Case Information
*1 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA 16TH & K HOTEL, LP,
Plaintiff,
Civil Action No. 11-759 (BAH) v. Judge Beryl A. Howell
COMMONWEALTH LAND TITLE )
INSURANCE COMPANY, et al. ,
Defendants. MEMORANDUM OPINION
The Plaintiff 16 th & K Hotel, LP, is the owner of the St. Regis Hotel at 16 th and K Streets, N.W. in Washington, D.C. The plaintiff’s plans to expand the hotel to an adjacent lot literally hit an unexpected brick wall, which had not been disclosed on the surveys relied upon in obtaining financing for the construction. In this case, the plaintiff sues the surveyors and the title insurer for over $23,000,000 in damages due to the alleged nondisclosure on the surveys of a party wall with an adjoining property. Pending before the Court is the motion by the defendant title insurer, Commonwealth Land Title Insurance Company (hereinaftеr “Commonwealth”), to dismiss the action against it, pursuant to Federal Rule of Civil Procedure 12(b)(7), for failure to join the plaintiff’s lenders as “necessary parties in this case.” Commonwealth P. & A. Supp. Mot. Dismiss, ECF No. 8, at 2-3. For the reasons set forth below, this motion is DENIED.
I. BACKGROUND
The plaintiff, a Delaware limited partnership, purchased the St. Regis Hotel, located at 923 16 th Street, N.W., in 2005 and thereafter explored the feasibility of expanding the hotel’s facilities by purchasing an adjacent lot with a townhouse at street address 1528 K Street, N.W. (referred to as “Parcel Two” in this litigatiоn). Compl. ¶¶ 9-10, 12-13. From 2005 through 2007, the plaintiff contracted with the surveyors, defendant Bruce C. Landes, who is a resident of Virginia, and defendant Landmark-Fleet Surveyors, P.C., a Virginia professional corporation with its principal place of business in Virginia, to prepare a series of certified surveys of Parcel Two. Id. ¶¶ 14, 16, 51; Commonwealth Cross-Claim, ECF No. 15, ¶¶ 2-3. The defendant surveyors supplied surveys of Parcel Two in December 2005, November 2006, December 2006, April 2007, and July 2007. Compl. ¶¶ 16, 51; see also Commonwealth Cross-Claim, ECF No. 15, ¶¶ 8-13. These surveys consistently showed that the townhouse on Parcel Two was a “free- standing structure, without material easements or encroachments thereon.” Compl. ¶¶ 17, 51. The plaintiff “reasonably concluded” that the townhouse could be fully demolished and redeveloped as part of the needed hotel facilities and, consequently, in April 2006, purchased Parcel Two. Id. ¶¶ 32-33. Thereafter, in 2006, the plaintiff commenced extensive renovations on the St. Regis, plans for which included demolition of the townhouse on Parcel Two and reconstruction of an addition to the hotel on that parcel. Id. ¶¶ 32, 35.
In connection with a modification of its construction financing, plaintiff purchased from Commonwealth, a Nebraska corporation with its principal place of business in Jacksonville, Florida, an Owner’s Policy of Title Insurance, Policy No. 08-001112, issued on April 2, 2008, for an insurance amount of $172 million (hereinafter the “Owner’s Policy”). Id. ¶ 38; *3 Commonwealth Cross-Claim, ECF No. 15, ¶ 1; Compl., Ex. A, Owner’s Policy of Title Insurance, at 4. The Owner’s Policy insured plaintiff “against, inter alia , loss or damage sustained or incurred by the reason of defect in or lien or encumbrance on or unmarketability of title for [the St. Regis] and Parcel Two.” Compl. ¶¶ 37-38; see also Commonwealth Answer, ECF No. 15, ¶ 38 (“Commonwealth admits that it sold Owner’s Policy No. 08-001112 to the Plaintiff”). [3] The Owner’s Policy is a binding agreement between the plaintiff and defendant Commonwealth. Compl. ¶ 67; Commonwealth Answer, ECF No. 15, ¶ 67.
The Owner’s Policy includes a so-called “ALTA 16 Mezzanine Endorsement,” which provides that Barclays Capital Real Estate Finance, Inc. (hereinafter “plaintiff’s Mezzanine Lender”) has an interest in some or all of the proceeds of any claim under the Owner’s Policy up to the amount of the outstanding indebtedness under the Mеzzanine Loan between the plaintiff and the Mezzanine Lender. Compl. Ex. A, Owner’s Policy of Title Insurance; Commonwealth Mot. Dismiss, ECF No. 8, Ex. A-1, Mezzanine Endorsement, at 1-2; Commonwealth Cross- Claim, ECF No. 15, ¶ 17. [4] The Mezzanine Endorsement states, in relevant part, that:
2.(a) [the Plaintiff] has assigned to the Mezzanine Lender the right to receive amounts otherwise payable to the insured under this policy, not to exceed the outstanding indebtedness under the Mezzanine Loan; . . . .
*4 6. (a) that the amount of insurance under this policy shall be reduced by any amount [Commonwealth] may pay under any policy insuring a mortgage to which exception is taken in Schedule B . . . and the amount so paid shall be deemed a payment under this policy; . . .
7. If the insured, the Mezzanine Lender or others have conflicting claims to all or part of the loss payable under the Policy, [Commonwealth] may interplead the amount of the loss into Court. The insured and the Mezzanine Lender shall be jointly and severally liable for [Commonwealth’s] reasonable cost for the interpleader and subsequent proceedings, including attorney’s fees. [Commonwealth] shall be entitled to payment of the sums for which the Insured and Mezzanine Lender are liable under the preceding sentence from the funds deposited into Court, and it may apply to the Court for their payment.
Commonwealth Mot. Dismiss, ECF No. 8, Ex. A-1, Mezzanine Endorsement, at 1-2.
In late April 2008, while construction on Parcel Two was underway, the plaintiff first discovered the existence of the party wall and immediately stopped construction. Compl. ¶ 52; Commnwealth Cross-Claim, ECF No. 15, ¶ 18. The party wall, which is 12 inches wide, serves as both the east wall of the townhouse on Parcel Two and the west wall of the office building on the adjoining property at 1522 K Street, N.W. Compl. ¶ 52; see also Commonwealth Cross- Claim, ECF No. 15, ¶ 8. The existence of the party wall, which was not disclosed on any of the surveys supplied by the defendant surveyors, rendered Parcel Two “substantially useless” to the plaintiff. Compl. ¶¶ 53, 59. The plaintiff claims that it has incurred damages in excess of $23,000,000 due to the costs of repairing the damage to the party wall, restoring the townhouse *5 on Parcel Two and its inability to meet its deadlines and obligations under the original construction plans. Id . ¶¶ 58, 73.
Subsequent to the discovery of the party wall, in January 2009, Barclays Capital Real Estate, Inc., which was the plaintiff’s Mortgage Lender, and Barclays Capital Real Estate Finance, Inc., which was the plaintiff’s Mezzanine Lender (hereinafter collectively referred to as “plaintiff’s Lenders”), notified Commonwealth of their claims for reimbursement of their losses against Commonwealth under both plaintiff’s Owner’s Policy and under the Loan Policy. See Commonwealth Mot. Dismiss, ECF No. 8, Ex. B, Notice of Claim Letter from plaintiff’s Lenders to Commonwealth dated Jan. 16, 2009, at 1-2; [5] Commonwealth Cross-Claim, ECF No. 15, ¶¶ 19-20. [6] Both of the plaintiff’s Lenders are Delaware corрorations, with their principal place of business in New York. Commonwealth P. & A. Supp. Mot. Dismiss, ECF No. 8, at 2.
According to the plaintiff, a “Substitute Trustees’ Deed” indicates that, in March 2011, the plaintiff’s Mortgage Lender recorded a Notice of Foreclosure with the District of Columbia Recorder of Deeds and, a month later, sold “the subject real property” [7] at public auction for $25,000,000 to STR DC, LLC, a Delaware limited liability company, which thereafter assigned its right, title and interest to SRDC8 OWNER, LLC. See Pl.’s P. & A. Opp’n Mot. Dismiss, ECF *6 No. 21 (hereinafter “Pl.’s Opp’n Mem.”), at 3; Pl.’s Opp’n Mot. Dismiss, ECF No. 21, Ex. A, Substitute Trustees’ Deed.
Plaintiff initiated this suit in Superior Court оf the District of Columbia on March 31, 2011, and the Defendant Commonwealth removed it to this Court on April 20, 2011. Notice of Removal, ECF No. 1, ¶ 1. The Complaint contains four counts, asserting, in Count I, breach of the Owner’s Policy against defendant Commonwealth and, in Counts II through IV, negligence against the defendant surveyors. Compl. ¶¶ 66-100. On April 25, 2011, the defendant filed the pending motion to dismiss. Commonwealth Mot. Dismiss, ECF No. 8.
II. DISCUSSION
Defendant Commonwealth urges the Court either to require the plaintiff to join its Lenders as party plaintiffs or to dismiss this action since, without joinder of the plaintiff’s Lenders, any judgment in this casе will not accord complete relief among the existing parties, the plaintiff’s Lenders’ ability to protect their interests will be impaired, and defendant Commonwealth will be subject to “substantial risk of incurring inconsistent obligations.” Commonwealth P. & A. Supp. Mot. Dismiss, ECF No. 8, at 1. The Court, however, is not persuaded that the plaintiff’s Lenders are required parties in this action.
A. LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(7) permits dismissal of a complaint for failure to
join a party under Rule 19, but courts are generally “reluctant to grant motions to dismiss of this
type.” 5C Charles A. Wright & Arthur R. Miller,
Federal Practice & Procedure
§ 1359 (3d ed.
2004); F ED . R. C IV . P. 12(b)(7). In evаluating the need for the absent person under Rule 12(b)(7),
*7
the court must accept as true the allegations in the complaint, and may also consider extrinsic
evidence submitted by the parties.
Davis Cos. v. Emerald Casino, Inc.,
The burden is on the defendant seeking dismissal for failure to name an absent person to
show “the nature of the interest possessed by an absent party and that the protection of that
interest will be impaired by the absence.”
Citadel Inv. Grp., L.L.C. v. Citadel Capital Co
., 699 F.
Supp. 2d 303, 317 (D.D.C. 2010) (quoting
Citizen Band Potawatomi Indian Tribe of Okla. v.
Collier
,
Federal Rule of Civil Procedure 19 prescribes a three-part test for determining whether
litigation may proceed in the absence of a particular person.
Capitol Med. Ctr., LLC v.
AmeriGroup Md., Inc.
,
Second, after making the threshold determination that an absent person is required to be a party under Rule 19(a)(1), the Court must determine whether joinder of the person is feasible. F ED . R. C IV . P. 19(b).
Finally, if the absent person required as a party cannot be joined, the court must
determine whether in equity and in good conscience, the action should proceed among the
existing parties or be dismissed. F ED . R. C IV . P. 19(b). As the Supreme Court observed,
“[r]equired persons may turn out not to be required for the action to proceed after all.”
Republic
of Philippines v. Pimentel
,
Applying each part of this test is a fact-specific inquiry that “can only be determined in
the context of particular litigation.”
Provident Tradesmens Bank & Trust Co.
,
Based upon the record before the Court, the plaintiff’s absent Lenders are not required parties to this lawsuit. The Court need not therefore consider the second and third parts of the test under Rule 19, namely, whether joinder of the plaintiff’s absent Lenders is feasible and, if infeasible, whether the case should be dismissed.
B. DISCUSSION
The crux of defеndant Commonwealth’s motion is that the Owner’s Policy obligates it to *10 pay, first, the plaintiff’s Mortgage Lender and the Mezzanine Lender at least the first $135,000,000 of any proper claim and, then, the plaintiff any amount in excess of the amount owed to both Lenders up the total amount of the insurance of $172,000,000. [10] Defendant Commonwealth asserts that the primacy of both Lenders’ claims makes them “necessary parties” to adjudication of Count I of the Complaint against it for breach of the Owner’s Policy. [11] Commonwealth P. & A. Supp. Mot. Dismiss, ECF No. 8, ECF No. 8, at 2-3. In these circumstances, unlеss joinder is required, Commonwealth argues that (1) “the Court cannot grant complete relief among the parties” since, under the Owner’s Policy, Commonwealth cannot pay any claim to plaintiff without paying the first $135,000,000 to the Mortgage Lender and some unknown amount to the Mezzanine Lender, id. at 3; (2) the Lenders will be unable to protect their own interests if Commonwealth is required to pay a judgment in the instant suit to the plaintiff rather than to the Lenders, id .; and (3) the Lenders would be able to assert claims against Commonwealth and thereby subject the latter to multiple suits, with “a substantial risk of incurring multiple and possibly inconsistent obligations, when pursuant to its contractual obligations, Commonwealth is obligated to the lender for the first $135 million of any proper claim and then to Plaintiff for the amounts in excess of $135 million, up to $172 million.” Id . Each of these arguments is addressed seriatim below.
*11
First, neither of the plaintiff’s Lenders is required for the Court to grant complete relief
among the parties to this action. The Complaint in Count One alleges that Commonwealth has
breached its obligations under the Owner’s Policy, to which only the plaintiff and
Commonwealth are in direct privity. Commonwеalth’s relationship with the plaintiff under the
Owner’s Policy is different from its relationship with the Lenders. Indeed, payment of any policy proceeds to the plaintiff’s Lenders is entirely contingent upon whether plaintiff’s claim
under the policy is viable and has merit. In other words, if plaintiff’s claim against
Commonwealth is not sustained, the Lenders are entitled to none of the proceeds.
See, e.g.,
Wometco Home Theatre, Inc. v. Lumbermens Mut. Cas. Co.,
The fact that if the plaintiff’s claim against the defendant Commonwealth is successful,
the plaintiff’s Lenders may be entitled to payment from the proceeds of the Owner’s Policy,
does not mean that relief is incomplete or inadequаte among the existing parties.
Accord Bedel
v. Thompson
,
Second, defendant Commonwealth raises concern over impairment of the plaintiff’s
Lenders’ ability to protect their interests in the Owner’s Policy proceeds if they are not joined.
Since any interest these Lenders may have in the policy proceeds is wholly contingent on the
success of the plaintiff’s claim, the Lenders’ intеrests are not impaired but rather protected by
the fact that the plaintiff is asserting a claim in this lawsuit. The case of
Markel American Ins.
Co. v. Cockrell
, No. 06-cv-603,
Similarly, here, the plaintiff’s Lenders’ interests in the Owner’s Policy at issue are entirely derivative of the plaintiff. If the plaintiff has satisfied its debts to the Lenders, the plaintiff’s Lenders have no interest whatsoever in the Owner’s Policy, let alone an interest that would be unprotected in their absence.
Finally, defendant Commonwealth’s assertion that it may be subject to multiple and
inconsistent obligations to pay the plaintiff in this lawsuit and then the Lenders in some other
lawsuit is incorrect. At the outset, this presumes that the plaintiff will not satisfy its debts,
prompting the Lenders to turn to Commonwealth directly for payment from the policy
proceeds. This presumption is purely speculative and, in any event, the mere risk of potential
litigation is not enough to require joinder.
See FDIC v. Bank of New York
,
Whether the plaintiff has any continuing indebtedness to the Lenders and, if so, the amоunt of such debt, is entirely unclear from the current record. The fact that both Lenders provided Commonwealth with notice of potential claims under the Owner’s Policy and Loan Policy in January 2009, over two and one-half years ago, does not mean they continue to carry any of plaintiff’s debt that might be subject to payment from the proceeds of the Owner’s Policy. Should it become clear during the course of discovery that the Lenders have a continuing interest in the proceeds of the Owner’s Policy, reconsideration of thеir joinder may be appropriate. To the extent that the plaintiff has continuing indebtedness to the Lenders that may be subject to satisfaction from the proceeds of the Owner’s Policy, the Lenders may seek those funds directly from the plaintiff without the necessity of being parties to the instant lawsuit.
Moreover, defendant Commonwealth should have no concern regarding a “double” or
“multiple” recovery against it because liability under the Owner’s Policy is limited to the
amount owed to the plaintiff. Commonwealth P. & A. Supp. Mot. Dismiss, ECF No. 8, at 3. In
other words, defendant Commonwealth owes no more to the plaintiff’s Lenders than is owed to
*15
the plaintiff. In this respect, the plaintiff is sole possessor of the contractual claim against
Commonwealth.
See Primax Recoveries, Inc. v. Lee,
Defendant Commonwealth has not shown that the plaintiff’s Lenders are required parties
to this action and, thus, no inquiry under Rule 19(b) is necessary.
See Temple v. Synthes Corp
.,
III. CONCLUSION
Defendant Commonwealth has failed to establish that the plaintiff’s Lenders are required parties to this action and, therefore, its motion to dismiss under Rule 12(b)(7) for failure to join a party under Rule 19 is DENIED. An order consistent with this memorandum opinion will be entered.
DATED: AUGUST 3, 2011
/s/ Beryl A. Howell BERYL A. HOWELL United States District Judge
Notes
[1] The Court has diversity jurisdiction over this matter pursuant to 28 U.S.C. § 1332 because the amount in controversy exceeds the jurisdictional limit and the parties have complete diversity of citizenship.
[2] The Complaint also indicates that Parcel Two “bears a street address of 1522 K Street, N.W.,” Compl. ¶ 22, but this address is elsewhere identified as that of the property adjoining and sharing a party wall with Parcel Two. See Commonwealth Cross-Claim, ECF No. 15, ¶ 8.
[3] A year earlier, in February 2007, Commonwealth had issued a Loan Policy of Title Insurance, Policy No. 06-1574, to Barclay’s Capital Real Estate, Inc. (hereinafter “Plaintiff’s Mortgage Lender”) for an insurance amount of $135 million (“Loan Policy”). Pl.’s P. & A. Opp’n Mot. Dismiss, ECF No. 21, at 2 n.2 (hereinafter “Pl.’s Opp’n Mem.”); Commonwealth Cross-Claim, ECF No. 15, ¶ 15. The Loan Policy is not at issue in any count of the Complaint. Pl. Opp’n Mem., at 2 n.2.
[4] “[A] mezzanine loan is secured not by the real property itself, but by stock of or some ownership interest in the
company that owns the real property. In the area of real estate finance, a mezzanine loan is typically used by
developers to secure supplementary financing for development projects in cases where the primary mortgage or
construction loan equity requirements are larger than [ten percent].”
Ramco Hartland L.L.C. v. Landmark/Mansour
Dev. LLC
, No. 294877,
[5] Commonweаlth indicates that “Barclays” may have assigned its loan to a third party, whose identity is likely known by the plaintiff, but does not make clear whether this “Barclays” reference is to one or both of plaintiff’s Lenders. Commonwealth P. & A. Supp. Mot. Dism., ECF No. 8, at 2.
[6] Commonwealth asserts that it determined that the plaintiff’s loss was $141,114.00, an amount which it has offered and continues to be willing to pay to the plaintiff or its lender, whichever is entitled to payment. Commonwealth Cross-Claim, ECF No. 15, ¶ 21.
[7] While the Court assumes that the plaintiff refers, in whole or part, to Parcel Two, this is not clear from the Substitute Trustees’ Dеed, which pertains to property on lot numbered 65 in square numbered 199, as per plat recorded in the Office of the Surveyor for the District of Columbia. Pl.’s Opp’n Mot. Dismiss, ECF No. 21, Ex. A, Substitute Trustees’ Deed, at 4. This lot number, however, differs from that provided for Parcel Two in other documentation provided by the parties. Cf. Compl. ¶13 (Parcel Two is on lot 814 in square numbered 199); Commonwealth Reply Supp. Mot. Dismiss, ECF No. 22, Ex. A, Deed of Trust between the plaintiff and Mortgage Lender, at 27 (same).
[8] All three defendants, including Commonwealth, have filed answers to the Complaint, and Commonwealth has cross-claims against the surveyor co-defendants for negligent misrepresentation and negligence. See Commonwealth’s Answer, Affirmative Defenses, and Cross-Claims, ECF No. 15; Bruce C. Landes and Landmark- Fleet Surveyors’ Answer, ECF No. 10.
[9] In addition to the pleadings, the parties have supplemented the record for this motion with the following six documents: (1) Owner’s Policy of Title Insurance, Compl., Ex. A; Commonwealth Mot. Dismiss, ECF No. 8, Ex. A- 1; (2) Loan Policy of Title Insurance, Commonwealth Mot. Dismiss, ECF No. 8, Ex. B at 5-37; (3) Plaintiff’s Notice of Claim Letter dated August 14, 2008 to Commonwealth under the Owner’s Policy, Commonwealth Mot. Dismiss, ECF No. 8, Ex. B, at 3-4; (4) Notice of Claim Letter from plaintiff’s Lenders to Commonwealth dated Jan. 16, 2009, Commonwealth Mot. Dismiss, ECF No. 8, Ex. B, at 1-2; (5) Substitute Trustees’ Deed dated May 12, 2011 for Lot numbered 65 in Square numbered 199, Pl.’s Opp’n Mot. Dismiss, ECF No. 21, Ex. A; (6) Construction Deed of Trust dated Feb. 1, 2007 from plaintiff, as borrower, to Lawyers Title Realty Services, Inc, as Trustee, for benefit of Barclays Capital Real Estate, Inc., Commonwealth Reply Supp. Mot. Dismiss, ECF No. 22, Ex. A.
[10] Commonwealth asserts that the Mortgage Lender is due the “proceeds of any insurance policies until the Mortgage Lender’s $135 million loan is satisfied in full” and the Mezzanine Lender is due “amounts otherwise payable to the insured under this [Owner’s] policy, not to exceed the outstanding indebtedness under the Mezzanine loan, the amount of which is unknown.” Commonwealth Reply Supp. Mot. Dismiss, ECF No. 22, at 3.
[11] Both parties use the terms “necessary” or “indispensable,” rather than “required,” person as used in the current
version of Rule 19.
Vann v. Kempthorne
,
[12] The plaintiff is vague, at best, on the amount owed under the mortgage and Mezzanine Loan, stating only “while the exact amount of [plaintiff’s] remaining indebtedness to Barclays Finance, if any, remains unknown, it is certainly not $135,000,000,” and regarding the Mezzanine Loan, “the amounts paid by the purchaser at the . . . foreclosure auction must be applied against underlying indebtedness.” Pl.’s Opp’n Mem., at 5. The plaintiff’s own purported lack of clarity about the precise amounts, if any, that it owes to its Lenders is puzzling, but resolution of the exact amount, if any, of plaintiff’s continued indebtedness to the Lenders is not necessary for resolution of this motion.