The developers of a Bloomington assisted living home and U.S. Bank are slugging it out in court over $250,000, with accusations of bad faith on both sides.
The partners behind Meadow Woods of Bloomington have sued U.S. Bank, arguing loan officers unfairly charged them default interest for 16 months and should give the money back. U.S. Bank says the borrowers “demanded a free pass” after admitting in 2013 they had not met the terms of their loan for a quarter.
Hennepin County District Judge Michael Browne ordered lawyers on both sides to make their final arguments in writing by Friday so he can decide whether the case should go to trial in March.
U.S. Bank insists the case is a normal dispute over a commercial loan and that it had every right to charge default interest in 2014 and 2015. Spokesman Dana Ripley said in a statement that the bank “acted reasonably and in good faith throughout the relationship, and we wanted to retain Meadow Woods as a customer.”
Terry McNellis, the only Meadow Woods partner still living and former director of housing in St. Paul and managing director at Piper Jaffray, says U.S. Bank is using a dubious interpretation of the contract to justify squeezing a customer for extra cash.
“It’s less of a financial issue than an ethical one,” McNellis said.
Meadow Woods borrowed about $12 million from U.S. Bank in 1998 and 2003. Under the terms of the loans, which converted from fixed rate to floating rate in 2008, Meadow Woods had to show each quarter that it had generated 1.5 times as much money as it owed in loan payments over the last four quarters, a requirement called the debt service coverage ratio.
In 2011 and 2012, Meadow Woods’ ratio dipped below 1.5 three times, when the partners were renovating the assisted living home and occupancy dropped temporarily. Each time, the partners let U.S. Bank know ahead of time, and U.S. Bank waived the defaults. The property was undergoing improvements, which increased its value, something lenders generally appreciate.
But when Meadow Woods reported that its ratio was going to be below 1.5 in the third quarter of 2013, again during a renovation, the two sides couldn’t agree on terms to waive the default. U.S. Bank wanted the partners to agree to a higher interest rate on the loans, and the partners balked.
According to McNellis, the impasse at that point had little to do with concerns about the loan, and more to do with the bank seeking more profit from a floating rate loan that wasn’t floating upward. Low interest rates have been a drag on U.S. Bank earnings for several years, and the bank’s leaders have made no secret of their desire for the Federal Reserve to raise interest rates.
The Meadow Woods loan was only earning the bank 1.25 percent. For a while, the partners paid U.S. Bank for an interest rate swap that earned the bank $1.3 million between 2009 and the summer of 2013. But when the swap expired a few months before the third quarter of 2013, and when U.S. Bank couldn’t persuade the partners to agree to a higher rate, the bank started charging an additional 2 percent in default interest — for the rest of the life of the loan.
McNellis and his partners, Roger Schnobrich and Denver Kaufman, were already trying to refinance their loan with the U.S. Department of Housing and Urban Development. Not wanting to scuttle the new deal, they paid the extra interest “under protest” until they had finalized that loan.
U.S. Bank argues this shows Meadow Woods didn’t really want to negotiate a waiver on its default in 2013.
“U.S. Bank granted waivers on three prior defaults by Meadow Woods, and also offered to negotiate a waiver on the fourth default,” said Ripley, the bank spokesman. “Meadow Woods, however, refused to negotiate because, [unbeknown] to the bank, it had already decided to leave to consolidate and refinance multiple debts through HUD.”
McNellis says the terms proposed by U.S. Bank always involved a more expensive loan, so they weren’t interested. After Meadow Woods refinanced with HUD, the partners sued U.S. Bank for the $250,000 in default interest.
The heart of the legal dispute is whether the one quarter of default in 2013 meant Meadow Woods was in “continuing” default. U.S. Bank argues the loan agreement was clear that the default couldn’t be cured unless the bank granted a waiver, and was therefore “continuing,” triggering an extra 2 percent interest “until such event of default is cured to the satisfaction of the lender.”
McNellis said he and his partners had no problem with paying default interest for that one quarter, but not for all the following quarters. Since they were quickly back in compliance with the terms of the loan, they argue, how could the default be considering “continuing”?
U.S. Bank has twice asked judges to throw out the case. The first judge who heard the bank’s motion to dismiss, Judge Ivy Bernhardson, wrote that U.S. Bank is arguing it has “carte blanche when it comes to determining whether an event of default is continuing and whether it is cured.”
She wrote, “The ‘cure’ sought here by U.S. Bank seems divorced entirely from the typical definition of cure.” Bernhardson denied U.S. Bank’s motion in February. The bank has asked a different judge, Browne, to throw out the case.
McNellis believes he and his partners had a good loan with no risk of actual default or harm to U.S. Bank, and yet the bank charged default interest when the partners wouldn’t agree to a loan that was more lucrative for the bank. He never would have signed an agreement that gives a lender the discretion U.S. Bank claims in this case, McNellis said.
“Either it was this big concerted effort to screw people based on how the documents were drafted,” McNellis said. “Or this was a conscious business decision that this was how they were going to improve their bottom line.”