Bank Wins Summary Judgment, Damages Against Hotel Purchasers

by Tara Arick on October 10, 2012 · 0 comments

in Banking,Contract Law

- From LexisNexis® Mealey’s™ Daily Legal News.

In a suit arising from a loan default by the purchasers of a hotel, a federal judge in Georgia on Oct. 5 granted summary judgment for breach of note and breach of guaranty claims in favor of a bank that assumed the loan from a failed bank, rejecting the hotel purchasers’ estoppel and mutual mistake arguments and ordering them to pay more than $ 3 million in damages (Bank of the Ozarks v. Kingsland Hospitality LLC, et al., No. 11-00237, S.D. Ga.; 2012 U.S. Dist. LEXIS 144666).

U.S. Judge B. Avant Edenfield of the Southern District of Georgia granted Bank of the Ozarks’ (the bank) motion in its suit against Kingsland Hospitality LLC, Bharat Gandhi, Kanubhai Patel and Parbhubhai Patel. The judge denied the bank’s motion as to its unjust enrichment claims.

Default, Complaint 

On Dec. 17, 2009, Kingsland, which Judge Edenfield said apparently was formed to purchase and operate a Comfort Inn hotel in Kingsland, Ga., executed a promissory note in favor of Woodlands Bank as a renewal of prior indebtedness related to the purchase of the hotel. On July 26, 2010, the Federal Deposit Insurance Corp. was appointed the receiver of Woodlands after Woodlands’ seizure by the U.S. Office of Thrift Supervision. On the same day, the bank purchased all of Woodlands’ assets, including Kingsland’s note, from the FDIC.

Gandhi had previously executed three guarantees of the original note from Kingsland to Woodlands, one each for himself and each of the Patels. The three documents all “absolutely and unconditionally guarantee” to the bank the payment of the note “and any extensions, renewals or replacements thereof.” Gandhi also executed a deed to the hotel securing the note. After execution of the note, Woodlands extended more than $ 2 million to Kingsland. In 2010, however, Kingsland defaulted on the note, and Gandhi defaulted on his obligations under his guarantee. The Patels denied authorizing their guarantees and disclaimed any obligations related to the note.

On Sept. 30, 2011, the bank filed its complaint for breach of note, breach of guaranty and unjust enrichment, seeking approximately $ 3.2 million in damages. On June 5, the bank moved for summary judgment, and on July 12, the defendants filed a response.

Mutual Mistake Defense Fails

All four defendants asserted that the bank should be estopped from collecting on the note because the “Bank had knowledge that Defendant Kingsland . . . has insufficient financial ability to service the loan.” The bank argued that because Woodlands’ officers never reduced their understandings and knowledge of Kingsland’s financial condition to writing, 12 U.S. Code Section 1823(e) and the doctrine of D’Oench, Duhme & Co. v. FDIC (315 U.S. 447, 62 S. Ct. 676, 86 L. Ed. 956 [1942]) operate to bar the defense.

“Defendants fail to demonstrate at least one essential element of estoppels,” Judge Edenfield said. “Kingsland undoubtedly had knowledge of its own financial condition. Kingsland, as well as the other three Defendants, also fails to put forth evidence that Woodlands, the FDIC, or the Bank had actual or constructive knowledge of ‘the real facts.’”

The defendants also argued that Woodlands’ and Kingsland’s belief in Kingsland’s ability to repay constituted a mutual mistake barring enforcement of all payment obligations. However, Judge Edenfield said, the defendants “offer nothing more than assertions and argument” and do not “cite record evidence of the existence of any implied condition to Kingsland’s payment obligation.”

“Even if the agreement here somehow escaped ? 1823(e)’s bar (it does not), Defendants have entirely failed to demonstrate how,” the judge explained. “The Court therefore finds that ? 1823(e) and the D’Oench doctrine prohibit the assertion of mutual mistake as a defense to any of Defendants’ payment obligations under the Note or their respective guarantees.”

In a suit arising from a loan default by the purchasers of a hotel, a federal judge in Georgia on Oct. 5 granted summary judgment for breach of note and breach of guaranty claims in favor of a bank that assumed the loan from a failed bank, rejecting the hotel purchasers’ estoppel and mutual mistake arguments and ordering them to pay more than $ 3 million in damages (Bank of the Ozarks v. Kingsland Hospitality LLC, et al., No. 11-00237, S.D. Ga.; 2012 U.S. Dist. LEXIS 144666).

(Order available 88-121022-283R )

U.S. Judge B. Avant Edenfield of the Southern District of Georgia granted Bank of the Ozarks’ (the bank) motion in its suit against Kingsland Hospitality LLC, Bharat Gandhi, Kanubhai Patel and Parbhubhai Patel. The judge denied the bank’s motion as to its unjust enrichment claims.

Default, Complaint 

On Dec. 17, 2009, Kingsland, which Judge Edenfield said apparently was formed to purchase and operate a Comfort Inn hotel in Kingsland, Ga., executed a promissory note in favor of Woodlands Bank as a renewal of prior indebtedness related to the purchase of the hotel. On July 26, 2010, the Federal Deposit Insurance Corp. was appointed the receiver of Woodlands after Woodlands’ seizure by the U.S. Office of Thrift Supervision. On the same day, the bank purchased all of Woodlands’ assets, including Kingsland’s note, from the FDIC.

Gandhi had previously executed three guarantees of the original note from Kingsland to Woodlands, one each for himself and each of the Patels. The three documents all “absolutely and unconditionally guarantee” to the bank the payment of the note “and any extensions, renewals or replacements thereof.” Gandhi also executed a deed to the hotel securing the note. After execution of the note, Woodlands extended more than $ 2 million to Kingsland. In 2010, however, Kingsland defaulted on the note, and Gandhi defaulted on his obligations under his guarantee. The Patels denied authorizing their guarantees and disclaimed any obligations related to the note.

On Sept. 30, 2011, the bank filed its complaint for breach of note, breach of guaranty and unjust enrichment, seeking approximately $ 3.2 million in damages. On June 5, the bank moved for summary judgment, and on July 12, the defendants filed a response.

Mutual Mistake Defense Fails

All four defendants asserted that the bank should be estopped from collecting on the note because the “Bank had knowledge that Defendant Kingsland . . . has insufficient financial ability to service the loan.” The bank argued that because Woodlands’ officers never reduced their understandings and knowledge of Kingsland’s financial condition to writing, 12 U.S. Code Section 1823(e) and the doctrine of D’Oench, Duhme & Co. v. FDIC (315 U.S. 447, 62 S. Ct. 676, 86 L. Ed. 956 [1942]) operate to bar the defense.

“Defendants fail to demonstrate at least one essential element of estoppels,” Judge Edenfield said. “Kingsland undoubtedly had knowledge of its own financial condition. Kingsland, as well as the other three Defendants, also fails to put forth evidence that Woodlands, the FDIC, or the Bank had actual or constructive knowledge of ‘the real facts.’”

The defendants also argued that Woodlands’ and Kingsland’s belief in Kingsland’s ability to repay constituted a mutual mistake barring enforcement of all payment obligations. However, Judge Edenfield said, the defendants “offer nothing more than assertions and argument” and do not “cite record evidence of the existence of any implied condition to Kingsland’s payment obligation.”

“Even if the agreement here somehow escaped ? 1823(e)’s bar (it does not), Defendants have entirely failed to demonstrate how,” the judge explained. “The Court therefore finds that ? 1823(e) and the D’Oench doctrine prohibit the assertion of mutual mistake as a defense to any of Defendants’ payment obligations under the Note or their respective guarantees.”

Patels’ Defenses

The Patels each asserted individual defenses, as well. They both argued that the District Court lacks personal jurisdiction over them. Kanubhai Patel is a Virginia resident, and Parbhubhai Patel is a Florida resident. Kanubhai Patel said that he never had any role in Kingsland, did not communicate with any representative of Woodlands and did not participate in Kingsland’s decision to purchase the hotel. Parbhubhai asserted that he has never had a role with Kingsland and never participated in the hotel purchase or the decision to obtain a loan from Woodlands. The bank argued that jurisdiction is proper because the Patels availed themselves of Georgia courts by signing the power of attorney with Gandhi, who, as their agent, subsequently signed the guarantees for a loan made and to be performed in Georgia.

Judge Edenfield noted that the Georgia long-arm statute permits the “exercise of personal jurisdiction over any nonresident . . . if in person or through an agent, he or she: . . . Transacts any business within the state,” quoting Official Code of Georgia Annotated Section (O.C.G.A.) 9-10-91(1). Because the powers of attorney are valid and, therefore, the guarantees are valid, the Patels transacted business in Georgia sufficient to satisfy O.C.G.A. Section 9-10-91(1), Judge Edenfield found.

Turning to the second step of the jurisdictional inquiry, the constitutional prong, Judge Edenfield found that the guarantee agreements constitute sufficient minimum contracts to satisfy due process without offending “traditional notions of fair play and substantial justice,” quoting Diamond Crystal Brands Inc. v. Food Movers Int’l Inc. (593 F.3d 1267 [11th Cir. 2010]). He said that with minimum contracts established and because the defendants pointed to no evidence identifying Georgia as an unduly burdensome forum offensive to the notions of fair play and justice, “the Constitution cannot object to the exercise of jurisdiction over K. and P. Patel.” Judge Edenfield concluded that the Patels are subject to the District Court’s jurisdiction.

Statute Of Frauds, Damages

The judge also rejected the Patels’ argument that because they never signed the guaranty agreements, the Statute of Frauds prohibits enforcement of the agreements against them, explaining that the Patels failed to establish a genuine dispute as to whether they signed the powers of attorney.

Regarding the banks’ claims, Judge Edenfield found that all of the defendants breached the note and the guarantees. However, the judge found that unjust enrichment does not apply, noting that unjust enrichment is “an equitable principle that may be applied when there is no valid written contract between the parties,” quoting Ga. Dep’t of Cmty. Health v. Data Inquiry LLC (313 Ga. App. 683, 687 [2012]). Here, four contracts, one for each defendant, exist, he said.

The judge ordered the defendants to pay $ 3,199,501.45 for the unpaid principal, interest, late fees and taxes paid by the bank; interest of $ 403.49 per day from June 5, 2012, until the day of judgment; attorney fees of 15 percent of $ 3,126,024.61, which represents 15 percent of the unpaid principal and interest due and owing under the note; and attorney fees in the amount of 15 percent of $ 403.49 per day from June 5, 2012, until the day of judgment.

The Patels each asserted individual defenses, as well. They both argued that the District Court lacks personal jurisdiction over them. Kanubhai Patel is a Virginia resident, and Parbhubhai Patel is a Florida resident. Kanubhai Patel said that he never had any role in Kingsland, did not communicate with any representative of Woodlands and did not participate in Kingsland’s decision to purchase the hotel. Parbhubhai asserted that he has never had a role with Kingsland and never participated in the hotel purchase or the decision to obtain a loan from Woodlands. The bank argued that jurisdiction is proper because the Patels availed themselves of Georgia courts by signing the power of attorney with Gandhi, who, as their agent, subsequently signed the guarantees for a loan made and to be performed in Georgia.

Judge Edenfield noted that the Georgia long-arm statute permits the “exercise of personal jurisdiction over any nonresident . . . if in person or through an agent, he or she: . . . Transacts any business within the state,” quoting Official Code of Georgia Annotated Section (O.C.G.A.) 9-10-91(1). Because the powers of attorney are valid and, therefore, the guarantees are valid, the Patels transacted business in Georgia sufficient to satisfy O.C.G.A. Section 9-10-91(1), Judge Edenfield found.

Turning to the second step of the jurisdictional inquiry, the constitutional prong, Judge Edenfield found that the guarantee agreements constitute sufficient minimum contracts to satisfy due process without offending “traditional notions of fair play and substantial justice,” quoting Diamond Crystal Brands Inc. v. Food Movers Int’l Inc. (593 F.3d 1267 [11th Cir. 2010]). He said that with minimum contracts established and because the defendants pointed to no evidence identifying Georgia as an unduly burdensome forum offensive to the notions of fair play and justice, “the Constitution cannot object to the exercise of jurisdiction over K. and P. Patel.” Judge Edenfield concluded that the Patels are subject to the District Court’s jurisdiction.

 

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