CDC Builders, Inc. v. Biltmore-Sevilla Debt Investors, LLC

Third District Court of Appeal
State of Florida

Opinion filed September 17, 2014.
Not final until disposition of timely filed motion for rehearing.

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No. 3D13-603
Lower Tribunal No. 11-6226
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CDC Builders, Inc.,
Appellant,

vs.

Biltmore-Sevilla Debt Investors, LLC, et al.,
Appellees.

An Appeal from the Circuit Court for Miami-Dade County, John W.
Thornton, Judge.

Siegfried, Rivera, Hyman, et al., and Michael J. Kurzman (Plantation);
Shubin & Bass, P.A., and John K. Shubin and Deana D. Falce, for appellant.

Peckar & Abramson, P.C., and Gary M. Stein and K. Stefan Chin, for South
Florida Associated General Contractors as amicus curiae, for appellant.

Levine & Partners, P.A., and Suzan Jon Jacobs, for appellees.

Before LAGOA, SALTER, and LOGUE, JJ.

LOGUE, J.
 CDC Builders, Inc. (“the Contractor”) appeals a final summary judgment of

foreclosure which terminated its construction liens for luxury homes it built on two

developments. The Contractor opposed the foreclosure action on the basis that the

newly-formed entity that filed the foreclosure action was created (1) by the same

investors that controlled the Developers of the project and (2) for the primary

purpose of acquiring the first mortgage from the Developers’ lender, foreclosing

the mortgage, and thereby eliminating the Contractor’s construction liens. We

reverse because there is sufficient evidence in the record to establish an issue of

fact regarding whether these allegations are true, in which event, the foreclosure

would not eliminate the Contractor’s construction liens.

FACTS AND PROCEDURAL BACKGROUND

This case involves a somewhat complicated network of interrelated land

development companies managed by Brian McBride. McBride is an attorney who

has worked for his family’s Cleveland, Ohio-based taxicab company for over

twenty-five years. He is the manager of McBride Family Properties, LLC, a real

estate investment firm owned by him and his family members. He has developed

properties in Florida since 1993.

In February 2006, McBride Family Properties deeded vacant properties to

Riviera Biltmore, LLC and Riviera Sevilla, LLC (“the Developers”), companies

formed by McBride and others for the sole purpose of developing the properties.

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Through the buyout of one of the original investors, at all times relevant to this

matter, McBride Family Properties controlled and largely owned the Developers.

To fund the project, the Developers obtained construction loans from SunTrust

Bank—at the same branch location where McBride had been a long-standing

customer. The loan was personally guaranteed by McBride, McBride Family

Properties, and the individual who was later bought out by McBride Family

Properties.

Shortly after their formation, the Developers hired the Contractor to

construct twenty-five luxury homes on the properties. At times, the Developers did

not have sufficient funds to meet their construction expenses. The Contractor was

consequently paid by checks drawn on companies managed by McBride. The

Contractor completed the homes and obtained certificates of completion from the

governing municipality. When the Developers failed to pay for the last eight

homes constructed, the Contractor recorded two statutory construction liens.

Ultimately, the Contractor filed a lawsuit against the Developers, including counts

to foreclosure its liens.

When the SunTrust loans matured, the Developers could not pay off the

loans due to a lack of home sales. McBride sought and obtained several loan

extensions, with SunTrust referring to the extensions as the “McBride renewals” in

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several email correspondences during loan extension negotiations. The closing

costs for the loan renewals were paid by McBride Family Properties.

As a condition to granting the renewals, SunTrust required “curtailment”

payments that reduced its exposure on the loan. McBride authorized SunTrust to

debit these payments from accounts at the bank of other companies he owned or

controlled. Moreover, he specifically directed SunTrust that these payments should

not be treated as reductions in the principal amount of the loan, which would have

reduced the interest on the loans. Instead, he insisted the payments be treated as

junior liens against the property. He took this unusual step, the SunTrust officials

noted, in order to limit the equity available to satisfy the Contractor’s construction

liens. An internal SunTrust document titled “Real Estate Finance Risk Analysis”

reports:

Unable to reason with the [Contractor], this has now escalated into a
lawsuit and the [Contractor] recently placed liens on all the finished
homes located in the Sevilla section. That lien has been bonded-off in
the approximate amount of $350,000 by Brian McBride. While the
Borrower does not believe the [Contractor] has a case, they are taking
steps to strengthen their position in the unlikely event the [Contractor]
should prevail. One of these steps was to approach the Bank and
request that any curtailments/principal reductions made to the loan
that come directly from Brian McBride be given a junior secured
position subordinate to SunTrust’s senior lien Position. Their thought
is that any principal reduction creates more equity exposure to [the
Contractor’s] lawsuit.

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These statements by SunTrust officials support an inference that McBride was

taking affirmative steps for the express purpose of defeating the Contractor’s

construction liens in the event that a court upheld the liens.

This background cannot be ignored when considering the circumstances

surrounding the creation of Biltmore-Sevilla Debt Investors, LLC (“BSDI”), which

was the entity that purchased the mortgages at issue. On April 29, 2010, McBride

formed BSDI. McBride is the manager of BSDI. The members of BSDI were

limited liability companies owned by McBride and his family.1 McBride actually

signed BSDI’s operating agreement five separate times in five separate capacities,

as manager of BSDI and as manager of each of its members. BSDI was operated

out of the same Cleveland office as the other McBride entities.

Although SunTrust had not actively marketed the loans for sale and was

apparently willing to renew the loans to provide the Developers with more time to

make payments, McBride did not seek further extensions of the loans. Instead,

BSDI borrowed money from the Royal Bank of Canada for the purpose of

purchasing the loans from SunTrust at full face value. BSDI was able to obtain this

loan although it had no assets. When questioned, McBride could not recall where

the collateral or guarantees for the Royal Bank loan originated. He could not recall

whether he had guaranteed the $10,000,000 loan.

1 Brian A. McBride Investments, LLC; MBK Investments, LLC; McBride Family
Investments, LLC; and Biltmore-Sevilla Investments, LLC.

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 In June 2010, BSDI used the loan from Royal Bank to pay off the SunTrust

construction loans. SunTrust duly executed two loan assignments to BSDI.

Although BSDI purchased the loans, SunTrust sent the payoff information to

McBride as the president of McBride Family Properties. In SunTrust’s internal

records, the officer who had negotiated with McBride characterized the transaction

in this manner: “This loan was repaid by the borrower buying our documents.”

Around the time of BSDI’s formation, the trial court, in the Contractor’s

action against the Developers, granted the Developers’ motion for partial summary

judgment and discharged the Contractor’s construction liens. The Contractor

appealed. In December 2010, this court reversed, holding that the Contractor’s

liens should not have been discharged. CDC Builders, Inc. v. Riviera Almeria,

LLC, 51 So. 3d 510, 511 (Fla. 3d DCA 2010). Less than a week after this court

issued its mandate in CDC Builders, BSDI filed the underlying action to foreclose

its construction loans against the Developers. Along with the Developers, BSDI

named the Contractor as a defendant. The Developers answered the complaint but

did not offer any defense to the foreclosure. In contrast, the Contractor answered

the complaint, counterclaimed against BSDI and McBride, cross-claimed against

the Developers, raised affirmative defenses, and actively challenged BSDI’s

attempt to eliminate the construction liens.

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 The trial court ultimately entered a final summary judgment of foreclosure

in favor of BSDI, which found that the Contractor’s affirmative defenses and

counterclaims were “legally insufficient and/or factually disproven by the

undisputed record evidence.” This appeal followed.

ANALYSIS

The law does not permit a person to borrow money from a bank, give the

bank a mortgage, incur additional liens and junior mortgages on the property,

purchase the mortgage back from the bank, and then foreclose on the mortgage for

the primary purpose of eliminating the additional liens and junior mortgages.

The Third Restatement of Property explains this rule of law as follows:

When a payment in full is made by a person who is primarily
responsible for the obligation, but the payor and payee agree not to
extinguish the mortgage, the payor might attempt to claim ownership
of the mortgage, either under the principle of subrogation or by taking
a formal assignment of the mortgage from the mortgagee. The payor
might then purport to foreclose the mortgage against the holder of
some junior lien or other interest subordinate to the mortgage.
However, subrogation is inapplicable to this situation, since one who
is primarily responsible for an obligation cannot have subrogation
upon paying it; Indeed, even a formal assignment of the mortgage to
the payor would confer no power on the payor to foreclose the
mortgage against junior interests, since doing so would unjustly enrich
the payor.

Restatement (Third) of Property (Mortgages) § 6.4 cmt. e (1997) (internal

citations omitted).

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 This rule has been part of Florida law since at least 1932. In fact, Florida has

expressly recognized that this rule holds true even if the borrower obtains and

forecloses the mortgage through a corporation that it controls. In Clermont-

Minneola Country Club v. Loblaw, 143 So. 129, 130 (Fla. 1932), for example, a

mortgagor hired a contractor to pave parts of her property. The contractor’s work

resulted in a lien on the property. Id. The mortgagor then paid the mortgagee to

assign the mortgage to a corporation in which she and her husband were

“practically the only shareholders” in order to foreclose and eliminate the

contractor’s lien. Id. at 132. In holding that the contractor’s lien continued to attach

to the property, the Florida Supreme Court observed:

It is a fundamental principle of law that a person will not be permitted
to do indirectly what he is not permitted to do directly. Under this
principle, the property would not be permitted to escape the legal
effect of the mortgage “assignment,” for which [the borrower] admits
having furnished the funds, by merely having it assigned to a
corporation which was apparently organized by her for the purpose of
taking title as it does not so much depend upon the form of the
transaction actually used to hinder, delay, or defraud creditors, as it
does upon the relation existing between the party advancing the
money, the party taking title, and the parties affected by the
transaction.

Id. at 134.

In so holding, the Court explained that “equity will not apply the principle of

subrogation, where to do so would deprive a party of a legal right.” Id. at 133

(citation omitted). Although this rule is generally accepted, caselaw reflects either

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disagreement or confusion regarding the doctrinal basis for the rule.2 It is not

necessary to this appeal to resolve that dispute. For our purposes, it is sufficient to

recognize that the rule is part of Florida law. In applying the rule, it stands to

reason that what investors cannot do indirectly through a single company, investors

cannot do indirectly thought a network of companies.

Turning to our case and viewing the record in the light most favorable to the

Contractor, genuine issues of material fact exist precluding summary judgment

against the Contractor.3 First, a jury could find that McBride controlled the

2 The Florida Supreme Court treats the rule as stemming from an equitable
limitation on subrogation. See Clermont-Minneola, 143 So. at 134; Fla. Land
Holding Corp. v. Lee, 159 So. 7, 8 (1935) (holding the purchase of a tax certificate
by the taxpayer “in equity will be regarded as redemption where it is part of a
transaction by which one whose duty it was to pay the taxes attempts thereby to
defeat a lien on the property by letting it sell for taxes and then buying it in at the
tax sale in an effort to defeat the rights of lienors”). Two Second District opinions
discussed later in this opinion treat the rule as stemming from merger and
subrogation. See MB Financial Bank, N.A. v. Paragon Mortg. Holdings, LLC, 89
So. 3d 917 (Fla. 2d DCA 2012); C.T.W. Co., Inc. v. Rivergrove Apartments, Inc.,
582 So. 2d 18 (Fla. 2d DCA 1991). A New York court treated the rule as stemming
from principles of merger and fraud. See Cambridge Factors, Inc. v. Thompson,
626 N.Y.S.2d 259 (N.Y. App. Div. 1995) (upholding a lower court’s finding of a
merger where “the appellant, through the use of aliases and alter egos, held title to
the property under one name and held the first mortgage in the name of a sham
corporation with the apparent purpose of perpetrating a fraud upon the plaintiff, the
holder of a second mortgage”). The Restatement expressly eschews merger in this
area and treats the rule, similar to the Florida Supreme Court, as an equitable
limitation on subrogation. Restatement (Third) of Property (Mortgages) § 8.5 cmt.
d (“As it does in other contexts, this section rejects the application of a merger
analysis in this situation. Rather, subrogation principles are applicable.”).
3 We are reviewing a final summary judgment, which is subject to the de novo
standard. Fla. Bar v. Greene, 926 So. 2d 1195, 1200 (Fla. 2006). “Summary

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Developers. He was the manager and sole member of McBride Family Properties,

which had an almost 90% membership interest in the Developers at the time BSDI

purchased the SunTrust loans. At times, the Contractor was paid on checks drawn

on other entities linked to McBride. He also solely negotiated and arranged the

loan extensions with SunTrust to such an extent that SunTrust referred to the loan

extensions as the “McBride renewal.” This was due, in part, to his actions in

paying the closing costs for the loan renewals through McBride Family Properties

and authorizing SunTrust to debit the curtailment payments from an account at the

bank in the name of his broadcasting company.

At the same time, a jury could also find that McBride controlled BSDI. He

managed the company, signed the operating agreement on behalf of all of its

members, and directed it to purchase the SunTrust loans and then foreclose on the

same. It is unclear, however, who personally guaranteed the Royal Bank loan,

BSDI’s only capital, which was obtained to purchase the assignment of the

SunTrust loans. At a deposition, McBride, BSDI’s manager, could not recall who

personally guaranteed the multimillion dollar loan, including whether he

judgment is designed to test the sufficiency of the evidence to determine if there is
sufficient evidence at issue to justify a trial or formal hearing on the issues raised
in the pleadings . . . .” Id. It is proper only if there is no genuine issue of material
fact and the moving party is entitled to judgment as a matter of law. Fla. R. Civ. P.
1.510(c). “On a motion for summary judgment, the court must read the record in
the light most favorable to the non-moving party.” Deakter v. Menendez, 830 So.
2d 124, 127 (Fla. 3d DCA 2002).

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personally guaranteed the loan. A jury may not believe McBride’s lapse of

memory on this point, and could, along with the other evidence, draw an inference

on this point as well.

The timing of crucial events supports a fair inference that BSDI’s creation,

purchase of the SunTrust loans, and subsequent foreclosure action were primarily

for the improper purpose of defeating the Contractor’s attempt to collect on its

liens. BSDI was not formed until around the time the Contractor was moving for

summary judgment in its suit to foreclose on its construction liens. Even after

BSDI acquired the mortgage, BSDI did not commence its foreclosure until shortly

after this court entered an opinion in favor of the Contractor. This timing implies

that BSDI’s foreclosure of the mortgage was undertaken to block the Contractor’s

efforts to collect the construction liens.

The statements of SunTrust representatives also support an inference that

BSDI was created by McBride for the improper purpose of defeating the

Contractor’s liens. This suggestion is directly bolstered by SunTrust’s internal

documents which report that McBride was taking “steps to strengthen [the

Developers’] position in the . . . event the [Contractor] should prevail” in its suit

against the Developers. In fact, a SunTrust employee familiar with the BSDI’s

purchase of the loans summed up the transaction as follows: “This loan was repaid

by the borrower buying our documents.” This comment reflects the Contractor’s

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allegation that BSDI was not acting as a disinterested third party but as an agent of

the Developers and McBride.

Moreover, McBride could not provide a legitimate reason why he formed

BSDI and why BSDI purchased the mortgage. Directly asked at a deposition to

explain why BSDI obtained the Royal Bank loan in order to purchase the SunTrust

loans, McBride offered only the most conclusory response, without providing any

specific alternative explanation that would rebut the obvious purpose of

eliminating the construction liens. Nor could he explain why the Developers

declined to seek to extend the payment period for the SunTrust loans, where

SunTrust was willing to extend the payment period for the loans as it had in the

past. This absence of a legitimate alternative reason supports an inference that the

actual primary purpose was to defeat the Contractor’s liens.

Not only does this evidence create genuine issues of material fact, but the

record also reflects that discovery remains to be completed. The Contractor, for

example, unsuccessfully sought documents relevant to these issues, including the

operating agreements of each member of BSDI, the written agreement regarding

McBride Family Properties’ buyout of the investor in the Developers whose

interest was purchased, and documentation reflecting the source of the collateral or

guarantees of the Royal Bank loan that was used to purchase the assignment.

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Without discovery on these matters, entry of final summary judgment against the

Contractor was premature.

The cases cited by the Appellees, MB Financial Bank, N.A. v. Paragon

Mortgage Holdings, LLC, 89 So. 3d 917 (Fla. 2d DCA 2012) and C.T.W. Co., Inc.

v. Rivergrove Apartments, Inc., 582 So. 2d 18 (Fla. 2d DCA 1991), do not

mandate a contrary result. In both cases, a group of investors purchased a property

through a loan and granted the lender a mortgage. When additional money was

needed for the development of the property, only some of the original investors

were willing to provide more capital. The investors willing to contribute additional

money formed business entities that ultimately paid off the lenders and acquired

the mortgages. MB Financial Bank, 89 So. 3d at 919; C.T.W., 582 So. 2d at 19.

The courts in both cases held that there was no merger of the owner’s interest and

the lender’s interest that would prevent an assignment of the mortgages to the

newly created entities that paid off the mortgages. MB Financial Bank, 89 So. 3d

at 921; C.T.W., 582 So. 2d at 19-20. Thus, in one case the holders of a junior

mortgage were held to have an interest inferior to the first mortgage. MB Financial

Bank, 89 So. 3d at 921. In the other case, the holders of a junior mortgage lost their

mortgage when the first mortgage was foreclosed. C.T.W., 582 So. 2d at 19.

Significantly, in both of these cases, the investors in the new entities that

acquired the mortgages were different from the investors in the original project.

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The new entities consisted only of the investors willing to risk more money while

the entities that owned the original projects consisted of the original investors,

which included those willing and those unwilling to risk more capital. The entities

were not identical and their interests were not identical. In our case, in contrast, a

jury could find that both BSDI and the Developers were controlled by McBride

and largely owned by McBride and his family.

Moreover, the new entities in MB Financial and C.T.W were formed in

order to purchase the mortgages for the same transparent and legitimate reason. In

both cases, the purpose for creating the new entities was to provide a vehicle to

infuse new capital into the project because some of the original investors balked at

contributing more money. The Appellees in our case have not offered any such

legitimate reason. To the contrary, as discussed above, the record in this case raises

genuine issues of material fact concerning whether McBride orchestrated the

purchase of the mortgage for the primary purpose of thwarting the Contractor’s

collection of the construction liens.

The Appellees maintain that final summary judgment in their favor was

proper because the Contractor “bargained for” a lien position subordinate to the

mortgage. It is certainly true that, under the Contractor’s bargain, the Contractor’s

construction liens would be wiped out if the Bank foreclosed on the mortgage (and

if, as apparently was the case here, there was no equity in the property in excess of

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the mortgage). Similarly, under the Contractor’s bargain, the Contractor’s liens

would be wiped out if a third party obtained the mortgage and foreclosed. But the

Contractor’s “bargain” provided that it would be paid before the Developers were

paid. The Contractor’s bargain thus aligned the interest of the Developers with the

interest of the Contractor, because the Developers could realize no profit until after

the Contractor was paid. The Contractor’s bargain did not acquiesce to a maneuver

whereby the investors of the Developers could elevate their interest over the

Contractor’s construction liens. If accepted, the Appellees’ argument would deliver

to the Developers’ investors a windfall in the form of the value of the Contractor’s

labor, equipment, and materials that went into the luxury homes that improved the

investors’ property.

In closing, investors cannot grant mortgages, contract for the improvement

of the property mortgaged, and then use a network of companies to purchase and

foreclose the mortgage for the primary purpose of extinguishing the construction

liens that increased the value of the property. To hold otherwise would undermine

the long-standing principle recognized by our Supreme Court in Clermont-

Minneola —persons cannot do indirectly what they are not permitted to do

directly.

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 Accordingly, we reverse the parts of the final judgment that adjudicate the

rights of the Contractor and remand for further proceedings regarding the

Contractor’s counterclaim and affirmative defenses.

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