IP of a West 86th Street 1, LLC v. Morgan Stanley Mortgage Capital Holdings, LLC
2012 U.S. App. LEXIS 11744
7th Cir.2012Background
- Twenty LLCs formed to hold a fractional TIC interest in commercial property at 5201 West 86th Street, Indianapolis.
- IPA Fund Manager, a Virginia LLC managed by Edward Okun, was authorized to sign loan documents for the Investors but could not own the LLCs.
- Morgan Stanley refinanced and then sold/assigned the loan and related escrow accounts to IPA Lender (an Okun-controlled entity) with netting of escrow funds against the purchase price.
- Escrow accounts totaling $1,361,184.63 were not reconstituted after the loan sale, depriving Investors of funds they were entitled to use for maintenance, taxes, etc.
- Okun stopped payments in 2007; Cordell Consultants eventually owned the loan; investors sued for breach of contract and conversion; district court granted summary judgment for Morgan Stanley.
- The dispute centers on whether Morgan Stanley could net the escrow funds against the loan purchase price and whether this violated the RSA, the Borrowers’ Escrow Instructions, or created a fiduciary duty to Investors.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Morgan Stanley breached the RSA by netting escrow funds. | Investors say RSA allowed escrow funds to be used only for maintenance, not to offset purchase price. | Note, Mortgage, and RSA authorize transfer/sale and allocation of escrow; netting was permitted as part of the sale. | No breach; RSA allows assignment and netting; funds were not misappropriated. |
| Whether Morgan Stanley owed fiduciary duties to Investors regarding escrow funds. | Morgan Stanley breached fiduciary duties by misusing escrow funds. | Mortgage explicitly disavows fiduciary relationship; lender-debtor relation is not fiduciary absent special circumstances. | No fiduciary duty; no unauthorized control. |
| Whether Investors' conversion claim is waived or substantiated. | Morgan Stanley’s use of escrow funds constitutes conversion. | Either waiver of fiduciary-duty theory or lack of unauthorized control under mortgage terms. | Waived as to fiduciary-duty theory; no unauthorized control; dismissal affirmed. |
| Whether the Borrowers’ Escrow Instructions authorized or prohibited the assignment and netting. | Instructions restricted assignment or use of funds. | Instructions anticipate assignment of interests and do not require physical retention of funds; netting allowed under RSA. | Authorized; no breach or conversion. |
Key Cases Cited
- Navin v. New Colonial Hotel, 90 N.E.2d 128 (Ind. 1950) (assignment of liabilities requires consent when coupled with rights)
- Nelson v. Reidelbach, 119 N.E. 804 (Ind. Ct. App. 1918) (rights arising from contract cannot be transferred if coupled with liabilities)
- Muscarello v. Ogle Cnty. Bd. of Comm'rs, 610 F.3d 416 (7th Cir. 2010) (diversity and standing principles for municipal/employee actions)
- Thomas v. Guardsmark, LLC, 487 F.3d 531 (7th Cir. 2007) (corporate ownership and fiduciary issues in employment-related matters)
- Haegert v. Univ. of Evansville, 955 N.E.2d 753 (Ind. Ct. App. 2011) (contract breach elements for Indiana state law)
- Egan Marine Corp. v. Great American Ins. Co. of New York, 665 F.3d 800 (7th Cir. 2011) (summary judgment standard and evidentiary burden on movant)
- Gold v. Cedarview Mgmt. Corp., 950 N.E.2d 739 (Ind. Ct. App. 2011) (contract interpretation and integration of related writings)
- Brown v. Ind. Nat. Bank, 476 N.E.2d 888 (Ind. Ct. App. 1985) (definition of assignment and rights conveyed)