Miller Barondess Saves Real Estate Developer’s Equity

Miller Barondess Saves Real Estate Developer’s Equity

Andrews’ Bank & Lender Liability Litigation Reporter

July 20, 2009



Copyright © 2009 Thomson Reuters

Citing the current economic climate, an arbitrator has determined that a lender cannot go through with a planned foreclosure sale on a California condominium complex.

Robert E. Thomas, a retired judge working with the Judicial Arbitration and Mediation Service, held in favor of developer Gateway & 4th LLC and enjoined the sale.

Lender Pacific City Home had scheduled the foreclosure sale after unilaterally determining that Gateway was in default under the parties’ loan agreement for failing to sell condo units.

Thomas said the lender could not hold the sale because the credit crisis had prevented the developer from fulfilling its contractual obligation to sell the units.

He agreed with Gateway’s position that the current economy frustrated the contract’s purpose and made it impossible to sell the condominiums.

“This is a very significant decision for developers,” Gateway attorney Daniel Miller of Miller Barondess LLP said.

“Normally if the market changes and there is a default, a lender can foreclose,” he said.

“Now developers have recourse against defaults because of the severity of the economic crisis. The doctrines of impossibility and frustration of purpose are available as defenses.”

Gateway borrowed $10.4 million from Pacific City Home Sept. 28, 2007, to assist in the development of the Long Beach complex.

Gateway also invested $3.6 million of its own money in the project.

The loan agreement provided that Gateway would sell the condominium units for minimum prices ranging between $431,300 and $635,700.

Gateway began marketing the units in February 2008 but was unable to sell them.

Pacific City notified Gateway Dec. 17 that the company was in default under the loan contract.

The lender said that even though Gateway was still making its loan payments the developer was in default because none of the units had sold for the prices specified in the loan contract.

Based on the alleged default Pacific City instituted nonjudicial foreclosure proceedings and scheduled an April 27 sale for the building.

A nonjudicial foreclosure is used when the loan documents specify that in the event of default the borrower will allow the lender to sell the property without court involvement to pay off the loan balance.

Gateway objected to the foreclosure, and pursuant to the terms of the loan agreement the parties went to arbitration over the dispute.

The developer asked for an injunction to stop the planned foreclosure sale. The company said the sale should be halted because it was not in default as Pacific City claimed.

Gateway alleged that it could not be in default because the purpose of the loan agreement, which was to sell condominium units, had been frustrated.

The developer also said its performance under the contract had been rendered impossible because the units would not sell at the specified minimum prices because of the credit crisis.

Gateway said the injunction was necessary because a sale of the property would eliminate its interest in the complex and its $3.6 million investment would be wiped out.

Thomas agreed with the developer and stopped the scheduled sale.

He said that when the parties entered into the loan contract no one had anticipated the economic crisis.

The credit crisis frustrated the purpose of the loan agreement, which was to build and sell condominiums.

Thomas also ruled that Gateway’s defense of impossibility was supported by evidence indicating that the loan contract’s condo sales plan could not be achieved in the present economy.

Thomas said that if he did not enjoin the foreclosure sale, Gateway would lose its property and its financial investment.

He held that the injunction would preserve the status quo while Pacific City and Gateway continue to arbitrate their dispute over the property.

Gateway is represented by Daniel Miller of Miller Barondess LLP in Los Angeles, CA. Pacific City is represented by Anthony Feeberry of Goodwin Proctor LLP in Boston, MA, and Brooks Brown of the firm’s Los Angeles, CA, office.