No damages were found where failure to deliver notice of default was not proximate cause of Lender’s claimed damages and Lender failed to take steps to mitigate losses. In re Lexi Development Company, Inc., Case No. 10-27573-BKC-AJC, 2019 WL 2426454 (Bankr. S.D. Fla. June 6, 2019).
By: Jeff Duston (King & Spalding)
An unsecured lender made a loan on a real estate development in located in Florida. The borrower also had a senior secured loan on the development. The unsecured lender entered into an intercreditor agreement with the senior lender. The intercreditor agreement provided, among other things, that (i) the senior lender was required to forward any notice of default under the senior loan to the unsecured lender and (ii) the unsecured lender may buy out the senior loan at any time or cure any default under the senior loan. As the Great Recession started, the borrower fell into default on the senior loan, but the senior lender failed to forward several notices of default it delivered to the borrower. Although the unsecured lender was aware of the borrower’s issues with the senior lender and the borrower’s ongoing discussions with the senior lender, the unsecured lender never attempted to cure any default on the borrower’s behalf or exercise its purchase option on the senior loan. The senior lender extended its original maturity date, but the borrower defaulted on payment in full of the loan at that extended date. The borrower eventually filed for bankruptcy and the unsecured lender sued the senior lender for breach of contract claiming that the senior lender’s failure to forward its notices of default caused the unsecured lender’s losses on its loan.
The U.S. Bankruptcy Court of the Southern District of Florida rejected the unsecured lender’s claim for damages. The court found that the senior lender’s failure to forward notices of borrower’s default on the senior loan, as required under intercreditor agreement, was not the proximate cause of loss to the unsecured lender, as required to establish breach of contract claim under Florida law. The Court concluded that the unsecured lender had actual knowledge of the borrower’s default and its ongoing negotiations with senior lender and could have made a protective advance or purchased or taken out the senior loan at any time. Furthermore, even if the unsecured lender had exercised its cure right prior to the maturity of the senior loan, the senior loan would have still matured on its extended maturity date and borrower would still have been unable to pay the balance. Therefore, the unsecured lender’s damages would have occurred regardless of whether it received the required notice by the senior lender. Additionally, notwithstanding the proximate cause issue, the court found the unsecured lender failed to mitigate its damages. Under Florida law, a plaintiff may not recover on a breach of contract claim if it fails to use reasonable efforts to avoid a loss. Here, although it was fully informed of borrower’s default and the potential imminence of acceleration and foreclosure, the unsecured lender failed to take any mitigating measures, either by curing the default or by purchasing the senior loan. Accordingly, the court provided a judgment in favor of the senior lender.
