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Royce-George & Associates, LLC v. U.S. Bank, N.A.

United States District Court, D. Massachusetts

July 16, 2019

Royce-George & Associates, LLC, Plaintiff,
v.
U.S. BANK, N.A., as Trustee for Morgan Stanley Bank of America Merrill Lynch Trust 2013-C13 Commercial Pass-Through Certificates, Series 2013-C13, and WELLS FARGO BANK, N.A., Defendants.

          MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS

          ALLISON D. BURROUGHS U.S. DISTRICT JUDGE.

         Plaintiff Royce-George & Associates, LLC (“RGA”) brings this action against U.S. Bank, N.A., as Trustee for Morgan Stanley Bank of America Merrill Lynch Trust 2013-C13 Commercial Pass-Through Certificates Series 2013-C13 (“U.S. Bank”) and Wells Fargo Bank, N.A. (“Wells Fargo” and together with U.S. Bank “Defendants”). RGA claims that Defendants are improperly withholding monthly lease payments that Walgreens Company (“Walgreens”) is paying for a now vacant drugstore on property owned by RGA. U.S. Bank is the note holder and mortgagee by assignment of a non-recourse mortgage on RGA's property at 78 Church Street in Flemington, New Jersey (the “Property”). [ECF No. 13 (“Amended Complaint” or “Am. Compl.”) ¶¶ 8, 12, 14]. Wells Fargo collects the rent for the Property and services the loan for U.S. Bank. Id. ¶ 10.

         Rite Aid leased the Property until February 2018, when its lease (the “Lease”) was assigned to Walgreens in connection with the acquisition of nearly 2, 000 Rite Aid stores. Id. ¶¶ 11-12. Rite Aid continued to operate a drugstore at the Property (the “Flemington Rite Aid”) until approximately July 2018, when the store ceased operations because it was among 600 stores that the Federal Trade Commission (“FTC”) required the companies to close as a condition for approval of Walgreens' acquisition of the Rite Aid stores. Id. ¶¶ 5, 13, 14. Following the closure, Defendants asserted that because the store was no longer open to the public, they were entitled to withhold Walgreens' rent less debt service payments (referred to as “excess cash flow”) that would otherwise have been forwarded to RGA. Id. ¶¶ 10, 14. The excess cash flow is instead being held in escrow.

         RGA asserts that, by withholding the excess cash flow, Defendants have breached the parties' contracts and a violated New Jersey law. RGA brings claims for a declaration that Defendants must forward the excess cash flow to RGA (“Count I”), breach of the implied covenant of good faith and fair dealing by U.S. Bank and Wells Fargo (“Count II” and “Count VI, ” respectively), breach of contract by U.S. Bank and Wells Fargo (“Count III” and “Count V, ” respectively), and violation of the New Jersey Consumer Fraud Act (“NJCFA”) against both Defendants (“Count IV”). Before the Court is Defendants' motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons explained herein, the motion to dismiss [ECF No. 16] is GRANTED IN PART and DENIED IN PART.

         I. BACKGROUND

         The following facts are drawn from the Amended Complaint, the well-pleaded allegations of which are taken as true for the purposes of evaluating the motion to dismiss. See Ruivo v. Wells Fargo Bank, N.A., 766 F.3d 87, 90 (1st Cir. 2014). Certain details are also culled from documents referred to in the Amended Complaint and from documents whose authenticity is not disputed by the parties. See Alvarez-Mauras v. Banco Popular of P.R., 919 F.3d 617, 622 (1st Cir. 2019) (holding that courts may consider additional documents the authenticity of which are not disputed by the parties).

         RGA is a Massachusetts limited liability company with a principal place of business in the Commonwealth. Am. Compl. ¶ 1. U.S. Bank is a corporation organized under the banking laws of the United States with its principal place of business in Ohio. Id. ¶ 2. Wells Fargo is likewise organized under the banking laws of the United States and has its principal place of business in California. Id. ¶ 3.

         On September 3, 2013, RGA obtained a $2.5 million non-recourse mortgage loan from Morgan Stanley Mortgage Capital Holdings, LLC (“Morgan Stanley”), which was later assigned to U.S. Bank. Id. ¶ 8. To secure the loan, RGA granted a mortgage on the Property to Morgan Stanley and also granted it the right to income from the Lease. Id. Wells Fargo services the loan for U.S. Bank, meaning that it collects the rent from Rite Aid, pays the debt service to U.S. Bank, and then ordinarily forwards the balance or “excess cash flow” to RGA. Id. ¶ 10.

         The Lease gave Rite Aid an unfettered right of assignment. Id. ¶ 20. On February 8, 2018, Walgreens bought 1, 932 Rite Aid stores, and as part of that transaction, Rite Aid assigned the Lease to Walgreens. Id. ¶¶ 11-12. As a condition for approving Walgreens' purchase of the stores, the FTC required the companies to close 600 stores, including the Flemington Rite Aid. Id. ¶ 13. On July 6, 2018, Wells Fargo notified RGA that it believed the Flemington Rite Aid would be closing and that Wells Fargo would consider the closure a “Trigger Event” under the terms of the reserve and security agreement (“Reserve Agreement”) between U.S. Bank, as assignee, and RGA. Id. ¶ 14. Wells Fargo informed RGA that it would therefore invoke its right to withhold excess cash flow until the Flemington Rite Aid reopened or a new tenant leased the Property. Id. ¶¶ 14, 16. Although the Flemington Rite Aid ceased operations on or shortly after July 6, 2018, Walgreens has continued to make rent payments under the Lease, and Defendants have not been financially damaged by the closure of the store. See id. ¶ 12.

         Section 2.4 of the Reserve Agreement (“Section 2.4”) between RGA and Morgan Stanley provides that the lender may deposit excess cash flow in escrow following a “Trigger Event, ” including a “Tenant Event” as Defendants claim occurred, and until a “Cash Sweep Transaction.” It states:

EXCESS CASH RESERVE. Commencing upon a Trigger Event (herein defined) and until a Cash Sweep Termination (herein defined) (the period from a Trigger Event to a Cash Sweep Termination shall be referred to herein as a “Cash Sweep Period”), Borrower shall, after written notice from Lender, on each Payment Date, deposit with Lender all excess cash flow (“Cash Flow”) from the Property (after deduction of Operating Expenses and Debt Service but prior to any distribution to any constituents of Borrower). For purposes hereof, the term “Trigger Event” shall mean any of the following: (i) an Event of Default (as defined in the Security Instrument); (ii) the tenant under the Rite Aid Lease (as defined in the Security Instrument) enters into bankruptcy (a “Credit Event”) and/or (iii) Rite Aid gives notice of its intention to terminate its lease early or ceases to do business open to the public at the Property (each, a “Tenant Event”). Such Cash Flow shall be deposited by Lender in an interest-bearing escrow account (the “Excess Cash Reserve Account”) to be held by Lender pursuant to the terms of this Agreement and the other Loan Documents.
Each of the following shall constitute a “Cash Sweep Termination”:
(A) In the case of Trigger Event as described in the foregoing subsection (i), such Event of Default has been cured to the satisfaction of Lender;
(B) In the case of a Credit Event, such time as Rite Aid either affirms its lease in bankruptcy or a replacement tenant has entered into a new lease acceptable to Lender and is paying full rent;
(C) In the case of a Tenant Event, either a replacement tenant has entered into a new lease acceptable to Lender and is paying full rent or Rite Aid has ...

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