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EH Investment Company, LLC v. Chappo, LLC

Superior Court of Connecticut, Judicial District of Fairfield, Bridgeport

October 28, 2015

EH Investment Company, LLC
v.
Chappo, LLC et al

Filed Date October 29, 2015

MEMORANDUM OF DECISION

Michael Hartmere, Judge Trial Referee.

On December 23, 2013 the plaintiff EH Investment Company, LLC filed this five-count complaint against the defendants Chappo, LLC and Richard J. Chappo alleging causes of action for breach of contract, statutory theft, conversion, breach of the covenant of good faith and fair dealing, and a violation of the Connecticut Unfair Trade Practices Act (CUTPA). On April 7, 2014 the defendants filed an answer to the complaint, along with a special defense of fraud, and counterclaims against the plaintiff charging fraud and breach of contract. The matter was tried to the court on May 13 and 14, 2015, subsequent to which the parties submitted post-trial briefs and replies. Based on the evidence submitted, the court makes the following findings.

FINDINGS OF FACT

Fred Gordon (" Gordon") is a 79-year-old attorney and real estate investor/developer who also holds an MBA with distinction. One of Gordon's companies is the plaintiff, EH Investment Company, LLC. Gordon has an active law practice in addition to being a real estate developer. Gordon conducts business from Bloomfield Hills, Michigan. The defendant, Richard Chappo (" Chappo"), is a West Point graduate who served five years on active duty in the United States Army before leaving the service with the rank of Captain. While in the Army Chappo completed his MBA and was hired by the Chase Manhattan Bank. After a number of other responsible positions in financing and real estate, Chappo moved the business to Connecticut and formed Chappo, LLC. Chappo has been financing corporate properties for almost 30 years. Gordon and Chappo were familiar with each other from Chappo's prior investment banking experience and had communicated on a number of occasions during a period of approximately twelve years about possible financing for Gordon's properties.

During one such call from the defendant Chappo to Gordon in November 2012, Gordon told Chappo that one of his companies, the plaintiff, EH Investment Company, LLC, owned a developed commercial property where the loan was in default and Gordon was seeking replacement financing. The property, located at 2190 Executive Hills Blvd., Auburn Hills, Michigan, consists of a 94, 000 square foot freestanding office building on 12 acres. The property currently was leased to Huntsman Corporation and Gordon explained that the property was in foreclosure and that he was seeking replacement financing. The lease had two years remaining before its expiration. Gordon told Chappo that he was trying to acquire the Huntsman building back from the bank and that Huntsman was considering renewing its lease for the building. According to Gordon in the Fall of 2012, the Michigan economy was in a distress condition and there were many lenders who would not consider financing any industrial property in Michigan, particularly one for which the note had matured and the property was in foreclosure.

Subsequently, Gordon and Chappo corresponded telephonically and by e-mail concerning further details of the proposed transaction including the terms of the lease being considered by Huntsman and questions concerning the property including information about the Auburn Hills market and the vacancy rates in Auburn Hills. An email dated November 15, 2012 from Gordon to Chappo enclosed an office memo which stated that the proposed lease being considered by Huntsman Corporation was for a term of 15 years, and described the building location as in the center of the automotive corporate headquarters/supplier area of southeastern Michigan. The proposed lease had an annual lease rental value of $1, 220, 000. Gordon also sent a memorandum to Greg Pelts, general manager of Huntsman in Auburn Hills and James Barlow, Pelts' immediate supervisor who had negotiated the original lease transaction some thirteen years previously. The memorandum provides: " Ideally a commitment to the new lease extension can be made by early January subject to senior management approval so as to allow for a refinancing commitment." Gordon contends that he told Chappo in November 2012 that any lease would have to be approved by senior management of Huntsman in Houston, while Chappo contends that he was not told that the lease needed senior management approval until February 2013. The court credits Gordon's testimony in this regard.

Under the foreclosure laws of the state of Michigan, as a result of the redemption price the plaintiff stood to gain a handsome windfall. If the plaintiff could obtain the lease extension under the proposed terms, the potential gain over and above the foreclosure price was approximately $5 million. Gordon's plan was to finance the purchase price of the property after it had defaulted on the existing loan at enough savings that if he could get Huntsman Corporation to agree to extend the lease under terms similar to those then in existence, plaintiff would gain a windfall profit of approximately $5 million.

Chappo LLC began work on this project in November 2012. An engagement letter dated November 20, 2012 was prepared by Chappo which included all the terms of the loan and indicated that Chappo had an exclusive engagement to procure a lender which would then provide financing for a single tenant property occupied by Huntsman Corporation in accordance with the terms outlined in the engagement letter. On January 4, 2013 Gordon, acting as president of EH, executed the subject engagement letter and specifically inserted the precise terms of the lease that Chappo's lender was to finance.

The engagement letter provided that the tenant would be Huntsman Corporation and that the lender would be an institutional lender, that the term of the loan would be 10 years, that the principal amount would be $9, 500, 000 at an interest rate of 5.25%, and that debt service would be based on a 20-year amortization. The letter then described the property and that the security would be a first mortgage interest and described the lease. The lease originally was to commence in November 2012, but Gordon changed that to March of 2013 with a term ending October 31, 2024. The lease was a triple net lease in which there are no landlord responsibilities. The lease payments Gordon had corrected to be $1, 183, 000 for the first 62 months and $1, 130, 000 for the remaining term. Closing and funding was to be approximately 30 days from the date of the lender commitment. The engagement letter provided that Chappo LLC would have an exclusive engagement with respect to the subject property and that the placement fee to Chappo LLC would be 1% of the principal amount of the notes. In the event that Chappo LLC was unable to provide a lender commitment as stipulated and the time frame was not extended, the engagement deposit was to be returned to the borrower. The letter stated that an engagement deposit of .5 of 1% of the approximate principal amount should be wired to Chappo LLC upon the execution of the engagement and that Chappo LLC would retain the deposit if the borrower failed to provide requested information in a timely manner or failed to complete the financing after Chappo LLC had provided a lender commitment. Gordon sent a memorandum to Chappo dated January 4, 2013 which enclosed the engagement letter. The memorandum provided that the deposit would be returned within five days of the time at which it appeared that the loan pursuant to the application was not probable of funding by February 28, 2013 or at an agreed later funding date.

At trial, Gordon testified that the lease terms specified in the engagement letter were the terms under which Chappo was to procure a lender willing to finance on the lease terms. Upon executing the engagement letter on January 4, 2013, Gordon wire transferred $47, 500 to Chappo as the engagement deposit. Gordon had made his changes to the engagement letter, originally dated November 20, 2012 but not executed by him until January 4, 2013 because he was still negotiating the terms of the lease with Huntsman.

On January 10, 2013 Chappo emailed three pages of an application from American National Insurance, the proposed lender, to be completed by the plaintiff. Gordon determined that the terms were acceptable, completed the three pages and returned them to Chappo within hours. Chappo testified that following the return of the initialed pages of the application, the investment officer from American National insurance company circulated the complete application/commitment letter to his investment committee and the senior vice president with authority to commit to the loan. The final version of the mortgage loan application was emailed to Gordon on January 22, 2015 with a hard copy direct from American National by UPS the following morning. On the formal application was a signature block for Gordon and for the senior vice president of American National, Scott F. Brast. As soon as Gordon signed and returned the original, Brast would countersign and the document would become the commitment letter. The application/commitment letter included all the terms specified by Gordon's engagement letter as well as an agreement by American National to fund by February 28, 2013, the date needed by Gordon.

Section 4.4 of the application/commitment letter provides: " At the time of closing, Applicant will have entered into a lease or leases and/or lease guarantees the terms and conditions of which are to be approved by Lender, with the tenant or tenants and lease guarantors approved by the Lender, to occupy 94, 000 square feet with an annual rental from such lease or leases to produce no less than $1, 183, 000." ...


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