Ankeny Hotel Assocs. v. OSK X, LLC

663 F.Supp.3d 947

ANKENY HOTEL ASSOCIATES, LLC, Plaintiff/Counterclaim Defendant, v. OSK X, LLC, Amerinational Community Services, LLC, d/b/a as AmeriNat,

OSP Value Fund III, LP, OSP LLC,

d/b/a O'Brien Staley Partners, Defendants/Counterclaimant.

OSK X, LLC, Third-Party Plaintiff, v. Kinseth Hospitality Company, Inc., Leslie Kinseth, Gary Kinseth,Linda Skinner, and Bruce Kinseth, Third-Party Defendants.

Case No. 3:21-cv-00054-SMR-SBJ

United States District Court, S.D. Iowa, Davenport Division

Signed March 22, 2023

Robert Blake McMonagle, Spencer Matthew Willems, Dentons Davis Brown PC, Des Moines, IA, for Plaintiff/Counterclaim Defendant/Third-Party Defendants.

Lance W. Lange, Stephanie Anne Koltookian, Faegre Drinker Biddle & Reath LLP, Des Moines, IA, for Defendants/Counterclaimant/Third-Party Plaintiff.

ORDER OSK X, LLC's MOTION FOR SUMMARY JUDGMENT ON COUNTERCLAIM AND THIRD-PARTY COMPLAINT

STEPHANIE M. ROSE, CHIEF JUDGE

The question before the Court is whether a hotel operator, Ankeny Hotel Associates, LLC, ("AHA") is contractually responsible for indemnification of attorney's fees after suing its lender ("OSK") to prevent the imposition of a penalty interest rate after the hotel experienced financial difficulties caused by the COVID-19 pandemic. OSK argues that the loan documents clearly provide that AHA is responsible for such fees, and that AHA could have avoided the costs of litigation by acknowledging the weakness of their claims after failing to obtain a preliminary injunction earlier in this case. OSK seeks summary judgment on the fees, asking the Court to enter a declaratory judgment finding that AHA and the individual guarantors of the loan are each jointly and severally liable for their attorney's fees and expenses.

AHA responds that the contract provision for attorney's fees violates Iowa public policy because it is unilateral. Additionally, AHA asserts that enforcement of this provision would discourage parties from pressing their legal claims in court and give an advantage to parties who seek to engage in wrongful actions by shielding them from the costs of litigation. It further objects to indemnification for attorney's fees for OSK's loan servicer because there is no contract between AHA and the company. It finally asserts the amount of fees sought by OSK is unreasonable.

I. FACTUAL BACKGROUND¹

A. First Borrowing Agreement

In May 2018, AHA entered into a Loan Agreement, Promissory Note, and Mortgage Agreement (collectively, "Loan Documents") with Great Western Bank for commercial real estate located in Ankeny, Iowa. [ECF No. 131-2 ¶ 10]. The interest rate on the loan was 4.50% per year. Id. ¶ 11. On the same day the Loan Documents were signed by AHA, the individual Defendants ("Guarantors") each signed a personal Guaranty (collectively, "Guarantees"). Id. ¶¶ 28-32.² Each Guarantor agreed to fully guarantee all of AHA's obligations and liabilities "in its most comprehensive sense" under the Loan Documents. Id. ¶¶ 34-36.

The Loan Documents included certain covenants to ensure AHA's financial stability, one of which is the Debt Service Coverage Ratio ("DSCR"). The DSCR required AHA to maintain a certain level of profitability, before and after distributions to members. Id. ¶¶ 12, 14-15. The DSCR was defined in the Loan Agreement as "the relationship, expressed as a numerical ratio, between (i) Borrower's EBITDA³ before distributions for the applicable calendar annual period and (ii) the interest expense, and current principal portion of long-term debt for the calendar annual period." Id. ¶¶ 14, 15.

If AHA did not satisfy the DSCR, the Loan Documents defined that as an event of default. Id. ¶ 16. An event of default would automatically increase the interest rate to 18.00% per year. Id. ¶ 17. If AHA experienced an event of default, it was obligated to notify OSK in writing within five days. Id. ¶ 19.

B. Amendment to the Loan Agreement

On December 18, 2020, AHA and Great Western Bank entered into an Amendment to the Loan Agreement, which included a Notice and Acknowledgement of Noncompliance. Id. ¶ 22. This Amendment stated that AHA had not complied with the DSCR covenants during the calendar year ending on December 31, 2019. Id. ¶ 23. The Amendment added additional reporting requirements for AHA, such as providing a monthly balance sheet and income statement, a Certificate of Compliance, and submission of Smith Travel Accommodation Reports⁴ at the end of each quarter. Id. ¶ 24. The Certificate of Compliance also contained a DSCR requirement. Id. ¶ 25.

C. Assignment of AHA Loan

Shortly after the Amendment was agreed to, Great Western Bank assigned the Loan Agreement, Promissory Note, and Mortgage to OSK. Id. ¶ 42. The Loan Documents expressly stated that Great Western Bank had "the right to sell, assign, transfer[ ] . . . any interest" to successors and assigns. Id. ¶¶ 43-44. AHA was notified of the assignment within days. Id. ¶ 45.

AHA submitted its 2020 financial statements to OSK in early January pursuant to the terms of the Loan Agreement. Id. ¶ 56. The financial statements reflected that AHA was not in compliance with the DSCR covenant for either pre- or post-distribution. Id. ¶ 60. However, OSK's loan servicer, AmeriNat, did not provide a Notice of Event of Default until May 11, 2021. Id. ¶ 64. This notification also included the notice of the default rate and contained a reservation of rights notice. Id. ¶ 64. The Notice of Event of Default expressly stated that OSK had not waived the specific default or any other default and it expressly reserved all of its rights, powers, privileges, and remedies under the Loan Agreement. Id. ¶ 66.

AHA refused to pay the default interest rate, asserting that OSK did not give AHA an opportunity to cure the default. Id. ¶ 69. On June 9, 2021, AHA sought a payoff statement from AmeriNat so it could secure refinancing from another lender. Id. ¶ 70. OSK responded that it would provide a payoff statement on the condition that it collected the default interest that had accrued from January 1, 2021 through the payoff date. Id. ¶ 71.

II. PROCEDURAL BACKGROUND

AHA initiated this case on June 16, 2021 when it filed a motion for declaratory relief and preliminary injunction against OSK. [ECF No. 1]. AHA sought a preliminary injunction to prohibit OSK from collecting the default interest rate on the Loan Agreement and Promissory Note. It stated that a preliminary injunction was necessary because it was prepared to refinance with another lender at a favorable rate which was "time sensitive." [ECF No. 3-1 at 8]. On July 6, 2021, the Court denied the motion for preliminary injunction after finding that AHA could not satisfy the factors necessary for such preliminary relief. [ECF No. 19]. It concluded that AHA could not satisfy any of the Dataphase factors to obtain a preliminary injunction, in particular the irreparable harm element, because the injury could be remedied with money damages in lieu of preliminary relief. Id. at 10.

AHA then refinanced the loan around July 13, 2021. [ECF No. 137-1 ¶ 72]. The payoff amount for the loan refinance included 18.00% interest plus OSK's attorney's fees through that date. Id. ¶ 73. OSK followed up by answering the Complaint and asserting a counterclaim of its own for indemnification of attorney's fees and expenses. [ECF No. 24]. It also filed a Third-Party Complaint against the Guarantors for the same, along with a request for declaratory judgment. [ECF No. 25]. The case then proceeded to discovery.

On February 23, 2022, AHA filed a Second Amended Complaint ("SAC") after obtaining leave from the Court. [ECF Nos. 62, 63]. The SAC added OSP, LLC, AmeriNat, and OSP Value Fund III, LP, as Defendants.⁵ [ECF No. 63].

Soon after AHA filed the SAC, OSK moved to dismiss. [ECF Nos. 72, 74]. AHA initially filed a resistance to the motions to dismiss and then—on the same day—moved to voluntarily dismiss all parties under Rule 41. [ECF Nos. 78, 79, 80]. AHA explained in its Rule 41 motion that "it believes it has meritorious grounds to continue to pursue its claims against OSK. However, in light of the extensive discovery, strategy, motions practice, and the reality of the time and expense required to fully litigate its claims against OSK, AHA is seeking this Court's leave to voluntarily dismiss OSK—as well as Value Fund and OSP—without prejudice." [ECF No. 80 at 2]. AHA wrote that it "will continue to litigate this matter against AmeriNat," but eight days later the company changed its mind and filed a Rule 41 motion to dismiss AmeriNat explaining that it "elected not to further pursue its claims against AmeriNat at this time as a matter of practicality and economics." [ECF Nos. 80 at 3; 92 at 2].

OSK and AmeriNat responded to AHA's Rule 41 motions by asserting the case "has resulted in a colossal waste of time and resources" and sought a dismissal of AHA's claims with prejudice including an award for attorney's fees and costs. [ECF Nos. 97, 99]. OSK then amended its counterclaims and third-party complaint to recoup attorney's fees incurred by AmeriNat after it was named as a Defendant in the SAC. [ECF Nos. 115, 116].

OSK has now filed a Motion for Summary Judgment on its counterclaim and third-party complaint. [ECF No. 130]. It seeks judgment as a matter of law on its claims for indemnification of attorney's fees and expenses from both AHA and the Guarantors. OSK also asks for declaratory judgment finding that each Guarantor is jointly and severally liable for its reasonable attorney's fees and expenses incurred during the litigation. AHA resists the Motion for Summary Judgment, claiming that the attorney's fees provision is barred under Iowa law as a violation of public policy. [ECF No. 137].

III. DISCUSSION

A. Summary Judgment Standard

Rule 56 of the Federal Rules of Civil Procedure provides that a party may move for summary judgment for each claim on which it asserts that there is no genuine dispute of material fact. Fed. R. Civ. P. 56(a). Summary...