IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
FILED
METRIC PARTNERS GROWTH ) September 24, 1998
SUITE INVESTORS, L.P., )
) Cecil W. Crowson
Plaintiff/Appellee, ) Appellate Court Clerk
)
VS. )
)
NASHVILLE LODGING COMPANY; ) Appeal No.
2300 ELM HILL PIKE, INC., ) 01-A-01-9712-CH-00723
)
Defendant/Appellant, ) Davidson Chancery
) No. 96-1405-III
and )
)
ORLANDO RESIDENCE, LTD.; and )
LA SALLE NATIONAL BANK as )
trustee under that certain pooling )
and servicing agreement dated )
July 11, 1995, for the holders of the )
WHP Commercial Mortgage Pass )
Through Certificates, Series 1995C1, )
and ROBERT M. HOLLAND, JR., )
Trustee, )
)
Defendants/Appellants. )
APPEALED FROM THE CHANCERY COURT OF DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE
THE HONORABLE ROBERT S. BRANDT, CHANCELLOR
ALAN T. FISTER
STEWART, ESTES & DONNELL
424 Church Street
Nashville, Tennessee 37219-2392
MIKE BUCKLEY
CROSBY, HEAFEY, ROACH & MAY
1999 Harrison Street
Oakland, California 94604-2084
Attorneys for Plaintiff/Appellee
SAMUEL L. FELKER
JOSEPH F. WELBORN, III
BASS, BERRY & SIMS
2700 First American Center
Nashville, Tennessee 37238-2700
Attorneys for Defendant/Appellant
EUGENE N. BULSO, JR.
BOULT, CUMMINGS, CONNERS & BERRY
414 Union Street
Nashville, Tennessee 37219-8062
Attorney for Defendant/Appellee Orlando Residence, Ltd.
KENNETH M. BRYANT
TRABUE, STURDIVANT & DEWITT
522 Union Street
Nashville, Tennessee 37219-1738
HUNTER T. CARTER
ARENT, FOX, KINTNER, PLOTKIN & KAHN
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attorneys for Defendants/Appellees LaSalle National Bank
and Robert M. Holland
AFFIRMED AND REMANDED
BEN H. CANTRELL, JUDGE
CONCUR:
TODD, P.J., M.S.
CAIN, J.
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OPINION
The owner of a hotel subject to a first mortgage sold the building and its
contents to the plaintiff and took a second mortgage to secure the purchase price.
The plaintiff also operated the hotel under a ground lease with the owner. When the
owner failed to pay the first mortgage, the plaintiff sought a declaratory judgment that
the owner was in default, that the plaintiff could pay the first mortgage directly to the
mortgagee, and that the plaintiff was discharged from its obligation to the owner. The
owner resisted the declaration on the ground that it had certain defenses against the
first mortgagee. The Chancery Court of Davidson County granted summary judgment
to the plaintiff. We affirm.
I.
In 1983 National Lodging Company (NLC) borrowed the money to
finance the construction of a Marriott Hotel in Nashville. NLC signed a note and deed
of trust giving the lender a first mortgage on the property. The original lender went
into receivership and the note became the property of the Resolution Trust
Corporation. The note passed through two other hands before it was finally
transferred to LaSalle National Bank, and it is referred to throughout the record as “the
LaSalle note.”
In 1989 NLC sold the hotel improvements to the plaintiff, Metric Partners
Growth Suite Investors, L.P., and entered into a long term ground lease with Metric.
Metric executed a note to NLC secured by a deed of trust on the hotel improvements.
Thus, Metric made monthly payments to NLC and NLC made the payments on the
first mortgage.
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As a part of the 1989 transaction, Metric, NLC, and the original lender
entered into a three party agreement. The agreement provided that in the event NLC
defaulted on the payments on the first mortgage (1) the lender would notify Metric of
the default and Metric could cure the default within ten days after receiving the notice,
and (2) Metric could then assume NLC’s obligations under the first mortgage and be
discharged from any further obligations to NLC on the second mortgage.
In January of 1996 (for reasons we will discuss in a later part of this
opinion) NLC failed to make its payment to LaSalle, and filed a bankruptcy petition in
the United State Bankruptcy Court for the Eastern District of Wisconsin. On April 5,
1996 LaSalle notified Metric of the default. On April 15, 1996 Metric cured the default
by making the required payment directly to LaSalle. At the same time Metric notified
NLC that Metric was exercising its rights to pay LaSalle directly under the three party
agreement, and that NLC should void the second mortgage. When NLC refused to
honor that arrangement and threatened to foreclose on the second mortgage, Metric
filed this action seeking declaratory and injunctive relief. NLC’s defense rested on the
following assertions: (1) that it had a defense against LaSalle’s collection of the note;
(2) that it had a bad faith and unclean hands defense against Metric; (3) that it was
not in default on the LaSalle note; and (4) that the three party agreement did not
afford Metric relief from the second mortgage.
II.
The Recoupment Defense
NLC asserts that it was not in default on the LaSalle note because it had
a $1,700.00 judgment against the Resolution Trust corporation (RTC), one of the
holders in LaSalle’s chain of title. The obligation arose when the RTC became the
receiver for the original lender and repudiated a refinancing agreement NLC had with
the original lender. NLC recovered the judgment against RTC as compensation for
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the breach. Since LaSalle’s status as a holder in due course is disputed, we will
assume that this defense, if it exists, may be asserted against LaSalle.
The recoupment question was litigated in the case that established
NLC’s claim against the RTC. NLC asked for a declaration that it had a right to set-off
or recoupment against the purchaser of the note from the RTC. The D.C. Circuit held
that the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)
allowed the RTC to sell the assets of a failed thrift free and clear of any
encumbrances arising from a borrower’s counterclaims; and that the purchaser of the
NLC note did not assume the claim against the RTC. Therefore, NLC could “recover
these amounts only from the RTC in its primary claim for damages.” Nashville
Lodging Co. v. Resolution Trust Corp., 59 F.3d 236 at 247 (D.C. Cir. 1995).
We recognize, however, that NLC’s position in this case rests on a
distinction between a defense to the note and a claim against the assignee of the
note. The D.C. Circuit acknowledged that such a distinction might be made, but the
court refused to address it because NLC had not raised it in that case. See 59 F.3d
at 247. Thus the precise question raised here was not decided by the court in the
litigation between NLC and RTC.
Other courts have allowed a recoupment defense to a note when an
assignee has sued to collect the note. See FLSIC v. Mackie, 962 F.2d 1144 (5th Cir.
1992); DiVall Insured Income v. Boatmen’s First Nat’l Bank, 69 F.3d 1398 (8th Cir.
1995). A recoupment defense, however, even against a non holder in due course,
must arise out of the same transaction that gave rise to the instrument. See Tenn.
Code Ann. § 47-3-305(a)(3); Howard v. Abernathy, 751 S.W.2d 432 (Tenn. App.
1988). NLC concedes that the claim against the RTC arose out of the refinancing
agreement, a contract separate from the note. Therefore, we are satisfied that the
recoupment defense was not available to NLC, regardless of whether RTC had the
power to strip defenses from the assets it sells.
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III.
NLC’S Default and Notice
We have dealt with NLC’s argument that it was not in default because
of the recoupment defense. Without that defense, NLC must concede that it was in
default for not making the January and February payments in 1996. It also must
concede that LaSalle gave notice of the default by letter on April 5, 1996. Therefore,
the two conditions precedent to Metric’s action in curing the default are met. The
“other” defaults alluded to by the chancellor, of which NLC alleges it had no notice, are
now beside the point.
IV.
The Three Party Agreement
NLC makes a similar argument with respect to Metric’s rights under the
three party agreement, i.e., that because NLC was not in default, Metric could not
assume the NLC note and be free of the second mortgage. Our discussion in Parts
II and III of this opinion disposes of this argument as well.
V.
The Bad Faith and Unclean Hands Defenses
NLC traces its ill fortune to an alleged breach of a 1993 settlement
agreement entered into by NLC, Metric, and others in the California Superior Court
at San Francisco. To settle some litigation unrelated to the Nashville property, Metric
agreed to purchase the Nashville property “as is, including but not limited to title
issues.” The settlement fell through, however, when Metric discovered that NLC’s title
was clouded by two actions filed in Nashville to set aside fraudulent conveyances by
NLC and by some lien claims that had been filed against the property. NLC sued
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Metric in chancery court in Nashville for breach of the settlement agreement and
obtained a judgment of liability. The damages have apparently not been ascertained.
NLC’s difficulties intensified in 1995 when Orlando Residence, Ltd.
obtained a judgment against NLC for a fraudulent conveyance. Metric was one of the
defendants in that litigation and one of the claimed fraudulent conveyances was the
sale of the hotel to Metric in 1989. After obtaining the judgment, Orlando served a
notice of garnishment on Metric in December of 1995. On January 2, 1996 NLC filed
its petition in bankruptcy. Metric filed an interpleader in the bankruptcy court and
tendered to the court its January 1996 payments under the ground lease and the
second mortgage. The interpleader alleged that Metric would continue to make its
payments to the court until further orders.
This court reversed the judgment in favor of Orlando on December 18,
1996, and the cause was remanded for a retrial on all issues. On remand the trial
court held that Orlando was, nevertheless, a bona fide purchaser of the property at
a prior foreclosure sale. The net result is that Orlando is now the owner of the
property previously owned by NLC.
On February 13, 1996 the bankruptcy court dismissed NLC’s petition
because it was filed in bad faith. As we have indicated, LaSalle declared a default in
April of 1996 and Metric claimed its rights under the three party agreement.
NLC’s bad faith and clean hands defenses are primarily based on
Metric’s failure to abide by the settlement agreement in the California litigation. The
rule NLC relies on has been stated in many Tennessee cases. It can be found in its
distilled form in Gibson’s Suits in Chancery §18:
This maxim declares that a plaintiff who has been guilty of
unconscientious conduct or bad faith, or has committed
any wrong, in reference to a particular transaction, cannot
have the aid of a Court of Equity in enforcing any alleged
rights growing out of such transaction. In the origin of the
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jurisprudence, the theory was adopted that a Court of
Equity interposed only to enforce the requirements of
good conscience and good reason as to matters not
equitably determinable in the Law Courts. This
interposition being deemed a matter of grace, it would not
be exercised in favor of a person whose conduct in the
matter complained of had been unconscientious, or in bad
faith, or who had violated any of those principles of Equity
and righteous dealing, which the Court had been
constituted to enforce.
Although used chiefly in cases seeking equitable relief, the bad faith/clean hands
defense has been held to apply to legal claims, Continental Bankers Life Ins. Co. v.
Simmons, 561 S.W.2d 460 (Tenn. App. 1977). But the unconscientious conduct must
arise out of the particular transaction which is the subject of the litigation. Hogue v.
Kroger Co., 373 S.W.2d 714 (Tenn. 1964).
The California litigation does have a connection to the Nashville property
since Metric was to purchase the property as part of that agreement. But the legal
rights and liabilities involved in that litigation were entirely separate from the financing
of the Nashville property or the 1989 three party agreement.
NLC argues that Metric’s failure to purchase the Nashville property
forced NLC into default. That may or may not be true, but that claim is the subject of
a separate action for which NLC is seeking a judgment for damages. We assume that
its damages claim will include its losses resulting from its default on the LaSalle note.
For all of these reasons, we affirm the chancellor’s decision to disallow
the good faith/clean hands defense.
Finally, there are no facts in this record from which an inference could
be drawn that Metric acted in any way except in accordance with its best business
judgment. That does not mean that it is free of a claim that it violated NLC’s legal
rights. But it does mean that there is no proof that would meet the burden NLC has
to meet.
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The judgment of the court below is affirmed and the cause is remanded
to the Chancery Court of Davidson County for any further proceedings that may
become necessary. Tax the costs on appeal to the appellant.
____________________________
BEN H. CANTRELL, JUDGE
CONCUR:
_______________________________
HENRY F. TODD, PRESIDING JUDGE
MIDDLE SECTION
_______________________________
WILLIAM B. CAIN, JUDGE