UNITED STATES BANKRUPTCY COURT

WESTERN DISTRICT OF LOUISIANA

ALEXANDRIA DIVISION

IN RE: * CASE NO. 08-81329

NR GROUP, LLC * SECTION A

DEBTOR * CHAPTER 7

CITY OF ALEXANDRIA * ADVERSARY PROCEEDING

Plaintiff
* NO. 09-08045
VERSUS
*
CAPITAL ONE, N.A. and
TED BRETT BRUNSON, *
CHAPTER 7 TRUSTEE
Defendants *

CAPITAL ONE’S MEMORANDUM IN SUPPORT OF ITS MOTION TO COMPEL

DISCOVERY RESPONSES

Capital One, N.A. (“Capital One”), through undersigned counsel, respectfully submits

this Memorandum in Support of its Motion to Compel Discovery Responses by the City of

Alexandria (hereinafter “City”) and represents as follows:

Background

The written discovery requests at issue were propounded by Capital One to the City of

Alexandria, and the City of Alexandria responded to them in November 2010 before the status

conference before the Court on December 7, 2010. As the Court knows, the Court has ordered

the parties to limit discovery to the issue of lease termination. The motion to compel should

nevertheless be addressed by the Court because most of the documents and information sought in

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the written discovery will be used by Capital One in support of its affirmative defenses, which

should preclude the termination of the lease as explained hereinbelow.

The factual background of this matter is set forth in the pleadings and documents filed

with this Court and will be summarized herein. In 2003, the NR Group LLC (the “Debtor”)

sought to purchase and operate a hotel in Alexandria, Louisiana – the Alexandria Fulton Hotel.

On December 15, 2003, the Debtor acquired by deed, assignment and assumption all rights, title

and interest of a prior lessee, under that certain lease (“Lease”), as amended with City, as lessor

for operation of the Alexandria Fulton Hotel. On that same date, the Debtor as lessee granted

Capital One a Multiple Indebtedness Mortgage dated December 15, 2003 (“2003 Mortgage”)

over, among other things, the Debtor’s leasehold interest under the Lease.

After encountering financial difficulty, the Debtor filed a voluntary Chapter 11 petition in

November of 2008. As set forth in the Answer and Counterclaim of Capital One and the

Affidavit of Mr. Gary Tillman (“Tillman Affidavit”),1 shortly after the Debtor’s Chapter 11

filing in December 2008, the City and Capital One engaged in discussions to determine the best

course of action to protect the respective interests of the City, Capital One, and the Chapter 11

estate. The affidavit of Mr. Tillman is attached hereto as Exhibit A. Initially, Capital One and

the City agreed that it was in the best interest of the parties including the estate to request that

this Court approve an auction of the Debtor’s interests in the Lease and related assets within a

reasonable period of time. See Exhibit A. As the City could not legally lend money to the

Chapter 11 estate, Capital One agreed to do so. The Court approved DIP financing by Capital

One to the Chapter 11 estate in December 2008. The City and Capital One agreed that the

closest possible auction date that could be proposed to this Court would be February 2009. See

Exhibit A.
1
Mr. Tillman was the attorney for Capital One during the pendency of the Debtor’s Chapter 11 case.

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 On several occasions in January 2009, the City requested Capital One’s cooperation in

postponing the proposed auction of the Debtor’s interest in the Lease and related assets from

February 2009 to September 2009 due to two significant conventions being held in Alexandria

during that time frame. At that time, Capital One had advanced only a small portion of the

$300,000.00 DIP financing that had been approved by the Court. The City represented to Capital

One that the City would assist Capital One and the Chapter 11 estate in conducting an auction of

the Debtor’s interest in the Lease and related assets and would execute an amended lease with

the new lessee which would, according to the City, be beneficial to the Chapter 11 estate and

would at all times preserve the position and security rights of Capital One subject at all times to

the approval of this Court. The City specifically represented to Capital One that the City would

take no action to adversely affect Capital One’s security rights in order to accomplish these goals

that the City contended were in the best interests of Capital One, the City, and the Chapter 11

estate. Capital One accepted the City’s representations. See Exhibit A.

Thereafter, pursuant to the City’s request, Capital One consented to suspend

consideration of the proposed February 2009 auction in reliance on the City’s promise that it

would take no action to adversely affect Capital One’s security rights or the Chapter 11 estate

until an auction could be conducted in the Chapter 11 case. See Exhibit A.

Capital One changed its position due to its justifiable reliance on the City’s wrongful

representations. After Capital One relied on the City’s representations and changed its position,

the City sought rejection of the Lease and increased its cure payments under the Lease to an

exorbitant amount in July and August of 2009. During the pendency of the Chapter 11 case, the

City committed to Capital One that the cure payments under the Lease would be in the range of

$350,000.00 and would be deferred until the sale after the auction. See Exhibit A. Despite the

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representations and promises of the City, the City in its adversary complaint claims that Capital

One should lose some or all of its security rights including but not limited to cancellation of its

2003 Mortgage over the Debtor’s leasehold interest under the Lease unless Capital One pays

cure claims under the Lease which according to the City total approximately $2,000,000.00. See

Exhibit A and the two letters from John W. Munsterman to Capital One, N.A. dated July 18,

2009 and August 7, 2009, attached to Exhibit A as T-1 and T-2 (City increased cure payments to

approximately $2,000,000.00).

Capital One filed its Answer and Counterclaim in the adversary proceeding which denied

the City’s basis for seeking cancellation of the 2003 Mortgage and asserted affirmative defenses

and counterclaims based on the wrongful actions set forth hereinabove. The affirmative defenses

to all relief requested by the City include, among others, estoppel, waiver, unclean hands, and

tortious conduct as a result of the wrongful actions of the City. These affirmative defenses

should preclude the City’s request to have the Lease terminated.

Thereafter, on or around February 8, 2010, the City filed a Motion for Partial Summary

Judgment Requesting Declaratory Relief and Judgment as to Counts One, Two and Three of the

Original Complaint, (the “Summary Judgment Motion”). Through the Summary Judgment

Motion, the City sought, among other things, (i) a declaratory judgment that the Lease had been

rejected and that such rejection constituted a termination of the Lease; (ii) a declaratory judgment

that the immovable improvements on the leased land were not property of the Debtor’s estate;

and (iii) the cancellation of Capital One’s 2003 Mortgage over the leasehold interest held by the

Debtor as well as over the immovable improvements on the leased land.

Capital One opposed the Summary Judgment Motion, but this Court entered a Partial

Summary Judgment (the “Judgment”) on the City’s Summary Judgment Motion. The Judgment

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is attached hereto as Exhibit B. The Judgment provided, among other things, that:

• The Bankruptcy Court’s order dated September 29, 2009 is vacated and the Bankruptcy
Court’s order dated September 18, 2009 is deemed to be in full force and effect and is no
longer stayed;

• The Clerk of Court for the Parish of Rapides, State of Louisiana (the “Clerk”) is ordered
to comply with this Court’s order dated September 18, 2009 ordering the Clerk to cancel
the Lease;

• The City is recognized as the owner of the land and the immovable improvements
thereon;

• The Lease is deemed judicially terminated as to all parties in interest, including Capital
One;

• The City possesses all right title and interest to the immovable improvements on the
leased land free and clear of Capital One’s 2003 Mortgage;

• Capital One’s 2003 Mortgage over the immovable improvements on the leased land is
hereby canceled and terminated;

• The Clerk is directed to partially cancel Capital One’s 2003 Mortgage, as it relates to
certain property, including the former leasehold and the immovable improvements.

See Exhibit B.

Capital One appealed the Judgment of this Court shortly thereafter. On appeal, the

District Court entered an order on October 27, 2010, which affirmed this Court’s ruling that the

City owned the land, the hotel, and the parking lot in fee, and Capital One’s 2003 Mortgage only

affected them to the extent of its mortgage on the leasehold. However, the District Court vacated

this Court’s ruling deeming the Lease terminated and this Court’s order to cancel the Lease from

the public records and Capital One’s 2003 Mortgage over the Debtor’s leasehold interest under

the Lease. To support its decision to vacate this Court’s ruling deeming the Lease terminated,

the District Court specifically stated that at the summary judgment hearing this Court:

. . . made no statement claiming to terminate the lease on a post-rejection basis,

and it made no findings with regards to the parties’ post-rejection behavior, either
legally about what the lease demanded of them or factually about what the parties

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 had done. . . .

[the Bankruptcy Court] also made no findings of fact with regard to the parties’
recent actions, both as to whether the City complied with the requirements, if any,
in the lease, and whether Capital One’s responses, if any, were enough to protect
its security interest in the face of those actions. Therewith, [the Bankruptcy
Court] did not address Capital One’s affirmative defenses, which it argues,
raise at least colorable defenses as to this issue. One is whether, for example,
the alleged agreements between Capital One and the City possibly constitute a
waiver of certain lease terms, an implied modification of the lease, a new or side
agreement, or an election of remedies. . . .

To the contrary, the Bankruptcy Court acknowledged multiple times that those
issues remained unresolved, declaring that, “there are a number of events we
never decided. We punted in the bankruptcy case.” It also specifically ruled that
the issues Capital One raised in its defenses about why it had allegedly failed to
exercise its rights “are not quite before me,” because it was holding the lease
terminated on the basis of its earlier rejection order.

See page 35-36 of the District Court’s Ruling attached hereto as Exhibit C (emphasis added).

After the District Court’s ruling, Capital One propounded the First Set of Requests for

Admission, Interrogatories and Requests for Production on the City. Most of the documents and

other information requested in the written discovery is needed to establish the facts to support

Capital One’s affirmative defenses so this Court would be in a position to consider and rule on

the merits of Capital One’s affirmative defenses of estoppel, waiver, unclean hands, and tortious

conduct as instructed by the District Court. On November 18, 2010, the City objected to

virtually every discovery request on the basis of Rule 408 of the Federal Rules of Evidence

because the City contends that all discussions with Capital One were in the context of settlement

and/or compromise negotiations. In addition, the City incorrectly stated in its discovery

responses that Capital One has lost its leasehold mortgage rights due to the ruling of this Court

and the ruling of the District Court on appeal.

The City objected to virtually every discovery request by stating Federal Rule of

Evidence 408 precludes the admissibility of the requested information because the discussions

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with Capital One were in the context of settlement and/or compromise negotiations. For

example, Request for Production No. 5 provides as follows:

Please produce any and all Documents Reflecting or Relating to any and all
communications Relating to any and all agreements Relating to the Lease or the
Hotel Tower during the period from January 1, 2008 through the present.

The City objected as follows:

The City of Alexandria objects to responding to this Request for Production on

the basis of Rule 408 of the Federal Rules of Evidence, as any and all meetings,
discussions or communications with Capital One and/or the Debtor were in the
context of settlement and/or compromise negotiations and evidence of same is
prohibited under Rule 408.

The City of Alexandria reserves the right to supplement and revise this response
as necessary.

As previously mentioned, this same objection is made by the City in its responses to 11

of the 13 requests for admission, 16 of the 20 interrogatories, and 14 of the 20 requests for

production propounded by Capital One to the City. See “The City of Alexandria’s Responses to

Capital One’s First Set of Requests for Admission, Interrogatories, and Requests for Production”

attached hereto as Exhibit D.

The City also states in virtually all of its responses:

…the City of Alexandria shows that the Bankruptcy Court record contains
all pleadings, written documents and decisions by the Debtor and all parties,
evidencing any decision or ultimate action taken by the City of Alexandria,
Capital One, or the Debtor regarding the lease or hotel property.

This statement by the City is not a proper response to the written discovery requests; the

discovery requests include documents and information in addition to the documents in the

Bankruptcy Court record. It is respectfully submitted that this Court should disregard or overrule

this statement by the City. See Mahoney v. Kempton, 142 F.R.D. 32, 33 (D. Mass. 1992)

(interrogatory answers must be complete in and of themselves; other documents or pleadings

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may not be incorporated into an answer by reference); Scaife v. Boenne, 191 F.R.D. 590, 594

(N.D. Ind. 2000) (“It is well established that an answer to an interrogatory must be responsive to

the question. It should be complete in itself and should not refer to the pleadings, or to

depositions or other documents …”).

After Capital One propounded its written discovery requests to the City, and the City

responded as described hereinabove, this Court conducted a status conference on December 7,

2010. This Court then entered its Order from Status Conference and Scheduling Order limiting

discovery to the issue of lease termination. Capital One’s affirmative defenses should preclude

lease termination, and most of the documents and other information sought in the written

discovery requests will support those affirmative defenses.

To invoke estoppel as a defense, Capital One must prove (1) a representation by conduct

or work, (2) justifiable reliance thereon, and (3) a change of position to one's detriment because

of the reliance. Elliott v. Catahoula Parish Police Jury, 816 So.2d 996, 997 (La. Ct. App. 3d.

Cir. 2002); Evangeline Refining Company v. Nunez, 153 So.2d 886, 889 (La. Ct. App. 3d. Cir.

1963); Department of Culture, Recreation & Tourism v. Fort Macomb Development

Corporation, 385 So.2d 1233, 1236-37 (La. Ct. App. 4th Cir. 1980). In addition to estoppel as a

legal basis to deny the relief requested by the City, this Court should also consider Capital One’s

affirmative defense of unclean hands as a result of the City’s wrongful representations. Under

the Clean Hands Doctrine, a person cannot maintain an action if, in order to establish his cause

of action, he must rely in whole or in part, on any illegal or immoral act or transaction to which

he is a part. Allvend, Inc. v. Payphone Commissions Co., Inc., 804 So.2d 27, 30 (La. Ct. App.

4th Cir. 2001). Additionally, as a result of the City’s actions, it has waived its right to enforce its

claims to the extent they are inconsistent with the City’s representations to Capital One. See

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Arceneaux v. Amstar Corporation, 921 So.2d 189, 192 (La. Ct. App. 4th Cir. 2005). The City is

also precluded from terminating the Lease as a result of the City’s intentional misrepresentations

and/or negligent misrepresentations.

Legal Analysis

Capital One’s discovery requests seek information to support Capital One’s affirmative

defenses to the City’s efforts to terminate the Lease. In response to the City’s specific objections

to the written discovery requests, Capital One responds as follows:

As an initial matter, the discussions that occurred between the City and Capital One at

issue in connection with the affirmative defenses were not settlement negotiations. However,

even if they were, Rule 408 cannot be employed to shield evidence of statements made during

settlement negotiations where such statements are being offered to prove estoppel or when a

claim is based upon some wrong that was committed in the course of settlement discussions.

See Starter Corporation v. Converse, Inc., 170 F.3d 286, 294 (2nd Cir. 1999) (need for evidence

to prove estoppel claims outweighed any potential for discouraging future negotiations between

these or other parties); Uforma/Shelby Business Forms, Inc. v. N.L.R.B., 111 F.3d 1284,

1293 (6th Cir. 1997) (Rule 408 is “inapplicable when the claim is based upon some wrong that

was committed in the course of settlement discussions”). In fact, the Seventh Circuit stated in

Bankcard America, Inc. v. Universal Bancard Systems, Inc., 203 F.3d 477, 484 (7th Cir. 2000):

It would be an abuse of Rule 408 to allow one party during compromise

negotiations to lead his opponent to believe that he will not enforce applicable
time limitations and then object when the opponent attempts to prove the waiver
of time limitations.

Id. Capital One’s discovery requests seek to establish that the City’s wrongful actions and

representations made after the Debtor’s bankruptcy filing preclude the City from obtaining

termination of the Lease and all other relief requested in its complaint. It is respectfully

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submitted that this Court should order the City to respond to each and every discovery request

and hold that Rule 408 is inapplicable.

The statements by the City that documents are in the Bankruptcy Court record are not

proper responses to the discovery requests, and it is respectfully submitted that this Court should

disregard or overrule them. See Mahoney v. Kempton, 142 F.R.D. 32, 33 (D. Mass. 1992)

(interrogatory answers must be complete in and of themselves; other documents or pleadings

may not be incorporated into an answer by reference); Scaife v. Boenne, 191 F.R.D. 590, 594

(N.D. Ind. 2000) (“It is well established that an answer to an interrogatory must be responsive to

the question. It should be complete in itself and should not refer to the pleadings, or to

depositions or other documents …”). Additionally, the discovery requests seek documents and

information that are not in the Bankruptcy Court record.

Ruling of the District Court on Appeal

The assertion by the City that Capital One has lost its 2003 Mortgage over the leasehold

interest of the Debtor under the Lease is incorrect. On appeal the District Court entered an order

on October 27, 2010, which affirmed this Court’s ruling that the City owned the land and the

immovable improvements thereon in fee and Capital One’s 2003 Mortgage was not over the

immovable improvements in fee; however, the District Court vacated this Court’s ruling

deeming the Lease terminated and this Court’s order to cancel the Lease from the public records

and Capital One’s 2003 Mortgage over the Debtor’s leasehold interest under the Lease. Request

for Admission Number 12 propounded by Capital One to the City states the following:

Please admit that the City now contends that Capital One has lost or should lose
some or all of its security rights in the Lease, Hotel Tower, or related assets.

See Request for Admission No. 12 in Exhibit D attached hereto. Contrary to the District Court’s

ruling, the City responded in part as follows:

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 Denied as written. The request is compound. As evidenced by the ruling of the
District Court on Appeal and the Bankruptcy Court, Capital One has lost its
leasehold mortgage rights.

See Response to Interrogatory No. 12 in Exhibit D attached hereto. The ruling of the District

Court expressly vacated this Court’s ruling deeming the Lease terminated and the order to cancel

Capital One’s leasehold mortgage relating to the Debtor’s interest under the Lease. Any

response by the City contrary to the District Court’s order should be rejected by this Court, and

the City should be ordered to amend its response to be consistent with the District Court’s ruling.

The Lease is still in effect, and Capital One still retains its 2003 Mortgage over the leasehold

interest of the Debtor.

Moreover, the City’s objection to Request for Admission No. 12 as being compound

should be overruled. The request expressly provides for the City to admit that it takes the

position that Capital One has lost or should lose some or all of its security rights. The City has

repeatedly stated that this is its position in this case, and its objection should be rejected by this

Court.

Objection to Interrogatory No. 14 is Meritless

The City’s objection to Interrogatory No. 14 on the basis of being overbroad and

compound is meritless. Interrogatory No. 14 provides:

Please Identify each and every person acting on behalf of the City who was involved in
any way with negotiations, communications, or discussions regarding the Lease from
2003 through the present and fully explain the role of each person in the process.

See Interrogatory No. 14 in Exhibit D attached hereto. The City objected in part as follows:

Further, the City of Alexandria objects to this Interrogatory because it is overly broad and
compound.

See Response to Interrogatory No. 14 in Exhibit D attached hereto. Interrogatory number 14

requests the identity of persons who were involved with negotiations, communications or

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discussions regarding the Lease from the time the Debtor executed the Lease with the City in

2003. It is not overbroad and compound. Rather, the City has a limited number of individuals

acting on its behalf in relation to the Lease, and the interrogatory is limited in duration from 2003

to date. Capital One is entitled to discover the identity of persons acting on behalf of the City in

connection with the Lease so it may properly conduct depositions of all material persons to

obtain information in support of its affirmative defenses to the City’s request to terminate the

Lease. It is respectfully submitted that this Court should order the City to properly respond

including identifying each person who acted on behalf of the City in connection with the Lease

since 2003.

Objection to Request for Production No. 19 Should be Overruled.

Public statements by the City are not readily available to Capital One as contended in the

City’s response to Request for Production No. 19. Moreover, the Documents in the City’s

control that Relate to these public statements are certainly not available to Capital One. It is

respectfully submitted that the response by the City to Request for Production No. 19 should be

disregarded or overruled.

Conclusion

WHEREFORE, Defendant Capital One respectfully requests that its motion to compel

be granted ordering responses to the requests for admission, answers to the interrogatories, and

the production of the documents and awarding Capital One the reasonable attorney’s fees and

expenses incurred in having to file this motion.

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 Respectfully Submitted:

LEMLE & KELLEHER, L.L.P.

By: /s/ Patrick Johnson, Jr.

PATRICK JOHNSON, JR. (#7322)
WESLEY M. PLAISANCE (#31289)
601 Poydras Street, Suite 2100
New Orleans, LA 70130
Telephone: (504) 584-9417
Telecopy: (504) 584-9142

Attorneys for Capital One, N.A.

CERTIFICATE OF SERVICE

I certify on this 21st day of December, 2010, I electronically filed Capital One’s
Memorandum in Support of its Motion to Compel Discovery Responses with the Clerk of Court
using the CM/ECF system which will serve all parties on the Court’s electronic CM/ECF system.
I further certify that a copy of Capital One’s Memorandum in Support of its Motion to Compel
Discovery Responses was served upon the following parties by depositing same in the United
States Mail, first class, postage prepaid, on this 21st day of December, 2010:

Trustee:
Ted Brett Brunson
P. O. Box 12
Natchitoches, LA 71457-0012

Attorney for Trustee:

John W. Luster
P. O. Box 488
Natchitoches, LA 71458-0488

Attorney for City of Alexandria:

Stephen D. Wheelis
Wheelis & Rozanski
2312 South MacArthur Drive
P. O. Box 13199
Alexandria, LA 71315-3199

/s/ Patrick Johnson, Jr.

Patrick Johnson, Jr.

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