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LLC v. Breakwater Equity Partners LLC

United States District Court, D. Arizona

April 23, 2015

4801 East Washington Street Holdings, LLC, acting by and through CWCapital Asset Management LLC, solely in its capacity as Special Servicer, Plaintiffs,
Breakwater Equity Partners LLC, et al., Defendants.


DAVID G. CAMPBELL, District Judge.

Plaintiff and two Defendants have filed separate motions for summary judgment. Docs. 184, 187, 192. The issues are fully briefed. The Court will grant Plaintiff's motion and deny Defendants' motions.[1]

I. Background.

A. The Parties and the Loan.

Plaintiff is 4801 East Washington Street Holdings, LLC, a loan servicing company acting as successor in interest to Column Financial, Inc. ("Lender"). Doc. 191, ¶ 10. Defendants include Breakwater Equity Partners, LLC ("Breakwater"), a commercial loan workout consultant, and Thompson National Properties, LLC ("TNP"), a property management firm. Other named Defendants include several common owners and tenants in common (collectively, "Borrowers").

On July 13, 2005, Lender loaned $40 million (the "Loan") to Borrowers to purchase certain real property including 4801 East Washington Street, Phoenix, AZ 85034 (the "Property"). Doc. 192 at 2.[2] The parties executed a Promissory Note (the "Note") secured by a Deed of Trust, Assignment of Leases and Rents ("ALR"), Security Agreement, and Fixture Filing. Doc. 189, ¶¶ 4, 5. A Cash Management Agreement ("CMA") was also executed. Id., ¶ 11. Collectively, these documents are referred to as the "Loan Documents."

B. The Loan Documents.

The Note required Borrowers to make monthly installment payments. Doc. 191-1 at 4 ("[p]rincipal and interest shall be due and payable thereafter in equal installments"). In the event of default, the Loan amount, including "all sums advanced or accrued hereunder or under any other Loan Document... shall, at the option of Lender and without notice to Borrower, at once become due and payable, and may be collected forthwith, whether or not there has been a prior demand for payment[.]" Id. at 7. An "Event of Default" occurs when "any sum payable under [the] Note is not paid on or before the date such payment is due[.]" Id.

The Deed of Trust applied to "[a]ll cash funds, deposit accounts and other rights and evidence of rights to cash, now or hereafter created or held by Lender... including, without limitation, all funds now or hereafter on deposit in the Reserves[.]" Id. at 18-19. It also applied to "all rents, issues, profits, bonus money, revenue, income, rights and other benefits... of the [Property], " including security deposits, as well as all "present and future funds[.]" Id. at 20. The Rents and Reserves were designated "as additional collateral security for the payment of the indebtedness secured hereby... intending such Assignment to create a present, absolute assignment to Lender of all current or future leases of all or any portion of the Property and Rents." Id. at 36, 40, 52. The parties stipulated that "(i) the [CMA] is one of the Loan Documents[, ] (ii) the Lock Box Account shall be included within the Reserves[, ] and (iii) during any Cash Trap Period (as defined in the [CMA]), the Cash Management Account and all other Accounts and Sub-Accounts... shall be included within the Reserves." Id. at 99.

The CMA established a "Lock Box Account" where Borrowers would deposit Rents for the Property, "and all amounts held therein" were "irrevocably pledged to the Lender as additional security for the Loan." Id. at 197. The Operating Account was created for the Borrowers and was to be under the "sole dominion and control of the Borrower[s]." Id. at 197-98. The CMA defined the "Cash Trap Period" to include the "period of time from the occurrence of an Event of Default... until such time as any and all Events of Default under the Loan Documents have been fully cured." Id. at 190.

The ALR assigned Lender "all deposits (whether for security or otherwise), rents... and income of every nature of and from the Property[.]" Id. at 176. This included the "immediate and continuing right to collect and receive the [Rents], whether now due or hereafter becoming due[.]" Id. Notwithstanding the assignment, the ALR granted a license to Borrowers to collect and retain Rents subject to an important limitation:

Upon the occurrence of an Event of Default, the aforementioned license granted to [Borrowers] shall automatically terminate without notice to [Borrowers], and [Lender] may thereafter, without taking possession of the Property, demand, collect (by suit or otherwise), receive and give valid and sufficient receipts for any and all of the Rents[.]

Id. at 176.

C. Defendants' Relationship with Borrowers.

In 2008, TNP began managing the Property on behalf of Borrowers under a Property Management Agreement. TNP would collect Rents and deposit them in the Operating Account. Doc. 189, ¶¶ 29, 33, 34. Rents deposited in the account were used to pay utilities, taxes, insurance, repairs, maintenance, and the monthly Loan payment for the Property. Id., ¶ 37.

Apparently because the balance of the Loan was due in 2013, Borrowers entered into a Consulting Agreement with Breakwater in late 2012 for loan workout services.[3] Id., ¶¶ 42, 43. The Consulting Agreement required Borrowers to pay Breakwater $390, 000 plus $210, 000 in estimated loan workout expenses. Id., ¶ 44. TNP would forward payment to Breakwater from the Operating Account at the direction of Borrowers. Id., ¶ 45. For its role in arranging the Consulting Agreement, TNP was paid a referral fee of 12.5% of Breakwater's fee, also paid from the Operating Account. Id., ¶ 47. Borrowers executed an internal Workout Funding Agreement and Memorandum of Understanding governing TNP's transfer of Rents in the Operating Account to Breakwater. Doc. 193, ¶ 6.

On January 11, 2013, and apparently on the advice of Breakwater, Borrowers defaulted on the Loan. Doc. 189, ¶ 22. At the time, the Operating Account held sufficient Rents to make the monthly Loan payment. Id., ¶ 58. Borrowers, however, directed TNP to permit the Loan default and to transfer Rents to Breakwater to pay its fee, as well as additional Rents to be held on behalf of Borrowers by Breakwater. Id., ¶¶ 53-56; Doc. 185, ¶ 8. Breakwater agreed to indemnify TNP from any claims arising out of the transfer. Doc. 189, ¶¶ 65-69; Doc. 191-1 at 176-79. Indeed, Breakwater is paying the legal fees TNP has accrued thus far in this case in accordance with the indemnity agreement. Doc. 189, ¶ 70.

D. The Transfers.

Between January 14 and April 19, 2013, at the direction of Borrowers, TNP made nine transfers of Rents from the Operating Account to Breakwater totaling $2, 306, 250 ( id., ¶¶ 72-82; Doc. 193, ¶ 9), and two transfers to its own account totaling $48, 750 (Doc. 189, ¶¶ 77, 80), for a grand total of $2, 355, 000 ( id., ¶ 2). Except for its fee of $341, 250 and $215, 000 in expenses, Breakwater maintained the remaining Rents in segregated accounts for the benefit of Borrowers. Id., ¶ 86; Doc. ...

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