of Inheritance was changed to W&D Real Estate Opportunity. As the corporate entities at the top of the corporate structure changed their name, ICG Ellis Road, the manager of RTP, followed suit. In June 2011, ICG Ellis Road changed its name to W&D Ellis Road, LLC ("W&D Ellis Road"). The name change was reflected in the ICG Ellis Road Operating Agreement, which also indicated that two new managers had replaced Shumake and Lucas in managing ICG Ellis Road: Bernard and Williford. Following its name change, ICG Real Estate Advisors declared bankruptcy in April 2012.

ORIX was unaware of any of the changes that had been made to the corporate entities delineated in the Loan Agreement until August 2012. On August 27, 2012, ORIX received an audit letter from a third party, Walker & Dunlop ("W&D") stating that ICG Ellis Road had been restructured and its name had been changed to W&D Ellis Road. Following the receipt of the audit letter, ORIX conducted its own investigation into the validity of the audit letter and thereafter deemed the structural corporate changes to be an Event of Default under the Loan Agreement. On September 10, 2012, ORIX sent notice to RTP that they had engaged in conduct which was construed to be in breach of their Loan Agreement and a Cash Trap Event would be declared. The September 10, 2012 breach notification erroneously stated that the Cash Trap Event was based on the anticipatory breach of the Loan Agreement, premised on Reichhold not renewing their lease in January 2013. A further letter was sent by ORIX on September 28, 2012, which corrected and clarified the previous notification with the circumstances that ORIX deemed to be the basis for the Events of Default. The following month, on October 18, 2012, ORIX enforced the Cash Trap Event breach provision and Reichhold's rental payments were secured by ORIX. A prolonged series of litigation ensued.

On December 17, 2012, Plaintiffs filed a complaint in the Circuit Court of Cook County, Illinois ("Cook County Case") alleging claims for breach of contract, conversion and seeking declaratory relief. In January 2013, ORIX removed RTP's Cook County Case to this Court, based on Diversity Jurisdiction. See 28 U.S.C. ยง 1332(a). Plaintiffs' five-count amended complaint alleges; (1) a breach of contract claim by RTP; (2) RTP seeks a declaratory judgment establishing the invalidity of ORIX's claims; (3) a claim of conversion by RTP; (4) a claim of breach of good faith and fair dealing claim by RTP; and (5) Inheritance seeks a declaratory judgment finding that they are not liable as a Guarantor to the Loan Agreement. On January 23, 2013, ORIX filed a one-count counterclaim alleging that RTP and Inheritance are joint and severally liable under the Loan Agreement Guaranty for the indebtedness and other obligations of the Cash Trap Event.

On March 8, 2013, ORIX filed a non-judicial foreclosure action in North Carolina ("North Carolina Foreclosure Action"). While the North Carolina Foreclosure Action was pending, RTP filed a separate lawsuit in North Carolina seeking to enjoin the foreclosure suit. On April 30, 2013, the North Carolina court having jurisdiction over RTP's claims entered an order enjoining ORIX's North Carolina Foreclosure Action. On December 18, 2013, RTP and Inheritance entered into a loan modification agreement changing the maturity date on the Note from January 31, 2014 to December 18, 2013. On January 6, 2014, the court in the North Carolina Foreclosure Action entered an Order authorizing foreclosure and set the date of the foreclosure sale for January 28, 2014. The sale was ultimately performed on February 27, 2014.

In the instant matters before this Court, on April 4, 2014, ORIX moved for summary judgment and Plaintiffs moved for partial summary judgment. On July 1, 2014, the Court held oral argument on the parties' motions for summary judgment. Both motions are ripe for disposition.

LEGAL STANDARD

Summary judgment is appropriate when the pleadings, discovery, disclosures, and affidavits establish that there is no genuine issue of material fact, such that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); Winsley v. Cook Cnty., 563 F.3d 598, 602-03 (7th Cir. 2009). The moving party bears the initial burden of showing that no genuine issue of material fact exists. Catrett, 477 U.S. 317 , 325 (1986). The burden then shifts to the non-moving party to show through specific evidence that a triable issue of fact remains on issues on which the non-movant bears the burden of proof at trial. Id. The non-movant may not rest upon mere allegations in the pleadings or upon conclusory statements in affidavits; he must go beyond the pleadings and support his contentions with proper documentary evidence. Id. The court considers the record as a whole and draws all reasonable inferences in the light most favorable to the party opposing the motion. Bay v. Cassens Transport Co., 212 F.3d 969, 972 (7th Cir. 2000). A genuine issue of material fact exists when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

When parties file cross-motions for summary judgment, each motion must be assessed independently, and denial of one does not necessitate the grant of the other. M. Snower & Co. v. United States, 140 F.2d 367, 369 (7th Cir.1944). Rather, each motion evidences only that the movant believes it is entitled to judgment as a matter of law on the issues within its motion and that trial is the appropriate course of action if the court disagrees with that assessment. Miller v. LeSea Broadcasting, Inc., 87 F.3d 224, 230 (7th Cir.1996). With these principles in mind, we turn to the parties' motions.

DISCUSSION

Plaintiffs' motion for partial summary judgment does not specify the claims that they are seeking judgment on. ORIX moves for summary judgment on all claims presently before the Court. The parties do not dispute that Illinois law governs the disposition of all claims. See Auto-Owners Ins. Co. v. Websolv Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009) ("Courts do not worry about conflict of laws unless the parties disagree on which state's law applies.").

I. Plaintiffs' and ORIX's Motions to Strike and Motions in Limine

As a preliminary matter, Plaintiffs and ORIX have filed numerous motions to strike and motions in limine to limit the evidence the Court considers in resolving the issues presented by the parties in their respective cross-motions for summary judgment. The parties argue that the opposing sides evidence is not in compliance with the applicable local rules, contains numerous hearsay statements, improperly authenticated exhibits, includes impermissible legal conclusions, and many declarations are not based on personal knowledge. This Court has considered both Plaintiffs' and ORIX's motions to strike and motions in limine. We review each Local Rule 56.1 statement and disregard any argument, conclusion, or assertion unsupported by the evidence in the record. The Court is mindful of its duty to assess the credibility of the evidence presented by both parties and only relies on relevant and admissible evidence when ruling on a motion for summary judgment. Plaintiffs' motions in limine and motion to strike are denied. ORIX's motions to strike are also denied.

II. Plaintiff's Motion for Summary Judgment

A. RTP's Breach of Contract Claim

RTP argues that ORIX breached the Loan Agreement in deeming that numerous Events of Default occurred and instituting a Cash Trap Event, thereby taking all revenue from the Property. In Illinois to prove a breach of contract, RTP must establish: (1) the existence of a valid and enforceable contract; (2) RTP's performance; (3) ORIX's breach of the terms of the contract; and (4) damages resulting from the breach. Lindy Lu LLC v. Ill. Cent. R.R. Co., 984 N.E.2d 1171, 1175 (Ill.App. 2013). The first element of RTP's breach of contract claim is undisputed. However, ORIX contests that RTP rendered performance, was itself responsible for the breach of the Loan Agreement, and that RTP suffered damages.

ORIX argues that it was entitled to declare the September 2012 Cash Trap Event based on numerous Events of Default which occurred under the Loan Agreement. ORIX claims that it was RTP who breached the Loan Agreement and ORIX was merely exercising its contractual remedies for a breach of contract. To resolve RTP's breach of contract claim and determine RTP's performance the Court must first determine if any of the occurrences which ORIX claims began in September 2010 gave rise to an Event of Default under the Loan Agreement.

Instrumental in determining if an Event of Default occurred is understanding the parameters of the corporate structure that was established in the Loan Agreement. ORIX asserts that they specifically bargained for the over expansive ownership structure of corporate entities that they specifically delineated in Exhibit C, a schematic diagram of a distinct corporate hierarchy that was attached to and mentioned in the Loan Agreement. RTP conversely argues that Exhibit C, with a singular reference in the Loan Agreement, was not properly incorporated into the Loan Agreement. RTP further contends that ...


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