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Portland Regency, Inc. v. Rbs Citizens, N.A.

United States District Court, D. Maine

March 20, 2015



D. BROCK HORNBY, District Judge.

Corporate borrowers and a bank entered into large secured commercial loan transactions when interest rates were higher than they are now.[1] For each transaction, the bank had the borrowers agree to a floating interest rate, coupled with an interest rate swap, so as to generate a synthetic fixed interest rate.[2] The borrowers remain current on all their obligations, but they have wanted for some time to prepay in full and thereby extricate themselves from three commercial mortgage loans and two swap agreements that are interest-unfavorable. The borrowers claim that the bank is signaling that it will charge far too much (around $5 million) in breakage fees for terminating the interest rate swaps. As a result, the borrowers sued for a declaratory judgment about the proper fees, and for misrepresentation damages caused by the high quotes that deterred them from prepaying and terminating. During the lawsuit, the borrowers have narrowed their declaratory judgment request and now want me to declare that, in calculating the swap breakage fees, the bank is obligated to take into account the new investment opportunity that it will obtain from the repayment of the principal balance of the loan. The bank has moved for summary judgment and to dismiss. Following oral argument on February 23, 2015, I GRANT the bank's motion for summary judgment on the misrepresentation claim (Count III) and on the declaratory judgment claims (Counts I and II) as to the bank's obligation to offset the reinvestment value of prepaid principal against the swap breakage fees. I also GRANT the bank's motion to dismiss the remainder of the declaratory judgment claims in Counts I and II because the borrowers no longer press them and because I conclude that they are not ripe for adjudication in any event. This outcome MOOTS the bank's motion to exclude the borrowers' experts.


I refer only to undisputed facts and the documents that the parties agree govern the transactions. The bank delivered a financing proposal for a commercial real estate mortgage loan to the borrowers dated June 15, 2006. June 15, 2006 Financing Proposal (ECF No. 141-5) ("2006 Financing Proposal"). The 2006 transaction was structured so that it included, among other components, a loan agreement, a promissory note for $9, 430, 000 with a variable rate of interest secured by a mortgage and security agreement, and an interest rate swap agreement that had the effect of creating a synthetic fixed interest rate for the borrowers. Pls.' Statement of Additional Facts at ¶¶ 143, 150, 151 (ECF No. 139) ("Pls.' SAF"); Defs.' Reply to Pls.' Statement of Additional Facts at ¶¶ 143, 150, 151 (ECF No. 151) ("Defs.' RSAF"). To document the interest rate swap agreement, the parties used the so-called ISDA Master Agreement, together with a Schedule and Confirmation.[3] Pls.' SAF at ¶ 150; Defs.' RSAF at ¶ 150. The swap had the same maturity date as the loan, and the starting "notional" amount of the swap on which interest was calculated matched the starting principal of the loan. June 22, 2006 Promissory Note (ECF No. 141-7) ("2006 Promissory Note"); June 23, 2006 Interest Rate Swap Confirmation at 1, 5 (ECF No. 141-25) ("2006 Confirmation"). The notional amount decreased on a schedule commensurate with projected principal payments on the mortgage loan. 2006 Confirmation at 5. Prepayment fees were specified on the Promissory Note, and "breakage" or early termination fees on the swap agreement. 2006 Promissory Note at 3; 2006 Confirmation at 3.

In September 2007, the borrowers and the bank executed documents further financing the borrowers. Pls.' SAF at ¶¶ 164, 176; Defs.' RSAF at ¶¶ 164, 176. The bank issued mortgage loans in the amounts of $8, 500, 000 and a restatement of a 2003 loan in the amount of $6, 256, 000. Pls.' SAF ¶¶ 167-68; Defs.' RSAF at ¶¶ 167-68. Like the 2006 transaction, the 2007 transactions were structured to include, among other components, one new promissory note with a variable rate of interest and mortgage and security agreement, [4] an amended promissory note with a variable rate of interest for the restatement of the 2003 loan, and an interest rate swap agreement.[5] Pls.' SAF ¶ 198; Defs.' RSAF ¶ 198. For the interest rate swap on this occasion, the parties referred back to their 2006 ISDA Agreement and the related Schedule, but with a new Confirmation, to create a synthetic fixed interest rate. Pls.' SAF ¶ 196; Defs.' RSAF ¶ 196. Once again, the maturity of the swap matched that of the loans, and the notional amount on which interest was calculated matched the principal of the two loans combined. Sept. 10, 2007 Amended and Restated Promissory Note (ECF No. 141-14) ("2003-2007 Amended Promissory Note"); Sept. 10, 2007 Promissory Note (ECF No. 141-18) ("2007 Promissory Note"); 2007 Confirmation at 2, 7.

In September of 2011, the borrowers asked the bank how much was due if the borrowers prepaid their transactions in full. Pls.' SAF ¶ 339; Defs.' RSAF ¶ 339. The bank said that the "penalty" to "break" the swap transactions would be "around" $5 million. Pls.' SAF ¶ 341; Defs.' RSAF ¶ 341. In October 2012, the borrowers again asked the amount due if they terminated their transactions. Pls.' SAF ¶ 348; Defs.' RSAF ¶ 348. The bank replied that the cost would be in excess of $4.2 million. Pls.' SAF ¶ 349; Defs.' RSAF ¶ 349. The bank's quotes were so high that the borrowers say they were unable to prepay the mortgage loans and seek more favorable financing from a new lender, or other business opportunities in which they were interested. Pls.' SAF ¶ 353.[6] The 2006 and 2007 transactions all remain in place and current in all respects. Pls.' SAF ¶¶ 159, 199; Defs.' RSAF ¶¶ 159, 199.


The borrowers filed their lawsuit in state court. The bank removed it to this court based upon diversity of citizenship. The state court complaint and a First Amended Complaint in this court asked for a declaration of the amount of Prepayment Fees and Early Termination Fees as well as damages for misrepresentation. Pls.' First Am. Compl. at 15 (ECF No. 24) ("Pls.' FAC"). The bank moved for summary judgment and to dismiss, arguing that it has no obligation to reduce the swap breakage fees by the reinvestment value of the prepaid principal, that otherwise the declaratory judgment claims are not ripe, and that the summary judgment record refutes the borrowers' misrepresentation claims. Defs.' Amended Mot. for Summ. J. in Part and Mot. to Dismiss in Part (ECF No. 131) ("Defs.' SJ Mot."). As the case has developed, the borrowers have dropped their initial request for an actual determination of fees due. First, they narrowed their declaratory relief request to a determination of the proper methodology to follow in determining the fees. Pls.' Opp'n to Defs.' Mot. for Summ. J. in Part and Mot. to Dismiss in Part at 49 (ECF No. 138) ("Pls.' Opp'n to SJ"). Then most recently at oral argument, they narrowed their request still further, to a declaration only that the bank must offset the investment value of the early principal payment against any breakage fees it claims resulting from termination of the swap agreements. Hr'g on Defs.' Summ. J. Mot. (Feb. 23, 2015). But the borrowers have not cross-moved for summary judgment because they maintain that the documents are ambiguous and that the factfinder must hear evidence of the parties' intent in this regard. Pls.' Opp'n to SJ at 1.


(A) The Declaratory Judgment Claims

The bank seeks summary judgment[7] on the borrowers' claim that in calculating swap breakage fees the bank must subtract the reinvestment value that it receives from the prepaid principal. The bank maintains that the agreements between the parties have no such requirement. Although the parties have devoted substantial attention to whether each respective loan and swap constitutes an integrated transaction and whether prepayment of a loan requires termination of a swap or vice versa, I assume for purposes of the motion that, as the borrowers contend, [8] the answer to both questions is yes. I turn to the contractual language.[9]

At the outset, the commitment letters explicitly promised both prepayment fees for the mortgage notes and breakage fees for the swap. The 2006 Financing Proposal states under "Interest Rate": "Any principal prepaid that is subject to a SWAP, CAP or FORWARD START or other Derivative contract will be subject to prepayment penalties and other costs that are normal and customary (a.k.a. Breakage Fees) for derivatives. " 2006 Financing Proposal at 2 (emphasis added). The language of the 2007 Financing Proposal is similar, although the amount of the loan prepayment penalty is different. Aug. 16, 2007 Financing Proposal (ECF No. 141-10). In turn, the mortgage notes as executed include both categories of fees. The 2006 Note provides:

Borrower shall have the right to prepay the Loan in whole or in part, together with all delinquency charges, plus any LIBOR[10] Rate Loan Prepayment Fee or any fees in connection with any Hedging Obligations, as such terms are set forth and defined in Rider A to the Note [defining a swap as a Hedging Obligation]... and additional interest on the amount being prepaid equal to an amount based upon ...

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