IN THE COURT OF COMMON PLEAS
CUYAHOGA COUNTY, OHIO
PANZICA CONSTRUCTION
COMPANY
Plaintiff,
vs.
ZAREMBA, INC., et al.
Defendants.
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CASE NO. CV 10 717571
JOURNAL ENTRY
STATEMENT OF THE CASE
Plaintiff Panzica Construction Company is a construction contractor who began this
Avenue in downtown Cleveland known as The Avenue District Phase I, a mixed-use
development that consists of commercial retail space, residential condominiums, and two
parking lots.
Defendant Zaremba Avenue LLC is the owner of the property. Defendants Key
Community Development New Markets, LLC, PNC Bank, N.A.1, and Cleveland New Markets
Investment Fund, LLC are entities that loaned money to Zaremba Avenue to build the
development. They were included by Panzica as defendants by virtue of their interest as
lienholders on the property. Each of the lenders has asserted cross-claims against Zaremba
Avenue for breach of contract and foreclosure.
1
The
into PNC after the loan date, the lender is referred to in this entry as PNC.
In turn, Zaremba has filed an amended cross-claim against PNC alleging that PNC:
breached the contract, described in the amended crossand tortiously interfered with
the business relationship Zaremba had with Panzica. The amended cross-claim also includes a
cause of action styled as being for a declaratory judgment that PNC breached the contract and
accordingly. 2
Each lender
Key,3 PNC and CNMIF
has now separately moved for summary
judgment on their breach of contract and foreclosure claims. Those motions are now fully
briefed, the court has considered all of the evidence and argument, and this entry follows.
FACTS, LAW AND ANALYSIS
Creation and Priority of the Security Interests
The Avenue District Phase I was mostly funded by loans from Key, PNC and CNMIF.
Key initially loaned Zaremba $11,150,600, as evidenced by a promissory note executed by
Zaremba in favor of Key dated October 17, 2005. As security for the note, Zaremba executed
and delivered to Key an Open-End Mortgage, Assignment of Rents, Security Agreement and
Fixture Filing4, all of which were recorded with the Cuyahoga County Recorder on October 18,
2005. On December 28, 2006, Zaremba gave Key an Amended and Restated Promissory Note
in the principal sum of $15,526,837, secured by a Modification of Open-End Mortgage,
Assignment of Rents, Security Agreement and Fixture Filing, all recorded on December 29,
2006 and re-recorded on January 1, 2007.
2
There are other parties and other claims. They will be described only as necessary for completeness or context in
the course of this journal entry.
3
For concision, KCDNM will be referred to in this entry as Key; Zaremba Avenue, LLC will be referred to as
Zaremba.
4
These documents will be referred to in this entry generally as loan documents.
0. Zaremba executed
a promissory note in favor of PNC on December 28, 2006, which was secured by an Open-End
Mortgage, Assignment of Rents, Security Agreement and Fixture Filing, all filed with the
Cuyahoga County Recorder on December 29, 2006. This note was guaranteed by defendant
Nathan Zaremba personally. The loan was modified by a First Amendment to Mortgage that
reduced the loan amount to $11,831,000. The First Amendment was recorded on December 21,
2007, along with a Modification Agreement that was executed by Zaremba, PNC, and Nathan
Zaremba (the owner of Zaremba Avenue, LLC) personally. The PNC mortgage encumbers all
of the property at issue except one of the parking lots.
CNMIF entered into a loan agreement with Zaremba on December 17, 2007. Zaremba
executed a promissory note in favor of CNMIF for $2,000,000. The note was secured by an
Open-End Mortgage, Assignment of Leases and Rents and Security Agreement, all recorded on
December 21, 2007. Attached to CNMIF
on of the property it
encumbers, which describes not only the
mortgages. That land is a five-foot wide strip along East 12th Street and St. Clair Avenue that
was vacated by City of Cleveland Ordinance No. 913-07 on July 18, 2007. 5
The lenders stipulated to the priority of their mortgages by an Amended and Restated
Subordination and Intercreditor Agreement that was also recorded on December 21, 2007. The
Intercreditor Agreement was signed by Key, PNC, CNMIF, the City of Cleveland, and
Zaremba. It states that the first priority mortgages are held by the three lenders in this lawsuit,
and establishes priority as follows: first priority for CNMIF on the retail portions of the
5
The vacated land is attached to Split Parcel B1, the land on which The Avenue District Phase I is being built.
Split Parcel B1, together with the five-foot strip of vacated land, is referred to as Consolidated Parcel B1.
property; first priority for Key on the parking lot portion of the property; and first priority
shared equally by Key Community and PNC Bank for the remainder of the property.
Plaintiff Panzica Construction Company was the general contractor for the project. It
filed its notice of commencement on January 4, 2007, i.e. after Key and PNC recorded their
mortgages but before CNMIF. More than two years later, on August 7, 2009, i.e. well after
CNMIF recorded its security interest, Panzica
includes the property encumbered by the all of
d the 0.053 acres of
vacated land described in CNMIF
Contractual Obligations
The Key Loan. When Key increased the loan amount to $15,526,837.00 by the
Amended and Restated Promissory Note on December 28, 2006, the parties also executed an
Amended and Restated Acquisition and Construction Loan Agreement that was incorporated
into the new note. Section 2 of the note and Article 5.1(d) of the loan agreement required
Zaremba to make interest payments on the first business day of each calendar month. A failure
to make that payment when due is defined as an Event of Default at Article 19.1(a)(i)(y) of the
loan agreement.
amount of all loaned money must be less than
s
within ten days of a request by Key, Zaremba would deposit with Key an amount known as the
available loan proceeds and the
cost to complete to bring the loan into balance. Morevoer, Key was not obligated to make any
distributions if the loan was not in balance. Article 19.1(k) defines the failure to make a
requested deficiency deposit as an Event of Default.
lien to be filed against the property and Article 15.1(y) provides that Zaremba cannot terminate
any contracts for the construction of the project without K
written approval. Both of these
occurrences are non-monetary Events of Default under Article 19.1(a)(ii).
Other events defined by the loan agreement as defaults include: discontinuing
construction for more than 15 days, or delaying construction to make it unlikely that the project
will finish by the completion date (Article 19.1(c)); the occurrence of a material adverse change
the property (Article 19.1(n)); and defaulting on another construction loan (Article 19.1(p)).
The PNC loan.
missing an interest payment on the first business day of the month, failing to make a requested
deficiency
,
the occurrence of a material adverse change, and defaulting on the other loans are all events of
default.
The CNMIF loan.
events of default the failure to make any interest or principal payment when due, the filing of a
lien against the property, and defaulting on the other loans.
accelerated and becomes due upon an event of default.
Events of Default
Key notified Zaremba by letters dated June 25, 2009 and January 12, 2010 of defaults
on the loan. Those notices are not of record, but the defaults included all of those things
mentioned above: failing to make payments; failing to keep the loan in balance; terminating the
general contractor without consent; discontinuing construction for more than 15 days and not
completing the project by the contract completion date; the occurrence of a material adverse
faults is provided by way of the affidavit of
Scott Childs, a designated signer for KCDNM, particularly paragraphs 8 and 9.
PNC notified Zaremba of defaults by correspondence dated June 24, 2009. A copy of
otion for summary judgment. The defaults cited
were: failure to keep the loan in balance; terminating the general contractor without consent;
discontinuing construction for more than 15 days and thereby not meeting the completion date;
and a material adverse change in the financial condition of the borrower. This evidence is
supported by the affidavit of a PNC vice president, Jason D. Phillips, attached as Exhibt J to
CNMIF cites as defaults by Zaremba the failure to
ien and the
failure to make timely payments. That evidence comes from an affidavit of Dean Parker, a vice
president of an investment manager responsible for administering the CNMIF.
Zaremba Denies or Excuses Defaults
Zaremba, in opposition to the lender
denies having defaulted on the loans or excuses its defaults by claiming they were caused by
the lenders. First, Zaremba claims that Key breached a purchase agreement it had made for one
of the condominium units, causing the loan to go out of balance by depriving the builder of
anticipated funds. However, the purchase agreement for the unit was between Zaremba and
Key Community Development Corporation. That contract was made in December, 2006 and
assigned to KeyBank, N.A. on May 15, 2007. Key CDC, KeyBank, N.A. and the lender, Key
Community Development New Markets, LLC, are three different corporate entities and
Zaremba has offered no evidence why a breach of the purchase agreement by either Key CDC
or Key Bank, N.A. should be attributed to KCDNM.
Second, Zaremba argues that Key, PNC and CNMIF breached their loan agreements by
and occupancy permits were granted and after [Panzica] had advanced roughly $2.6 million in
6
But the Key and PNC loan agreements
specifically address retainages and say nothing about having to release them once the building
tion or occupancy permits have been granted. Instead, retainages are
to be released, according to Article 12.4
7
s
between Zaremba and the lenders. Not only that, but the obligation to pay Panzica always
rested with Zaremba, not the lenders, so that if the contract with Panzica called for the retainage
6
ief in opposition to the motions for summary judgment, page 8. The same allegation against PNC
is repeated at page 11 and against CNMIF at page 13.
7
loan has analogous provisions at Section 6 and Schedule I.
in their contracts.
Third, Zaremba claims that PNC breached a limited partnership agreement with
Zaremba by failing to make a capital contribution and breaching a separate contract of the
limited partnership to purchase a condominium unit, thereby depriving Zaremba of money that
could have kept the loans in balance. The limited partnership agreement is attached as Exhibit
design and build
two loft units in the project for ultimate sale to people with low to moderate incomes. The
partners were Zaremba Avenue, LLC and National City Community Development Corporation.
However, the lender was National City Bank, a separate corporate entity from National City
CDC, and Zaremba has produced no evidence to treat these two entities as one or to justify
imputing a breach of the limited partnership agreement by National City CDC to National City
Bank and its successor, PNC.
Fourth, Zaremba attributes its loss of sales
loan in balance
and, as a result, its inability to keep the
to PNC changing the down-payment terms of separate loan agreements it had
with ten different buyers for the condominium units, thereby forcing those buyers to withdraw
their purchase commitments.
This allegation is insufficient to create a genuine issue of
material fact for a few reasons, not the least of which there is no competent evidence of why
the buyers backed out. Beyond that, there is not only no evidence that PNC somehow breached
its separate contracts with those ten buyers by changing a term, but there is no evidence that
breach of loan agreements with condominium purchasers constitutes a breach of the
loan agreement with Zaremba.8
Fifth, Zaremba says the three lenders created the material adverse change by doing a
9
reappraisal that resul
even
though the building and parking lot had been constructed between the two appraisals. This
objection, like some of the others, is not supported by competent evidence
before and after appraisals, or a summary of them, are not in evidence
for example, the
and is insufficient to
excused.
Sixth, Zaremba claims the lenders implicitly consented to the termination of
contract
how:
Key and PNC claimed Borrower defaulted by terminating the Panzica contract without
their prior written consent. However, both banks were provided with prior written
change orders to terminate the contract, and neither rejected it. All prior written change
orders were provided to the Lenders in writing, and at no time prior did any of the
Lenders ever sign off on any of them. Yet all previous change orders were funded.
Borrower had no reason to believe that the Lenders would disapprove the change order
prior conduct and lack of objection in discussions to believe that they were approved to
terminate the contract. 10
In short, by not objecting to previous change orders, the lenders, according to Zaremba, waived
ination. But Article
8
Zaremba blames Key for the failure o
17-18.) No competent evidence supports this assertion.
9
Br. in opp., p. 18.
10
Nathan Zaremba affidavit, paragraph 13. This identical testimony is included in the affidavit of Brian
is effective unless in writing. No such writing exists here. Additionally, Article 22.4 provides,
essentially, that a waiver in the past does not waive the same condition in the future.
Seventh, the builder claims that construction stopped for more than 15 days only
because of the other claimed breaches by the lenders.
Given that the court has found
breaches to be unsupported by competent evidence, this claim
is also without merit. Additionally, Zaremba offers no detail about exactly when construction
was stopped, for how long, and specifically why.
not merit any serious consideration.
Finally, as equitable reasons why the lenders are not entitled to recover on their claims,
much less by way of summary judgment, Zaremba invokes the doctrines of laches, estoppel and
bad faith.
-taken, hence none
of these doctrines operates in this case to preclude summary judgment.
The Affidavits of Nathan Zaremba and Brian Blasinsky
Rule 56(C) of the Ohio Rules of Civil Procedure allows a party opposing summary
where all of the available evidence, including affidavits, construed most strongly in favor of the
non-
But the affidavits cannot be
conclusory or perfunctory; according to Rule 56(E) they must be made on personal knowledge,
be admiss
In this case, Zaremba has produced as evidence the affidavits of Nathan Zaremba, the
financial manager. The
opposition. Each affidavit has 16 numbered paragraphs and is ten pages long. From paragraph
5, on the first page, to the end each affidavit is identical, down to grammatical, syntactical and
typographical idiosyncrasies.
verbatim in the affidavits.
These
circumstances suggest that the affidavits were prepared, reviewed and signed with less than
scrupulous attention, which is a matter of concern to this court, especially if the affidavits were
made in bad faith.
have been made on the personal knowledge of Nathan Zaremba or Blasinsky. For example, in
the affiants, both non-
buyers canceled their purchase contracts. Yet the affiants offer no testimony showing how they
would know why the buyers canceled their contracts. Paragraphs 15 and 16 are recapitulations
witnesses is indiscernible.
Another shortcoming in the affidavits is the failure to set forth specific facts. The
affiants variously assert: Zaremba met all the conditions of loan disbursement (¶ 5); Zaremba
¶
obligations with the Lender
that Zare
payments after receiving notices of default (¶ 16). Not only are these assertions arguably
inconsistent
suggesting at one point that all payments were made on time and admitting at
another that they were not
but they are devoid of reference to facts to support them. By
example, the affiants could have produced a list of the dates and amounts of their payments to
nce to the contrary. The affiants
could have produced a spreadsheet or similar document showing, by date, that the loan was in
balance at specific times. But none of that was offered. Instead, Zaremba simply offers a
blanket assurance that whatever might have been done that could be considered a breach of
contract was in every instance justified by the actions of one, some or all of the lenders.
Because of these deficiencies, the court finds that the affidavits of Nathan Zaremba and
Blasinsky are not worthy of consideration and therefore do not create genuine issues of material
fact for trial.
Zaremba also hints, without explicitly saying, that a flood in the building caused by a
water line break and the 2008 downturn in the general economy are events that excused its
performance under the loan agreements. To the extent that Zaremba does actually put forth this
proposition, the court rejects it on the basis of the absence of evidence that performance under
the contracts would be excused upon the occurrence of either of these things.
Two of The Loans Mature
about whether Zaremba has defaulted is wrong, an independent basis for default exists: two of
the loans have matured and full, unaccelerated payment is past due.
Restated Promissory Note matured December 28, 2009
matured on
August 29, 2010.11 Even taking into account the affidavits of Nathan Zaremba and Blasinsky,
Zaremba has offered no evidence or justification for not paying off the loans by their maturity
dates.
Breach of Contract
In order for the lenders to prevail on their breach of contract claims, they must show
that there are no genuine issues of material fact on each of the following elements: (1) that
contracts existed; (2) that the lenders fulfilled their contractual obligations; (3) that Zaremba
failed to fulfill its obligations; and (4) that the lenders incurred damages as a result of
failure. All Star Land Title Agency, Inc. v. Surewin Invest., Inc., 8th Dist App. No.
87569, 2006-Ohio-5729, 2006 WL 3095701, ¶19.
There is no dispute that contracts existed between Zaremba and each of the three
lenders. Promissory notes were executed and mortgages were recorded pursuant to each
lender s loan agreement. No competent evidence exists to show that the lenders did not
perform their own obligations under the contracts. Furthermore, each lender has produced
evidence showing that Zaremba did not fulfill its contractual obligations and that the lender
incurred damages as a result. Hence, summary judgment in favor of Key, PNC and CNMIF on
their breach of contract claims against Zaremba Avenue, LLC is appropriate.
Additionally, by a separate contract, Nathan Zaremba personally guaranteed Zaremba
obligations to PNC. No reason to excuse that guaranty has been shown, and
11
Exhibit Ajudgment, section 3. Without default, the CNMIF loan does not mature until December 17, 2014. (Ex. 2 to
the Key and PNC loans have matured by now.
since PNC is entitled to a judgment against Zaremba Avenue, LLC it is also entitled to a
judgment against Nathan Zaremba personally.
The damages incurred by the movants include unpaid principal, interest, late charges
accrued before the agreements were terminated, and costs of collection, including attorney
fees.12
Foreclosure
A mortgage is a conveyance of property that secures the performance of an obligation,
which is usually a debt. Bramel v. Lawhun, 12th Dist. App. No. CA98-03-006, 1998 WL
789640, (Nov. 16, 1998). The mortgage is granted to the lender to enforce performance of the
Id. Upon breach of performance by the borrower, the lender may
bor
foreclose the mortgage and sell the property. Id.
All three lenders recorded mortgages on various portions of the property at issue. Each
mortgage allows the mortgagee, upon a default by Zaremba, to foreclose on the property. 13
of contract claims, they are all also entitled to summary judgment on their foreclosure claims.
This
held if its cross-claim against PNC remains pending because, if necessary, provisions can be
the first priority until
Yet three questions remain: who has a lien on the vacated 0.053 acre strip of land; what
is the priority of the liens on the 0.053 acre strip; and should the retail portion of the property
12
The provisions for recovery of costs of collection, includi
, are found: 1) for the Key note at
section 4(h); 2) for the PNC note at section 4(h); and 3) for the CNMIF note at section 13.
13
mortgage, Exhibi
be partitioned and sold separately at a
These questions cannot be answered yet.
Panzica claims a security interest on the entire property
acre
and a first priority lien on the 0.053
by virtue of its me
still being litigated in arbitration so until the existence, or not, of an enforceable lien by Panzica
is established it cannot be declared whether Panzica has a lien at all, much less a first priority
lien on the 0.053 acre. As for partition, although it is provided for by statute the court deems it
an equitable remedy and not a claim that is suitable for resolution by summary judgment. In
deciding whether to order that the retail portion of the premises be partitioned, the court needs,
at a minimum, evidence of the market value of all of the property 1) as a whole and 2) as
separate parcels. That information, and other relevant evidence, is not before the court on the
current motions for summary judgment and is best presented at an evidentiary hearing or by a
stipulated statement of evidence.
CONCLUSION
Consistent with the foregoing, the court hereby grants the motions for summary
judgment of Key, PNC and CNMIF on their claims for breach of contract and foreclosure.
Those parties are ordered to collaborate to produce a single proposed judgment entry that
comports with Rule 24 of the Cuyahoga County Common Pleas Court Local Rules and that will
recite: a judgment for a specific principal amount due each lender as of March 1, 2012; a
judgment for a specific amount of unpaid interest to each lender accumulated to date; the per
annum interest rate (or per diem amount, whichever is easier) on
principal
judgment beginning March 1, 2012; and, where applicable, a judgment amount for late fees
.14 Assuming some of those amounts
14
Company v. HVL, Inc., et al., Case No. CV 11 748701, p. 8.
The T-Building
will be different than the amounts shown in the motions for summary judgment, the lenders
should also submit affidavits showing how the amounts were calculated. The judgment entry
should also note that all three of the lenders are entitled to their costs of collection, including
ment are left for
determination at a future evidentiary hearing. The judgment entry should also reflect that each
and several against Zaremba Avenue, LLC and Nathan Zaremba.
foreclosed
if not redeemed, should describe the entire
property and should indicate the priority distribution of court costs and taxes, but should
reserve for a future order the
of a lien in favor of Panzica, and the possibility of a partition before sale.
Upon filing the proposed entry with the clerk of courts a copy, in Word format, should
be emailed to the court at [email protected] and [email protected].
IT IS SO ORDERED.
____________________________________
Judge J
Date: February ____, 2012
CERTIFICATE OF SERVICE
A copy of the foregoing journal entry was sent by email to the following on February
10, 2012:
Alan R. Lepene
[email protected]
Daniel M. Haymond
[email protected]
Robert S. Lewis
[email protected]
Attorneys for Key
Darrell A. Clay
[email protected]
Donald E. Miehls
[email protected]
Attorneys for PNC
Steven A. Friedman
[email protected]
Saber W. VanDetta
[email protected]
Attorneys for CNMIF
Daniel F. Lindner
[email protected]
Attorney for Zaremba Avenue, LLC
Mark R. Koberna
[email protected]
Mark E. Owens
[email protected]
Andrew J. Natale
[email protected]
Mark L. Rodio
[email protected]
Aaron S. Evenchik
[email protected]
Attorneys for Panzica