Stobba Residential Assocs. v. FS Rialto 2019-Fl 1 Holder, LLC

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STOBBA RESIDENTIAL ASSOCIATES, L.P., And STOBBA ASSOCIATES, L.P. Plaintiffs v. FS RIALTO 2019-FL 1 HOLDER, LLC and RIALTO CAPITAL ADVISORS, LLC Defendants.

No. 2543

Commerce Program Control No. 22102744

Common Pleas Court of Philadelphia County, Pennsylvania, Civil Trial Division

February 7, 2023

ORDER

PAULA A. PATRICK, J.

AND NOW, this 6^th day of February 2023, upon consideration of Defendants' Motion for Summary Judgment Plaintiffs' Response in Opposition, all matters of record and the attached Opinion, it hereby is ORDERED and DECREED that the Motion for Summary Judgment is GRANTED. Judgment is entered in favor of Defendants and against Plaintiffs on all claims in the Amended Complaint.

OPINION

This action arises from a lender/borrower relationship between Plaintiffs Stobba Residential Associates and Stobba Associates, L.P. ("Borrower") and Defendants FS Rialto 2019-FL 1 Holder, LLC and Rialto Capital Advisors, LLC ("Lender"). Presently before the Court is Lender's Motion for Summary Judgment. For the reasons set forth below, Lender's Motion for Summary Judgment is GRANTED.

BACKGROUND

On August 2, 2019, Lender's predecessor in interest FS Creit Originator LLC made a loan to Borrower in the amount of $24,250,000.^[1] The Loan is evidenced by a Loan Agreement ("The Loan Agreement") and a Promissory Note (the "Note") ^[2] and is secured by an Open-End Mortgage Assignment of Leases and Rents, Security Agreement and Fixture Filing ("Mortgage").^[3] Borrower also executed a Deposit Account Control Agreement (the "DACA"). ^[4] The Loan Agreement requires Borrower to make monthly payment to Lender on each payment date. ^[5] The Loan Agreement provides that an "Event of Default" occurs if, "any portion of the Debt is not paid on or before the date the same is due and payable." ^[6]

Borrower granted Lender a security interest in the Property defined to include specific units within Headhouse Flats and Abbots Square developments in Philadelphia, and all Leases and Rents in connection with the Property.^[7] To protect the security interest in the Property, Borrower is required to have all tenants deposit rents into the DACA Account at Wells Fargo. The contents of DACA are to be disbursed into the Cash Management Account at Wells Fargo daily.^[8]

Borrower has not made any payments on the Loan since December 2020.^[9] Additionally, the Loan matured on August 9, 2022 and Borrower has not paid the Loan in full.^[10] Borrower contends its performance under the Loan Agreement is excused due to Lender's pre occurring breaches. ^[11]

Pending Lawsuits

On May 21, 2021, Lender commenced an action alleging breach of contract against Borrower. ^[12] Lender alleges that Borrower breached the Loan Agreement by failing to make the required monthly payments, failing to provide financial reporting and misrepresenting the status of tenant leases at the Property. Borrower filed an Answer with New Matter and Counterclaims. ^[13]

In June 2021, Lender filed a Petition to Appoint a Receiver. The Court denied the Petition to Appoint a Receiver but ordered Borrower to provide Lender and the Court with certain records and required that Borrower instruct the tenants to pay rent as required by the Loan Agreement. The Order has been appealed to the Pennsylvania Superior Court by Borrower and Lender.^[14]

Lender also filed an action to Confess Judgment against the Guarantor Eric Blumenfeld, which is currently stayed pending the resolution of the Lender Action and this action. ^[15]Additionally, Lender filed a Mortgage Foreclosure action against Borrower.^[16]

The Giant Lease

On March 9, 2016, Fresh Formats, LLC ("Fresh Formats") entered into a Lease with Borrower for commercial space at Abbotts Square to operate a "Bfresh" Market. ^[17] The Fresh Formats' Lease was assigned to Giant Food Stores, LLC ("Giant") on December 31, 2017. Giant agreed to accept the premises "as is" and began paying rent to Borrower. ^[18]

In December 2019, Giant began to fit the space for use as a grocery store and discovered the leased space was not serviced by 277/480-volt, 800 amp electric, the electric service Giant required for its purposes.^[19] In March 2020, due to the COVID 19 Pandemic, the City of Philadelphia and the Commonwealth of Pennsylvania issued orders shutting down Giant's fitting out of the space.^[20] Additionally, construction stalled because PECO required the entire building be converted to High Tension Service to accommodate Giant's electric needs.^[21]

On August 31, 2020, Giant issued a notice of default to Borrower because Borrower failed to provide Giant with 277/480-volt, 800 amp electric-service. ^[22] On November 20, 2020, Giant stopped paying rent to Borrower^[23] and on December 23, 2020, Giant filed a lawsuit against Borrower in the Eastern District of Pennsylvania alleging breach of the Lease. ^[24]

On February 18, 2021, during an email exchange between Borrower and Lender, Borrower provided an update to Lender regarding the Giant electric issue including the lawsuit filed by Giant against Borrower. ^[25] At Lender's request, Borrower provided Lender with documents including its engineering report, Giant's default letter, engineering drawings and the Lease.^[26] Thereafter, the following emails were exchanged between Lender and Borrower regarding the Giant issue:

-On March 1, 2021, Lender emailed Borrower as follows: "we [Lender] have some contacts at Giant that we have worked with a lot in the past. Do you mind if we [Lender] reach out to them to discuss their thoughts on what's going on here?^[27]

-On March 1, 2021, Borrower responded, "...if you feel that a conversation between Rialto [Lender] and Giant will be helpful then please do so...I hope the conversation is fruitful."^[28]

-On March 2, 2021, Lender sent an email to Giant stating in part, “... We [Lender] are involved in this deal as the lender and understand that there is a little bit of a disconnect regarding the delivery of the specific electrical service that you require, so we wanted to quickly touch based with you on this. Might you have some time this week for a quick call?" ^[29]

-On March 4, 202110:36 a.m., after having received no response from Giant to the March 2, 2021 email, Lender sent a follow up email.^[30]

-On March 4, 2021, 10:35 a.m., Borrower emailed Lender stating that after speaking with Blumenfeld, "and apologies for the reversal but Blumenfeld did not want lender/tenant communications. We have an opportunity to right size our process and he feels your involvement might skew our process."^[31] -On March 4, 2021, at 10:51 a.m., Lender emailed Giant and asked them to . .please disregard the request for the call..." ^[32]

-On March 4, 2021 at 11:33 a.m., Giant emailed Lender and apologized for the delayed response and stated ".. .After talking with counsel I've been advised not to comment because of pending litigation. I would suggest you seek a copy of the pleadings."^[33]

Kimley-Horn, an engineering firm hired by Lender regarding the electric issue, conducted an onsite investigation of the Giant space on March 12, 2021 and issued a report to Lender on April 12, 2021.^[34]

On May 20, 2021, Borrower emailed Lender with the following update:

Borrower provided Lender with correspondence from Giant's Chief engineer outlining the additional requirements from PECO over and above the cost of installing the HT service at Abbots Square. We [Borrower] believe that the approximate cost of these 2 components will be in the range of $500k. We are currently working with the local code officials to see if some concessions can be made to address Giant's concerns as outlined in the letter. It is our intention to resolve these issues and then agree to split these costs with Giant to move forward. Eric [the Guarantor] has asked that I keep you advised as to the progress on a regular basis.^[35]

On July 1, 2021, Giant voluntarily dismissed the action filed against Borrower without prejudice and entered into a consensual Stay and Tolling Agreement to attempt resolution of their dispute consensually.^[36]

Forbearance Requests

The Borrower submitted two requests to Lender for loan forbearance, April 27, 2020 and September 3, 2020.^[37] Lender received the requests, requested information to support the requests but, Lender never presented Borrower with a forbearance agreement.^[38]

This Action

On July 1, 2021, Borrower filed this action against Lender ("Borrower Action"). Lender filed Preliminary Objections to the Complaint which were overruled by the Court. On January 18, 2022, Borrower filed an Amended Complaint. The Amended Complaint alleges causes of action for breach of contract/breach of the duty of good faith and fair dealing (count I), tortious interference with contract (count II), promissory estoppel/detrimental reliance (count III), and seeks a declaratory judgment (count IV). Lender filed Preliminary Objections to the Amended Complaint which were overruled by the Court on March 8, 2022. On March 23, 2022, Lender filed an Answer with New Matter to the Amended Complaint. Presently before the Court is Lender's Motion for Summary Judgment which is ripe for disposition.

DISCUSSION

I. There is no evidence that Lender interfered with Giant's Lease causing Giant to stop paying rent and file a lawsuit against Borrower.

In Count II of the Amended Complaint, Borrower purports to state a claim for tortious interference with contract. Specifically, Borrower alleges that Lender intentionally and knowingly interfered with Borrower's relationship with Giant causing Giant to stop paying rent and file suit against Borrower.^[39] A party is liable for pecuniary loss due to tortious interference with a contractual relationship when the party "intentionally and improperly...