Opinion ID: 801993
Heading Depth: 3
Heading Rank: 1

Heading: Investors’ Breach of Contract Claim

Text: The Investors may sustain a breach of contract claim against Morgan Stanley if (1) a contract existed between them; (2) Morgan Stanley breached that contract; and (3) the breach resulted in damages. See Haegert v. Univ. of Evansville, 955 N.E.2d 753, 758 (Ind. Ct. App. 2011) (citing Ruse v. Bleek, 914 N.E.2d 1, 11 (Ind. Ct. App. 2009)). The Investors and Morgan Stanley agree that the Note, the Mortgage, and the RSA constitute contracts between them. Morgan Stanley contends that the Borrowers’ Escrow Instructions also constitutes a contract between them, but the Investors challenge this document as executed without their requisite authorization. Both parties disagree on the issues of breach and damages. 12 No. 11-2891 According to the Investors, Morgan Stanley breached the RSA. That document, they posit, allowed Morgan Stanley to assign its interest in the escrow funds to a buyer, not apply the funds to its sale of the loan. Morgan Stanley could not “net” the funds without breaching its agreement with the Investors unless it was authorized to do so by the Borrowers’ Escrow Instructions. Although the instructions released their interest in the escrow accounts to Morgan Stanley, the Investors argue that IPA Fund Manager did not have authority to execute them. As IPA Fund Manager lacked the authority or apparent authority to release the escrow funds to Morgan Stanley, they claim, Morgan Stanley could not “net” the escrow accounts without breaching the RSA. Morgan Stanley argues that it did not breach the RSA. The loan documents, it argues, unambiguously afforded it the right to sell the loan without notice to the Investors and without their consent, as well as to assign its rights in the escrow accounts to the buyer. In particular, Morgan Stanley argues that after it assigned its rights and delegated its obligations in the escrow accounts to the loan’s buyer, the new buyer was bound, as it was, by the original loan documents: IPA Lender was required to set up reserve accounts for the Investors’ benefit. In Morgan Stanley’s view, it cannot be held liable for Okun’s fraud or failure to comply with the terms of the loan documents. It never authorized or purported to authorize IPA Lender to raid the escrow accounts to finance its purchase of the loan. No. 11-2891 13
Summary judgment on a breach of contract claim can be appropriate when the terms of the contract are clear and straightforward. Haegert, 955 N.E.2d at 758. If ambiguity exists, the appropriate construction is an issue of material fact meriting trial and within the province of a trier of fact. Id. Under Indiana law, a contract is ambiguous “only if reasonable persons would differ as to the meaning of its terms.” Id. (citing Trs. of Ind. Univ. v. Cohen, 910 N.E.2d 251, 257 (Ind. Ct. App. 2009)). Moreover, “in the absence of anything to indicate a contrary intention, writings executed at the same time and relating to the same transaction will be construed together in determining the contract.” Gold v. Cedarview Mgmt. Corp., 950 N.E.2d 739, 743 (Ind. Ct. App. 2011) (quoting Salcedo v. Toepp, 696 N.E.2d 426, 435 (Ind. Ct. App. 1998)). The parties do not dispute that IPA Fund Manager was authorized to execute the Note, the Mortgage, and the RSA with Morgan Stanley and that both the Investors and Morgan Stanley were bound by the terms of those documents. As an initial matter, the terms of the Note and the Mortgage make clear that Morgan Stanley had a right to transfer the loan without the Investors’ knowledge or consent. The loan, represented by the Note, was “secured by that certain Mortgage and Security Agreement . . . in the principal sum of $7,100,000 given by [the Investors] to (or for the benefit of) [Morgan Stanley] . . . .” The Mortgage and Security Agreement reiterates this relationship in Section 1.3, in which it states: 14 No. 11-2891 This Security Instrument is both a real property mortgage and a “security agreement” within the meaning of the Uniform Commercial Code. The Property includes both real and personal property and all other rights and interests, whether tangible or intangible in nature, of [Investors]. By executing and delivering this Security Instrument, [the Investors] hereby grant[] to [Morgan Stanley], as security for the Obligations (defined in Section 2.3), a security interest in the Personal Property to the full extent that the Personal Property may be subject to the Uniform Commercial Code. The Note and the Mortgage unambiguously grant Morgan Stanley a mortgage and security interest in the Investors’ property. According to Section 18.1 of the Mortgage, Morgan Stanley enjoyed the right to “at any time, sell, transfer, or assign the Note, this Security Instrument and the Other Security Documents, and any and all servicing rights with respect thereto . . . .” The RSA expressly granted Morgan Stanley a security interest in the escrow funds, as well as granted it a right to assign those funds as it wished. In Section 3.1 of the RSA, the Investors “pledge[d], assign[ed], and grant[ed] a security interest to [Morgan Stanley] . . . in all of [the Investors’] right, title and interest in and to each of the Reserve Escrow Accounts and each of the Reserves . . . .” In Section 3.4, the Investors unambiguously represented that they “underst[ood] and agree[d] that, in connection with any sale of the Loan pursuant to Section 18.1 of the [Mortgage], all of [Morgan Stanley’s] No. 11-2891 15 interest in the Reserves and Reserve Escrow Accounts will be assigned to the transferee of the Loan.” The only questions before us, then, are (1) whether Morgan Stanley’s right to “assign” its interest in the escrow accounts under the RSA included the right to “net” the escrow accounts, and (2) if not, whether that right was permissibly granted under the Borrowers’ Escrow Instructions. The Investors suggest that by allowing IPA Lender to use the escrow funds to pay for the loan, Morgan Stanley did something other than assign its interest in the funds. The Note, Mortgage, and RSA do not define the term “assign.” On appeal, however, the Investors advance, and Morgan Stanley accepts, the term’s conventional legal definition: “a transfer which confers a complete and present right in a subject matter to the assignee.” See Brown v. Ind. Nat. Bank, 476 N.E.2d 888, 894 (Ind. Ct. App. 1985). Per the terms of Morgan Stanley’s transaction with IPA Lender, an assignment unambiguously transpired. See supra Part I.A.2. In addition to assigning its interest, however, Morgan Stanley also delegated to IPA Lender its obligations under the Note, Mortgage, and RSA. See supra Part I.A.2. The loan’s sale terms clearly imposed upon IPA Lender the responsibilities vis-à-vis the escrow accounts that Morgan Stanley held before the loan’s sale. In particular, IPA Lender was bound to comply with the RSA and maintain the escrow accounts as dictated by its terms. Those terms make clear that Morgan Stanley—and now IPA Lender—was not re- 16 No. 11-2891 quired to treat those funds as a trust or avoid com- mingling funds. Contrary to the Investors’ claims, the RSA did not grant to the Investors an interest in each unique dollar in the funds—only in the account totals. Accordingly, when Morgan Stanley agreed to “net” or credit IPA Lender the value of the cash in the accounts against the sale price, it did not agree to let IPA Lender pirate the escrow accounts. It permitted IPA Lender to use the dollars in the accounts, now under its control, to pay for the loan. In doing so, it was entitled to assume and expect that IPA Lender would abide by the terms of the transaction, and ensure any dollar taken out of the accounts for the sale would be immediately replaced such that the escrow account totals remained unaffected. The Investors challenge twofold that the obligations vis-à-vis the escrow accounts remained with Morgan Stanley. First, they argue that, under Indiana law, Morgan Stanley could not transfer its obligations to IPA Lender without their consent, which they did not give. Second, they argue that Section 3.4 of the RSA obligated Morgan Stanley to ensure that IPA Lender replaced the funds and that, as a result, Morgan Stanley should have transferred the actual cash in the accounts upon assigning its interest in them to IPA Lender. Regarding their first argument, the Investors direct us to Navin v. New Colonial Hotel, 90 N.E.2d 128, 133-34 (Ind. 1950), in which the Indiana Supreme Court held that a party cannot assign away his liabilities without the consent of his adversary party. See also Nelson v. No. 11-2891 17 Reidelbach, 119 N.E. 804, 806 (Ind. Ct. App. 1918) (“It is a general rule that rights arising out of a contract cannot be transferred if they are coupled with liabilities . . . such that the party whose agreement conferred the rights must have intended them to be exercised only by him in whom he actually confided.”). They maintain that they did not consent to such an assignment by Morgan Stanley. The Investors, however, overlook that they fostered in IPA Fund Manager—and Okun—the authority, or at least apparent authority, to consent on their behalf to such an assignment. See supra Part I.A.1. Section 3.02 of the LLC Amendments states, “Third parties dealing with the Company shall be entitled to conclusively rely on the signature of the Vice President as evidence of the authority of the Vice President to execute the Loan Documents on behalf to the Company and to bind the Company.” See id. The Investors’ Consent identifies IPA Fund Manager as the Vice President. See id. As such, when IPA Fund Manager authorized the assignment—of both Morgan Stanley’s rights and its obligations—to IPA Lender, Morgan Stanley obtained the consent of its adversary party and complied with the Navin Court’s edict. Whether or not IPA Fund Manager was permitted to grant this authorization to Morgan Stanley does not alter the fact that Morgan Stanley was permitted to rely on IPA Fund Manager’s representations that it was so empowered. Furthermore, we do not agree that Section 3.4 imposed an obligation upon Morgan Stanley to verify that IPA Lender reconstituted the escrow accounts. That section 18 No. 11-2891 manifests the Investor’s consent to Morgan Stanley transferring its interest in the escrow accounts to the buyer of the loan; it levies no additional requirements upon Morgan Stanley. See supra Part II.A.1.a. We decline to construe the terms of the agreement such that Morgan Stanley would have avoided breach had it physically transferred the funds to IPA Lender and then accepted the same funds back into its coffers immediately after, but committed breach because it skipped that formalistic step and deducted the balance of the accounts from the purchase price. The fact that IPA Lender did not comply with its end of the transaction or fulfill its obligations toward the escrow accounts does not render Morgan Stanley’s assignment anything other than an assignment. Morgan Stanley had already performed under the terms of the RSA when IPA Lender, now bound by the RSA’s obligations, allegedly breached its terms.1 1 Morgan Stanley assigned its interest and delegated its obligations to IPA Lender as permitted by the RSA, see supra Part II.A.1.a. Consequently, we do not examine the legitimacy of the Borrowers’ Escrow Instructions or their impact on the assignment between Morgan Stanley and IPA Lender, except to note that the terms of those instructions do not wrest from the Investors their interest in the escrow accounts. The plain language of the instructions authorizes only the transfer of the funds between Morgan Stanley and IPA Lender. No. 11-2891 19
Finding no breach of contract on the part of Morgan Stanley, we do not examine the issue of damages.