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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 [a percentage starting at 3% of the amount to be prepaid and declining to zero as the Note matures].

2006 Promissory Note at 3 (emphasis added).[11] With respect to the LIBOR Loan Prepayment Fees, Rider A provides:

When classified as a LIBOR Rate Loan, the Loan may be prepaid upon the terms and conditions set forth herein. The Borrower acknowledges that additional obligations may be associated with prepayment, in accordance with the terms and conditions of any applicable Hedging Contracts [defined in the Rider to include interest rate swaps].

Id. at 12 (emphasis added).

Turning to the swap documents, I observe that they describe the calculation of "breakage fees" for the swap part of the transaction, but they do not speak to the value of the bank's ability to reinvest prepaid principal as part of that calculation. The ISDA master agreement has no language that suggests that such an offset is required. Instead, the ISDA master agreement is devised for use in a variety of transactions, including those where the interest rate swap agreement is with a third party, not the lender. See Thrifty Oil Co., 322 F.3d at 1043 (describing uses of ISDA master agreement). In those instances there would be no return of principal to the swap party, and it is therefore not surprising to find no reinvestment offset language in the ISDA master agreement.[12] Neither the bank nor the borrowers offer an explanation for why the parties executed variable-rate mortgage loans and interest-rate swap agreements, rather than execute fixed-rate mortgage loans in the first place.[13] But in executing the swap, the borrowers agreed to pay a fixed rate, thus avoiding the vagaries of interest rate fluctuations. And the bank, while also insulating itself from adverse changes in interest rates, faced the risk that if rates increased above the fixed rate, the bank would not see the benefit of this interest-rate environment. The benefit of the bank's bargain on the swap agreement has nothing to do with payment of principal, but with whether interest rates go up or down.

The documents tailored to the 2006 and 2007 swap agreements, the Confirmations, each provides that if there has been no default the borrowers may, with notice, terminate the swap. 2006 Confirmation at 3; 2007 Confirmation at 4. Then, they say, the bank as "Calculation Agent" must "determine a Settlement Amount in accordance with the provisions of the ISDA Master Agreement and provide a statement with respect thereto...." 2006 Confirmation at 3; 2007 Confirmation at 4. Under the ISDA Master Agreement, "Settlement Amount" includes a party's "Loss, "[14] ISDA Master Agreement at 16 (ECF No. 141-23) ("ISDA Master"), and "Loss, " in turn, is defined in part as

[A]n amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement... including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining, or reestablishing any hedge or related trading position (or any gain resulting from any of them).... A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A Party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets.

Id. at 15. There is no reference here to reinvestment value of prepaid principal, and no reference to what the standard would be for determining such a value.[15]

I conclude that even if these all are integrated documents and even if prepayment of the loans requires termination of the swaps, nothing in the documents or the transactions supports requiring a principal reinvestment offset in calculating the swap breakage fees.[16] The borrowers want to have a trial where the factfinder would determine what the parties' intent was in entering the transactions. The borrowers say that they entered these transactions believing that they were agreeing to a fixed mortgage interest rate, with no understanding that if they prepaid they would owe huge additional amounts to the bank. But the borrowers do not claim fraud in the inducement or mutual mistake between them and the bank so as to void their agreements. And in fact, the borrowers did obtain the advantage of a fixed interest rate that will last as long as they pay until maturity. But the borrowers' position on swap breakage fees ignores the fact that the fixed interest rate was synthetic, that they had agreed to an underlying variable rate, and that the swap transaction gave the bank any profit that resulted from the variable rate falling below the fixed rate (just as the bank would have lost if the variable rate rose above the fixed rate). That is the benefit that the bank seeks to preserve in its calculation of loss on the swap if the borrowers prepay, and the reinvestment value of the prepaid principal plays no role in that calculation. I find no ambiguity in the documents on this score and thus no basis to allow parol evidence to interpret them. Zavota v. Ocean Acc. & Guarantee Corp., 408 F.2d 940, 943 (1st Cir. 1969) ("oral evidence will not be received to create ambiguity where none existed before.").[17] The bank, therefore, is entitled to summary judgment on this claim.

Because the borrowers no longer press their request for a declaration as to the dollar amount of fees due or a description of the methodology to be followed, I grant the bank's motion to dismiss the remainder of the declaratory judgment claims on the basis that they are not ripe for adjudication. (I find those claims to be unripe in any event.[18])

(B) Negligent/Intentional Misrepresentation

The borrowers' claim here is that the bank falsely quoted to the borrowers "prohibitively high" breakage fees associated with terminating the swap agreements, FAC at ¶ 16, and that while the borrowers were "skeptical that the Bank could be calculating fees consistent with the parties' agreement, " they "were required to conduct themselves as if the Bank's statements were true... because the consequence of proceeding otherwise were so severe." Pls.' SJ Opp'n at 47 (emphasis in original). Thus, the borrowers allege, the borrowers have suffered damage because they were "unable to pursue more favorable lending arrangements and other business opportunities because their assets and funds have been tied up in the... Transactions." FAC at ¶ 36. They make no claim that the bank was contractually obligated to quote the fees in advance and breached the contract in how it did so.

(1) Choice of Law

As a threshold matter, the parties disagree over what law applies to the misrepresentation claim. Compare Defs.' SJ Mot. at 41 with Pls.' SJ Opp'n at 42-43. Maine, unlike New York, [19] does not require claims for negligent misrepresentation to include a showing of a "special relationship." The borrowers argue that they have been harmed in Maine and that Maine law applies to the tort; the bank argues that because the misrepresentation claims are "essentially contractual, " Defs.' SJ Mot. at 41, the parties' selection of New York law under the swap agreements governs. Because Maine is the forum state, I apply Maine's choice of law rules to determine which state's substantive rules apply. York Ins. Co. of Me. v. Schultz, 307 F.Supp.2d 108, 111 (D. Me. 2004).

The borrowers have chosen to pursue tort relief, not contractual relief, [20] and questions regarding tort liability are "appropriately addressed pursuant to tort choice-of-law principles." State Farm Mut. Auto. Ins. Co. v. Koshy, 2010 ME 44, ¶¶ 21-23; see also Flaherty v. Allstate Ins. Co., 2003 ME 72, ¶¶ 11-22 (applying tort choice-of-law principles in a wrongful death case involving insurance coverage issues). For choice of law, Maine looks to the Restatement (Second) of Conflict of Laws. Uncle Henry's Inc. v. Plaut Consulting Co., 399 F.3d 33, 42 (1st Cir. 2005). Under section 148 of the Restatement, the relevant consideration is whether the plaintiffs' action in reliance took place in the state where the false representations were made and received. Restatement (Second) of Conflict of Laws, § 148 (1971). If that is the case, the local law of that state determines the rights and liabilities of the parties, unless some other state has a more significant relationship. Id.

Here, the agreements regarding the mortgage loans and associated swaps were reached in Maine. The plaintiff borrowers were residents of Maine, conducted their business in Maine, and the properties-which served as collateral for the mortgage loans-are located in Maine. The borrowers allege that they relied in Maine and that they suffered harm in Maine. New York does not have a more significant relationship merely because the swap agreements are governed by New York law. I therefore apply Maine law.

(2) Elements of Claim: Reliance

Claims for intentional and negligent misrepresentation, although clearly distinct, [21] "both require that the defendant have made a false representation of present fact and that the plaintiff justifiably relied on the representation as true." Kearney v. J.P. King Auction Co., 265 F.3d 27, 33-34 n. 8 (1st Cir. 2001) (construing Maine law). Therefore, like the parties, I do not distinguish the two for purposes of this discussion. See id. (finding it unnecessary to distinguish fraudulent and negligent misrepresentation for purposes of analyzing misrepresentation and reliance elements). Although ordinarily the reasonableness of a party's reliance is a question of fact for the jury, if no reasonable jury could find the party's reliance reasonable, a court may grant summary judgment. Rodi v. S. New England Sch. of Law, 532 F.3d 11, 15 (1st Cir. 2008).

The required reliance is directed to the truth of the misrepresentation. Kearney, 265 F.3d at 33-34 n. 8 ("that the plaintiff justifiably relied on the representation as true"); see also Restatement (Second) of Torts § 548 (1977) Comment (a) ("the recipient of a misrepresentation must rely upon the truth of the misrepresentation itself, and his reliance upon its truth must be a substantial factor in inducing him to act or to refrain from action.") (emphasis added). In response to the bank's motion for summary judgment that asserts, among other arguments, lack of reliance by the borrowers, the borrowers' evidence of justifiable reliance on the bank's calculations is distinctly qualified. The bank said in its statement of material facts: "Both [the borrowers and their principal] testified that they did not rely on them; that, indeed, they never believed that the indicative quotes were consistent with the correct assessment of Early Termination Fees." Defs.' Am. Statement of Material Facts at ¶ 122 (ECF No. 132). To that, the borrowers responded: "Qualified. The plaintiffs admit that they did not believe that the Bank's October 22, 2012 quotations of early termination amounts were correct, [22] but dispute that they did not act in reliance upon such quotations in deciding not to terminate their mortgages with the Bank. To the contrary, the plaintiffs directly relied upon the Bank, and did not pursue alternative financing options and other opportunities as a result." Pls.' Opposing Statement of Facts at ¶ 122 (ECF No. 139) (footnote added). In other words, the borrowers did not believe the bank's calculations, but claim justifiable reliance regardless of their disbelief. Specifically, the borrowers assert that they were "required to conduct themselves as if the Bank's statements were true, even if Plaintiffs had substantial doubts, because the consequences of proceeding otherwise were so severe." Pl.'s Opp'n to SJ at 47 (emphasis in original).[23] This hesitancy to prepay the loans and terminate the swaps reflects the borrowers' concern that the bank might turn out to be correct in its interpretation of the contract and the resulting calculations. As their legal memorandum says: "certainty as to the fact [of the calculations' accuracy] was not attainable, without obtaining a definitive determination from the Court as to the meaning of the contracts concerning the methodology to use to determine the termination fee (an avenue Plaintiffs ultimately resorted to), because the Bank as the Calculation Agent had the duty and right to make the initial calculation of the termination fee." Id. at 47.[24] To treat that uncertainty over proper contract interpretation ("the meaning of the contract") as justifiable reliance on the truth of false statements by the bank would extend Maine law beyond its current scope. In the end, this dispute is over what the contractual documents mean.


I GRANT the defendant's motion for summary judgment on parts of Counts I and II and DISMISS the remainder of those claims as unripe.

I GRANT the defendants' motion for summary judgment on Count III.

The defendants' motion to exclude plaintiffs' experts is MOOT.


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