Court Opinion

ID: 2701536
Source: CourtListenerOpinion
Date Created: 2014-08-04 19:37:10.098076+00
Date Added: 2024-06-11T12:22:04.623938
License: Public Domain

[Cite as Euclid Hous. Partners, Ltd. v. Wells Fargo Bank, N.A., 2014-Ohio-3033.]

                 Court of Appeals of Ohio
                               EIGHTH APPELLATE DISTRICT
                                  COUNTY OF CUYAHOGA

                              JOURNAL ENTRY AND OPINION
                                      No. 100421

          EUCLID HOUSING PARTNERS, LTD., ET AL.
                                                           PLAINTIFFS-APPELLANTS

                                                     vs.

       WELLS FARGO BANK, N.A., AS TRUSTEE, ETC.
                                                           DEFENDANT-APPELLEE

                                   JUDGMENT:
                             REVERSED AND REMANDED

                                      Civil Appeal from the
                             Cuyahoga County Court of Common Pleas
                                    Case No. CV-10-717025

        BEFORE: Rocco, P.J., Kilbane, J., and E.T. Gallagher, J.

        RELEASED AND JOURNALIZED: July 10, 2014
                                         -i-

ATTORNEY FOR APPELLANT

Stephen D. Dodd
Dodd, L.’Hommedieu & McGrievy, L.L.C.
50 East Washington Street
Chagrin Falls, Ohio 44022

ATTORNEYS FOR APPELLEE

Michael P. Shuster
Tami H. Kirby
Tracy S. Francis
Porter, Wright, Morris & Arthur L.L.P.
925 Euclid Avenue, Suite 1700
Cleveland, Ohio 44114

KENNETH A. ROCCO, P.J.:
         {¶1}   Plaintiff-appellant Joseph R. Leach appeals from the trial court’s grant of

summary judgment to defendant-appellee Wells Fargo Bank, N.A. (“Wells Fargo”).            The

parties dispute the extent of Leach’s liability as a guarantor under a guaranty signed by

Leach.     We conclude that the trial court erred in its interpretation of the guaranty and in

its determination that Leach was liable on the entire amount of the loan.       Accordingly,

we reverse and remand.

         {¶2}   The underlying action involves a default on a commercial real estate loan.

Euclid Housing Partners, LTD. (“EHP”) was the borrower, and Leach was the guarantor.

EHP was the record owner of certain real property located at 27300 Euclid Avenue,

Euclid, Ohio (“the Property”), on which an apartment complex is situated. Wells Fargo

was, at all times relevant, the owner and holder of all relevant loan documents.

         {¶3} All of the claims in this case arose out of a non-recourse loan made by Wells

Fargo’s predecessor-in-interest to EHP (“the Loan”).        The Loan was evidenced by a

promissory note (“the Note”) in the amount of 6.3 million dollars. EHP granted a

mortgage on the Property to Wells Fargo’s predecessor-in-interest (“the Mortgage”) that

included Leach’s limited personal guaranty of the Note (“the Guaranty”).

         The Note and the Mortgage

         {¶4} The Note defines the “Borrower” as EHP.      Under Section 8.1 of the Note, if

EHP defaulted, the lender’s recovery against the Borrower was generally limited to the
Property and other defined collateral, but the lender could obtain a money judgment

against the Borrower under limited circumstances.     Those circumstances are set forth in

Section 8.2 of the Note (“the carve-out provisions”).    The carve-out provisions at issue

in this case concern misappropriation of insurance proceeds, holding rents in escrow after

a payment default, and a prohibition on assuming debt other than the loan or trade debt

(“the single-purpose entity provision”).   The insurance and rent provisions provide as

follows:

      8.2 Exceptions. Notwithstanding anything to the contrary contained in
      Section 8.1 or elsewhere in this Note or the other Loan Documents,
      Borrower shall be personally liable to Lender:

      (a) for any liabilities, costs, expenses, (including reasonable attorney’s fees
      and expenses) claims, losses, or damages incurred by Lender * * * with
      respect to any of the following matters:

      ***

      (iv) failure to deliver any insurance or condemnation proceeds or awards or
      any security deposits received by Borrower to Lender or to otherwise apply
      such sums as required under the terms of the Loan Documents or any other
      instrument now or hereafter securing this Note;

      ***

      (vi) failure to apply any rents * * * royalties, accounts, revenues, income,
      issues, profits, sums received in consideration of any surrender or
      termination of any lease * * * and other benefits from the Property which
      are collected or received by Borrower (A) as required under the term of the
      Loan Documents or any other instrument now or hereafter securing this
      Note, or (B) either during the period of any Default, or after the occurrence
      of any event which with the giving of notice or the passage of time, or both,
      would constitute a Default, or after acceleration of the indebtedness and
      other sums owing under the Loan Documents, only to the payments of
      either such indebtedness or other sums, or the normal and necessary
      operating expenses of the Property.
       (b) * * *

       (c) * * *

       {¶5} The single-purpose entity provision appears in the last paragraph of Section

8.2 of the Note and provides, in pertinent part, as follows:

       Additionally, notwithstanding anything to the contrary contained in Section
       8.1 of this Note or the other Loan Documents, if * * * (z) Borrower shall
       (1) incur any debt, secured or unsecured, direct or indirect, absolute or
       contingent (including guaranteeing any obligation), other than the Loan or
       trade debt incurred in the ordinary course of Borrower’s business which
       shall be paid in accordance with the terms of the Loan Documents * * * or
       Borrower shall otherwise fail to maintain all of the single-purpose entity
       requirements set forth in Exhibit “B” attached to the Mortgage, then Lender
       shall have the right to seek a personal judgment against Borrower on this
       Note and under any other Loan Document with respect to any and all
       indebtedness secured thereby.

Unlike the other paragraphs in Section 8.2, the single-purpose entity provision is

unnumbered.

       {¶6} Section 2 in Exhibit “B” to the Mortgage contains parallel language:

       Mortgagor shall not incur any debt, secured on unsecured, direct or indirect,
       absolute or contingent (including guaranteeing any obligation) other than
       the Loan and trade debt incurred in the ordinary course of Mortgagor’s
       business and the managing member or general partner of Mortgagor shall
       not incur any debt, secured or unsecured, direct or indirect, absolute or
       contingent (including guaranteeing any obligation).

       The Guaranty

       {¶7} The first sentence of the Guaranty defines the term “Guarantor” as Leach.

The first recital in the Guaranty defines the term “Borrower” as EHP.     Section 1 of the

Guaranty is a near mirror image of the carve-out provisions set forth in section 8.2 of the
Note. Section 1 of the Guaranty provides, in pertinent part, as follows:

      Limited Guaranty. Guarantor hereby unconditionally, absolutely, and
      irrevocably guarantees and promises to pay to Lender or order, on demand *
      * * all sums for which Borrower is now or hereafter liable to Lender with
      respect to any of the following matters:

      (a) for any liabilities, costs, expenses (including reasonable attorneys’ fees
      and expenses), claims, losses or damages incurred by Lender * * * with
      respect to any of the following matters:

      ***

      (iv) failure to deliver any insurance or condemnation proceeds or awards or
      any security deposits received by Borrower or Lender or to otherwise apply
      such sums as required under the terms of the Loan Documents or any other
      instrument now or hereafter securing the Note; or

      ***

      (vi) failure to apply any rents * * * royalties, accounts, revenues, income,
      issues, profits, sums received in consideration of any surrender or
      termination of any lease * * * or material modification of any lease on the
      Property, and other benefits from the Property which are collected or
      received by Borrower * * * only to the payment of either such indebtedness
      or other sums, or the normal and necessary operating expenses of the
      Property.

      ***

      (b) * * *

      (c) * * *

      {¶8}    The last paragraph in Section 1 of the Guaranty contains the single-purpose

entity provision.   Unlike the rest of the paragraphs in Section 1, this paragraph is

unnumbered, and provides in pertinent part:

      Additionally, notwithstanding anything to the contrary contained in Section
       1 of this Guaranty or the other Loan Documents, if * * * (z) Borrower shall

       (1) incur any debt, secured or unsecured, direct or indirect, absolute or

       contingent (including guaranteeing any obligation), other than the Loan or

       trade debt incurred in the ordinary course of Borrower’s business which

       shall be paid in accordance with the terms of the Loan Documents * * * or

       Borrower shall otherwise fail to maintain all of the single-purpose entity

       requirements set forth in Exhibit “B” attached to the Mortgage, then Lender

       shall have the right to seek a personal judgment against Borrower on this

       Guaranty and under any other Loan Document with respect to any and all

       indebtedness secured thereby.

       {¶9} After EHP defaulted on the Note, Wells Fargo filed, and later dismissed, a

suit against EHP and Leach in federal district court. EHP and Leach then filed the

action that is the subject of this appeal, seeking a declaratory judgment and asserting three

claims.1 EHP and Leach voluntarily dismissed their first claim. In their second claim,

they sought a declaratory judgment that there was no violation of the single-purpose entity

requirements.   In their third claim, they sought a declaratory judgment that they were not

liable for a money judgment for the full amount due on the Loan under section 8.2 of the

Note and under Section 1 of the Guaranty.

       {¶10} Wells Fargo filed an answer, counterclaim, and cross-claim (“the

counterclaim”). Wells Fargo alleged that EHP had defaulted on the Note and that Wells

       EHP is not a party to this appeal.
       1
Fargo was entitled to a judgment.          The counterclaim asserted five claims against EHP

and/or Leach, two of which are relevant to this appeal.2 In its first claim, Wells Fargo

sought a monetary judgment against EHP, as the Borrower in an amount “to be

determined at trial.”      Count five sought a monetary judgment against Leach, as the

Guarantor, in an amount “to be determined at trial.”

        {¶11} On October 25, 2010, Wells Fargo moved for summary judgment on counts

two and three of EHP and Leach’s complaint and on counts one and five of its

counterclaim. The summary judgment motion only sought a ruling on the issue of EHP

and Leach’s liability, reserving the issue of damages for a later disposition.              On January

4, 2012, the trial court granted Wells Fargo’s motion for summary judgment, finding EHP

and Leach liable to Wells Fargo for the full amount due on the Note.3

        {¶12} In its opinion, the trial court concluded:

        Leach agreed to be personally responsible for EHP’s liabilities to the lender
        for failure to pay over insurance proceeds (section 1(a)(iv) of the guaranty),
        failure to apply rents (section 1(a)(vi) of the guaranty), and if EHP incurs
        any debt other than the loan or trade debt or “otherwise fail[s] to maintain
        all of the single-purpose entity requirements set forth in Exhibit ‘B’
        attached to the Mortgage, then lender shall have the right to seek a personal
        judgment against Borrower on the Guaranty and under any other Loan
        document with respect to any and all indebtedness secured thereby.”

        2
         Wells Fargo’s complaint also sought foreclosure of mortgage and liens, the appointment of a
receiver, and recovery of collateral. The trial court granted Wells Fargo’s motion to appoint a
receiver on March 11, 2010. In a separate order, on October 27, 2010, the trial court granted
summary judgment to Wells Fargo on the foreclosure and collateral claims. Leach is not appealing
from these orders.

        In order to correct a clerical error, the trial court amended the journal entry, nunc pro tunc, on
        3

August 27, 2012.
Liability Decision at 4.

         {¶13} On April 4, 2012, the trial court conducted a bench trial to determine

damages. On September 4, 2012, the trial court entered a judgment against EHP and

Leach in the amount of $5,615,921.12, plus costs and interest.

         {¶14} Leach now appeals, setting forth two assignments of error for our review:

         I. The trial court erred in granting Wells Fargo’s motion for summary
         judgment as to count five of Wells Fargo’s counterclaim.

         II. The trial court erred in entering the money judgment in favor of Wells
         Fargo and against Leach.

         {¶15} Because this case involves an order granting summary judgment, we review

the trial court’s order de novo. Grafton v. Ohio Edison Co., 77 Ohio St.3d 102, 105, 671

N.E.2d 241 (1996). Under Civ.R. 56(C), summary judgment should be granted if (1)

there is no genuine issue as to any material fact; (2) the moving party is entitled to

judgment as a matter of law; and (3) reasonable minds can come to but one conclusion,

and that conclusion is adverse to the party against whom the motion for summary

judgment is made, who is entitled to have the evidence construed most strongly in his

favor.    Gilbert v. Summit Cty., 104 Ohio St.3d 660, 2004-Ohio-7108, 821 N.E.2d 564, ¶

6.

         {¶16} Leach argues in his first assignment of error that the trial court erred in

determining that Leach was personally liable on the loan under the single-purpose entity

provision.     We agree.      Leach is not disputing that EHP actually violated the

single-purpose entity provision.    The issue on appeal is whether Leach is liable as a
guarantor for EHP’s breach.

       {¶17} A contract is construed as a matter of law if the contract is “clear and

unambiguous.” Nationwide Mut. Fire Ins. Co. v. Guman Bros. Farm, 73 Ohio St.3d 107,

108, 652 N.E.2d 684 (1995). Words in a contract should be given their plain and

ordinary meaning unless “manifest absurdity results or some other meaning is clearly

intended from the face or overall contents of the instrument.” Alexander v. Buckeye

Pipe Line Co., 53 Ohio St.2d 241, 245-246, 374 N.E.2d 146 (1978). In construing the

language of a contract, we are to give effect to the words, neither deleting words used nor

adding words not used. Cleveland Elec. Illum. Co. v. Cleveland, 37 Ohio St.3d 50, 524

N.E.2d 441 (1988), paragraph three of the syllabus.

       {¶18} In the instant case, there is no ambiguity.   The Guaranty sets forth the only

circumstances under which the Guarantor guarantees the Note.            The trial court was

correct in ruling that, under the terms of the Guaranty, the Guarantor is liable for a

Borrower’s breach under Sections 1(a)(iv) and 1(a)(vi).        Leach does not dispute this

finding. But the Guaranty’s single-purpose entity provision states that if that provision

is violated, “then Lender shall have the right to seek a personal judgment against

Borrower on this Note * * * .” The Guarantor is mentioned nowhere in this provision.

It follows that the Lender does not have the right to seek a personal judgment against the

Guarantor on the Note under the single-purpose entity provision. Applying the terms of

the Guaranty to the facts of this case, it follows that Leach, as the Guarantor, is not liable

to Wells Fargo for EHP’s violation of the single-purpose entity provision. Wells Fargo
can seek a personal judgment only against EHP for the breach of the single-purpose entity

provision.

       {¶19} In support of its position that the Guarantor is liable under the single-entity

provision, Wells Fargo points to the opening language in Section 1 of the Guaranty that

states that “Guarantor hereby unconditionally, absolutely, and irrevocably guarantees and

promises to pay to Lender or order, on demand * * * all sums for which Borrower is now

or hereafter liable to Lender with respect to any of the following matters * * * .”     But

this language is followed by a series of numbered paragraphs listing conditions under

which the Borrower’s actions would trigger the Guarantor’s liability.      In contrast, the

Guaranty’s single-purpose entity provision is set off as an unnumbered paragraph.

Unlike the other paragraphs in Section 1, the Guaranty’s single-entity provision

specifically names the Borrower as the only entity who is liable if the provision is

violated.    The language relied on by Wells Fargo does not apply to this final,

unnumbered paragraph in Section 1.

       {¶20} We conclude that the trial court erred in concluding that Leach was liable on

the Note under the single-purpose entity provision. Accordingly, we sustain the first

assignment of error.

       {¶21} In Leach’s second assignment of error, he argues that the trial court erred in

entering the money judgment in favor of Wells Fargo and against Leach.           We agree.

The Guaranty’s single-purpose entity provision provides that if this provision is breached,

“the Lender shall have the right to seek a personal judgment against Borrower on this
Note and under any other Loan Document with respect to any and all indebtedness

secured thereby.” (Emphasis added.)      According to this language, whoever is liable

under the single-purpose entity provision is liable on the full amount due on the Note.

       {¶22} In contrast, if a provision under Section 1(a) of the Guaranty is violated,

then the Guarantor is liable only for “any liabilities costs expenses (including reasonable

attorneys’ fees and expenses), claims, losses or damages incurred by Lender * * * with

respect to” that particular provision. (Emphasis added.) Wells Fargo conceded in its

motion for summary judgment that breaches under Sections 1(a)(iv) and 1(a)(vi) would

require proof of damages specific to the breach:

       The extent of recovery to which [Wells Fargo] is entitled is depend[e]nt on
       the court’s determination of which recourse violations * * * EHP breached.
       * * * Specifically, EHP’s breach of the rent and insurance proceed
       provisions entails more limited damages (damages specific to the breach)
       than its breach of the single-purpose entity requirement (full recourse for
       the entire loan obligation).

Wells Fargo MSJ at 19.

       {¶23} Because the trial court erroneously determined in its summary judgment

order that EHP and Leach were both liable under the single-purpose entity provision, at

trial, Wells Fargo only put on evidence pertaining to the entire amount due on the loan.

Wells Fargo did not put on any evidence specific to the damages resulting from the

breaches of the insurance and rent proceeds provisions (Sections 8.2(a)(iv) and 8.2(a)(vi)

in the Note and Sections 1(a)(iv) and 1(a)(vi) in the Guaranty).

       {¶24} On appeal, Leach does not contest the trial court’s determination that EHP

breached the insurance and rent proceeds provisions.     He also does not contest the fact
that he is personally liable for those breaches under the terms of the Guaranty.    And we

find no reason to reverse these aspects of the trial court’s decision.     But because the

money judgment entered against Leach was based on the erroneous determination that

Leach was liable under the single-entity provision, the money judgment is also erroneous.

 Leach is liable only for damages specific to EHP’s breaches under Sections 8.2(a)(iv)

and 8.2(a)(vi) of the Note.    Because the trial court decided otherwise, we sustain the

second assignment of error.

       {¶25} The trial court’s order granting summary judgment is reversed.              On

remand, the trial court is instructed to hold further proceedings to determine the proper

extent of Leach’s liability under Sections 1(a)(iv) and 1(a)(vi) of the Guaranty for EHP’s

breaches under Sections 8.2(a)(iv) and 8.2(a)(vi) of the Note.

       It is ordered that appellant recover from appellee costs herein taxed.

       The court finds there were reasonable grounds for this appeal.

       It is ordered that a special mandate be sent to said court to carry this judgment into

execution.

       A certified copy of this entry shall constitute the mandate pursuant to

Rule 27 of the Rules of Appellate Procedure.

__________________________________________
KENNETH A. ROCCO, PRESIDING JUDGE

MARY EILEEN KILBANE, J., and
EILEEN T. GALLAGHER, J., CONCUR