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Foundation Capital Resources, Inc. v. Prayer Tabernacle Church of Love, Inc.

United States District Court, D. Connecticut

September 30, 2018

FOUNDATION CAPITAL RESOURCES, INC., Plaintiff and Counter Defendant,
PRAYER TABERNACLE CHURCH OF LOVE, INC., Defendant and Counter Claimant.



         Plaintiff Foundation Capital Resources, Inc. (“Foundation Capital”) is a religiously affiliated financial company that lent millions of dollars for a major church construction project in Bridgeport, Connecticut. Unfortunately, the church entity that received the funds-defendant Prayer Tabernacle Church of Love, Inc. (“the Church”)-defaulted on the loans. Foundation Capital has filed this lawsuit to foreclose on the Church, and the Church has responded with defenses and counterclaims alleging in essence that Foundation Capital engaged in predatory lending and fraud. Foundation Capital now moves for summary judgment. I will grant in part and deny in part the motion for summary judgment. I also grant the Church's motion to vacate the receivership order.


         The parties in this case tell two very different stories. For Foundation Capital, this is the story of a straightforward foreclosure action due to the Church's failure to pay back loans. For the Church, this is the story of a predatory lending scheme, featuring multiple misrepresentations and tactics that induced the Church to take on debt it could not pay. I will first recount Foundation Capital's version of events before relating the Church's version.

         Foundation Capital describes a sequence of several loans and forbearance agreements from 2007 through 2009. The first loan was executed in December 2007 and provided the Church with $6.1 million in construction financing at an interest rate of 8.375%. Doc. #87-2 at 5-6 (¶¶ 21-22, 26-27). The loan was secured by a mortgage on fifteen parcels of property owned by the Church in Bridgeport, Connecticut. Id. at 6-8 (¶ 29).

         The construction project incurred numerous cost overruns and change orders, leading to the parties' agreement to enter into a bridge loan for more financing to complete the project. Id. at 10 (¶¶ 39, 43). Foundation Capital issued the Church a bridge loan in December 2008 for an additional $1.175 million at an interest rate of 10.5%. Id. at 11 (¶¶ 47-48).

         By the spring of 2009, the Church was delinquent in repaying its loans, and the parties negotiated forbearance agreements and other arrangements designed to cure any default. Id. at 13-22. In March and June 2009, the parties entered into forbearance agreements with respect to the 2007 and 2008 loans. Id. at 13-14. The June 2009 forbearance agreement provided for a higher interest rate of 13.375% until the arrearage had been cured. Id. at 14 (¶ 68).

         Just a few months later, the parties executed a third loan, of $850, 000 at an interest rate of 11.5% in September 2009. Id. at 15 (¶¶ 71-72). They also entered into a separate interest rate agreement in November 2009 stipulating to an interest rate of 11.5%. Id. at 16 (¶ 76).

         In October 2009, the parties entered into another forbearance agreement with respect to the three prior loan notes of 2007, 2008, and 2009. Id. at 16 (¶ 79). This October 2009 forbearance agreement contained a clause acknowledging the validity of the prior notes and disclaiming and waiving any defenses to their enforcement. Ibid. (¶ 80). In addition, the October 2009 forbearance agreement provided that “[t]his document contains the entire agreement between the parties hereto and there are not oral representations or agreements which are not set forth herein.” Id. at 17 (¶ 81).

         In September 2010, the Church's leader (Bishop Kenneth Moales, Sr.) passed away. Id. at 18 (¶ 88). The parties thereafter agreed in April 2011 that $1.7 million in life insurance for Bishop Moales would be paid to Foundation Capital, such that all three of the outstanding loans from 2007, 2008, and 2009 were made current in payments, and the interest rates on the notes were reset to 6.25%. Id. at 18-19 (¶¶ 90-92).

         The Church, however, fell behind by about $200, 000 in payments again by late February 2012. Id. at 19 (¶¶ 95-96). In March 2012, the parties entered into modification agreements for the 2007, 2008, and 2009 notes, with an interest rate of 6.25% and a maturity date of May 1, 2014. Id. at 21-22 (¶¶ 102-108). The Church was represented by counsel in connection with these modification agreements. Id. at 22 (¶ 109). In anticipation of that agreement, the Church's officers and voting trustees executed a certification and resolution authorizing the Church to enter into these modification agreements. Id. at 20 (¶ 98). The certification and resolution acknowledged the Church's cumulative debt of about $7.2 million under the 2007, 2008, and 2009 notes. Ibid. (¶ 100).

         Once again, the Church fell behind in its payments, and on May 16, 2013, Foundation Capital sent demand letters to the Church and accelerated all amounts due and owing under each loan. Id. at 23 (¶¶ 112-13). The Church has not made any payments on the notes since January 2013. Ibid. (¶ 115).

         The Church does not dispute the foregoing facts. It contends instead that there are additional facts involving fraudulent oral misrepresentations that led to the Church's incurring of debt and inability to repay its loan obligations. This defense relies in principal part on the deposition testimony of Pastor Kenneth Moales, Jr., who was the son of Bishop Moales and is currently the Senior Pastor and CEO of the Church. Pastor Moales had previously served as the youth pastor for the Church while his father was leading the Church. Id. at 23 (¶ 118).

         Pastor Moales was involved in the execution of all the notes, mortgages, and forbearance agreements between the parties. Id. at 24 (¶ 120). As an advisor at that time to the Church's board of trustees, his role also included “bookkeeping, creating business models, negotiating with vendors and dealing with lawyers, and doing my internal bookkeeping, and review of the [Church's accountant's] audits.” Id. at 23-24 (¶ 119). Pastor Moales' background includes a college degree in accounting as well as ten years working in the field of accounting for organizations including the New York Times, Deloitte and Touche, and Mercedes Benz; he was also lead tax accountant for Pepperidge Farm for four years. Ibid. (¶¶ 121-22).

         According to Pastor Moales, the Church first decided to move from its previous location in Bridgeport to build a new, larger church facility, sometime in 2005 or 2006. Doc. #92-3 at 9- 10 (deposition transcript). The planned construction project would consist of two phases: Phase One, consisting of a new church building and a new location for the church's affiliated religious school, and Phase Two, consisting of numerous additional amenities including a dining room, gymnasium, four basketball courts, an auditorium, a bowling alley, a swimming pool, and additional classrooms for the school. Id. at 11.

         The Church initially acquired a mortgage from the Evangelical Christian Credit Union (“ECCU”) for a $5 million line of credit at an interest rate of 7.693%. Id. at 46-47. But after the architect on the construction project determined that Phase One alone would cost $6.5 million, id. at 19-20, and that the entire project combined would cost $13.5 million, id. at 64, the Church realized it would need additional construction financing beyond the mortgage from ECCU. The Church's accountant, Samuel Wilson, then put the church in touch with seven potential lenders, including the Assemblies of God Loan Fund (“AGLF”). Id. at 36-37.

         AGLF is a part of the Assemblies of God (“AG”), a Protestant Christian denominational group. Doc. #92-14 at 14. AGLF was created in 1994, and then placed under the auspices of the newly-formed Assemblies of God Financial Services Group (“AGFSG”) in 1998. Ibid.

         AGFSG also controls a real estate investment trust called Foundation Capital Resources, Inc., the plaintiff in this case. During the relevant period, from 2007 to 2009, AGFSG owned roughly 99% of Foundation Capital's stock, “either directly or through entities it controls.” Id. at 36, 53. Foundation Capital paid “dividends quarterly in an amount that approximates its taxable income, ” and was “consolidated into the financial statements of AGFSG.” Ibid. AGFSG, AGLF, and Foundation Capital are all in the business of making construction loans to church groups. Id. at 15.[1]

         Foundation Capital was one of three potential lenders to make the Church a formal loan offer. Doc. #92-3 at 37. According to Pastor Moales, Foundation Capital offered a “verbal commitment” to fund both Phases One and Two in their entirety. Id. at 38. Kregg Hood, one of Foundation Capital's officials, stated that “God told him to fund the project.” Ibid. “He said the Lord had led him to our city and to our church.” Id. at 40.

         According to Pastor Moales, Hood, along with Johnnie Baker and Larry Russell, repeatedly told the Church that the loan from Foundation Capital would take place in several increments. The Church would receive $6.1 million immediately, and would then receive a second installment based on the pledge totals from a capital campaign to raise funds from church membership that would be supervised by Foundation Capital. Id. at 60. Ultimately, both the initial construction loan and the subsequent bridge loan would be converted to a single, “traditional” mortgage, with an interest rate between 4% and 6%. Id. at 60, 69-72, 75-76.

         Pastor Moales testified that he understood that the Church would receive enough financing from Foundation Capital to conduct the entire construction project, and that the capital campaign would only be intended to pay off the resulting mortgage, not to pay for the construction itself. Id. at 69, 99-100. He also testified that part of Foundation Capital's pitch was the guarantee that it would make sure that all of the construction workers and subcontractors were paid on time so that there were no delays in construction. Doc. #92-4 at 49.

         This verbal commitment, however, was not reflected in the first loan agreement, which simply provided for a loan of $6.1 million at an interest rate over 8%. Doc. #92-3 at 76. According to Pastor Moales, throughout his dealings with Foundation Capital “80 percent of what they did for us was not in writing.” Ibid. In fact, Pastor Moales advised the Church's board of trustees not to sign the 2007 loan documents precisely because of these discrepancies. Id. at 76-77. But Hood, Russell, and Baker assured Bishop Moales and the board of trustees that the documents were “just a formality.” Id. at 77. After the closing of the first mortgage, Hood, Russell, and Baker repeatedly represented that the loans would eventually be converted into a traditional mortgage with an interest rate under 6%; these representations spanned from 2007 all the way to 2012. Id. at 71-72. This promised lower interest rate never materialized.

         According to Pastor Moales, by February 2008 he knew that the project was on pace to run out of money by the summer. Id. at 92. He began pressing Foundation Capital for the money from the bridge loan, which he understood to be a second disbursement from the initial loan, once the pledge total from the capital campaign had come in. Id. at 128-33. But Larry Russell responded that the Church would need to fill out certain new forms concerning the capital campaign that had never been presented to the Church. Id. at 129-30. Pastor Moales stated that he received an ever-shifting narrative from Kregg Hood and Foundation Capital's other officials about ...

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