UNITED STATES OF AMERICA
BEFORE THE NATIONAL CREDIT UNION ADMINISTRATION
In the Matter of
Docket No. BD-03-21
Decision and Order on Appeal
This matter comes before the National Credit Union Administration Board (Board) under 12 C.F.R. Part 746, Subpart B, as an administrative appeal of XXXX (Petitioner) of the determination by the liquidating agent (Liquidating Agent) disallowing its creditor claim against the XXXX (XXXX).
Petitioner is appealing the determination by the Liquidating Agent to disallow its $968,431.16 creditor claim against XXXX. The claim is for damages Petitioner asserts were caused by XXXX in settling the defaulted loans in the XXXX group of loans (XXXX Loans).
The Board placed XXXX under conservatorship and appointed itself conservator on June 26, 2017. On September 30, 2018, because of insolvency caused by losses in their taxi medallion loan portfolio, XXXX was liquidated, and the Board was appointed liquidating agent. Upon liquidation, the Liquidating Agent acquired the XXXX loan relationship, referring to a member, XXXX, a figure in the XXXX taxi market. The XXXX loan relationship involved nineteen loans, with seven participant credit unions, secured by XXXX taxi medallions, real estate, and personal guarantees by way of a 2015 forbearance agreement. Petitioner’s claim relates to its participation interest in loans made to XXXX, other members of his family, and entities owned and/or controlled by him or his family (the XXXX).
After liquidation, the Liquidating Agent engaged XXXX (XXXX) to service XXXX loans, including the XXXX Loans. In October 2019, the approximately $23 million XXXX Loan relationship was modified into an A/B note structure and the XXXX executed consents to money judgments and agreed to the sale of the real properties in the event of default. The XXXX then immediately defaulted by failing to make the November 2019 and December 2019 payments on time. In January 2020, the XXXX were sent a notice of default, and the Liquidating Agent began exploring options to either sell the collateral real estate or to pursue a settlement with the XXXX.
In February 2020, the Liquidating Agent filed the consent judgments in the appropriate (XXXX) state courts, but the advent of the COVID-19 pandemic caused substantial delays in the foreclosure process until summer 2020, when the court finally permitted the foreclosure process to proceed. The Liquidating Agent decided to have the foreclosure sale marketed and conducted by a real estate broker and in late May 2020 Petitioners were notified that a brokered foreclosure sale option was selected. After considering proposals from three potential real estate brokers, XXXX (XXXX) was selected to market the XXXX properties for sale via a foreclosure bid/overbid process. While the Liquidating Agent was coordinating the foreclosure sale process, the XXXX made a settlement offer to resolve the matters. Also, during this time, the contract between XXXX and the Liquidating Agent expired, and the Liquidating Agent entered into a new agreement with XXXX to service the remaining XXXX loans.
XXXX provided their broker’s opinion of value for both commercial properties on July 20, 2020. The estimated value for the first property was $3,025,000, with a suggested initial listing price of $3.7 million. The estimated value for the second property was $2,485,000, with a suggested initial listing price of $2.9 million. Participants were informed that the Offering Memorandum was complete, and October 13, 2020 was the bid deadline. Once the initial bids were received and evaluated, winning bids for each or both properties would be awarded, then the winning bids would be subject to a three-week overbid process ending in an overbid auction. Once accepted, that final price would be submitted to the court for final approval.
Bids were received on the properties in October of 2020, as anticipated. The highest bids for the two properties were $1.3 million and $1.8 million, respectively, far less than the estimated sale prices. The Liquidating Agent called the Participants (there was no response from one Participant) to discuss the bids as well as the overbid process. The six Participants who were contacted agreed to proceed with the overbid process except for Petitioner, which stated it was not interested in the initial bid offers. At this time, while a majority of the Participants were in consensus with the foreclosure sale, the Liquidating Agent requested a legal opinion from outside counsel, in order to determine if unanimous consent from Participants was required to move forward with a foreclosure sale or settlement relative to the XXXX Loans.
Legal counsel advised that the Liquidating Agent could move forward with a sale of the underlying collateral as part of its collection efforts, without the consent and cooperation of Petitioner, as “there is no requirement that the NCUA Board provide the participated credit unions, including [Petitioner], with an opportunity to specifically approve or reject proposed collection and/or settlement efforts.”
During the bidding process, the XXXX requested a call, which took place on October 16, 2020. During this call, the XXXX confirmed that its prior settlement offer was still on the table and indicated that they would provide financials and a commitment letter for $5.5 million from a hard money lender so that the Liquidating Agent could verify the validity of the loan facility. The XXXX sent the requested financials and commitment documents to the Liquidating Agent during the last week of October 2020. Following the offer, on October 26, 2020, XXXX provided an analysis to the Liquidating Agent, opining that a settlement with the XXXX, netting Participants $3.5 million, was a better option than proceeding with the foreclosure sale.
On October 26, 2020, Petitioner made its first written grievance about the bid process, the number of bids received, and the amounts of those bids. Petitioner also asserted that unanimous consent of the Participants was required for the Liquidating Agent to continue with the foreclosure auction.
On October 29, 2020, the Liquidating Agent indicated it would accept the settlement offer from the XXXX. On a November 18, 2020 call, Petitioner informed the Liquidating Agent that it would neither agree to pursuing the foreclosure sale nor to the proposed settlement with the XXXX. Petitioner subsequently followed up with a written rejection of both options.
Due to time limitations and duties owed to the other Participants, the Liquidating Agent entered into the settlement agreement (Settlement) with the XXXX on December 2, 2020. The Settlement was determined to be the most prudent option for the Liquidating Agent based on the substantial increase in proceeds each Participant would receive over the foreclosure bid sale option. Specifically, the Settlement translated into an additional $1.5 million in total net recovery to Participants. The Settlement Agreement and Mutual Release closed on December 8, 2020 and Participants were informed of the successful execution of the Settlement the following day. Due to Petitioner’s rejection of both the foreclosure sale and the settlement options, the Liquidating Agent provided a discovered creditor’s notice to Petitioner on December 18, 2020.
Disallowance of Claim. Petitioner submitted a proof of claim on January 29, 2021. Petitioner’s claim “contends that the Liquidating Agent breached Paragraph 3.6 of the Terms and Conditions [of the Agreement] and set out three bases for recovery: (1) breach of contract, (2) breach of fiduciary duties, and (3) indemnity.” After consulting with the NCUA’s Office of General Counsel, the Liquidating Agent sent a disallowed creditor letter to Petitioner on July 28, 2021, denying its claim in full.
Appeal. On August 30, 2021, Petitioner, through legal counsel, appealed the Liquidating Agent’s determination to the Board, pursuant to 12 C.F.R. Part 746, Subpart B. In its appeal, Petitioner contends that the Liquidating Agent’s disallowance of its claim was erroneous, and the Board should allow the claim in full.1 In support, Petitioner asserts that the Liquidating Agent entered into the Settlement with the various obligors (the XXXX) of the XXXX Loans without the consent of Petitioner. Petitioner argues that the Liquidating Agent’s consummation of the Settlement constituted a breach of the Agreement between XXXX and the Participants, including Petitioner. Petitioner also asserts that the Settlement contravened the regular course of dealing “to provide each [Participant] with financial information and analyses pertinent to proposed loan modifications or settlements, and to solicit and obtain the consent of each [Participant] to proposed loan modifications and settlements” before agreeing to the Settlement.
In addition to breach of contract, Petitioner asserts that the Liquidating Agent’s consummation of the Settlement, without Petitioner’s consent and without providing Petitioner and the Participants with relevant financial information to support the Settlement, constituted a breach of fiduciary duty. Thus, pursuant to the Agreement, the Liquidating Agent is obligated to indemnify Petitioner for its “consequent losses.”
Accordingly, Petitioner is seeking damages of at least $968, 431.16, representing the difference between the reasonable value of Petitioner’s interest (20.35%) in the XXXX Loans and in the collateral securing such loans, that is, $1,680,555.00 less the $712,123.84 gross amount ascribed to Petitioner’s share of the $3.5 million received from the XXXX under the Settlement.
Contract Law. To the extent that Petitioner’s claim concerns a loan participation agreement, which is a type of contract, this matter is subject to contract law. Paragraph 18 of the Agreement states that New York law is controlling, except on those issues exclusively controlled by federal law. Because contract law is a matter of state law, New York contract law applies here.
Pertinent Contractual Provisions. Petitioner’s proof of claim relates to the Agreement, originally entered into between XXXX as seller and Petitioner as one of several purchasers of such a participation interest in the XXXX Loans. Petitioner entered into the Agreement on or about July 1, 2009. Accompanying the Agreement were Addendum A, entitled “Loan Participation Summary,” and Addendum B, entitled “Terms and Conditions.” The Loan Participation Summary indicated that XXXX was to act as the Servicer for the Agreement. The Terms and Conditions set out certain requirements applicable to the Servicer and the Participants. The loans included under the Agreement were all loans to taxi drivers and taxi companies, which were secured by taxi medallions. On September 17, 2013, the parties entered into Amendment Number One, and on September 27, 2018, the parties entered into an Assignment, Consent and Recognition Agreement. The key provisions of these contractual documents relative to this appeal are as follows:
Agreement, Addendum “B” – Section 3.6; Servicer’s Authority Regarding Loan Modifications
- “It is agreed that the exclusive right to decide how the loan(s) participated under this Agreement shall be serviced and collected is hereby vested exclusively in Servicer, as trustee for all Participants subject to the terms hereof. Other Participants are not authorized to give directions to Servicer in connection with these matters; except that any Party having the greatest Participation Interest in the loan(s) as reflected on Servicer's books and records may direct that a particular collection action be taken, if no collection action occurs on a default of sixty (60) days or greater…” (Emphasis added).
. . .
Servicer shall not have the authority, without the prior written consent of all Participants, (i) to decrease the interest rate, (ii) modify the payment schedule, or (iii) modify the amount of credit or release collateral, guarantors or makers.” (Emphasis added).
Agreement, Addendum “B” – Section 3.12; Default by Borrower
- “In the event of a default in the payment of principal or interest by a Borrower on any loan(s) sold hereunder, then as to such loan(s), remittances of principal or interest to Participants hereunder shall not be required until collected from the Borrower or for the account of the Borrower. In the event of a default of a loan(s) in excess of thirty (30) days which remains uncured and unless otherwise agreed to by all Participants, Servicer may undertake collection efforts including, but not limited to, hiring of legal counsel, repossession of collateral, filing of court actions, obtaining judgments and execution thereon.” (Emphasis added).
Breach of Contract. As noted above, New York contract law applies in this matter. Under New York law, a breach of contract claim requires: (1) the existence of an agreement, (2) adequate performance of the contract by the plaintiff, (3) breach of contract by the defendant, and (4) damages.2
There is no dispute that the Agreement was a contract to which Petitioner and XXXX were counterparties or that the Agreement was in effect at the time XXXX was conserved and liquidated. Thus, the two key issues before the Board for resolution in this appeal relate to the third and fourth required elements: first, whether the Liquidating Agent, stepping into the shoes of XXXX,3 breached the contract when acting in its capacity as Servicer of the Agreement, and second, whether Petitioner suffered actual and recoverable damages.
In its appeal, Petitioner submits that the Liquidating Agent’s determination to deny its claim was erroneous in its reliance on Section 3.12 of the Agreement to justify its authority to unilaterally enter into the Settlement of the XXXX Loans without Petitioner’s consent. Specifically, Section 3.12 states, in pertinent part: “In the event of a default of a loan(s) in excess of thirty (30) days which remains uncured and unless otherwise agreed to by all Participants, Servicer may undertake collection efforts including, but not limited to, hiring of legal counsel, repossession of collateral, filing of court actions, obtaining judgments and execution thereon.” (Emphasis added).
Petitioner contends that, instead, Section 3.6 applies. That provision states, in pertinent part: “Servicer shall not have the authority, without the prior written consent of all Participants, (i) to decrease the interest rate, (ii) modify the payment schedule, or (iii) modify the amount of credit or release collateral, guarantors or makers.” (Emphasis added).
Petitioner notes that under established legal principle, a provision in a contract should not be interpreted in a manner that would render the terms of another provision in the same contract meaningless. Petitioner charges that the Liquidating Agent’s interpretation that Section 3.12 provides authority to unilaterally enter into the Settlement without the consent of all Participants would “render the Section 3.6 Provision devoid of any legal force or effect, clearly [violating] that sacred legal principle.”
The Board notes that the provisions of the Agreement at issue are not a model of clarity and recognizes that Petitioner’s interpretation is not patently unreasonable. On balance, however, in the Board’s view, the Liquidating Agent has the more reasonable reading of the language of the Terms and Conditioners of the Agreement based on all currently available information.
The Board notes that the Section 3.6 provision addresses loan modification whereas the Section 3.12 provision addresses collection. The Liquidating Agent did not take the position that the Section 3.6 provision never applies; it took the position that such language applies to loan modification prior to default, but not to a resolution of a collection action that both terminated the litigation and relationship with the borrower. The Section 3.6 language is therefore not meaningless, but instead simply limited to loan modifications, which create a new future relationship with a borrower. However, with the power to commence collection and obtain the greatest potential recovery available, the Servicer needed and had the ability to end that litigation without any requirement for Participant consent, which is provided for specifically in Paragraph 3.12. The distinction between modification and collection also explains why the Liquidating Agent actively sought involvement of Participants when restructuring the XXXX Loans in 2019, while it did not consult with Participants on every collection-related matter. The distinction is therefore supported by the Liquidating Agent’s actual conduct as well.
In addition, even assuming a breach of the Agreement, Petitioner must establish that it suffered a calculable amount of recoverable damages in accordance with the applicable law. Here again, the Board believes the Liquidating Agent holds the more reasonable position on this element as it does not appear that Petitioner has or can sufficiently establish recoverable monetary damages for several reasons.
First, according to Petitioner’s appeal, the damages it is seeking for the alleged breach of contract are for “its consequent losses.” In seeking consequential rather than general damages, the indemnification clause in Section 6.2 of the Agreement appears to bar Petitioner’s claim: “Each Party shall indemnify and hold harmless the other Parties for any direct (but not consequential) losses sustained . . . ” (Emphasis added).
Second, even if the indemnification clause applies, the consequential damages Petitioner seeks were not the type of damages that were contemplated by the parties. Further, Petitioner has not established the amount of its consequential damages with a reasonable degree of economic certainty due to a lack of reliable data.
Third, even if Petitioner were only pursuing a claim for general damages, due to myriad uncertainties concerning collection from the XXXX, Petitioner cannot establish the fact that it was actually damaged with a reasonable degree of economic certainty.
Fourth, although nominal damages are potentially available for a breach of contract claim under New York law, and the indemnification clause does provide for an award of attorneys’ fees for the prevailing party, the indemnification clause does not appear to contemplate an award of attorneys’ fees if no direct damages are proven.
Accordingly, even if there were a breach of contract by the Liquidating Agent, Petitioner has not established recoverable damages under New York law. Thus, for the foregoing reasons, the Liquidating Agent’s decision to deny the claim based on all information available at the time of its determination appears proper and in accordance with the applicable law.
Breach of Fiduciary Duties and Indemnification. In addition to its breach of contract claim, Petitioner’s appeal asserts breach of fiduciary duty and indemnification. Petitioner contends the Liquidating Agent breached its fiduciary duties in consummating the Settlement without Petitioner’s consent, and in not ascribing sufficient value to the collateral released pursuant to the Settlement. Petitioner provides that, under the terms of the Settlement, the XXXX “paid only $3.5 million, a mere 11.4% of the approximate $30.7 million amount of indebtedness under the XXXX Loans set forth in the [Settlement] (exclusive of post-judgment interest, attorneys’ fees and costs, all guaranties of the [XXXX] were cancelled, and the entirety of the loan collateral – all 105 medallions and each of the real estate parcels – were released in their entirety.” Petitioner asserts those terms “grossly undervalued the collateral, to the severe detriment of the Participants,” including Petitioner. Accordingly, Petitioner argues that, pursuant to Section 6.2 of the Agreement,4 the Liquidating Agent is obligated to indemnify Petitioner for its consequent losses.
However, under New York law, a plaintiff seeking to recover for breach of fiduciary duty against a defendant under a participation agreement “properly sounds in contract, not tort, law.”5 For that reason, if a “plaintiff’s breach of fiduciary duty claim arises out of the same facts as its breach of contract claim, the fiduciary duty claim is insufficient.”6 Although a fiduciary duty outside of the contract can give rise to a breach of that duty, “banks who participate in loans together are not fiduciaries, but act at arm’s length.”7
This is precisely the situation in this instance. Petitioner has not provided any allegations or evidence separate from those that allegedly support its breach of contract claim. In order to present a viable breach of fiduciary claim under New York law, Petitioner must establish an additional basis for a fiduciary duty outside of the Agreement. Because participation agreements do not create a fiduciary duty absent specific language setting out such a duty, and there is no other basis for finding that the Liquidating Agent had a fiduciary duty to Petitioner, it cannot state an independent claim for breach of fiduciary duty. Although Petitioner may argue that there is fiduciary duty set out in the Agreement itself, any such claim is properly considered and evaluated as a breach of contract claim, and there is no additional legal basis for recovery.
Thus, for purposes of this analysis, any purported contravention of the duty of good faith and fair dealing is properly addressed as a failure to meet the third (or second) element8 of a breach of contract claim under New York law. Even if the Liquidating Agent was required to act as a fiduciary under the Agreement when taking collection actions, all available evidence establishes that the Liquidating Agent complied with those obligations. Moreover, the existence of a fiduciary obligation for the Servicer begs the question of why Petitioner’s consent to the Settlement would be required, as a fiduciary obligation would already require the Liquidating Agent to act with the Participants’ best interests in mind. Regardless, the parties were still required to comply with the duty of good faith and fair dealing, which is an implicit requirement in every contract under New York law. However, the extensive and well documented efforts of the Liquidating Agent in resolving the XXXX Loans seem to satisfy that duty.9
Petitioner’s indemnification claim is also not a separate basis for recovery. Under New York law, a cause of action for indemnity must be based either upon an express contract or a common-law theory of implied indemnity.10 Because Petitioner has no basis for an indemnification claim other than one pursuant to or under the Agreement, any claim for indemnification overlaps the breach of contact claim it has already presented.
Based on a full review of the administrative record, the Liquidating Agent’s disallowance of Petitioner’s proof of claim was reasonable and is well supported by the record.
Petitioner contends that it was harmed by the actions of the Liquidating Agent when it entered into the Settlement on behalf of the Participants. However, the record reflects that the Settlement, which resolved protracted and expensive litigation with the XXXX, was a reasonable business decision by the Liquidating Agent that was informed by the advice of outside legal counsel that unanimous consent of the Participants was not required, and by XXXX determination that the Settlement would result in the greatest recovery for the Participants in the least amount of time.
Applying the relevant state contract law applicable to this matter, Petitioner’s contention that the Liquidating Agent breached the Agreement is not wholly without merit, given some degree of ambiguity in the Terms and Conditions of the Agreement, specifically Sections 3.6 and 3.12. On balance, however, the Liquidating Agent’s interpretation of the contract is well supported and reasonable. Further, because Petitioner’s asserted damages are properly considered consequential damages, the Agreement’s indemnification clause bars those damages and, in any event, Petitioner has not established the amount of its consequential damages with a reasonable degree of economic certainty, or even reliably proven that it sustained any damages. For all of these reasons, the record supports that the Liquidating Agent was reasonably justified in its decision to deny Petitioner’s proof of claim in full.
For the reasons set forth above, it is ORDERED as follows:
The determination by the Liquidating Agent disallowing XXXX creditor claim against XXXX is AFFIRMED and the appeal of XXXX is DENIED.
The Board’s decision constitutes a final agency determination and is subject to judicial review in accordance with Chapter 7 of Title 5 of the United States Code.
So ORDERED this 23rd day of November 2021, by the National Credit Union Administration Board.
Secretary of the Board
1 For purposes of its appeal, Petitioner incorporates by reference the entirety of the contents of its proof of claim and its supplement, including all documentary evidence.
2 See Fillmore E. BS Fin. Subsidiary LLC v. Capmark Bank, No. 11 CIV. 4491 PGG, 2013 WL 1294519, at *9 (S.D.N.Y. Mar. 30, 2013), aff’d, 552 F. App’x 13 (2d Cir. 2014).
3 Under the Federal Credit Union Act (FCU Act), “[t]he Board shall, as conservator or liquidating agent, and by operation of law, succeed to –
(i) all rights, titles, powers, and privileges of the credit union, and of any member, accountholder, officer, or director of such credit union with respect to the credit union and the assets of the credit union; and
(ii) title to the books, records, and assets of any previous conservator or other legal custodian of such credit union.” 12 U.S.C. §1787(b)(2).
4 Section 6.2 of the Agreement states: “Each Party shall indemnify and hold harmless the other Parties for any direct (but not consequential) losses sustained (including reasonable costs and attorneys’ fees) as a direct and proximate result of a Party’s intentional or negligent failure to discharge its duties or honor its warranties in this Agreement.”
5 Banque Arabe Et Internationale D’Investissement v. Maryland Nat. Bank, 819 F. Supp. 1282, 1295 (S.D.N.Y. 1993), aff’d, 57 F.3d 146 (2d Cir. 1995); see Fillmore E. BS Fin. Subsidiary, 2013 WL 1294519, at *13-14 (dismissing breach of fiduciary duty claim because it was duplicative of breach of contract claim under participation agreement).
6 Fillmore E. BS Fin. Subsidiary, 2013 WL 1294519, at *14; see Bayerische Landesbank v. Aladdin Cap. Mgmt. LLC, 692 F.3d 42, 58 (2d Cir. 2012) (“Under New York law, a breach of contract will not give rise to a tort claim unless a legal duty independent of the contract itself has been violated.”).
7 Fillmore E. BS Fin. Subsidiary, 2013 WL 1294519, at *14; see ABL Advisor LLC v. Peck, 147 A.D.3d 689, 691 (N.Y. Sup. Ct., 1st Dept. 2017) (“[T]he Participation Agreements . . . were arm’s length business transactions that did not create any fiduciary duty[.]”).
8 Although it would not be necessarily incorrect to view this instead as a failure to satisfy the second element under New York law (i.e., adequate performance of the contract by plaintiff) because the analysis of the issue is the same, and because Petitioner’s failure to meet any of the four elements negates its claim, whether the issue is addressed under the second or third element is ultimately inconsequential.
9 However, it is questionable whether Petitioner satisfied its duty of good faith and fair dealing in light of its unwillingness to work productively with the Liquidating Agent on collection matters.
10 See Jakobleff v. Cerrato, Sweeney & Cohn, 97 A.D.2d 786, 786 (N.Y. Sup. Ct., 2d Dept. 1983) (citing Margolin v. New York Life Ins. Co., 297 N.E.2d 80 (N.Y. 1973)).