Sun Coverage
A big national owner of distressed real estate debt has been suing borrowers in the wrong court, a federal judge in Las Vegas ruled Thursday.
U.S. District Judge James Mahan dismissed a lawsuit filed by a shell company owned by Multibank 2009-1 RES ADC Venture LLC.
Multibank is owned by homebuilder Lennar Corp. and the Federal Deposit Insurance Corp. It was created in 2010 to own a portfolio of $2.253 billion in distressed loans of failed banks around the country.
Multibank typically creates a subsidiary company to sue borrowers in each loan.
The case Mahan dismissed on Thursday was filed by Multibank shell company RES-NV TVL.
In July 2010, RES-NV TVL sued developers of the Echelon in Centennial Hills condominiums near Durango Drive and the northern Las Vegas Beltway, charging they had defaulted on a 2006 loan for $14.1 million from the failed Silver State Bank. The suit charged the defendants had breached contracts by failing to honor guarantees to pay off the loan and that by June 2010 the balance had ballooned to $18.1 million. After foreclosing on the project, Multibank sought a deficiency judgment against the guarantors of the loan for that amount.
In fighting the lawsuit, two of the six defendants — Fred Lessman and the Fred Lessman 2001 Living Trust — argued the federal court in Las Vegas didn’t have "diversity jurisdiction’’ to hear the state-law breach of contract claims in the suit.
They said that’s because the FDIC — a federally chartered corporation with no state citizenship — owns part of Multibank.
Diversity jurisdiction "requires complete diversity between the parties, meaning that no plaintiff may be a citizen of a state of which any defendant is also a citizen,’’ attorneys for the borrowers wrote in their brief.
"The FDIC’s status as a federally-chartered corporation renders it a national citizen only — it is not a citizen of any state. Because it does not have citizenship in any state, no diversity jurisdiction can exist,’’ the brief continued.
As in similar cases pending locally, the attorneys for the Echelon in Centennial Hills borrowers charged that Multibank came to the case with "unclean hands’’ as Multibank itself had made these same arguments in other lawsuits in other states where it did not want to litigate in federal court.
"The fact that there can be no diversity jurisdiction involving limited liability companies owned by the FDIC is not a novel legal principle and has been advanced by Multibank in multiple other jurisdictions for the purpose of escaping diversity jurisdiction,’’ said the dismissal motion by attorneys with the Las Vegas office of the law firm Glen J. Lerner & Associates.
Mahan agreed in his order Thursday that he lacks jurisdiction over the state law claims in the case, writing in his dismissal order: "Plaintiff’s entire ownership structure must be diverse. Here, FDIC’s status as a federally-chartered bank destroys citizenship.’’
Mahan also noted Multibank’s inconsistency on the issue, citing Multibank court filings in other cases.
"The court notes that Multibank has previously advanced the same argument it now opposes,’’ Mahan wrote in his order.
Las Vegas attorneys fighting Multibank in other cases cheered Mahan’s decision and said they would use it in their own cases. They’ve said the Multibank suits should have been filed in state court, where Multibank may now have statute of limitations problems and may face a new state law aimed at limiting deficiency judgments against commercial real estate developers.
The law enacted in June, Assembly Bill 273, limits deficiency judgments by basing them on what the note holder paid for the debt, not its face value.
Attorney Shawn Mangano, representing homebuilder Codi Investments LLC in one of the suits, on Thursday notified U.S. District Judge Roger Hunt in Las Vegas of Mahan’s decision and said it strengthens his argument that Multibank’s suit against Codi Investments should be dismissed and that Multibank's attorneys should be sanctioned.
"Judge Mahan’s decision completely adopts and vindicates the defendants’ arguments raised in this action that subject matter jurisdiction based on diversity citizenship grounds is absent in this action,’’ Mangano wrote in his filing.
Attorneys for Multibank at the Las Vegas office of the law firm Lionel Sawyer & Collins are fighting Mangano’s request for sanctions.
They said in a court filing Oct. 20 that they have no control over positions taken by Multibank’s counsel in other states and that the FDIC should be deemed a citizen of Washington, D.C., or be completely ignored for purposes of diversity jurisdiction.
Hunt hasn’t yet indicated when he’ll rule on the sanctions motion or whether he has jurisdiction over Multibank's claims in his case.