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LLC v. Carden

United States District Court, N.D. Iowa, Cedar Rapids Division

September 29, 2017

COLLEGE PARK TIC 1, LLC, a Delaware limited liability company et al., Plaintiffs,
v.
WILLIAM J. CARDEN, Defendant.

          MEMORANDUM OPINION AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

          Leonard T. Strand, Chief Judge.

         I. INTRODUCTION

         Presently before me are cross-motions for summary judgment. Plaintiffs College Park TIC 1, LLC, et al. (plaintiffs), [1] were tenant-in-common owners and lessors of a student housing project called College Park Apartments, located in Cedar Rapids, Iowa (College Park or the Property). Defendant William J. Carden (Carden) is an individual who acted on behalf of a non-existent corporation, American Spectrum Management Co., Inc., a putative Texas corporation (ASM Texas).

         In their complaint (Doc. No. 3), plaintiffs allege that Carden and ASM Texas assumed lessee responsibilities for the Property pursuant to a lease assignment agreement. They further allege that Carden acted as the promoter[2] of ASM Texas and is personally liable for any breaches of the lease. They argue that Carden breached the lease by failing to pay rent and mortgage payments for the Property. Plaintiffs contend that this caused a foreclosure on the Property, resulting in the loss of their interests and investments in the Property.

         In their motion for summary judgment (Doc. No. 32), plaintiffs argue that they have proven that the lease assignment was effective, that the lease agreement was breached, and that Carden is personally liable to them for that breach. In his motion for summary judgment (Doc. No. 31), Carden argues that the lease assignment was invalid. Alternatively, he argues that he is not personally liable because the lease had been assumed by a different entity at the time the assignment was made.

         The motions are fully submitted and ready for decision. Although both parties have requested oral argument, I find that oral argument is not necessary.

         II. FACTS

         The following facts are undisputed except where noted otherwise:

In 2007, Evergreen Realty Group, LLC (Evergreen), a real estate investment company, sponsored a private placement offering for the sale of tenant-in-common interests in College Park. The College Park student housing complex consisted of 25 buildings, 340 units and 750 beds located on about 21 acres in Cedar Rapids. Doc. No. 3 at 7. Evergreen then formed College Park Acquisitions, LLC (CP Acquisitions), in order to purchase and sell the tenant-in-common interests. To carry out the sale, multiple limited liability companies, including the plaintiffs, were formed.[3]

         At some point, either on or before November 1, 2007, CP Acquisitions entered into a Master Lease Agreement (Master Lease) with College Park Leasing, LLC (CP Leasing).[4] CP Acquisitions acted as the landlord/lessor and CP Leasing acted as the tenant/lessee.[5] Also on November 1, 2007, CP Acquisitions entered into a mortgage loan agreement with Citigroup Global Markets Realty Corp. (Citigroup) to finance the purchase of the Property and, along with CP Leasing, delivered to Citigroup a Multifamily Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (Citigroup Mortgage).[6] Plaintiffs then assumed CP Acquisitions' rights and responsibilities and became the landlord/lessors. CP Leasing remained as the tenant/lessee and had sole authority for the management and operation of the Property.

         Under the Master Lease, CP Leasing was obligated to pay its monthly rent in a split fashion. Basically, it was required to pay the mortgage principal and interest directly to Citigroup out of the base rent and was then required to pay the balance of the base rent to plaintiffs. Doc. No. 31-3 at 89. The parties refer to the portion of the rent that was payable to plaintiffs as the “Investor Payments.” It appears to be undisputed that between December 1, 2007, and February 28, 2009, CP Leasing made the required rent payments.

         On March 16, 2009, Evergreen sent a letter to plaintiffs regarding a 90-day suspension of the Investor Payments that CP Leasing was required to pay under the Master Lease.[7] Evergreen also sought to amend the Master Lease payment requirements, which plaintiffs rejected. On May 26, 2009, Evergreen told plaintiffs that CP Leasing could make only partial distributions of the Investor Payments. On October 15, 2009, Evergreen announced that the Investor Payments would be suspended effective December 1, 2009.[8]

         On December 15, 2009, Evergreen entered into a Purchase Agreement with American Spectrum Realty, Inc., a Maryland corporation, and American Spectrum Management Co., LLC, a Delaware limited liability company (together the ASM Parties) for the sale of a number of assets.[9] Carden executed the Purchase Agreement on behalf of the ASM Parties. On January 17, 2010, American Spectrum Realty Management (ASM Realty) took over as property manager. Evergreen and the ASM Parties then began a lengthy process of assigning and transferring all the assets purchased under the Purchase Agreement.

         On November 18, 2011, CP Leasing entered in the College Park Master Lease Assignment (Lease Assignment) with American Spectrum Management Co., Inc., a Texas corporation (ASM Texas). Under the assignment, ASM Texas assumed all of CP Leasing's rights and responsibilities relating to College Park. Carden executed the Master Lease Assignment on behalf of ASM Texas and represented his title as “President.”[10] However, ASM Texas is a company that has never existed. The Lease Assignment identifies CP Leasing as assignor and ASM Texas as assignee. It also states that “[t]he American Spectrum Parties have nominated Assignee to accept the assignment of the Evergreen Parties' rights, title, and interest in and to the [College Park Master] Lease.” Doc. No. 32-6 at 70. The Lease Assignment identified January 17, 2010, as the effective date of the assignment.

         On November 19, 2012, plaintiffs provided the ASM Parties with notice that they were in breach of the Master Lease for failure to pay rents. The notice purported to terminate occupancy and right of possession, but not terminate the Master Lease. In December 2012, the mortgage payment was not made. On January 10, 2013, a foreclosure action was filed and on March 7, 2014, the Property was foreclosed on. The parties agree that plaintiffs have not been paid any of the rent or assessment payments due under the Master Lease since December 2012.[11]

         Additional facts will be discussed below, as necessary.

         III. SUMMARY JUDGMENT STANDARDS

         Any party may move for summary judgment regarding all or any part of the claims asserted in a case. Fed.R.Civ.P. 56(a). Summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

         A material fact is one that “‘might affect the outcome of the suit under the governing law.'” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Thus, “the substantive law will identify which facts are material.” Id. Facts that are “critical” under the substantive law are material, while facts that are “irrelevant or unnecessary” are not. Id.

         An issue of material fact is genuine if it has a real basis in the record, Hartnagel v. Norman, 953 F.2d 394, 395 (8th Cir. 1992) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986)), or when “‘a reasonable jury could return a verdict for the nonmoving party' on the question.” Woods v. DaimlerChrysler Corp., 409 F.3d 984, 990 (8th Cir. 2005) (quoting Anderson, 477 U.S. at 248). Evidence that only provides “some metaphysical doubt as to the material facts, ” Matsushita, 475 U.S. at 586, or evidence that is “merely colorable” or “not significantly probative, ” Anderson, 477 U.S. at 249-50, does not make an issue of material fact genuine.

         As such, a genuine issue of material fact requires “sufficient evidence supporting the claimed factual dispute” so as to “require a jury or judge to resolve the parties' differing versions of the truth at trial.” Anderson, 477 U.S. at 248-49. The party moving for entry of summary judgment bears “the initial responsibility of informing the court of the basis for its motion and identifying those portions of the record which show a lack of a genuine issue.” Hartnagel, 953 F.2d at 395 (citing Celotex, 477 U.S. at 323). Once the moving party has met this burden, the nonmoving party must go beyond the pleadings and by depositions, affidavits, or otherwise, designate specific facts showing that there is a genuine issue for trial. Mosley v. City of Northwoods, 415 F.3d 908, 910 (8th Cir. 2005). The nonmovant must show an alleged issue of fact is genuine and material as it relates to the substantive law. If a party fails to make a sufficient showing of an essential element of a claim or defense with respect to which that party has the burden of proof, then the opposing party is entitled to judgment as a matter of law. Celotex, 477 U.S. at 322.

         In determining if a genuine issue of material fact is present, I must view the evidence in the light most favorable to the nonmoving party. Matsushita, 475 U.S. at 587-88. Further, I must give the nonmoving party the benefit of all reasonable inferences that can be drawn from the facts. Id. However, “because we view the facts in the light most favorable to the nonmoving party, we do not weigh the evidence or attempt to determine the credibility of the witnesses.” Kammueller v. Loomis, Fargo & Co., 383 F.3d 779, 784 (8th Cir. 2004). Instead, “the court's function is to determine whether a dispute about a material fact is genuine.” Quick v. Donaldson Co., Inc., 90 F.3d 1372, 1376-77 (8th Cir. 1996).

         On cross motions for summary judgment, the “court must rule on each party's motion on an individual and separate basis, determining, for each side, whether a judgment may be entered in accordance with the Rule 56 standard.” 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2720 (3d ed. 1998). Because the parties seek summary judgment on some of the same issues, I will consider all the parties' arguments as to each issue, keeping in mind the separate inferences that are to be drawn from each motion. See Wright v. Keokuk Cnty. Health Ctr., 399 F.Supp.2d 938, 946 (S.D. Iowa 2005).

         IV. ANALYSIS

         Both parties agree that the Master Lease is, by its express terms, governed by Iowa law. In order to prevail on a breach of contract claim under Iowa law, the plaintiffs must show: (1) the existence of a contract, (2) the terms and conditions of the contract, (3) the plaintiffs have performed their duties under the contract, (4) the defendant breached the contract and (5) the plaintiff suffered damages as a result of that breach. Molo Oil Co. v. River City Ford Truck Sales, Inc., 578 N.W.2d 222, 224 (Iowa 1998); Iowa Arboretum, Inc. v. Iowa 4-H Found., 886 N.W.2d 695, 706 (Iowa 2016).

         Plaintiffs argue that the lessee's rights and obligations under the Master Lease were effectively assigned to ASM Texas. They contend that they performed their required duties under the contract by providing ASM Parties with notice of default, but that Carden, as promoter of ASM Texas, breached the Master Lease by failing to pay the required rent. Doc. No. 32-1 at 14-16. They argue that Carden caused CP Leasing to assign the Master Lease to ASM Texas and that he is personally liable for breach of contract as President of a non-existent company. Id. at 24. Plaintiffs claim they suffered lost rents totaling $15, 641, 657.26 and lost investments totaling $10, 823, 270.00, equaling over $25 million in damages. Id. at 17.

         At the outset, there is a dispute between the parties about whether the Master Lease was subleased to ASM Texas or, instead, assigned. Doc. No. 37 at 8; Doc. No. 40 at 3. An assignment transfers the lessee's entire interest without retaining a reversionary interest. Duck Creek Tire Serv., Inc. v. Goodyear Corners, L.C., 796 N.W.2d 886, 893-94 (Iowa 2011). In a sublease, the lessee reserves a reversionary interest by transferring the interest for a period less than the entire term. Id.; see also 17 Ia. Prac., Real Estate Law and Practice General aspects of the landlord-tenant relationship-Assignments and subleases § 4:3 (2016-2017).

         Here, the Lease Assignment “assigns, sells, transfers, sets over and delivers to Assignee 75% of Assignor's estate, right, title and interest in and to the Lease and Assignee hereby accepts such assignment as of the Effective Date.” Doc. No. 32-6 at 70. Nothing in the Lease Assignment suggests that CP Leasing, as the assignor, retained a reversionary interest in the portion of the interest that it transferred to ASM Texas. The assignment did not, for example, expressly expire at some point in time prior to the end of the lease term set forth in the Master Lease. Based on the express terms of the Lease Assignment, I find that it was, in fact, a permanent assignment of 75% of CP Leasing's rights and interests in the Master Lease, rather than a mere sublease.

         I will next address the elements of a breach of contract claim under Iowa law.

         A. Existence of a Contract

         Plaintiffs argue that a contract exists between them and Carden because (a) the Master Lease was properly executed and created by CP Acquisitions and CP Leasing (Doc. No. 32-1 at 14) and (b) there was a subsequent, valid Lease Assignment between CP Leasing and ASM Texas that made Carden, as promoter of ASM Texas, the principal lessee under the Master Lease contract. Doc. No. 32-1 at 15.

         1. The Consent Requirement for Assigning the Lease

         a. Was the Lease Assignment void or merely voidable?

         i. The Parties' Arguments

         Carden first argues that he is not personally liable because the assignment of the Master Lease was void due to the lack of the lessors' consent. Doc. No. 35-6 at 3-4. He notes that the language of the Master Lease requires the lessors' consent for any assignment. Id. at 3; Doc. No. 31-1 at 5. Because plaintiffs, as lessors, did not consent to the assignment of the Master Lease, Carden argues that the assignment was void and, therefore, that no contract exists between he and the plaintiffs. Doc. No. 35-6 at 10-11. Plaintiffs respond by arguing they merely had the option to object to the assignment and did not do so. Doc. No. 37 at 2. As such, they contend that the assignment is valid.

         ii. Analysis

         The Master Lease addresses assignments as follows:

Except as herein expressly provided, the prior written consent of the Landlord and its lender under the Permitted Mortgage, which consent may be withheld for any reason or no reason, shall be required in order for Tenant to sell, assign, transfer or otherwise dispose of this Lease or any interest of Tenant in this Lease or in any sublease or in any subrents whether by operation of law or otherwise.

         Doc. No. 31-3 at 100. Under Iowa law, restrictions on assignments set forth in lease agreements are enforced when the language is plain and unambiguous. In re Owen's Estate, 259 N.W. 474, 476 (Iowa 1935). However, the Iowa Supreme Court has held that such restraints are not favored and should be construed strictly against the lessor because of the limitations they impose on the transfer of property. Id. In Owen's Estate, the Court held that if an assignment is made by operation of law, rather than through a voluntary transaction, a covenant in the lease against such an assignment is not breached. Id. at 476.

         Both sides cite Snyder v. Bernstein Bros., 208 N.W. 503 (Iowa 1926), in support of their arguments. Carden relies on Snyder to argue that consent restrictions are valid and enforceable, such that any assignment without consent is void. Doc. No. 31-1 at 5. Plaintiffs cite Snyder in support of their contention that the lease's assignment restriction simply gives them, as landlords, the option of rejecting or accepting the assignment. Doc. No. 37 at 7. In Snyder, defendants were tenants who assigned the lease to another group of tenants. The plaintiff was the landlord who served a notice of forfeiture on the second group of tenants. 208 N.W. at 504. The lease agreement stated that if the lease was assigned without the written consent of the landlord, “the tenancy should at once terminate, and the lessor ‘may then, if he so elects, treat and declare this lease void and at an end.'” Id. The Court held that the consent requirement was valid and that the original tenants' breach gave the landlord the right to forfeit the lease. Id. at 504.

         In Central State Bank v. Herrick, 240 N.W. 242, 243 (Iowa 1932), the Iowa Supreme Court addressed a situation in which a lease was assigned multiple times before being assigned to the defendant. The defendant failed to pay a portion of the rent during the time he remained on the premises and the lessors took action to recover those rents. Id. The Court explained that even though the lessors did not consent in writing to the assignment when it was made, as required by the lease, they “acquiesced therein and by implication consented” to the assignment. Id. at 245. The Court went on to state,

[the] [assignee] at this time cannot say that the lease was not properly assigned. Whatever restriction there may have been in the lease against its assignment without the lessors' written consent has been waived by the lessors. Under those circumstances, the lessee is in no position to say that the transfer of the lease to him was invalid.

Id.

         Berg v. Ridgway, 140 N.W.2d 95 (Iowa 1966), also presented a situation in which the lease prohibited the lessee from assigning the lease without the lessors' consent. However, because the landlords accepted rent from the assignee without objection to his occupancy, the Court found that both parties were “acting pursuant to the lease.” Id. at 97.

         Even when a lessor refuses to give consent, he or she can waive the consent requirement by subsequent conduct. See Colton v. Gorham, 33 N.W. 76, 77 (Iowa 1887). In Colton, the Court found that the lessor knew of the assignment of the lease and the assignee's occupancy of the property for at least two years, accepted rent payments from the assignee, and even made repairs on the property at the assignee's request. Id. at 76. The lessor did not demand rent from the original lessees during the time the assignee occupied the property. Id. Under these facts, the Court found that the lessor authorized the assignment and accepted the assignee as tenant, discharging the original lessee's duties. Id.

         As noted above, the Master Lease states, in relevant part, that “[e]xcept as herein expressly provided, the prior written consent of Landlord and its lender under the Permitted Mortgage, which consent may be withheld for any reason or no reason, shall be required in order for Tenant to . . . assign . . . any interest of Tenant.” Doc. No. 31-3 at 100. It is undisputed that plaintiffs, as landlords, did not give written consent for the assignment and, indeed, did not receive any documents evidencing the assignment. Doc. No. 37-1 at 31. Nonetheless, Iowa law recognizes that lessors can waive their right to object to an assignment made ...


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