RED Mortgage Capital, LLC v. Shores, LLC, et al., No. 2:16‑ 678, 2017 WL 1196170 (S.D. Ohio 03/31/17)
In a breach of contract and declaratory judgment action against a borrower, the District Court for the Southern District of Ohio (the “Court”) held that the execution of a guarantee acknowledging the existence of an unsigned document satisfied Ohio’s statute of frauds with respect to that unsigned document and rendered its provisions enforceable.
In March 2010, Shores LLC (“Shores”) submitted an application to RED Mortgage Capital, LLC (“RED”) for a $125 million Federal Housing Authority (“FHA”) loan (the “Loan”) to construct a twelve‑building, 544‑unit multi‑family housing unit in Marina del Rey, California (the “Project”). The Loan required RED to examine the feasibility of the Project, determine the creditworthiness of the borrower and its principals, and navigate the application process with the Department of Housing and Urban Development (“HUD”) to ensure the approval of the Loan. RED submitted its final loan application to HUD on January 20, 2011 and the Loan closed on March 3, 2011.
The closing documents for the Loan included, among others, a commitment letter from RED (“Commitment Letter”) stating that Shores was required to pay to RED an extension fee if RED was unable to achieve the Loan’s final endorsement with the FHA. The Commitment Letter also contained a forum selection clause designating the federal or local courts of Ohio as the exclusive forum for any disputes arising thereunder. In addition, the Loan documents included an unconditional guarantee attached and incorporated into the Commitment Letter (“Guarantee”) by Jerry B. Epstein (“Epstein”)—who at the time owned 50% of Shores and was the president of Shores’ managing member—covering all costs, expenses, losses and damages due to any breach by Shores of the Commitment Letter or failure by Shores to perform any of its obligations thereunder. The Guarantee was signed, but the parties dispute whether Shores or one of its representatives ever signed the Commitment Letter. Further, Shores’ legal counsel issued an opinion letter (the "Opinion Letter") stating that a number of documents related to the transaction, including the Commitment Letter, had been duly executed by Shores and constituted valid, legally binding and enforceable promises by Shores.
Construction of the Project began shortly after the Loan closed. RED regularly disbursed funds on an “as‑needed” basis pursuant of the terms of the Loan. Shores completed construction of the Project in the fall of 2013 but was not able to achieve final endorsement of the Loan by November 2013. RED began invoicing Shores for the extension fees under the Commitment Letter in February 2014.
District Court Litigation
RED filed an action for breach of contract and declaratory judgment to enforce its right to recover over $5.3 million in extension fees that were allegedly due and owing and an additional $156,250 that continued to accrue each month. RED argued that the Ohio statute of frauds had been satisfied because Shores acknowledged the existence of, and accepted the terms of, the Commitment Letter by signing the Guarantee which referenced and incorporated the Commitment Letter.
Shores and Epstein (the “Defendants”) moved to dismiss the complaint for lack of personal jurisdiction and improver venue, or, in the alternative, to transfer the action to the U.S. District Court for the Central District of California alleging that the Commitment Letter could not satisfy Ohio’s statute of frauds because it was not signed and as a result the forum selection clause designating Ohio courts in the Commitment Letter was unenforceable. The Defendants further argued that neither the Opinion Letter nor other documents acknowledging the existence of the Commitment Letter can serve as an alternative memorandum or note in the absence of an executed Commitment Letter to satisfy the statute of frauds.
Related executed documents satisfied statute of frauds
In accordance with prior Ohio case law holding that unsigned documents may satisfy Ohio’s statute of frauds by virtue of other documents which are part of the same transaction sufficiently acknowledging the unsigned document’s existence and essential terms, the Court found that by signing the Guarantee, Epstein acknowledged the existence of the Commitment Letter and the rights and obligations of the parties set forth therein.
In addition, because the statute of frauds was satisfied by the Guarantee’s acknowledgment of the Commitment Letter, the Court found it unnecessary to delve into sematic arguments related to the scope of the term “Loan Documents” as used in the Opinion Letter and whether that term intended to include the Commitment Letter. Based on these factors, the Court held that the forum selection agreement in the Commitment Letter was valid and denied Defendant’s Motion to Dismiss for Lack of Personal Jurisdiction. The Court also denied Defendants’ Motion to Dismiss for improper venue as the vast majority of the Loan’s underwriting process took place at RED’s principal office in Ohio and declined the Defendants’ request to transfer the case to the Central District of California.