Law360 (May 28, 2020, 7:22 PM EDT) -- The loan servicer for a Pittsburgh-area shopping center said a major tenant's rent reduction was a valid trigger for diverting all the tenants' rents toward its debt repayment and said the mall couldn't cite the COVID-19 pandemic to get an emergency injunction, according to filings in federal court Thursday.
When North Hills Village LLC, the operator of a sprawling suburban strip mall in Ross Township, Pennsylvania, signed a new lease with Burlington Coat Factory that reduced the retailer's rent, it triggered a "cash sweep" event where loan servicers LNR Partners LLC and Wells Fargo Bank could take over collecting tenants' rent. North Hills Village had claimed in its complaint that losing access to what was left over after bills were paid, combined with reduced income due to the state-mandated shutdown of many nonessential retailers amid the pandemic, jeopardized the shopping center's viability.
"The plain language of the controlling agreements demonstrates that all of plaintiff's claims are unfounded because plaintiff did not renew the Burlington Coat Factory lease as was required by the loan agreement. … the implementation of the cash sweep that plaintiff now complains about was exclusively a situation of plaintiff's own making," LNR's attorneys wrote in a brief Thursday. "Plaintiff relies on pure conjecture and speculation in asserting that it might suffer an asset shortfall and the potential loss of the property absent the termination of the cash sweep, … However, neither monetary damages nor highly speculative future damages qualify for injunctive relief."
LNR and Wells Fargo asked the court to deny the shopping center's request for an injunction blocking the cash sweep, arguing that North Hills Village was unlikely to succeed on the merits and could not prove it would suffer irreparable harm if the cash sweep went forward.
The mall had sued Wells Fargo and LNR, a Starwood Property Trust subsidiary, in late March, claiming that it had avoided the conditions for a cash sweep by getting a new lease for Burlington and keeping that space in the 600,000-square-foot shopping center occupied. The servicers had agreed to a 40-day delay on the sweep on April 1.
Under the loan that North Hills Village got from JP Morgan Chase in 2016, tenants' rents go into a "lock box" account with Wells Fargo, which is then used each month to pay back the loan, fees, taxes, insurance and other expenses, with any remainder used to maintain and operate the shopping center.
But in the loan agreement and cash management agreement that made Wells Fargo and LNR the loan servicers, there was a provision that said the servicers could institute a cash sweep and collect all the rents themselves under certain conditions.
Thursday's brief said those conditions included failure to renew Burlington's lease or replace it with another retailer for anything less than what Burlington was previously paying.
"Plaintiff failed to cure the cash sweep trigger event because it did not satisfy the Burlington renewal criteria by renewing the lease under the same terms and conditions as the original lease," the brief said. "Indeed, plaintiff chose to and did renew the Burlington lease ... under materially different and less favorable terms than the original lease."
LNR said it warned North Hills Village on March 10 that the rent reduction — and the shopping center's last-minute lease renewal — would trigger a cash sweep, but the shopping center signed the new lease with Burlington anyway. The cash sweep would last until the deficiency was fixed or the loan was paid off in full, the brief said.
North Hills Village had claimed that the COVID-19 crisis was already pushing it to a breaking point and the loss of the rent income could be the final straw, but LNR countered that monetary harm alone could not form a reason for an injunction.
"Injunctive relief is inappropriate where, as here, monetary damages can compensate the alleged harm," the brief said. "A plaintiff cannot convert monetary harm from a breach of contract into irreparable harm for the purposes of injunctive relief."
The servicer compared North Hills Village's request for relief to a recent case in the District Court of New Jersey, Tracey v. Recovco Mortgage Management, LLC , where a plaintiff claimed a mortgage servicer's delay in releasing a loan for her home purchase put her health at risk because she was allegedly being forced to go back to house-hunting during the COVID-19 pandemic.
"The court found that the plaintiff failed to establish irreparable harm because her alleged losses were compensable by monetary damages or, with regard to her health concerns, entirely speculative," LNR's brief said. "Plaintiff speculates that a continued cash sweep could put plaintiff 'at risk of default on the loan' ... This goes beyond reading tea leaves and is certainly not a sufficient basis to obtain an injunction."
Counsel for the loan servicers and North Hills Village did not immediately respond to requests for comment Thursday.
LNR and Wells Fargo are represented by Joel M. Walker, Gerald J. Schirato Jr., Rachel M. Good and Paul E. Chronis of Duane Morris LLP.
North Hills Village is represented by Mark C. Zheng, Daren S. Garcia, Joseph R. Miller and John M. Kuhl of Vorys Sater Seymour and Pease LLP.
The case is North Hills Village LLC v. LNR Partners LLC et al., case number 2:20-cv-00431, in the U.S. District Court for the Western District of Pennsylvania.
--Editing by John Campbell.
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