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Palmetto Assisted Living Systems, Inc. v. Keybank National Association

United States District Court, D. South Carolina, Columbia Division

April 25, 2019

Palmetto Assisted Living Systems, Inc., Plaintiff,
v.
KeyBank National Association; Deutsche Bank Trust Company Americas, as trustee for the registered holders of the Wells Fargo Commercial Mortgage Securities, Inc., Multifamily Mortgage Pass-Through Certificates, Series 2014-K37; and U.S. Bank National Association, as trustee for the registered holders of Wells Fargo Commercial Mortgage Securities, Inc., Multifamily Mortgage Pass-Through Certificates, Series 2013-KS01; FC Real Estate - Harbison, LLC; FC Real Estate - Rock Hill, LLC; FC Real Estate-Garden City, LLC; and FC Midlands, LLC, Defendants.

          OPINION AND ORDER GRANTING KEYBANK, DBTCA, AND U.S. BANK'S MOTION TO DISMISS (ECF NO. 14)

          CAMERON MCGOWAN CURRIE SENIOR UNITED STATES DISTRICT JUDGE.

         Through this action, Plaintiff, Palmetto Assisted Living Systems, Inc. (“Plaintiff”), brings a claim against Defendants KeyBank National Association (“KeyBank”); Deutsche Bank Trust Company Americas (“DBTCA”), as trustee for the registered holders of the Wells Fargo Commercial Mortgage Securities, Inc., Multifamily Mortgage Pass-Through Certificates, Series 2014-K37 (“the K37 Trust”); and U.S. Bank National Association (“U.S. Bank”), as trustee for the registered holders of Wells Fargo Commercial Mortgage Securities, Inc., Multifamily Mortgage Pass-Through Certificates, Series 2013-KS01 (“the KS01 Trust”) (collectively, the “Trust Defendants”) for breach of contract. Plaintiff also seeks a declaratory judgment that KeyBank, U.S. Bank, and DBTCA breached the contract and implied covenant of good faith and fair dealing in withholding consent to foreclose certain property, and that Plaintiff is entitled to a judgment allowing foreclosure. Plaintiff has also named as Defendants FC Real Estate - Harbison, LLC; FC Real Estate - Rock Hill, LLC; FC Real Estate - Garden City, LLC; and FC Midlands, LLC (collectively, “the Midlands Defendants”).

         The matter is before the court on the Trust Defendants' motion to dismiss under Fed.R.Civ.P. 12(b)(6). ECF No. 14. Plaintiff filed a response in opposition (ECF No. 23) and the Trust Defendants filed a reply (ECF No. 25). After reviewing the briefing, the court ordered the Trust Defendants to file further contract documents bearing on the issue (ECF No. 29), which were filed December 14, 2018 (ECF No. 30). The court also directed the parties to file their positions on the Senior Loan Documents' impact on their arguments regarding dismissal (ECF NO. 31), which they did (ECF Nos. 34, 35).

         The court thereafter entered an Order holding the motion to dismiss in abeyance, as Plaintiff had requested leave to file an Amended Complaint in its response to the Trust Defendants' Motion to Dismiss. See ECF Nos. 23 at 6 (Plaintiff's response), 36 (Order). Plaintiff filed a motion for leave to file Amended Complaint, and attached the Proposed Amended Complaint. ECF No. 38. Both sets of Defendants opposed the motion. ECF Nos. 39, 40. Because it found Plaintiff's proposed amendments futile, the court denied Plaintiff's motion for leave to file an Amended Complaint. ECF No. 41. The court also noted it would apply the summary judgment standard to the Trust Defendants' motion, as it considered documents beyond those attached to the Complaint, and gave the parties until April 18, 2019 to file any additional items they wished the court to consider. Id. No. such filings were made, and the deadline has expired.

         For the reasons set forth below, the Trust Defendants' motion to dismiss, converted into one for summary judgment, is granted.

         STANDARD

         Because the court has considered materials outside the pleadings, the standard applicable to motions for summary judgment applies. Summary judgment should be granted if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). It is well established that summary judgment should be granted “only when it is clear that there is no dispute concerning either the facts of the controversy or the inferences to be drawn from those facts.” Pulliam Inv. Co. v. Cameo Properties, 810 F.2d 1282, 1286 (4th Cir. 1987). The party moving for summary judgment has the burden of showing the absence of a genuine issue of material fact, and the court must view the evidence before it and the inferences to be drawn therefrom in the light most favorable to the nonmoving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).

         FACTS[1]

         Plaintiff entered into three Subordination Agreements (the Harbison Subordination Agreement, the Rock Hill Subordination Agreement, and the Garden City Subordination Agreement) for the Midlands Defendants to purchase properties from Plaintiff. ECF No. 1-1 at ¶¶ 2, 42. Defendants U.S. Bank and DBTCA are the trustees for the KS01 and K37 Trusts, respectively, that hold the Promissory Note and Pledge and Security Agreement to facilitate this sale of properties, [2] and KeyBank acted as the master servicer for both U.S. Bank and DBTCA in connection with the Subordination Agreements. Id. at ¶¶ 6, 11, 16. As set forth in the Subordination Agreements, Plaintiff holds a promissory note dated August 14, 2015, in which FC Midlands promised to pay eight million dollars and other certain sums due to Plaintiff (the “FC Midlands Loan”). Id. at ¶ 42. That loan is secured by a Pledge and Security Agreement between FC Midlands and Plaintiff, which provides terms and conditions under which Plaintiff may foreclose on and obtain membership of FC Midlands Properties III, LLC (currently held by FC Midlands). Id. at ¶ 43. Under the Subordination Agreements, KeyBank (as master servicer for the Trusts) must consent to any “Enforcement Action” Plaintiff may file to protect its interest in the event of a default under the FC Midlands Loan Agreement. Id. at ¶ 44.

         On August 15, 2018, Plaintiff submitted to KeyBank, as master servicer for DBTCA and U.S. Bank, formal notice of its request under each Subordination Agreement for consent to proceed with an Enforcement Action against FC Midlands to obtain the membership interest in FC Midlands Properties, III, LLC, as contemplated in the Pledge and Security Agreement. Id. at ¶ 48. KeyBank refused Plaintiff's request for consent. Id. at ¶ 49. Although Plaintiff requested KeyBank (and U.S. Bank and DBTCA) provide a good faith reason for denying consent, they did not do so. Id. at ¶¶ 51-52.

         ARGUMENTS

         In support of their motion to dismiss, the Trust Defendants argue the Complaint does not allege any actual breach of contract, because a refusal of consent prior to the debt being paid in full is not a breach of the terms of the Subordination Agreements. ECF No. 14 at 8. Even though the Trust Defendants refused to consent to an enforcement action, the Subordination Agreements specifically note Plaintiff may not proceed with an enforcement action until after the Trusts are paid in full for the senior indebtedness, except with the Trustees' consent, which they refused. Id. They contend Plaintiff has attempted to circumvent this requirement by invoking the covenant of good faith and fair dealing; however, they argue that covenant is not an independent cause of action separate from a breach of contract claim under South Carolina law, and “cannot contravene the parties' express agreement.” Id. at 7 (citing In re Hovis, 325 B.R. 158, 166 (Bankr. D. S.C. 2005)). The Trust Defendants argue they did not, as a matter of law, violate the covenant by withholding consent to Plaintiff's proposed enforcement action because, under the express terms of the Subordination Agreements, they may withhold consent for any or no reason. Id. at 8. They contend KeyBank must be dismissed because it is not a party to the Subordination Agreements, but is a mere servicer for the Trusts and has “no rights, duties, or obligations” under the agreements and therefore cannot breach them. Id. at 9. Finally, they request the court dismiss the declaratory judgment action as it “hinges on Plaintiff's ability to prevail on its breach of contract claim, ” which it cannot. Id. at 9-10.

         In response, Plaintiff argues it has alleged facts sufficient to show a breach of contract occurred and it was damaged as a result. ECF No. 23 at 4. Plaintiff disagrees with the Trust Defendants' interpretation of the Subordination Agreements, arguing they do not contain a provision allowing consent to be withheld for any reason, and the parties to the contract did not contemplate arbitrary refusal, as this intention could have been effected by inserting the word “voluntary” before “consent.” Id. Plaintiff also briefly argues its ability to prevail on the declaratory judgment claim does not depend on its ability to prevail on the breach of contract claim. Id. at 5-6. In the alternative, Plaintiff requests leave to amend the Complaint if the court determines Plaintiff has failed to plead with sufficient particularity. Id. at 9.

         The Trust Defendants submitted a reply in further support of their motion, arguing Plaintiff's interpretation of the Subordination Agreements is incorrect because “consent, ” by definition, must be voluntary. ECF No. 24. They argue the court should refrain from re-writing the contract to include a standard for consent to initiate an enforcement action. Id. at 2. Finally, they contend they did not ...


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