MLMT 2005-CIP1 PARSIPPANY PROPERTY, LLC v. WATERFORD OF PARSIPPANY PROPERTY LLC

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3.

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

MLMT 2005-CIP1 PARSIPPANY

PROPERTY, LLC, a New Jersey

limited liability company,

Plaintiff,

v.

WATERFORD OF PARSIPPANY PROPERTY,

LLC, a New York limited liability

company,

Defendant-Respondent,

and

CORK HOSPITALITY, LLC

n/k/a WATERFORD OF PARSIPPANY,

LLC; and MICHAEL A. SANTARO,

Defendants.

LVP WVTC LLC,

Plaintiff-Appellant,

v.

MICHAEL A. SANTARO,

Defendant.

December 7, 2016

Before Judges Simonelli, Carroll and Gooden Brown.

On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket Nos. L-2086-12 and L-2656-12.

Robert L. Grundlock, Jr., argued the cause for appellant (Rubin, Ehrlich & Buckley, P.C. attorneys; Mr. Grundlock, on the briefs).

John P. Leonard argued the cause for respondent (McElroy, Deutsch, Mulvaney & Carpenter, attorneys; Mr. Leonard, of counsel; Kristoffer S. Burfitt, on the brief).

PER CURIAM

Plaintiff LVP WVTC, LLC sued defendant Michael A. Santaro for his alleged violations of a personal guaranty given in connection with an $18 million nonrecourse mortgage loan1 to Santaro's wholly-owned company, Waterford of Parsippany, LLC (Waterford). The loan agreement required Waterford to maintain special purpose bankruptcy remote entity (SPE) status, pursuant to which Waterford was to maintain adequate capital; pay its own liabilities; not commingle funds; and not make loans. Violation of Waterford's SPE status constituted a "springing recourse event" that would trigger Santaro's personal liability under the guaranty. Notably, Waterford's payment default did not constitute such an event.

The trial court found that plaintiff's expert report was a net opinion and that plaintiff failed to establish any violation of the loan agreement that would render Santaro personally liable for the loan balance. The court consequently dismissed plaintiff's complaint on summary judgment, which plaintiff now challenges in this appeal. Plaintiff also appeals from several discovery orders that denied its repeated requests for the production of Waterford's tax returns. For the reasons that follow, we affirm.

I.

By way of background, Waterford is a single-purpose limited liability company formed for the purpose of constructing and owning a hotel on property in Parsippany that Waterford purchased in 1998. Originally, Waterford obtained a $12,300,000 mortgage loan from HSBC to finance the purchase and construction.

In 2005, Waterford refinanced the HSBC mortgage loan for $18 million with Ixis Real Estate Capital Inc. (Ixis). In its loan application, Ixis represented that "[t]he [l]oan will be non-recourse subject to Ixis' standard 'carve outs' . . ." 10.1 of the June 27, 2005 Loan Agreement thereafter entered into between Ixis and Waterford (the Loan Agreement) recited that,

except as specifically provided herein, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of Borrower's interest in the Property, in the Rents and in any other collateral given to Lender, and Lender shall not sue for, seek or demand any deficiency judgment against Borrower in any such action or proceeding under or by reason of or under or in connection with any Loan Document.

The Loan Agreement carved out certain limited exceptions to the general nonrecourse nature of the loan that were designated "springing recourse events." This meant that the occurrence of any of these springing events would allow Ixis not only to foreclose on the hotel property but to also seek full recourse against Waterford. Waterford's failure to maintain its SPE status constituted one such springing recourse event. Its failure to pay the mortgage loan did not. Santaro, as Waterford's sole member, executed a guaranty of the recourse obligation that similarly triggered his personal liability for the entire loan balance upon the occurrence of a springing recourse event.

The Loan Agreement also obligated Waterford to enter into a management agreement for the operation of the hotel. Under this arrangement, all of Waterford's financial commitments, with the exception of the mortgage debt to Ixis, were to be paid by Marriott, which operated the hotel. The net profits were then distributed to Waterford only after Marriott satisfied all of Waterford's other obligations, including the funding of tax escrows and reserve accounts, payments to the hotel's employees and vendors, and Marriott's management fee.

The Loan Agreement acknowledged that Waterford was using the $18 million loan proceeds to refinance the property and pay closing costs, and that "[a]ny excess proceeds may be used for any lawful purpose." Following the closing, after satisfaction of the HSBC mortgage and various closing costs, the excess proceeds of more than $6 million were wired to Santaro's account with Ixis's knowledge.

It is undisputed that Waterford defaulted on the loan payments in September 2010. In March 2011, MLMT 2005-CIP1 Parsippany Property, LLC (MLMT), the assignee of the loan between Ixis and Waterford, commenced an action to foreclose the mortgage. MLMT then sold the loan to plaintiff LVP, which obtained a final judgment of foreclosure on April 19, 2012, and purchased the hotel property for nominal consideration at a sheriff's sale in July 2012. Waterford and Santaro filed counterclaims against MLMT in the foreclosure action. Those counterclaims were severed and transferred to the Law Division, where they were consolidated with the present action until they were dismissed on summary judgment on December 1, 2014.

Plaintiff filed the present action against Santaro on June 21, 2012. In its complaint, plaintiff alleged that Waterford failed to maintain its SPE status, thus triggering Waterford's full recourse obligation and rendering Santaro personally liable under the guaranty for the entire amount of the loan. Santaro moved to dismiss the complaint for failure to state a claim. R. 4:6-2(e). Judge Stephan C. Hansbury denied the motion on January 28, 2013. In his written statement of reasons, Judge Hansbury explained that "[i]f [] [p]laintiff can prove that [] [d]efendant was obligated to maintain adequate capital for Waterford and failed to do so, this would constitute a breach of [d]efendant's obligation to maintain [SPE] [s]tatus which would trigger [p]laintiff's right to recourse under the Loan Agreement."

During discovery, plaintiff served Santaro with various requests for the production of documents, including Waterford's tax returns. Santaro and Waterford refused to produce the tax returns and moved for a protective order. The court granted the protective order on January 6, 2014, reasoning that plaintiff failed to demonstrate the "strong need" required under Ullman v. Hartford Fire Insurance Company, 87 N.J. Super. 409, 415 (App. Div. 1965). Plaintiff later moved to impose sanctions on Santaro and Waterford under Rule 4:23-2(b) for failure to comply with discovery. On January 15, 2015, the court denied the request for sanctions and again denied plaintiff's request for the production of Waterford's tax returns. The court did, however, grant plaintiff's alternative request to serve a subpoena on Waterford's New York accountant to enable plaintiff to obtain information necessary for the preparation of its expert report.

Santaro moved for summary judgment after the discovery period ended. He contended that plaintiff failed to establish a violation of Waterford's SPE status that would trigger his personal liability under the guaranty. Judge Donald S. Coburn heard oral argument on March 20, 2015, and adjourned the motion to allow plaintiff to complete its expert report. Prior to the new return date, plaintiff filed another cross-motion for sanctions on the basis that Santaro's document production was deficient, and again argued the need for the production of Waterford's tax returns.

Judge Coburn again conducted oral argument on May 8, 2015, after plaintiff's expert accountant, H. Edward Morris, Jr., produced his report and was deposed. Addressing plaintiff's discovery motion, Judge Coburn noted that the discovery period had ended, and that plaintiff never sought reconsideration of the two prior orders denying its request for Waterford's tax returns. The judge found that Morris's expert report was a net opinion; that the loan documents contained no definition of "adequate capital" nor did any expert opine as to what the term meant; and that "there [was] no evidence that there was a failure to maintain adequate capital, nor [was] there evidence with respect to commingling." Because the judge found no evidence of a violation of Waterford's SPE status that would alter the nonrecourse nature of the loan, he entered summary judgment dismissing plaintiff's complaint. This appeal followed.

II.

Initially, we clarify what issues are before us on appeal. Plaintiff appeals from the May 8, 2015 summary judgment order. In its notice of appeal, plaintiff also lists the January 6, 2014 and January 15, 2015 discovery orders, to the extent they denied plaintiff's requests for the production of Waterford's tax returns. However, nowhere in its brief on this appeal does plaintiff present any legal argument or citation of law explaining how the trial court erred in failing to compel the production of the tax returns. As a consequence, plaintiff has effectively waived this argument on appeal. See N.J. Dep't of Envtl. Prot. v. Alloway Twp., 438 N.J. Super. 501, 505-06 n.2 (App. Div.), certif. denied, 222 N.J. 17 (2015).

Therefore, the only issues before us are plaintiff's contentions regarding the May 8, 2015 summary judgment. Plaintiff argues that the trial court erred in granting summary judgment because Santaro failed to negate the existence of material facts giving rise to his personal liability under the loan documents. Plaintiff further asserts that the court erred in discounting its expert report. We disagree.

A.

We first define the legal principles that guide our analysis. We review a grant of summary judgment de novo, observing the same standard as the trial court. Townsend v. Pierre, 221 N.J. 36, 59 (2015). Summary judgment should be granted only if the record demonstrates there is "no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c). We consider "whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Davis v. Brickman Landscaping, Ltd., 219 N.J. 395, 406 (2014) (quoting Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)). If no genuine issue of material fact exists, the inquiry then turns to "whether the trial court correctly interpreted the law." DepoLink Ct. Reporting & Litig. Support Servs. v. Rochman, 430 N.J. Super. 325, 333 (App. Div. 2013) (quoting Massachi v. AHL Servs., Inc., 396 N.J. Super. 486, 494 (App. Div. 2007), certif. denied, 195 N.J. 419 (2008)).

"'[A] trial court confronted with an evidence determination precedent to ruling on a summary judgment motion squarely must address the evidence decision first.'" Konop v. Rosen, 425 N.J. Super. 391, 402 (App. Div. 2012) (alteration in original) (quoting Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 384-85 (2010)). "Appellate review of the trial court's decisions proceeds in the same sequence, with the evidentiary issue resolved first, followed by the summary judgment determination of the trial court." Townsend, supra, 221 N.J. at 53 (citing Hanges, supra, 202 N.J. at 385).

The evidentiary decision regarding the exclusion of the expert opinion is entitled to deference on appellate review. Id. at 52 (citing Bender v. Adelson, 187 N.J. 411, 428 (2006)). We review de novo the legal consequences of the exclusion of the expert opinion as it effects plaintiff's ability to establish Santaro's liability under the SPE exceptions to this nonrecourse loan. Id. at 59 (citing Davis, supra, 219 N.J. at 405).

"[A]n expert's bare opinion that has no support in factual evidence or similar data is a mere net opinion which is not admissible and may not be considered." Pomerantz Paper Corp. v. New Cmty. Corp., 207 N.J.344, 372 (2011). As we have explained, "'[e]xpert testimony should not be received if it appears the witness is not in possession of such facts as will enable him [or her] to express a reasonably accurate conclusion as distinguished from a mere guess or conjecture.'" Dawson v. Bunker Hill Plaza Assocs., 289 N.J. Super. 309, 323 (App. Div. 1996) (alteration in original) (quoting Vuocolo v. Diamond Shamrock Chems. Co., 240 N.J. Super. 289, 299 (App. Div. 1990), certif. denied, 122 N.J. 33, (1990)), certif. denied, 146 N.J. 569 (1996).

Finally, we note that when interpreting contracts of guaranty, the rules governing the construction of contracts apply. Center 48 Ltd. P'ship v. May Dep't Stores Co., 355 N.J. Super. 390, 405 (App. Div. 2002) (citations omitted). As a contract, a guaranty must be interpreted "according to its clear terms so as to effect the objective expectations of the parties," and any ambiguity in the terms should be construed in the guarantor's favor. Id.at 406. "Courts are generally obligated to enforce contracts based on the intent of the parties, the express terms of the contract, surrounding circumstances and the underlying purpose of the contract." Caruso v. Ravenswood Developers, Inc., 337 N.J. Super. 499, 506 (App. Div. 2001) (citations omitted). "An agreement guaranteeing a particular debt or debts does not extend to other indebtedness not within the manifest intention of the parties." Garfield Trust Co. v. Teichmann, 24 N.J. Super. 519, 527 (App. Div. 1953).

B.

Guided by these principles, we conclude that the trial court did not abuse its discretion in determining that Morris's expert report was a net opinion. In his report, Morris asserted three primary grounds upon which plaintiff based its contention that Waterford had failed to maintain its SPE status, thus triggering Santaro's personal liability.

First, Morris concluded that "Waterford has been insolvent since it was organized in 1997 and inadequately capitalized from 1999 when Waterford construction began." However, the standard for "adequate capitalization" is not defined in the loan documents, and in his report Morris conceded that "[t]here is no one textbook definition of 'adequate capitalization[.]'" During his deposition testimony, Morris acknowledged that he did not use any formula to determine whether Waterford was adequately capitalized. He admitted he was unaware whether Waterford ever failed to pay any of its obligations, and whether Waterford generated a positive cash flow in the years between 2005 and 2010.

Morris stated he based his opinion regarding Waterford's capitalization solely on three annual financial statements that showed a "member's deficit." However, he conceded he did not know if the documents he relied on were accurate, and that a member's negative equity can be affected by accounting factors such as depreciation. When informed that 1,400 publicly traded companies currently show a negative shareholders' equity and asked whether those companies were therefore insolvent, Morris responded, "[f]rom a strict accounting standpoint, they have real solvency issues. There must be something else that's allowing those companies to survive."

Second, Morris concluded that "it is evident that Mr. Santaro has made substantial capital withdraw[al]s in the form of distributions and payments to related entities which substantially reduced the capital of Waterford and left it insolvent from 1999-2011." However, Morris conceded he was unable to offer an opinion as to how much capital Santaro invested in Waterford. He was also unable to render an opinion with respect to the amount of withdrawals or payments made from Waterford to Santaro from 1999 to 2011, or what percentage of Waterford's total profits those withdrawals and payments represented. Moreover, he acknowledged there was nothing in the Loan Agreement precluding Waterford from making distributions to Santaro or preventing Santaro from directing where his distributions were to be paid. Likewise, nothing in the Loan Agreement required that any portion of the more than $6 million in excess proceeds paid to Santaro following the Ixis loan closing be kept in reserve.

Third, Morris opined that

The distributions and payments to date indicate the commingling of Waterford's funds with the personal funds of Mr. Santaro and those of related entities. In one instance the related entity indicated that it had a receivable (loan) from Waterford which had to be repaid while on the books of Waterford this transaction was treated as a distribution of profits, which did not have to be repaid.

During his deposition, Morris conceded he did not know the nature of the payments that purportedly supported his theory of commingling. Nor had he seen any document establishing that there was a loan between Waterford and a related entity. Moreover, in his report, Morris further stated "there is ample evidence that Mr. Santaro has commingled funds between himself, Santaro Holdings, LLC[,] and Willow." Conspicuously absent is any reference to the commingling of Waterford's funds. Instead, Morris went on to speculate, "[i]t is unknown but likely that [Santaro] has also made payments to other related entities that he controls from Waterford."

We conclude from the recitation above that Morris's expert opinion necessarily fails since it lacks objective support. SeePomerantz, supra, 207 N.J.at 373. Consequently, since it is the only evidence relied on by plaintiff to establish a "springing recourse event" that would trigger Santaro's personal liability, plaintiff's claim against Santaro on the guaranty similarly fails. In short, the general nonrecourse nature of the loan is self-evident, and plaintiff has failed to demonstrate that any exception applies.

Plaintiff points to Judge Hansbury's earlier statement that "[i]f [] [p]laintiff can prove that [] [d]efendant was obligated to maintain adequate capital for Waterford and failed to do so, this would constitute a breach of [d]efendant's obligation to maintain [SPE] [s]tatus which would trigger [p]laintiff's right to recourse under the Loan Agreement." Plaintiff urges that this reasoning compels a different interpretation of the Loan Agreement and hence a different result. We find this contention without merit. Judge Hansbury was addressing a motion to dismiss at the pleading stage, which is governed by an entirely different standard of evidence than that which is required to withstand summary judgment under Rule4:46-2.

Affirmed.

1 A "nonrecourse loan" is defined as "[a] secured loan that allows the lender to attach only the collateral, not the borrower's personal assets, if the loan is not repaid." Black's Law Dictionary 1020 (9th ed. 2004).