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A federal appeals court has upheld a judgment for Mermart LLC in a suit brought by investors in its $47.3 million redevelopment project alleging breach of contract for failing to disclose payment deductions in connection with lead paint contamination of the site.
The case involved a $47.3 million redevelopment of the historic Merchandise Mart Building in downtown St. Louis that the developer planned to convert the property into a mixed-use apartment and retail building. As part of the renovation, Mermart retained a LBP abatement contractor. The abatement was completed in 2003 and the Missouri Department of Natural Resources issued a certificate of occupancy.
In connection with a refinancing, Mermart hired another consultant to perform a phase 1 who identified continued presence of lead paint and suggested that further remediation was necessary. Mermart began to remediate the LBP as units became available but characterized the cost as an “upgrade” expense, rather than a capital expense. This allowed Mermart to deduct the removal costs from the funds available to the Subordinate Net Loan Operating income, used to make the interest payments to its subordinate bondholders.
Several subordinate bondholder investors sued Mermart for breach of contract, unjust enrichment, negligence and fraudulent misrepresentations that the project had no environmental hazards. The investors demanded equitable accounting for failure to pay interest under the financing documents. Mermart filed a motion seeking dismissal because the subordinate bondholders failed to obtain the written consent of the senior mortgagee prior to bringing suit.
The court agreed and also held that the claims for fraudulent misrepresentation did not comply with pleading requirements and the negligence, unjust enrichment, and fraudulent misrepresentation claims were precluded by the economic loss doctrine.
Larry
