Bellwether Enterprise Real Estate Capital v. Jaye

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF LOUISIANA

BELLWETHER ENTERPRISE REAL ESTATE CAPITAL CIVIL ACTION

v. NO. 19-10351

c/w 19-130581

CHRISTOPHER JAYE, ET AL. SECTION “F”

ORDER AND REASONS

Before the Court are cross-motions for summary judgment. For

the reasons that follow, the motions of Christopher Jaye, Kristi

Morgan, and Mirus New Orleans are GRANTED and the motion of

Bellwether Enterprise Real Estate Capital is DENIED.

Background

This contract dispute arises from a project to build

affordable housing in New Orleans East and concerns, principally,

a stipulated damages provision in a contract between borrowers and

their lender. The borrowers say the provision is unenforceable

under a Louisiana law allowing courts to modify stipulated damages

that are “so manifestly unreasonable as to be contrary to public

policy.” LA. CIV. CODE art. 2012. The Court agrees.

1 This Order applies to both consolidated cases.

Christopher Jaye and Kristi Morgan own a real estate

development company called Mirus New Orleans. That company owns

the Village of Versailles project——the first affordable housing

development built in New Orleans East after Hurricane Katrina.

To fund the Village of Versailles project, Jaye, Morgan, and

Mirus obtained a $31,552,100 commercial mortgage loan from

Bellwether. The loan is insured by the United States Department of

Housing and Urban Development and memorialized in a mortgage note

and a building loan agreement. Under the building loan agreement,

Bellwether disbursed loan proceeds upon receipt of “draw requests”

from Mirus. After funding each draw, Bellwether sold GNMA mortgage-

backed securities in the amount of the draw to Lancaster Pollard,

an investment company.

Pivotal to the project was one date——August 31, 2018. By then,

two events should have occurred: completion of construction and

final endorsement. Final endorsement is when HUD approves a loan

for insurance; to ensure that it occurred on time, and as a

condition of the loan, Jaye, Morgan, and Mirus entered into an

extension-fee agreement with Bellwether. That agreement required

the borrowers to pay Bellwether a monthly “extension fee” if final

endorsement did not occur by August 31, 2018:

1. Extension Fees. (a) Obligor agrees that in the

event that Final Endorsement has not occurred on or

before August 31, 2018, Obligor shall be liable and

obligated to pay to Lender a monthly extension fee (the

“Extension Fee”) equal to (i) 1/8th of one percent

(0.125%) of the original face amount of the FHA Mortgage

Note for each “monthly Period” (as defined below) or

portion thereof, commencing on September 1, 2018 and

continuing through November 31, 2018 then increasing to

(ii) 1/4th of one percent (0.25%) of the original face

amount of the FHA Mortgage Note for each Monthly Period

or portion thereof, commencing on December 1, 2018 and

continuing until Final Endorsement. In the event that

Final Endorsement shall not theretofore have occurred,

Obligor shall be obligated to pay each such monthly

Extension Fee in advance, fifteen (15) days prior to the

commencement of the applicable Monthly Period; provided

that Lender shall refund the last such monthly Extension

Fee to Obligor in the event that Final Endorsement shall

occur prior to the commencement of the applicable

Monthly Period. Thereafter, there shall be no refund of

the monthly Extension Fee. As used herein [sic] “Monthly

Period” shall mean a period starting on the first day of

a month and ending on the last day of that month.

This extension-fee agreement, Bellwether maintains,

compensates it for the losses it would suffer if final endorsement

did not occur by August 31, 2018. Those losses would allegedly

result from Bellwether’s trade agreement with its investor,

Lancaster Pollard. Under that trade agreement, Bellwether had to

pay Lancaster Pollard a fee of $39,440.13——which equates to 0.125%

of the delivery amount of the $31,552,100 loan——for each month

final endorsement was delayed.

Delay ensued. The parties dispute the reason: Bellwether

points to a lawsuit the general contractor brought against Mirus

and others; the borrowers highlight Bellwether’s alleged

negligence in impeding the selection of a project management agent.

Whatever the reason for the delay, it is undisputed that the

general contractor on the project, Broadmoor, LLC, sued Mirus,

Bellwether, and others in September 2018. See Eastern District of

Louisiana Civil Action No. 18-9064. And it is undisputed that

Broadmoor’s lawsuit complicated the final-endorsement process; the

Federal Housing Administration Multifamily Program Closing Guide

(HUD Guide), which governs the closing of HUD-insured loans,

illustrates how.

Section 1.17(A) of the HUD Guide contemplates delays caused

by disputes between a borrower and a contractor, like the

litigation involving Mirus and Broadmoor:

A. Disputes. Occasionally, Borrower and the general

contractor may have disputes regarding change orders,

the quality or cost of the construction work, or the

timing of payments therefore [sic]. This may delay

final closing. If Borrower and the general contractor

enter into arbitration, litigation, or both, the delay

may be excessive. It may be impossible to reach

agreement in order to complete final closing. Such

delays may cause Lender and Borrower to ask HUD to

finally endorse the Note even without the full

participation of the general contractor, because the

cost of continuing to incur extension or other fees

and Lender’s need to convert the underlying financing

of the mortgage loan to permanent status.

Section. 1.17(B) of the HUD Guide contains a procedure for

final endorsement despite such litigation:

B. Closing Without General Contractor. If both the HUB

Director and HUD Closing Attorney, each in his or her

own discretion, agree, the parties may proceed to

final closing without the participation of the general

contractor if the following conditions are met:

1. Cost certification must have been satisfactorily

completed by all parties required [sic] subject to

this requirement.

2. The remaining mortgage loan proceeds must be placed

in escrow pending the outcome of the dispute.

3. The title company must issue affirmative title

insurance coverage over any liens that are in place

related to the dispute.

4. There must be a mechanism in place for eventual

resolution of the dispute or termination of the

escrow that is satisfactory to HUD, such as

litigation that does not involve HUD.

So, for the loan to proceed to final endorsement despite the

Broadmoor litigation, all of the requirements set out in Section

1.17(B) had to be met. The parties dispute whether those conditions

could have been met, but they agree that final endorsement did not

occur by way of Section 1.17(B).

The Broadmoor litigation settled in March 2019, and final

endorsement occurred around the same time.

As that dispute resolved, another emerged. Because final

endorsement did not occur by August 31, 2018, Bellwether invoked

the extension-fee agreement and demanded fees from Jaye, Morgan,

and Mirus. Bellwether said the borrowers owed $39,441 per period

for the monthly periods beginning on September 1 and October 1 and

$78,881 per period for the monthly periods beginning on November

1, December 1, January 1, February 1, and March 1. Bellwether

received a fraction of what it claimed: the borrowers made just

two $39,441 payments, for the monthly periods beginning September

1 and October 1. The borrowers declined to pay the $354,965 in

extension fees that allegedly accrued during the monthly periods

from November 1 to March 1. So Bellwether sued.

In its one-count complaint, filed in May 2019, Bellwether

alleged that Jaye and Morgan breached the extension-fee agreement

by failing to pay $354,965 in extension fees. For reasons

unexplained, Bellwether did not sue Mirus——the company owned by

Jaye and Morgan and also bound by the extension-fee agreement. But

Mirus soon entered the fray.

In October 2019, Mirus filed a separate suit against

Bellwether; it too arose from the extension-fee agreement. See

Eastern District of Louisiana Civil Action No. 19-13058. Mirus

sued Bellwether for: (1) breach of contract; (2) a declaratory

judgment that the extension-fee agreement is unenforceable; (3)

payment of a thing not owed; and (4) negligence.

For its contract claim, Mirus alleged that Bellwether

breached implied obligations arising from the extension-fee

agreement by “unreasonably and wrongfully delay[ing]” final

endorsement. Mirus said it gave Bellwether everything it needed to

proceed to final endorsement by August 31, 2018, but Bellwether

failed to do so.

Mirus based its negligence claim on similar allegations——that

Bellwether “unreasonably impede[d] Mirus’ selection of management”

and “unreasonably cause[d] rescission of and delaying HUD’s

approval” of project management.

For its declaratory-judgment claim, Mirus alleged that the

extension-fee agreement is unenforceable because (a) it provides

for “liquidated penalty damages" that are “manifestly

unreasonable” under Civil Code Article 2012, and (b) Bellwether

failed to place Mirus in default.

Finally, for its claim for payment of a thing not owed, under

Civil Code Article 2299, Mirus alleged that Bellwether is “bound

to restore” the payments Mirus made under the allegedly

unenforceable extension-fee agreement.

Meanwhile, in the original lawsuit, Jaye and Morgan

counterclaimed against Bellwether for breach of contract and a

declaratory judgment that the extension-fee agreement is

unenforceable. The contract and declaratory-judgment counterclaims

mirrored the claims Mirus brought in Eastern District of Louisiana

Civil Action No. 19-13058.

In both lawsuits, Bellwether moved to dismiss for failure to

state a claim. See FED. R. CIV. P. 12(b)(6). The Court denied the

motions, in part, and held that: (1) Jaye, Morgan, and Mirus stated

a claim that Bellwether breached its Civil Code Article 1772-

derived obligation not to prevent the suspensive condition of final

endorsement from occurring; (2) Jaye, Morgan, and Mirus stated a

claim for a declaratory judgment that the extension-fee agreement

is unenforceable because it imposes damages “manifestly

unreasonable” within the meaning of Civil Code Article 2012; (3)

Mirus stated a claim for payment of a thing not owed under Civil

Code Article 2299; and (4) Mirus stated a negligence claim. See

Order and Reasons of 12/11/19.

Bellwether’s Rule 12 motions revealed the legal and factual

overlap between the lawsuits. Based on that overlap, the Court

consolidated the lawsuits in November 2019. See Order and Reasons

of 11/19/19. The Court concluded that the lawsuits arose from the

same commercial mortgage loan and turned, principally, on the same

legal question: Is the extension-fee agreement enforceable?

Now, the borrowers move for partial summary judgment against

Bellwether, and Bellwether moves for summary judgment against the

borrowers.

I.

Summary judgment is proper if the record discloses no genuine

dispute as to any material fact and the movant is entitled to

judgment as a matter of law. FED. R. CIV. P. 56(a). A dispute is

“genuine” if “the evidence is such that a reasonable jury could

return a verdict for the non-moving party.” Anderson v. Liberty

Lobby, 477 U.S. 242, 248 (1986). A fact is “material” if it “might

affect the outcome of the suit.” Id. at 248.

If the non-movant will bear the burden of proof at trial, the

movant “may merely point to an absence of evidence, thus shifting

to the non-movant the burden of demonstrating by competent summary

judgment proof that there is an issue of material fact warranting

trial.” In re La. Crawfish Producers, 852 F.3d 456, 462 (5th Cir.

2017) (citation omitted).

The Court emphasizes that the mere argued existence of a

factual dispute does not defeat an otherwise properly supported

motion. See Anderson, 477 U.S. at 248. Nor do “[u]nsubstantiated

assertions, improbable inferences, and unsupported speculation[.]”

Brown v. City of Houston, Tex., 337 F.3d 539, 541 (5th Cir. 2003).

Ultimately, to avoid summary judgment, the non-movant “must go

beyond the pleadings and come forward with specific facts

indicating a genuine issue for trial.” LeMaire v. La. Dep’t of

Transp. & Dev., 480 F.3d 383, 387 (5th Cir. 2007).

In deciding whether a fact issue exists, the Court views the

facts and draws all reasonable inferences in the light most

favorable to the non-movant. See Midwest Feeders, Inc. v. Bank of

Franklin, 886 F.3d 507, 513 (5th Cir. 2018). The Court “resolve[s]

factual controversies in favor of the nonmoving party,” but “only

where there is an actual controversy, that is, when both parties

have submitted evidence of contradictory facts.” Antoine v. First

Student, Inc., 713 F.3d 824, 830 (5th Cir. 2013) (citation

omitted).

On cross-motions for summary judgment, the Court views each

motion separately and asks, as to each, whether the movant has met

the Rule 56(a) standard. See Shaw Constructors v. ICF Kaiser

Engr’s, Inc., 395 F.3d 533, 538-39 (5th Cir. 2004) (citing 10A

Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, FEDERAL

PRACTICE AND PROCEDURE § 2720 (3d ed. 1998)).

II.

Jurisdiction is based on diversity, so the Court applies the

substantive law of the forum, Louisiana. See Boyett v. Redland

Ins. Co., 741 F.3d 604, 607 (5th Cir. 2014) (citing Erie R.R. Co.

v. Tompkins, 304 U.S. 64 (1938)). Because Louisiana choice-of-law

rules are substantive, they apply here. See Weber v. PACT XPP

Tech., AG, 811 F.3d 758, 770 (5th Cir. 2016) (citing Klaxon Co. v.

Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941)). Louisiana’s

choice-of-law rules require the Court to honor a contractual

choice-of-law provision, except to the extent the law chosen

“contravenes the public policy of the state” whose law would

otherwise apply. LA. CIV. CODE art. 3540.

Section 5(d) of the extension-fee agreement contains a

choice-of-law provision; it calls for the application of Louisiana

contract-interpretation law. Neither side contends that the

application of Louisiana law “contravenes the public policy of the

state” whose law would otherwise apply. LA. CIV. CODE art. 3540. So

the Court honors the parties’ choice, applies Louisiana law, and

turns to the cross-motions for summary judgment.

III.

For the first cross-motion, Bellwether moves for summary

judgment: (A) dismissing the claims the borrowers bring against

it; and (B) awarding it damages on its claims for breach of

contract against the borrowers. The Court considers dismissal

before damages.

A.

In the first part of its two-part motion, Bellwether seeks

summary judgment dismissing the claims of Jaye, Morgan, and Mirus.

Those claims are: (1) a claim for a declaratory judgment that the

extension-fee agreement is unenforceable; (2) a claim for payment

of a thing not owed; (3) a claim for breach of implied obligations

arising from the extension-fee agreement; and (4) a claim for

negligence.2 The Court considers each in turn.

2 Jaye and Morgan originally asserted counterclaims for:

breach of contract; breach of the duty of good faith and fair

dealing; violations of the Louisiana Unfair Trade Practices and

Consumer Protection Law, LA. REV. STAT. §§ 51:1401 — 51:1430; a

declaratory judgment; and attorney’s fees. The Court dismissed the

1.

The first claim Bellwether challenges is the one for a

declaratory judgment that the extension-fee agreement is

unenforceable as a matter of Louisiana law.

The Declaratory Judgment Act allows a federal court, “[i]n a

case of actual controversy within its jurisdiction,” to “declare

the rights and other legal relations of any interested party

seeking such a declaration, whether or not further relief is or

could be sought.” 28 U.S.C. § 2201.

Invoking the Declaratory Judgment Act, the borrowers request

a judgment declaring the stipulated damages provision of the

extension-fee agreement unenforceable. Bellwether moves for

summary judgment, contending the provision is enforceable for

three reasons: (1) it is not a stipulated damages provision at

all; (2) even if it were, it is enforceable as the product of arms-

length negotiations between sophisticated parties; and (3) it

“reasonably approximates” Bellwether’s damages in the event of

breach.

attorney-fee counterclaim on the pleadings, and Jaye and Morgan

dropped their claims for breach of the duty of good faith and fair

dealing and violation of the Louisiana Unfair Trade Practices and

Consumer Protection law when they filed an amended answer that did

not assert them. See King v. Dogan, 31 F.3d 344, 346 (5th Cir.

1994) (citing Boelens v. Redman Homes, Inc., 759 F.2d 504, 508

(5th Cir. 1985)). So the Court need not address Bellwether’s

arguments for dismissal of these claims.

Bellwether’s arguments center on the Louisiana law of

stipulated damages. At first glance, that law appears clear: The

Civil Code creates a general rule respecting stipulated damages

provisions, LA. CIV. CODE art. 2005, and an exception allowing

judicial modification of them, LA. CIV. CODE art. 2012. The general

rule permits parties to “stipulate damages to be recovered in case

of nonperformance, defective performance, or delay in

performance[.]” LA. CIV. CODE art. 2005. The exception allows a

court to modify a stipulated damages provision if it is “so

manifestly unreasonable as to be contrary to public policy.” La.

Civ. Code art. 2012. Simple enough.

But the case literature proves complicated. One line of cases

calls for closer consideration of stipulated damages provisions

and urges courts to ask whether such provisions “reasonably

approximate” the obligee’s loss in the event of a breach. See,

e.g., Keiser v. Catholic Diocese of Shreveport, Inc., 38,797, p.

9 (La. App. 2d Cir. 8/18/04); 880 So. 2d 230, 236.3 Another line,

3 The cases composing this line are more numerous and of more

recent vintage. See Prof'l Fluid Servs., LLC v. Norsk Bronnservice

AS, 2017-920, p. 6 (La. App. 3d Cir. 4/25/18); 245 So. 3d 47, 52,

writ denied, 2018-0869 (La. 10/29/18); 254 So. 3d 120; Plaquemines

Parish Gov’t v. River/Road Constr., Inc., 2001-2222, p. 18 (La.

App. 4th Cir. 8/28/02); 828 So. 2d 16, 28; Mobley v. Mobley,

37,364, p. 4-6 (La. App. 2d Cir. 8/20/03); 852 So. 2d 1136, 1139-

40; Carney v. Boles, 25,905, p. 6-7 (La. App. 2d Cir. 9/21/94);

643 So. 2d 339, 343-44; Philippi v. Viguerie, 606 So. 2d 577, 579-

however, cautions courts against comparing the stipulated amount

with the obligee’s expected damages. See, e.g., American

Totalisator Co. v. Fair Grounds Corp., 3 F.3d 810, 815 (5th Cir.

1993).4 The parties dispute which line controls.

The first line coheres with Civil Code Article 2012, which

allows a court to modify stipulated damages that are “so manifestly

unreasonable as to be contrary to public policy.” LA. CIV. CODE art.

2012. Of course, a court cannot decide if a stipulated damages

provision is “manifestly unreasonable” without comparing the

stipulated amount to the obligee’s expected or actual damages. See

Saul Litvinoff, 6 LA. CIV. L. TREATISE, Law Of Obligations § 13.18

(2d ed.). The Court has not found, and Bellwether has not

identified, another means of gauging the reasonableness of a

stipulated damages provision.

80 (La. Ct. App. 5th Cir. 1992); Am. Leasing Co. of Monroe, Inc.

v. Lannon E. Miller & Son, 469 So. 2d 325, 328-29 (La. Ct. App. 2d

Cir. 1985); John Jay Esthetic Salon, Inc. v. Woods, 377 So. 2d

1363, 1367 (La. Ct. App. 4th Cir. 1979); Preis v. Daily, --- So.

3d ---; 2019-700, (La. App. 3d Cir. 3/25/20); 2020 WL 1457687, at

*4-7; Util. Constructors, Inc. v. Perez, No. 15-4675, 2016 WL

5801363, at *5-6 (E.D. La. Oct. 5, 2015).

4 See also Pembroke v. Gulf Oil Corp., 454 F.2d 606, 611 (5th

Cir. 1971); Ball Marketing, Inc. v. Sooner Refining Co., 422 So.

2d 582, 585-86 (La. Ct. App. 3d Cir. 1982); Maloney v. Oak

Builders, Inc., 235 So. 2d 386, 390 (La. 1970); Lama v. Manale, 50

So. 2d 15, 17 (La. 1950).

Instead, Bellwether urges the Court to apply the all-

deference, all-the-time approach from the second line of cases.

See, e.g., Lama v. Manale, 50 So. 2d 15, 17-18 (La. 1950). Courts

cannot consider the reasonableness of stipulated damages

provisions, these authorities instruct, because “parties to a

contract generally have the unqualified right to stipulate for any

amount of liquidated damages in the event of a breach.” Pembroke

v. Gulf Oil Corp., 454 F.2d 606, 611 (5th Cir. 1971) (emphasis

added).

But that is not the law. See, e.g., Plaquemines Parish Gov’t

v. River/Road Const., Inc., 2001-2222, p. 18-19 (La. App. 4th Cir.

8/28/02); 828 So. 2d 16, 28-29 (reversing trial court for failing

to analyze the reasonableness of a stipulated damages provision);

Am. Leasing Co. of Monroe,, 469 So. at 329 (“When a stipulated

damages provision is enforced, the court must determine the

reasonableness of the amount[.]”) (emphasis added).

What is more, this hands-off approach clashes with the Civil

Code: The cases applying the approach purport to preclude the

reasonableness analysis the Civil Code plainly permits. Compare

Pembroke, 454 F.2d at 611 (declaring, without citation, it “well

settled” that parties enjoy the “unqualified right to stipulate

for any amount of liquidated damages”) with LA. CIV. CODE art. 2012

(allowing judicial modification of stipulated damages provisions

that are “so manifestly unreasonable as to be contrary to public

policy”) and Revision Comment (c) (1984) to LA. CIV. CODE art. 2005

(“A stipulated damages clause is given effect if the court deems

it to be a true approximation of actual damages.”) (emphasis

added).

The hands-off approach also ignores relevant scholarship. For

example, a professor of the Louisiana State University Law Center,

writing in 1983, considered it “clear from the jurisprudence that

the parties must have made a good faith effort to reasonably

estimate the probable loss that a breach would cause.” Ronald L.

Hersbergen, Unconscionability: The Approach of the Louisiana Civil

Code, 43 LA. L. REV. 1315, 1419 (1983). The late Professor Saul

Litvinoff concurred; he explained that courts must modify

stipulated damages provisions that are “manifestly unreasonable”

in light of the obligee’s expected or actual damages:

[T]he basic principle of no modification of the

stipulated damages must yield when such damages are

manifestly unreasonable. It should be clear that whether

or not such damages are unreasonable is a determination

that will result from contrasting the evaluation

contained in the pertinent clause with an evaluation of

the real loss sustained by the aggrieved obligee.

Litvinoff, 6 LA. CIV. L. TREATISE, at § 13.18 (emphasis added).

Because the text of the Civil Code supports the first line of

authority and cast doubt on the second, the Court applies the first

line. From that line, three principles emerge.

First, the aim of a stipulated damages provision is “to fix

the measure of damages in advance and to constrain the timely

performance of the principal obligation.” James Const. Grp.,

L.L.C. v. State ex. Rel. Dept. of Transp. & Dev., 2007-0225, p. 12

(La. App. 1st Cir. 11/2/07); 977 So. 2d 989, 997. And stipulated

damages provisions cannot “serve as a vehicle to recover punitive,

as opposed to compensatory[,] damages.” Philippi v. Viguerie, 606

So. 2d 577, 579 (La. Ct. App. 5th Cir. 1992); see also Litvinoff,

6 LA. CIV. L. TREATISE, at § 13.17 (“[P]arties may not avail

themselves of a stipulated damages clause as a subterfuge to allow

either one or both of them the recovery of damages that are

punitive rather than compensatory.”).

Second, stipulated damages “should reasonably approximate the

obligee’s loss in the event of a breach[.]” Keiser, 880 So. 2d at

236 (citing Am. Leasing Co. of Monroe, 469 So. 2d at 325. To decide

if a stipulated damages provision is reasonable, the Court asks

“whether the parties attempted to approximate the actual damages

in confecting the agreement.” Keiser, 880 So. 2d at 236. The

provision is enforceable if they did and unenforceable if they did

not. Id.

Third, the stipulated amount is presumed reasonable, and the

party that says otherwise must rebut the presumption. James Const.

Grp., 977 So. 2d at 998. To do so, the party must show that the

provision is “so manifestly unreasonable as to be contrary to

public policy.” LA. CIV. CODE art. 2012.

With these principles in mind, the Court turns to Bellwether’s

arguments for dismissal of the borrowers’ claims for a declaratory

judgment that the extension-fee agreement is unenforceable.

First, Bellwether contends that Civil Code Article 2012 does

not even apply. So, Bellwether says, the Court need not subject

the extension-fee agreement to any scrutiny. That is because,

according to Bellwether, the extension-fee agreement does not

provide for “stipulated damages”; it merely grants Bellwether “the

option” to grant the borrowers an extension in exchange for the

payment of monthly fee. The Court disagrees.

To start, Bellwether’s argument misreads the extension-fee

agreement. That agreement does not give Bellwether “the option” to

extend the deadline for achieving final endorsement in exchange

for a fee; it makes the borrowers “liable and obligated to pay to

[Bellwether] a monthly extension fee” for each month final

endorsement was delayed beyond August 31, 2018. It therefore

requires the borrowers to pay an extension fee, even if Bellwether

refuses to grant an extension.

What is more, Bellwether’s argument fails to consider the

text of the Civil Code. Article 2005 permits parties to “stipulate

the damages to be recovered in case of nonperformance, defective

performance, or delay in performance of an obligation.” That is

exactly what the parties did here; they agreed that the borrowers

would pay Bellwether fixed monthly sums for each month final

endorsement was delayed beyond August 31, 2018. Those sums

supposedly supplied the measure of Bellwether’s damages in the

event the borrowers breached their obligation to timely achieve

final endorsement. So the extension-fee agreement is an attempt to

“stipulate . . . damages” within the meaning of Civil Code Article

2005 and is therefore subject to Civil Code Article 2012. Having

rejected Bellwether’s first argument, the Court turns to its

second.

For its second argument, Bellwether says that the extension-

fee agreement is enforceable as the product of “arms-length

negotiations between sophisticated parties.” In so arguing,

Bellwether invites the Court to hold that Civil Code Article 2012

applies only when there are disparities in bargaining power. The

Court declines the invitation.

Civil Code Article 2012 is not as limited as Bellwether says.

Article 2012 is clear: Before a court modifies a stipulated damages

provision, it must find that the stipulated damages “are so

manifestly unreasonable as to be contrary to public policy.” LA.

CIV. CODE art. 2012. A court need not also find a gap in bargaining

power. See, e.g., Plaquemines Parish Gov’t, 828 So. 2d at 29

(reversing trial court for failing to consider the reasonableness

of stipulated damages provision in arms-length transaction between

construction company and parish government); Philippi, 606 So. 2d

at 580 (affirming trial court’s modification of stipulated damages

provision in contract between “sophisticated businessmen with

equal bargaining power”). Accordingly, Bellwether’s second

argument lacks merit, and the Court turns to its third.

For its third argument, Bellwether contends that the

stipulated damages provision is enforceable, as a matter of law,

because the stipulated amount “reasonably approximates” the

damages Bellwether would suffer if final endorsement was delayed.

According to Bellwether, the stipulated amount——0.125% of the

mortgage note ($39,441) each month for the first three months of

delay and 0.25% of the mortgage note ($78,881) each month

thereafter——approximates: (a) the amounts it was contractually

obligated to pay its investor, Lancaster Pollard, due to the delay;

plus (b) unspecified “additional costs” Bellwether would incur in

“managing” and “servicing” the loan during the delay. To evaluate

Bellwether’s argument, the Court turns first to the contract

between Bellwether and Lancaster Pollard.

That contract was styled a “trade agreement” and signed on

May 26, 2016——just thirty-six days before Bellwether and the

borrowers entered into the extension-fee agreement. Under the

trade agreement, Bellwether agreed to sell mortgage-backed

securities to Lancaster Pollard. Bellwether promised to deliver

the securities by January 31, 2019, “the last day of the month in

which the twenty-ninth (29th) monthly anniversary of the Initial

GNMA CLC occurs[.]” Bellwether could extend that delivery date by

paying Lancaster Pollard a monthly fee of 0.125% of the $31,522,100

delivery amount, or $39,440.13. And it did so: Bellwether made

three $39,440.13 payments——on January 1, 2019, February 2, 2019,

and March 1, 2019——for a total of $118,320.39. So the delay in

final endorsement cost Bellwether $118,320.39, plus “additional

costs” for “managing” and “servicing” the loan. Bellwether appears

to contend that the stipulated damages provision of the extension-

fee agreement “reasonably approximates” these amounts.5 The Court

disagrees.

First, consider the chasm between the stipulated amounts and

the amount Bellwether was contractually obliged to pay Lancaster

5 Bellwether does not apply the “reasonably approximate”

standard that springs from the case literature. Bellwether instead

says that “the Extension Fee compensates Bellwether for actual

costs it incurs as a result of delays in the Final Endorsement

date.” But the “actual costs” are unstated. Bellwether adds that

the extension-fee arrangement is “commonplace . . . in the

commercial lending industry.” That is not the standard, though;

“commonplace” or not, the stipulated amount should “reasonably

approximate” Bellwether’s actual damages. There must be some “fit”

between the figures, and Bellwether’s wayward contentions do not

help the Court find it.

Pollard. For the months of January, February, and March 2019, the

stipulated amount is $78,881 per month——double Bellwether’s

monthly payment obligation to Lancaster Pollard. And the total

stipulated amount——$433,847——is more than triple the amount

Bellwether was contractually obliged to pay Lancaster Pollard.

These figures are multiples of Bellwether’s actual damages——not

“reasonable approximations” of them.6

Second, consider the timing of Bellwether’s contractual

obligation to pay Lancaster Pollard. Until January 1, 2019,

Bellwether owed no payments to Lancaster Pollard. By then, however,

the stipulated damages provision required the borrowers to pay

Bellwether $197,204. So the stipulated damages provision required

the borrowers to pay Bellwether nearly $200,000 when Bellwether’s

actual damages were $0.

Third, consider the formulaic fee structure of the extension-

fee agreement. It requires the borrowers to pay Bellwether 0.125%

of the mortgage note ($39,441) each month for the first three

months of delay and 0.25% of the mortgage note ($78,881) each month

thereafter. Why does the stipulated amount double after the third

6 Stipulated damages may of course “exceed, to some degree[,]”

the obligee’s “reasonably approximate[d]” actual damages. Am.

Leasing Co. of Monroe, 469 So. 2d at 329. But the Court has not

found, and Bellwether has not invoked, any authority allowing

stipulated damages of double or triple the obligee’s anticipated

damages.

month of delay? Bellwether provides no satisfactory answer. Its

trade agreement with Lancaster Pollard is of little help; nothing

in it supports a finding that Bellwether’s actual damages somehow

doubled beginning in December 2019.

Bellwether has not met its Rule 56(a) burden. On the contrary,

the facts and law raised in connection with Bellwether’s motion

show that the stipulated damages provision of the extension-fee

agreement is unenforceable as a matter of Louisiana law because it

is “so manifestly unreasonable as to be contrary to public policy.”

LA. CIV. CODE art. 2012. As explained, the stipulated amounts do not

“reasonably approximate” Bellwether’s actual damages in the event

of breach. Keiser, 880 So. 2d at 236. And it is plain that the

parties did not even “attempt[] to approximate” those damages in

confecting the stipulated damages provision. Id.; Am. Leasing Co.

of Monroe, Inc., 469 So. 2d at 329 (demanding a determination of

whether the parties “truly attempted to reasonably approximate

actual damages” in confecting the provision); Mobley, 852 So. 2d

at 1140 (same). To be sure, the stipulated amounts “do not bear

any reasonable relation,” Carney, 643 So. 2d at 343, to

Bellwether’s actual damages——damages Bellwether knew with

reasonable certainty at the time of contracting. A provision with

these characteristics is not compensatory; it is punitive.

Accordingly, the Court finds that the stipulated damages

provision of the extension-fee agreement is unenforceable, and the

Court denies Bellwether’s motion for summary judgment on the

borrowers’ declaratory-judgment claims.7

2.

Bellwether next moves for summary judgment on Mirus’ claim

for payment of a thing not owed.

In Louisiana, “[a] person who has received a payment or a

thing not owed to him is bound to restore it to the person from

whom he received it.” LA. CIV. CODE art. 2299. “A thing is not owed

when it is paid or delivered for the discharge of an obligation

that does not exist.” LA. CIV. CODE art. 2300.

Mirus sued Bellwether under Civil Code Article 2299 to recoup

the money it paid under the stipulated damages provision of the

extension-fee agreement. Because the stipulated damages provision

7 Critically, Bellwether does not argue——as a fallback

position should the Court find against it——that the Court should

modify the stipulated amount to a sum that reasonably approximates

its anticipated losses. So the Court does not consider whether it

should reduce the stipulated amount rather than declare the entire

stipulated damages provision unenforceable. See, e.g., Carney, 643

So. 2d at 344(reducing stipulated sums); Philippi, 606 So. 2d at

580(affirming trial court’s reduction of stipulated sums); John

Jay Esthetic, 377 So. 2d at 1368 (declining to enforce stipulated

damages provision and remanding for presentation of evidence of

actual damages).

is unenforceable, Mirus reasons, the payments were not “owed,” and

Bellwether is “bound to restore” them. LA. CIV. CODE art. 2299.

Bellwether disagrees. It says it is entitled to summary

judgment on this claim for the same reason it is entitled to

summary judgment on the declaratory-judgment claim: the stipulated

damages provision is enforceable as a matter of law. Because the

Court has rejected that argument, the Court rejects this one, too.

The provision is not enforceable, and Bellwether cannot show that

Mirus actually “owed” payments under the unenforceable provision.

LA. CIV. CODE art. 2299; see also Bell South Telecomm., LLC v. City

of Orleans, 31 F. Supp. 3d 819, 831 (E.D. La. 2014) (payment made

to city in compliance with an ordinance was never “owed” because

ordinance was unenforceable from the start). The Court therefore

denies Bellwether’s motion for summary judgment on Mirus’ Civil

Code Article 2299 claim.

3.

Bellwether next moves for summary judgment on the borrowers’

claims that it breached implied obligations arising from the

extension-fee agreement under Civil Code Article 1772.

Under Louisiana law, a breach-of-contract claim has three

elements: “‘(1) the obligor’s undertaking an obligation to

perform, (2) the obligor failed to perform the obligation (the

breach), and (3) the failure to perform resulted in damages to the

obligee.’” IberiaBank v. Broussard, 907 F.3d 826, 835 (5th Cir.

2018) (quoting Favrot v. Favrot, 1108-09, pp. 14-15 (La. App. 4th

Cir. 2011); 68 So. 3d 1099, 1108-1109).

An obligation is “conditional” if it depends on an “uncertain

event.” LA. CIV. CODE art. 1767. It is “suspensive” if it “may not

be enforced until the uncertain event occurs.” Id. Louisiana law

regards a suspensive condition as “fulfilled” when “it is not

fulfilled because of the fault of a party with an interest contrary

to the fulfillment.” LA. CIV. CODE art. 1772.

Civil Code Article 1772 embraces a “frustration” or

“prevention of performance” principle: One contracting party has

an implied obligation not to do anything that prevents the other

from performing his obligation. Orleans Parish Sch. Bd. v.

Lexington Ins. Co., 2012-1686, p. 16 (La. App. 4 Cir. 6/5/13); 118

So. 3d 1203, 1216 (citing In re Crutcher-Tufts Res., Inc., 504

F.3d 535, 542 (5th Cir. 2007)). The principle flows from “the

premise [that] one should not be able to take advantage of his own

wrongful act.” Gibbs Const. Co. v. Thomas, 500 So. 2d 764, 766

(La. 1987). It applies to both obligor and obligee. LA. CIV. CODE

art. 1772 cmt. a.

If the obligee’s fault prevents a suspensive condition from

becoming “fulfilled,” the obligor may sue for damages. See LA. CIV.

CODE art. 1772 cmt. c; 5 LA. CIV. L. TREATISE, Law of Obligations §

5.9 (2d ed.). The obligee conceptually has breached his implied

contractual obligation. See LA. CIV. CODE art. 2054; Certain

Underwriters at Lloyd’s, London v. Sea-Lar Mgmt., Inc., 2000-1512,

p. 8 (La. App. 4 Cir. 5/9/01); 787 So. 2d 1069, 1076.

Here, the borrowers sued Bellwether for breaching implied

obligations arising from the extension fee agreement by

“unreasonably and wrongfully delay[ing]” final endorsement.

Bellwether says it is entitled to summary judgment because it did

not cause the delay; the Broadmoor litigation did.

The Broadmoor litigation complicated the final endorsement

process, Bellwether explains, because the HUD Guide contains only

a narrow procedure for closing without the general contractor’s

participation. Bellwether says that it asked Mirus if Mirus “wanted

to use that procedure,” but Mirus failed to respond.

The borrowers rejoin that fact issues preclude summary

judgment, and the Court agrees. On this record, it is impossible

to assign blame for the delay in final endorsement. The borrowers

point to facts——taken as true and viewed in their favor——sufficient

to support a finding that Bellwether caused, at least in part, the

delay.

The borrowers’ theory finds support in the declaration of

Kristi Morgan. Morgan attests that: (1) following a call with a

Bellwether employee in July 2017, it became “apparent” that

Bellwether encouraged HUD to rescind its approval of Syncromatic

Management, LLC as the management agent for the project,

necessitating the selection of a replacement and delaying final

endorsement; (2) Bellwether wrongly withheld money from payments

owed to the general contractor, Broadmoor, for builders risk

insurance, contributing to the filing of the Broadmoor litigation;

(3) Bellwether failed to pay “undisputed invoice amounts,”

stripping Mirus of the funds it needed to pay Broadmoor’s draw

request and sparking the Broadmoor litigation; and (4) Bellwether

“was not cooperative in establishing [the] escrow” needed to

proceed to final endorsement during a contractor dispute, in

accordance with Section 1.17(B)(2) of the HUD Guide.

A jury could find that any of these acts amounts to a breach

of Bellwether’s Civil Code Article 1772-derived obligation not to

take any action to prevent the suspensive condition of final

endorsement from occurring. See, e.g., Gibbs Const. Co., 500 So.

2d at 766; Orleans Parish Sch. Bd., 118 So. 3d at 1216. The Court

therefore denies Bellwether’s motion for summary judgment on the

borrowers’ breach-of-contract claims.

4.

Bellwether next moves for summary judgment dismissing Mirus’

claim that it negligently delayed final endorsement.

The source of negligence liability in Louisiana is Civil Code

Article 2315, which instructs that “[e]very act whatever of man

that causes damage to another obliges him by whose fault it

happened to repair it.” LA. CIV. CODE art. 2315. Courts use a duty-

risk approach to decide whether to impose negligence

liability. Lemann v. Essen Lane Daiquiris, Inc., 2005-1095, p. 7

(La. 3/10/06); 923 So. 2d 627, 632.

To recover under that approach, the plaintiff must prove five

elements: (1) the defendant had a duty to conform its conduct to

a specific standard; (2) the defendant’s conduct failed to conform

to that standard; (3) the defendant's substandard conduct was

cause-in-fact of the plaintiff’s injuries; (4) the defendant's

substandard conduct was a legal cause of the plaintiff’s injuries;

and (5) actual damages. Audler v. CBC Innovis, Inc., 519 F.3d 239,

249 (5th Cir. 2008) (citing Lemann, 923 So. 2d at 633).

Bellwether contends that is entitled to summary judgment

because Mirus cannot prove damages caused by Bellwether’s alleged

negligence. The Court disagrees.

Consider, again, the declaration of Kristi Morgan. Morgan

attests that, as a result of the Bellwether-engineered rescission

of Syncromatic as project management agent, Mirus incurred

$360,206.97 in “management and lease up fees,” plus unspecified

“expenses for staff time.” Whether these fees and expenses were

caused by Bellwether’s negligence is a factual dispute for the

jury. The Morgan declaration aside, many of the same genuine

disputes of material fact that precluded summary judgment on the

breach-of-contract claims preclude summary judgment on this claim.

The Court therefore denies Bellwether’s motion for summary

judgment on Mirus’ negligence claim.

Having denied the first component of Bellwether’s motion for

summary judgment——dismissal of the borrowers’ claims——the Court

turns to the second: Bellwether’s request for an award of damages

on its claims for breach of contract.

B.

In the second part of its two-part motion, Bellwether seeks

summary judgment awarding it damages on its claims for breach of

contract. But the Court has held that the stipulated damages

provision of the extension-fee agreement is unenforceable. See §

III(A)(1), supra. So Bellwether cannot recover damages against the

borrowers for breaching the unenforceable stipulated damages

provision. The Court therefore denies this component of

Bellwether’s motion for summary judgment.

IV.

For the second cross-motion, Jaye and Morgan move for partial

summary judgment: (A) declaring the stipulated damages provision

of the extension-fee agreement unenforceable as a matter of

Louisiana law; and (B) dismissing Bellwether’s breach-of-contract

claims.

A.

First, Jaye and Morgan ask the Court to hold that the

stipulated damages provision is unenforceable. The Court has so

held. See § III(A)(1), supra. Accordingly, for the reasons given

in § III(A)(1) of this Order and Reasons, the Court grants Jaye

and Morgan’s motion for partial summary judgment on the

enforceability of the stipulated damages provision.

B.

Second, Jaye and Morgan move for summary judgment dismissing

Bellwether’s claims for breach of contract. Bellwether sued Jaye

and Morgan for breaching portions of the extension-fee agreement

that this Court held unenforceable in § III(A)(1) of this Order

and Reasons. Because the stipulated damages provision of the

extension-fee agreement is unenforceable as a matter of Louisiana

law, Bellwether cannot succeed on its claims against Jaye and

Morgan for breach of that provision. See, e.g., Ramos v. Liberty

Bank and Trust Co., 2018-0612, p. 2 (La. App. 4th Cir. 12/19/18);

262 So. 3d 917, 918 (breach-of-contract claim requires an

enforceable contract).

Bellwether contends, however, that summary judgment is

inappropriate, even if the Court concludes (as it has) that the

stipulated damages provision is unenforceable. Bellwether says it

still has claims against Jaye and Morgan for breaching the

principal obligation of the extension-fee agreement——the

obligation to proceed to final endorsement by August 31, 2018.

It is of course true, as Bellwether says, that “[n]ullity of

the stipulated damages clause does not render the principal

obligation null.” LA. CIV. CODE art. 2006. But Bellwether did not

sue the borrowers for breaching the “principal obligation” of the

extension-fee agreement; it sued them for breaching the stipulated

damages provision only. The Court declines to deny summary judgment

on the basis of a hypothetical claim Bellwether has not brought.8

8 Because the amendment deadline expired long ago, Rule 16(b)

would govern any request to amend. See Innova Hosp. San Antonio,

Ltd. P'ship v. Blue Cross & Blue Shield of Ga., Inc., 892 F.3d

719, 735 (5th Cir. 2018). The “more liberal standard of Rule 15(a)”

would not apply until Bellwether showed “good cause to modify the

scheduling order[.]” S&W Enters., L.L.C. v. SouthTrust Bank of

Ala., NA, 315 F.3d 533, 536 (5th Cir. 2003). Bellwether has not

moved for leave to amend its complaint out of time, and its summary

judgment papers do not contain the facts the Court needs to make

an informed good-cause determination. See Innova Hosp., 892 F.3d

at 735 (calling for consideration of four factors in deciding

whether to allow an untimely amendment). Consequently, the Court

takes no position on the question whether Bellwether can make the

Accordingly, the Court grants Jaye and Morgan’s motion for

partial summary judgment dismissing the breach-of-contract claims

Bellwether brings against them.

V.

For the third and final cross-motion, Mirus moves for partial

summary judgment: (A) declaring the stipulated damages provision

of the extension-fee agreement unenforceable as a matter of

Louisiana law; and (B) ordering Bellwether to “restore” to Mirus

the $78,882 in fees that Mirus paid Bellwether under the stipulated

damages provision.

A.

First, Mirus moves for summary judgment declaring the

stipulated damages provision of the extension-fee agreement

unenforceable as a matter of Louisiana law. The Court has held

that the provision is unenforceable. See § III(A)(1), supra. So,

for the reasons given in § III(A)(1) of this Order and Reasons,

the Court grants Mirus’ motion for partial summary judgment on the

enforceability of the stipulated damages provision.

showing required to amend its complaint out of time to assert the

claims it references in § IV of its brief in opposition to Jaye

and Morgan’s motion for partial summary judgment.

B.

Second, Mirus moves for summary judgment on its effort to

recoup, under Civil Code Article 2299, the money it paid Bellwether

under the stipulated damages provision of the extension-fee

agreement. Because that provision is unenforceable, Mirus reasons,

the payments were not “owed,” and Bellwether is “bound to restore”

them. LA. CIV. CODE art. 2299. Bellwether counters that, even if the

provision is unenforceable, Bellwether need not “restore” the

payments because Mirus made them voluntarily and with “full

knowledge of the relevant facts[.]” The Court disagrees.

Bellwether invokes the voluntary payment doctrine, which

holds that “‘voluntary payments made with full knowledge of all

the facts and not under duress may not subsequently be recovered,

even though the amount so paid is not actually owed.’” Carter v.

Montgomery Ward & Co., 413 So. 2d 309, 314 (La. Ct. App. 3d Cir.

1982) (quoting Whitehall Oil Co. v. Boagni, 217 So. 2d 707, 713-

14 (La. Ct. App. 3d Cir. 1968) (Tate, J., dissenting)). But the

1996 amendment to Civil Code Article 2299 suggests that the

doctrine does not apply to claims for payment of a thing not owed.

See Revision Comment (b) (1996) to LA. CIV. CODE art. 2299 (“[T]he

person who receives a thing or a payment not owed, whether

knowingly or through error, must restore it to the person from

whom he received it.”). And the Fifth Circuit, invoking Revision

Comment (b), has instructed that “[t]he right to reimbursement

conferred by [A]rticle 2299 exists regardless of whether such

payment was made knowingly or through error.” Am. Intern. Specialty

Lines Ins. Co. v. Canal Indem. Co., 352 F.3d 254, 273 (5th Cir.

2003). So too here.

Because Mirus’ right to reimbursement of the $78,882 in

extension fees that it paid Bellwether under the unenforceable

stipulated damages provision “exists regardless of whether such

payment was made knowingly or through error,” the voluntary payment

doctrine poses no impediment to Mirus’ claim for payment of a thing

not owed under Civil Code Article 2299.9 Am. Intern. Specialty

Lines, 352 F.3d at 273.

Accordingly, because the stipulated damages provision of the

extension-fee agreement is unenforceable, the $78,882 in extension

fees that Mirus paid were not “owed” to Bellwether, and Bellwether

is “bound to restore” them to Mirus. LA. CIV. CODE art. 2299. The

Court therefore grants Mirus’ motion for partial summary judgment

on its claim for payment of a thing not owed.

9 The Fifth Circuit’s nonprecedential opinion in Sanders v.

Washington Mut. Home Loans, Inc. ex rel Washington Mut. Bank, 248

F. App’x 513 (5th Cir. 2007) (per curiam), is not to the contrary.

The plaintiffs there——unlike the borrowers here——asserted no

causes of action under Civil Code Article 2299. See id. at 517.

VI.

Accordingly, for the foregoing reasons, IT IS ORDERED: that

Bellwether’s motion for summary judgment is DENIED, Jaye and

Morgan’s motion for partial summary judgment is GRANTED, and Mirus’

motion for partial summary judgment is GRANTED.

New Orleans, Louisiana, June 10, 2020

MARTIN . Cy BRLDMAN

UNITED STATES DISTRICT JUDGE

36