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Tri-Town Construction Co., Inc. v. Commerce Park Associates 12, LLC

Supreme Court of Rhode Island

June 22, 2016

Tri-Town Construction Company, Inc.
Commerce Park Associates 12, LLC et al.

         Superior Court Kent County, No. 13-639 Bennett R. Gallo Associate Justice

          For Plaintiff: Ryan J. Lutrario, Esq. Vincent A. Indeglia, Esq.

          For Defendants: Richard G. Riendeau, Esq.

          Present: Suttell, C.J., Goldberg, Flaherty, and Robinson, JJ.


          Francis X. Flaherty, Associate Justice

         The defendants, Commerce Park Associates 12, LLC (CPA) and Nicholas E. Cambio, appeal to this Court, arguing that the judgment of the Superior Court in favor of the plaintiff, Tri-Town Construction Company, Inc., was infected with four errors. The defendants argue that the trial justice erred when he granted summary judgment in favor of the plaintiff's claims for (1) breach of a promissory note and (2) breach of a guaranty of the note. CPA also challenges (3) the trial justice's dismissal of its counterclaim pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure for payments made to the plaintiff and for various expenses it incurred. Finally, the defendants contend that the trial justice erred by (4) granting the plaintiff's motion for attorney's fees. Addressing these issues in order, we affirm in part and vacate in part the judgments of the Superior Court.

         Facts and Travel

         The Underlying Transactions

         In 2004, CPA and Cambio agreed to purchase property in West Greenwich from Tri-Town in hopes of developing a 140-unit "over 55" residential condominium. The parties entered into a purchase and sale agreement pursuant to which Tri-Town conveyed the unimproved wooded lot located on the New London Turnpike to CPA, and Cambio signed a promissory note (the note), "individually, as guarantor, " for $4, 500, 000.[1] In August 2006, the transactions closed. CPA paid $136, 000 and executed the promissory note that is at the heart of this dispute.[2]The note obligated CPA to pay the principal sum of $4, 363, 000 plus 7 percent annual interest to Tri-Town. Under the note, principal-only payments of $6, 000 per month were to be paid until January 2007, at which time interest began to accrue in the amount of $25, 316.67 per month. Despite that accrual, however, the note called for interest-only payments of $10, 000 per month until the "first Homebuyer closing." At that time, and at each closing thereafter, the payment due to Tri-Town included accrued interest and a portion of the principal.[3] However, there was no deadline set forth in the note specifying when the first "[h]omebuyer closing" was to occur. The note, which was set to mature on July 31, 2016, was secured by a mortgage on the property.

         The note defined default as one or more of eight events, including the "[n]onpayment of any installment of principal and/or interest due under this Note when it shall become due and payable * * *." A late fee of 5 percent was also assessed on any overdue payment made after ten days. The defendants agreed to remain primarily liable on the "Note and Security Instrument * * * unaffected by * * * any other matter * * *." Of particular significance to this appeal, the note provided that defendants would "pay the reasonable legal and other fees and expenses of [Tri-Town] * * * reasonably incurred connected with or incidental to * * * the collection or enforcement of an Event of Default * * *." Finally, imbedded in the last two pages of the note, directly above the signature line, was the following language:

"Whomever signs this Note, each person is fully and personally obligated to keep all of the promises made in this Note, including the promise to pay the full amount owed. Any person who is a guarantor, surety or endorser of this Note is also obligated to do these things. Any person who takes over these obligations, including the obligations of a guarantor, surety or endorser of this Note, is also obligated to keep all of the promises made in this Note. HOLDER may enforce its rights under this Note against each person individually or against all of us together. This means that any one of us may be required to pay all of the amounts owed under this Note."

Cambio signed that provision twice: once as CPA's manager, and once individually as guarantor.

         The Default, the Bankruptcy Proceedings, and the Foreclosure

         For two years after the closing and the execution of the documents, CPA satisfied all its obligations and also invested a significant sum of money into developing the property. Those expenditures included engineering fees, legal expenses to obtain needed zoning and regulatory relief, and expenses related to developing the land for the project. According to CPA, in the midst of its efforts, the national economy collapsed and the "Great Recession" ensued. This, CPA maintained, created an environment wherein it could no longer obtain financing, because "[t]he era of easy money ended." By September 2008, CPA had ceased making payments under the note.

         In early 2012, Tri-Town initiated foreclosure proceedings. After Tri-Town issued a notice to CPA of the impending foreclosure, CPA filed a petition for Bankruptcy in the United States Bankruptcy Court under Chapter 11 of the United States Bankruptcy Code. Undeterred, Tri-Town sought and secured relief from the automatic stay that accompanied the bankruptcy filing. Eventually, the Bankruptcy Court dismissed the case and in April 2013, Tri-Town purchased the property at a public auction for $2, 250, 000.

         The Superior Court Proceedings

         In an effort to capture the difference between the $6, 161, 894.95 CPA owed to it and the $2, 250, 000 that it had paid at the auction, Tri-Town filed a two-count complaint against CPA and Cambio, seeking to secure the $3, 911, 894.95 deficiency. Count 1 of the complaint alleged a breach of the note against both defendants, and count 2 alleged a breach of guaranty against Cambio. In response, defendants raised several affirmative defenses, including frustration of purpose. The defendants also filed separate counterclaims: Cambio sought a declaratory judgment that the language in the note was legally insufficient to establish a binding guarantee and CPA counterclaimed for deposits, for interest paid, and for the value of the investments that it had made to the property.

         In due time, Tri-Town moved for summary judgment on both counts in its complaint. Regarding count 1, it argued that there was no dispute that the note was valid and binding, that the note itself defined nonpayment of any installment, that defendants had stopped making payments in accordance with the terms of the note, and that Tri-Town had provided notice of default to each defendant. With respect to count 2, Tri-Town argued that there was no dispute that Cambio had executed the note as a guarantor and that the note was legally sufficient to create a binding obligation on his part. Tri-Town also moved to dismiss CPA's counterclaim pursuant to Rule 12(b)(6), and to strike both defendants' affirmative defense of frustration of purpose and Cambio's counterclaim pursuant to Rule 12(f).

         The defendants objected to plaintiff's motions. They maintained that summary judgment was inappropriate because questions of material fact existed to support their defenses; the "entire purpose" of the sale, they said, was "[t]he development of the site from a less than valuable thirty acres zoned commercial * * * to a residential site of 140 units for an 'over 55' age restricted condominium * * * wherein both Tri-Town and CPA 12 would profit." Tri-Town's foreclosure was the "last straw, " they argued, and a tacit admission by Tri-Town that the purpose of the entire transaction was frustrated. The defendants pointed to the fact that plaintiff had received twice the market value for the property and that the repayment schedule under the note hinged, in part, on homebuyer closings as evidence that plaintiff had a continuing relationship to the enterprise. Cambio also disputed the allegation that he was obligated as a guarantor.

         In addition to his objection to Tri-Town's motion for summary judgment, Cambio filed a cross-motion for summary judgment on his counterclaim for a declaratory judgment. In that cross-motion, Cambio argued that he was under no duty to guarantee the note because the instrument failed to establish a legally binding secondary obligation. In support of his argument, he pointed to the fact that there was no separate writing, that there were no separate terms establishing a guaranty agreement or an obligation in the note, and that there was no recitation of consideration in the note.

         Tri-Town filed a reply to defendants' objection to its motion for summary judgment that also included an objection to Cambio's cross-motion for summary judgment. Tri-Town reiterated its position that there were no disputed material facts and that, if summary judgment was granted in its favor, Cambio's cross-motion was moot and his counterclaim should be dismissed. Tri-Town also argued that the frustration of purpose defense did not apply because CPA and Cambio's promise to pay money under the note in no way hinged on the nonoccurrence of a recession and, therefore, frustration of purpose did not apply.

         There were a series of hearings conducted to dispose of the issues raised in the motions and cross-motions. At the first hearing, the trial justice heard arguments on Tri-Town's motion for summary judgment, defendants' objection thereto, and Cambio's cross-motion for summary judgment. The defendants pressed their argument that the note was part of a "larger transaction" between the parties to develop the property as evidenced by the payment schedule, and that no one anticipated that construction financing would become unavailable when the sale was negotiated. At the hearing on Tri-Town's motion for summary judgment, counsel for defendants argued:

"there's sufficient material facts that would trigger such a – a jury could find from the facts as I'm outlining them that there was, because of the doctrine of frustration of purpose, they could find just as I'm proposing that there was no – that the parties – essentially because of the impossibility due to – I don't want to go as far as say impossibility – impracticability in the frustration of the purpose of the overall transaction, could find that there was essentially a nullification, which is essentially what it is, of the contract. They got their property back, and, you know, everybody can go home."

         Although they stopped short of categorizing Tri-Town as a co-venturer, defendants maintained that, with the facts as they were, a jury could find in their favor under the doctrine of frustration of purpose. The ...

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