Can IV Packard Square, LLC v. Schubiner

1

CAN IV PACKARD SQUARE, LLC, Plaintiff-Appellee, v. CRAIG SCHUBINER, Defendant-Appellant.

No. 21-1717

United States Court of Appeals, Sixth Circuit

August 12, 2022

NOT RECOMMENDED FOR PUBLICATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN

Before: GIBBONS, WHITE, and NALBANDIAN, Circuit Judges.

OPINION

NALBANDIAN, Circuit Judge

A quick drive south from the University of Michigan sits an apartment-retail complex formerly known as Packard Square. Construction for the development finished in 2019 after going more than $20 million over budget. Disputes over financing for the development are the genesis of this appeal.

Can IV Packard Square, LLC ("Can IV") financed the project by loaning tens of millions of dollars to the developer Packard Square, LLC ("Packard Square"). It secured that loan with a mortgage on the property. In addition Packard Square's sole member Craig Schubiner executed a guaranty to cover completion costs above and beyond the original budget. Can IV ended up foreclosing on the property and recouped the guaranty amount from the sheriff's sale and a statecourt judgment. But Can IV sued to enforce the guaranty anyway, and the district court awarded $20 million plus 16 percent interest. Because this amounts to impermissible double recovery, we vacate, reverse, and remand with instructions to enter summary judgment in Schubiner's favor.

The law in this case is simple but the facts are complex. We begin with the facts and procedural history. Back in 2014, Packard Square set out to redevelop a derelict shopping center into a luxury retail and apartment complex. To finance the project, Packard Square obtained a $53.78 million loan (the "Original Loan") from Can IV, a private equity firm. The parties executed a loan agreement (the "Original Loan Agreement"). And they secured that loan with both a mortgage on the property and a promissory note (together with the Original Loan Agreement, the "Original Loan Documents"). Under the mortgage, Packard Square consented to "the appointment of a receiver for all or any part of the Property" in the event of default. (R.1, Mortg., PageID 119.)

Can IV wanted additional assurances, so Packard Square's principal and sole member- Craig Schubiner-executed two guaranties to belt-and-suspender Can IV's investment. The first of these (the "Recourse Guaranty") guaranteed repayment of the Original Loan. And the second (the "Completion Guaranty") guaranteed both the completion of the project "within the time limits set forth in the [Original] Loan Documents" and payment of any "Completion Cost Deficiency." (R. 130-3, Completion Guar., PageID 8626-41.) "Completion Cost Deficiency," in turn, included construction costs going above and beyond the budget for hard and soft costs listed in the Original Loan Agreement (set at $37.92 million).^[1] (Id. at PageID 8627; R. 152-2, Original Loan Agreement, PageID 10740.)

With these documents papered and inked, construction began on the project. But it wasn't long before things began to unravel. Soon enough, the parties found themselves embroiled in a series of legal disputes, three of which are relevant here.

Receivership and foreclosure. In 2016, Packard Square defaulted by missing the construction milestones specified in the Original Loan Documents. And so Can IV filed suit in the Washtenaw County Circuit Court, seeking foreclosure and the appointment of a receiver. That court appointed a receiver to take over the property, borrow funds as needed, and complete the construction. Packard Square appealed, but the Michigan Court of Appeals affirmed. Can IV Packard Square LLC v. Packard Square LLC, No. 335512, 2018 WL 521843, at *5, *9 (Mich. Ct. App. Jan. 23, 2018) (per curiam). Soon after that, the Michigan Supreme Court denied leave to appeal. Can IV Packard Square LLC v. Packard Square LLC, 917 N.W.2d 624 (Mich. 2018) (mem.).

By this point, it was becoming apparent that the project would end up overbudget. And so the newly-appointed Receiver secured an additional $37.46 million in loans from Can IV (the "Receiver Loan") to finance and complete the remaining construction. This Receiver Loan was secured by a super-priority mortgage on the same property.

The litigation continued apace in the meantime. Can IV eventually moved for summary disposition on its foreclosure claim. More specifically, it sought foreclosure on both mortgages (on the Original Loan and the Receiver Loan, respectively). See Can IV Packard Square, LLC v. Schubiner, No. 352510, 2021 WL 1711593, at *2 (Mich. Ct. App. Apr. 29, 2021) (per curiam). The Washtenaw County Circuit Court granted summary disposition and "entered a judgment of foreclosure authorizing the sale of the property at a sheriff's sale." Id. (internal quotation omitted). A sheriff's sale took place in November 2018, and Can IV purchased the property with a $75 million credit bid. Id. Can IV applied the proceeds first to the higher priority Receiver Loan and the leftover amount to the Original Loan. Id. at *11. This left Can IV about $14 million short, which included the remaining indebtedness on the Original Loan and $1.6 million for the remaining construction costs. Id. Not long after, the Michigan Court of Appeals affirmed the trial court's order. Id. at *1. The Michigan Supreme Court eventually denied leave to appeal. Can IV Packard Square LLC v. Packard Square LLC, 939 N.W.2d 686, 686-87 (Mich. 2020) (mem.).

Recourse Guaranty. A second action paralleled much of the receivership litigation. In September 2017, Packard Square filed for Chapter 11 bankruptcy. Can IV, 2021 WL 1711593, at *1. The bankruptcy triggered, in turn, Can IV's right to enforce the Recourse Guaranty. Id. at *2. And so in 2018, Can IV sued Schubiner in the Oakland County Circuit Court for repayment of the Original Loan. Id. In December 2019, the court granted summary disposition in Can IV's favor and held Schubiner liable for the outstanding $14 million. Id. at *3. Schubiner appealed, but the Michigan Court of Appeals affirmed. Id. at *17. About a year later, the Michigan Supreme Court denied Schubiner's application for leave of appeal. Can IV Packard Square, LLC v. Schubiner, 970 N.W.2d 324 (Mich. 2022) (mem.).

Completion Guaranty. That brings us to the third and final lawsuit, which is the immediate dispute presented on appeal. With the Receiver at the helm, construction finally finished in February 2019. Two months later, Can IV decided to enforce the Completion Guaranty and sent Schubiner a demand letter for payment of a $20.09 million "Completion Cost Deficiency." (R. 1, Apr. 25, 2019 Demand Letter, PageID 240-42.) Can IV arrived at this number by subtracting the Original Loan Agreement's budget ($37.92 million) from the total hard and soft costs expended in completing construction ($58.01 million). When Schubiner refused to pay, Can IV filed suit in the Washtenaw County Circuit Court. Schubiner removed the case to the Eastern District of Michigan on diversity.

Eventually, Can IV and Schubiner filed dueling summary judgment motions. Can IV claimed "the clear and unambiguous terms of [the] Completion Guaranty" entitled it to $20.09 million in damages. (R. 129, Can IV Mot., PageID 7761.) Schubiner's motion, meanwhile, focused on res judicata. Responding to Can IV's motion, Schubiner argued that Can IV could not establish any damages under the Completion Guaranty because it was "fully repaid for the Receiver's construction costs and more." (R. 152, Schubiner Resp., PageID 10635.) More specifically, the $20.09 million "Completion Cost Deficiency" was financed with the Receiver Loan, and Can IV had already recouped the full sum of that loan by applying the foreclosure proceeds.

The district court was unpersuaded. In August 2021, it granted Can IV's motion and denied Schubiner's. Citing no cases, the court explained that Can IV had a viable claim for damages because it "does not seek to hold defendant accountable for [the Receiver] loan, but to hold him to the terms of his guaranty to pay the completion cost deficiency." (R. 159, Aug. 16, 2021 Op. &Order, PageID 13081.) The district court went on to award Can IV $20.09 million plus 16 percent interest. And now Schubiner appeals.

II.

"We review a district court's grant of summary judgment de novo, viewing all the evidence in the light most favorable to the nonmoving party and drawing all justifiable inferences in his favor." Delek U.S. Holdings, Inc. v. United States, 32 F.4th 495, 497 (6th Cir. 2022) (internal quotations omitted).

III.

Under Michigan law, parties claiming breach of contract must establish that "(1) there was a contract (2) which the other party breached (3) thereby resulting in damages to the party claiming breach." Miller-Davis Co. v. Ahrens Const., Inc., 848 N.W.2d 95, 104 (Mich. 2014). And here, "[t]his appeal concerns only the damages component of Can IV's claim (element (3))." ^[2] (Appellant Br. at 20.) Schubiner argues that Can IV's claim fails because the damages here amount to impermissible double recovery. And he challenges the 16 percent interest rate as well. Because Schubiner prevails on the double-recovery question, we need not reach the second issue.

"Michigan law proscribes double recovery for the same injury." Chicilo v. Marshall, 460 N.W.2d 231, 232 (Mich. Ct App. 1990) (per curiam). And "[t]o ascertain whether a double recovery has occurred, we must determine what injury is sought to be compensated." Id. Importantly, "[i]n making such a determination, . . . the label attached to the plaintiff's claims are of little relevance." Id.; see also Ledbetter v. Brown City Sav. Bank, 368 N.W.2d 257, 262 (Mich. Ct. App. 1985) (per curiam) ("At issue is whether there was a double recovery...