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In re Charles Street African Methodist Episcopal Church of Boston

United States District Court, D. Massachusetts

May 19, 2017




         This bankruptcy appeal arises from the failed effort of a venerable Boston church, the Charles Street African Methodist Episcopal Church, to develop a multi-service community center in Roxbury. In the bankruptcy proceeding, the Church objected to a claim by its lender for the project, OneUnited Bank, asserting that OneUnited had wrongfully originated the loan to the Church under the Massachusetts Consumer Protection Statute (Chapter 93A). The Bankruptcy Court overruled the objection after an extended bench trial, and the Church appeals. In light of an ambiguity in the Bankruptcy Court's order, and deferring to that Court's factfinding capacity, the case will be remanded for further consideration.


         Neither party contests the extensive factual findings made by the Bankruptcy Court, so the court will simply summarize them here. See Charles St. African Methodist Episcopal Church of Bos. v. OneUnited Bank (In re Charles St. African Methodist Episcopal Church of Bos.), 2016 WL 7167910 (Bankr. D. Mass. Nov. 2, 2016).

         The Church is a Boston institution. It traces its origins to the early 1800s, when a small group of free African-Americans began to worship communally in a private home on Beacon Hill. The congregation grew, eventually acquiring a full-time pastor and membership in the African Methodist Episcopal (A.M.E.) Church, as well as articles of incorporation from the Massachusetts Legislature. In 1939, the congregation relocated from its namesake sanctuary on Charles Street to the Grove Hall neighborhood of Roxbury. The Church is an active presence in the community and is one of the largest congregations in the First Episcopal District of the A.M.E. Church, the governing body for some 330 A.M.E. churches in the northeast United States.

         In the late 1990s, the Church undertook to expand its community outreach by establishing the “Roxbury Renaissance Center” (RRC) to provide services for local residents. In April of 1999, the Church acquired a building near its sanctuary to carry out the plan. It financed the purchase with its own funds and with the proceeds of a loan from the First Episcopal District Economic Expansion and Development Group (FEDEEDG). The Church gave the FEDEEDG a mortgage on the newly acquired property.

         The Church then launched a fundraising campaign to raise the money to pay for renovations to the building, collecting approximately $1.5 million as of 2005. Some of the funds raised went to preconstruction projects, including the commissioning of architectural plans and engineering studies. Based on this preliminary work, the Church projected a budget of roughly $4.7 million to fully renovate the RRC. In early 2005, the Church sought a $5 million loan to underwrite the budget, but was unsuccessful in locating an interested lender.

         After these initial efforts failed, the Rev. Gregory Groover, the Church's pastor, met with an official from the City of Boston Department of Neighborhood Development, who suggested that the Church approach OneUnited Bank for a loan. OneUnited is the largest black-owned bank in the United States and has a long history of making loans to churches and nonprofits in the black community. Fortuitously, when contacted by the Church, OneUnited had plans to open a retail branch in Grove Hall.

         In April of 2005, OneUnited sent Rev. Groover a letter of interest. The letter included three pages of proposed terms, including requirements that the loan not exceed $3.2 million; that the Church contribute $800, 000 toward a total budget of $4 million; that the First District fully and unconditionally guarantee the loan; and that OneUnited be granted a first and exclusive mortgage on the RRC property. Over the next year and a half, negotiations stayed more or less within the parameters set by OneUnited, although both sides understood that the anticipated loan would not pay for the full cost of the renovations.

         The underwriting documents were signed by OneUnited on May 22, 2006, and the loan closed in October. The loan allocated $3.2 million for construction costs, $165, 000 to address construction overages (subject to OneUnited's approval), and $187, 000 to fund interest payments. The term of the loan was eighteen months, although the Church had the option of exercising two 90-day extensions should it encounter construction delays. The loan carried an initial 7.25% interest rate that over time floated with the prime rate (capped at 13.25%). The First District guaranteed the loan, which was also secured by mortgages on the RRC property and another church- owned property in Roxbury. The loan also required either a voluntary subordination of the FEDEEDG's mortgage to OneUnited's, or a reduction in the construction budget sufficient for the Church to pay off the FEDEEDG mortgage. OneUnited promised to provide a take-out loan to pay off the construction loan and to amortize the debt over a longer term once the RRC received a certificate of occupancy.

         The Bankruptcy Court found, and the parties do not contest, that OneUnited's decision to underwrite the loan on these terms was based on a review process that underappreciated weaknesses in the structure and premises of the loan.

         OneUnited's underwriters at the outset accurately noted that the Church lacked the cash flow to service the loan at the qualifying or start rate. OneUnited's benchmark debt service coverage (DSC) ratio - the amount by which the debtor's net income could be expected to exceed the annual cost of servicing the debt - was 1.20, but an early draft of the underwriting documents pegged the DSC ratio for the Church at well below that mark at both the qualifying and start rates.[1] The shortfall, however, was larvated in later drafts by the exclusion of continuing payments that the Church was obligated to make on a separate outstanding loan, despite the fact that the Church would continue to service that loan together with the construction loan. The exclusion improved the DSC ratios substantially, but misleadingly.[2]

         OneUnited also relied on the anticipated cash flow that would be generated by the RRC once it opened for business. The projections the Church provided to OneUnited, however, showed no rental income until the second year of occupancy, a fact that went unmentioned in OneUnited's underwriting documents. The impact of this oversight was compounded by the fact that rents were contingent on the Church's ability to raise a minimum of $1.3 million in the new phase of its fundraising campaign in order to complete the RRC renovations. OneUnited was aware of the symbiosis between fundraising and the eventual success of the RRC; it repeatedly emphasized the importance of the fundraising campaign in its discussions with the Church, and one of its underwriters observed that the long-term success of the loan depended “on the receipt of unprecedented lease and rental income, gifts, grants and campaign contribution[s].” Charles St., 2016 WL 7167910, at *21. Despite this fact, “[n]o one at [OneUnited] inquired into the soundness of the [fundraising] projections.” Id. These projections also distorted OneUnited's assessment of the Church's liquidity: OneUnited simply compared the Church's liquid assets with the monthly debt service on the proposed loan, without factoring in the Church's need to raise additional funds to finish the project.

         Two other badges of success that OneUnited relied on also rested on shaky foundations. First, the underwriting documents emphasized the Church's deposit of an $850, 000 “reserve” with OneUnited. The underwriters viewed the deposit as alleviating concerns about the Church's liquidity and ability to service the debt. In addition, the underwriters used the deposit to tamp down the “loan-to-value ratio” derived by dividing the loan amount by the appraised value of the collateral securing the loan. OneUnited's internal policy contemplated a maximum loan-to-value ratio of 75%, while the loan to the Church had a ratio of almost 96%. As an avoidance, the underwriters treated the $850, 000 deposit as reserved collateral. This “reserve, ” however, consisted entirely of restricted funds that could not be used to cover obligations related to the loan or the RRC. OneUnited knew this to be true, both because Rev. Groover told it so, Charles St., 2016 WL 7167910, at *12, and because the terms of the deposit allowed it to be withdrawn by the Church in March of 2007, at least a year prior to the first payment on the loan. Thus, even were it not for the restriction, “the pledge of this deposit . . . served no true collateral purpose because it would disappear before [OneUnited] might need to have recourse to it.” Id. at *22.

         Second, OneUnited seriously misjudged the strength of the First District's guaranty. OneUnited reviewed two First District financial statements setting out its financial picture, which included its subsidiaries (like the FEDEEDG) and its 330 member churches. These statements looked robust: a consolidated net worth of $409 million and a $3.6 million excess cash flow as of late February of 2005. The statements also asserted that the Bishop of the First District ...

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