2010-1 SFG Venture LLC v. Lee Bank & Trust Co.

332 Ga.App. 894

775 S.E.2d 243

2010–1 SFG VENTURE LLC et al.

v.LEE BANK & TRUST COMPANY.

No. A15A0271.

Court of Appeals of Georgia.

July 9, 2015.

Certiorari Denied Oct. 5, 2015.

Morris, Manning & Martin, Robert Philip Alpert, Jeffrey Keith Douglass, Ryan Chorkey Burke, Atlanta, for Appellants.

Thompson, O'Brien, Kemp & Nasuti, Aaron Marcus Kappler, William J. Shaughnessy, Norcross, for Appellee.

Opinion

ELLINGTON, Presiding Judge.

Pursuant to a granted application for an interlocutory appeal, 2010–1 SFG Venture LLC and Milwaukee Hotel Owner LLC (collectively “Venture”) contend that the Superior Court of Fulton County erred in denying their motion for summary judgment on Lee Bank & Trust Company's (“Lee Bank's”) claims. For the following reasons, we reverse the court's order in part, vacate it in part, and remand with direction.

Summary judgment is proper when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. A de novo standard of review applies to an appeal from a [grant or] denial of summary judgment, and we view the evidence, and all reasonable conclusions and inferences drawn from it, in the light most favorable to the nonmovant.

(Citations and footnote omitted.) GEICO Gen. Ins. Co. v. Wright, 299 Ga.App. 280, 281, 682 S.E.2d 369 (2009). So viewed, the record shows the following.

This case arises out of a commercial real estate loan for approximately $15 million, which was originated by non-party Specialty Finance Group LLC (“SFG”) in 2008 to DOC Milwaukee LP (“the borrower”) to fund the construction of a hotel in Milwaukee, Wisconsin. The hotel was part of the collateral for the loan. After SFG originated the Loan, Lee Bank bought a 3.36% interest in the loan for $500,000, the sale of which was memorialized in a “Participation Agreement” signed by the president and CEO of Lee Bank.

Pursuant to the participation agreement, Lee Bank, in exchange for its purchased interest, was entitled to receive its pro rata share of the payments the borrower made on the loan. The agreement also obligated Lee Bank to pay its pro rata share of any losses and expenses sustained in connection with the loan. SFG, as the holder of the largest percentage interest in the Loan (about 47%) retained the “reasonable discretion” to make decisions concerning the administration of the loan. However, it also required SFG to “exercise the same degree of care in administering the loan that SFG customarily exercises in administering similar loans for its own account.” The agreement provided that Lee Bank purchased its interest “on a non-notification, all servicing rights retained by SFG basis.” Although SFG agreed to make “reasonable efforts under the circumstances then applicable” to consult with Lee Bank concerning any actions taken with respect to the loan, the agreement provided that “in all events the decision of SFG shall control.” Further, although the agreement provided that SFG would inform Lee Bank of any default by the borrower, SFG retained the right “to sell or otherwise dispose of the [hotel] without the prior approval of [Lee Bank] and the commercially reasonable decision of SFG shall be binding as to the best manner in which to proceed with respect to the completion or construction, operation, management and disposition of the [hotel].”

The agreement also contained specific provisions governing any breaches of the participation agreement by SFG or by Lee Bank. With respect to an alleged breach by SFG, the agreement provided that, “[i]f SFG shall fail to cure any material default by SFG under this agreement” within 30 days, Lee Bank would have, in addition to its rights at law and equity, a right to require SFG to repurchase its participation interest, less certain costs and subject to any regulatory limitations.

The agreement also limited SFG's liability for any action taken with respect to the loan or participation agreement as follows:

17. Limitation on Liability of SFG. SFG shall not be liable for any action taken or omitted to be taken by it or by any of its employees, members, officers, managers, contractors or agents, or any of them, for any errors of judgment under, or in connection with this Agreement, or any of the Loan Documents, except in the case of gross negligence or willful misconduct.

The record shows that the borrower initially made regular payments on the loan, that SFG made regular remittances to Lee Bank of its 3.36% share of those loan payments, and that Lee Bank accepted and retained those remittances. The borrower, however, eventually defaulted on the loan by failing to make loan payments and by halting construction of the hotel. Shortly thereafter, the loan guarantors declared bankruptcy. In May 2009, SFG's parent company, Silverton Bank, was closed and, a year later, the FDIC was appointed receiver for Silverton and SFG. The FDIC sold SFG's loan portfolio, including SFG's interest in the instant loan, to an affiliate of Venture.

Following its purchase of the loan from the FDIC, Venture assumed SFG's role as lead lender under the purchase agreement. Venture took control of the hotel and, over a three-and-a-half year period, made repairs to it, paid insurance and real estate taxes, pursued legal action against the borrower, and negotiated settlements with contractors who had placed liens against the property. In its efforts to secure and to maintain the value of the hotel, Venture incurred over $6 million in expenses. Venture issued regular demands to the participant banks for their pro rata shares of these expenses. For example, in 2010 and 2011, it demanded of Lee Bank payments of $20,243.27, $9,070.27, $11,504.99, and $3,424.27.

By letter dated January 3, 2013, Lee Bank informed Venture that it believed that the expenses incurred in connection with the loan were grossly unreasonable. It considered Venture to be in breach of the participation agreement by failing to notify it of “material adverse information.” Lee Bank demanded that “Venture acknowledge that the Participation Agreement[ has] been terminated and to restore [Lee Bank's] consideration by repurchasing [its] participation interest[ ] within thirty (30) days” of the date of the letter. Lee Bank also demanded that Venture remit to it its pro-rata share of any proceeds of the sale of any collateral “without offset or diminution.” On January 31, 2013, Venture sued Lee Bank for breaching its obligation under the participation agreement. Lee answered, denying responsibility for the expenses, and brought counterclaims for breach of contract and rescission.

While the lawsuit was pending, Venture retained a commercial real estate firm to sell the renovated hotel. Venture's intention to sell the hotel was published to a website that it had created to keep participant banks informed of its loan management activities. The real estate agent procured six offers, the highest of which was for $12 million. The $12 million offer and the associated contract documents were shared with the participant banks; none of the banks objected to the sale price. The hotel was sold in October of 2013; thereafter, Venture distributed $141,163.94 to Lee Bank. According to Venture, this amount represented Lee Bank's share of the proceeds ($347,695.69) less that portion of expenses due Venture from Lee Bank ($206,531.75).

In early August 2013, an Atlanta-based consulting firm inspected the property at the request of counsel for Lee Bank, and it appraised the hotel in the condition it had been on May 12, 2012, before the renovation was complete. The firm opined that the appraised value of the hotel as of that date was $17.1 million.

On January 31, 2014, Venture moved for summary judgment on Lee Bank's counterclaims for breach of contract and for rescission arguing, inter alia, that Paragraph 17 of the participation agreement limited SFG's (and hence Venture's) liability only to those acts or omissions that amounted to gross negligence or willful misconduct. The trial court denied the motion. In its order, the court determined that the limitation of liability provision in the participation agreement was unenforceable because the provision was not prominently displayed in the agreement. Additionally, with respect to Lee Bank's breach of contract claims, the trial court ruled that Lee Bank could pursue a breach of contract claim based on Venture's failure to repurchase Lee Bank's participation interest. And, with respect to Lee Bank's rescission claim, the trial court found that questions of fact remain as to whether Lee Bank's offer to restore the consideration it received under the agreement was reasonable under the circumstances. It is from these rulings that Venture appeals.

1. (a) Venture contends that the trial court erred in concluding that Paragraph 17 of the participation agreement, a clause that limited SFG's (and hence Venture's) liability to acts or omissions that amounted to gross negligence or willful misconduct, was unenforceable because it was not sufficiently prominent in the agreement. Our review of this claim of error is de novo.¹ For the following reasons, the limitation of liability clause² at issue was valid and enforceable and the trial court erred in concluding to the contrary.

It is the paramount public policy of this state that courts will not lightly interfere with the freedom of parties to contract. A contracting party may waive or renounce that which the law has established in his or her favor, when it does not thereby injure others or affect the public interest. Exculpatory clauses in Georgia are valid and binding, and are not void as against public policy when a business relieves itself from its own negligence.

(Citation omitted.) Neighborhood Assistance Corp. of America v. Dixon, 265 Ga.App. 255, 256(1), 593 S.E.2d 717 (2004).³ Given this paramount public policy, courts “exercise extreme caution in declaring a contract void as against public policy, and should do so only when the case is free from doubt and an...