POWER & TELEPHONE SUPPLY COMPANY, INC. v. SUNTRUST BANKS, INC. SUNTRUST BANK SUNTRUST BANKATLANTA SUNTRUST BANKNASHVILLE, N.A. SUNTRUST EQUITABLE SECURITIES CORPORATION SUNTRUST CAPITAL MARKETS, INC.
Docket: 05-5966
Court: Court of Appeals for the Sixth Circuit; May 17, 2006; Federal Appellate Court
Power Telephone Supply Company, Inc. (P.T.) filed a lawsuit against various SunTrust entities seeking $6 million in damages related to two derivative interest rate swap agreements intended to hedge against rising variable interest rates on its credit lines. P.T.'s third amended complaint included claims for breach of contract, breach of fiduciary duty, negligence, common law suitability, deceptive trade practices under the Tennessee Consumer Protection Act (TCPA), and illegal tying under the Bank Holding Company Act. The district court dismissed some claims and granted summary judgment to the defendants on the remaining claims. SunTrust counterclaimed for attorney fees, which were also awarded by the district court, totaling $802,535.93.
On appeal, P.T. contested the dismissal of its intentional misrepresentation claim due to failure to meet the specificity requirements of Fed. R. Civ. P. 9(b) and argued that its TCPA claim was wrongly dismissed as time-barred by a one-year statute of limitations. Although P.T. abandoned its fiduciary duty claim, it contended that the district court erred in ruling against its negligence claim and in granting indemnification to the defendants based on the agreements. P.T. did not dispute the judgment's amount. After reviewing the case and arguments, the appellate court affirmed the district court's decisions.
P.T., a Tennessee corporation based in Memphis, distributes telecom products and had a long-standing relationship with First Tennessee Bank, which was replaced by SunTrust as the primary bank in late 1998. P.T. alleged that SunTrust misrepresented the quality of care in its banking services during presentations made in 1996 and 1997, claiming the firm prioritized client interests and accountability in its dealings.
The professional staff has an average of 14 years' experience across various financial and corporate roles, with a senior product specialist overseeing each deal from initiation to completion, emphasizing the importance of high-quality service. STCF's lending syndication services include assisting clients in structuring marketable transactions tailored to their needs and maintaining involvement post-transaction to discuss future opportunities. The firm prioritizes appropriate risk management, pledging to recommend only suitable strategies.
In April 1997, following a presentation, First Tennessee and SunTrust advised P. T on hedging against rising interest rates, proposing both an interest-rate cap and swap. P. T opted for a five-year interest rate cap at 8% instead of a swap. The SLOC was not moved to SunTrust until November 1998, and swap agreements were entered into in July 1999 and July 2000.
When the existing SLOC matured in November 1998, SunTrust-Nashville became P. T's primary lender for a new $60 million SLOC, with documentation clarifying the absence of a fiduciary relationship. In June 1999, SunTrust proposed an interest-rate swap to mitigate interest rate increases on P. T's higher loan balances. P. T accepted a written proposal from SunTrust Equitable Securities Corporation (STES), which disclaimed any advisory role, advising P. T to assess risks independently.
The accepted swap involved a fixed payment rate of 6.56% from P. T against a floating LIBOR rate from SunTrust-Atlanta, governed by an ISDA Master Agreement that explicitly denied any advisory or fiduciary relationship. The swap’s confirmation noted inherent risks, including market and liquidity risks. Initially, the swap was beneficial, as rising interest rates increased its positive unwind value, reported at $90,000 in December 1999, $170,998 in April 2000, and $475,362 in May 2000, coinciding with P. T's increased credit demands and concerns over rising interest rates.
STES evaluated three potential scenarios for P. T regarding hedging its borrowing: (1) no further hedging, (2) adding a second interest-rate swap for $15 million, or (3) unwinding the 1999 Swap and entering a new swap for $35 million. P. T opted to retain the 1999 Swap and initiate a second swap for $20 million, paying a fixed rate of 7.37%, with SunTrust-Atlanta paying based on LIBOR. This swap, effective July 3, 2000, was confirmed under an existing master agreement, which included disclaimers of advisory relationships. An August 2000 Loan Commitment Letter from SunTrust and STES provided P. T with a $75 million SLOC, contingent on hedging at least 50% of it and requiring cross-collateralization with the swaps. P. T claims the second swap was entered at the defendants' suggestion due to the hedging requirement. By October 2000, interest rates (LIBOR) began to decline, leading to a decrease in P. T's SLOC borrowing from $60 million in June 2000 to zero by February 2002, while obligations under the swaps increased. Estimates to unwind the unfavorable swaps indicated liabilities of $1.5 million in March 2001, rising to $3.5 million by November 2001. P. T held the swaps until October 2002, when transferring the SLOC triggered a termination by SunTrust at a cost of $3,475,500. P. T filed a complaint on March 13, 2003, later amended multiple times, seeking $6 million due to the swaps. Claims included allegations of deception by defendants regarding their advisory role and the appropriateness of the swaps. The district court partially dismissed several claims but allowed claims for breach of fiduciary duty, agency, and negligence to proceed, pending further evidence of a fiduciary relationship. Following motions for reconsideration and summary judgment, the court ultimately granted summary judgment for the defendants on P. T's remaining claims and denied P. T's motion to dismiss defendants' counterclaim.
Judgment was entered for the defendants, leading to an appeal. The district court's dismissal of claims under Fed. R. Civ. P. 12(b)(6) is reviewed de novo, requiring the complaint to be construed favorably for the plaintiff, with factual allegations accepted as true, excluding legal conclusions or unwarranted inferences.
Under the Tennessee Consumer Protection Act (TCPA), a plaintiff can pursue a claim for monetary loss due to unfair or deceptive practices, with a statute of limitations of one year from the discovery of the unlawful act. A cause of action accrues when an injury is discovered or should have been discovered with reasonable diligence. P. T contends that the district court misapplied the discovery rule, arguing that awareness of the injury must include knowledge of its tortious nature. However, the law states that plaintiffs cannot delay filing until all details of their claims are known. The court found no error in the district court’s conclusion that P. T's claim was time-barred, as P. T was aware of its financial injury from the defendants' practices before the one-year cutoff.
P. T alleged deception by the "SunTrust Entities" regarding their role as financial advisors and the suitability of swap transactions for managing interest rate risk. P. T began payments on the first swap in July 2000, and the second swap was executed in October 2000, with significant interest rate drops occurring shortly thereafter, diminishing the need for hedging. By March 2001, the cost to unwind the swap transactions increased significantly, indicating that P. T should have recognized its financial injury by March 12, 2002.
Intentional misrepresentation, treated as fraud under Tennessee law, requires detailed allegations including the specifics of the misrepresentation, fraudulent intent, the scheme, and resulting injury. The elements of fraud involve intentional misrepresentation of a material fact, made knowingly or recklessly, reasonable reliance by the plaintiff, and the misrepresentation pertaining to a past or existing fact, or a promise of future action without intention to fulfill it.
In *Stacks v. Saunders*, the court addressed P. T's allegations that the defendants misrepresented their role as financial advisors and the suitability of swap agreements. The district court dismissed the claim due to insufficient specificity in alleging the misrepresentations, fraudulent intent, or scheme. P. T subsequently focused on representations from the 1996 and 1997 sales presentations that were attached to the complaint, asserting that these misrepresented the defendants' intention to act as financial advisors. However, the court noted that statements of future intentions or opinions are typically not actionable as they do not represent material past or present facts. The court stated that P. T did not demonstrate that the defendants lacked the present intention to fulfill their promises or that there was a fraudulent scheme to induce P. T into unsuitable swap agreements. Furthermore, the court clarified that the representations aimed to encourage P. T to engage with SunTrust generally, rather than to rely on their advice for future agreements.
Regarding summary judgment, the court explained that such a judgment is proper if there are no material factual disputes and the moving party is entitled to judgment as a matter of law. It emphasized the need to view evidence in favor of the non-moving party. In the context of negligence, the court highlighted that a plaintiff must establish a duty of care, a breach of that duty, causation, and resultant injury. The court noted that determining the existence of a legal duty is a question of law, emphasizing that Tennessee law typically does not impose fiduciary duties on banks towards their customers unless special circumstances exist.
In Glazer v. First American National Bank, the court determined that the relationship between banks and their customers typically involves arm's-length transactions, concluding that no fiduciary or advisory relationship existed concerning the swap transactions at issue. Consequently, the district court granted summary judgment to the defendants on claims of agency and breach of fiduciary duty, a decision not appealed by P. T. However, P. T contested the summary judgment on the common law negligence claim, which was based solely on the assertion of a fiduciary duty to assess the appropriateness of the swap transactions. P. T argued for a claim of "professional negligence," suggesting that a legal duty to exercise reasonable care arises by law and can be supported by expert testimony on banking standards. P. T referenced Wood v. Clapp, which articulates that professionals must possess the necessary skill and knowledge to avoid causing harm to those who employ them. P. T contended that the defendants acted as financial advisors and held themselves out as market professionals, thus assuming a duty to recommend suitable derivative products. However, the court found that this claim did not establish a legal duty separate from the previously dismissed claims of breach of fiduciary duty. As such, the district court's grant of summary judgment on the professional negligence claim was upheld. Regarding indemnification, Tennessee follows the American Rule, meaning parties generally bear their own attorney fees unless otherwise provided by statute or contract. The district court recognized that the defendants were entitled to indemnification for some, but not all, attorney fees and costs incurred, depending on the indemnity provisions cited.
P. T contends on appeal that it is not bound by the indemnity clauses and that the district court erred in determining that defendants could collectively recover. The provisions under scrutiny include section 10.4(iii) of both the 1998 and 2000 Restated Credit Agreements, section 14(l) of the 1998 Restated Security Agreement, and section F.1 of the 2000 Loan Commitment Letter. The Loan Commitment Letter, involving SunTrust Bank and STES, includes an indemnification provision that obligates P. T to indemnify and hold harmless the "Indemnified Persons" against losses related to the Commitment Letter and associated financing, effective regardless of whether definitive financing documentation is executed.
P. T's allegations include claims that the "SunTrust Entities" improperly mandated that P. T hedge 50% of the 2000 SLOC as a loan condition, which P. T argues constitutes unlawful tying. The court found that attorney fees and costs from the litigation arise from the Commitment Letter's terms. P. T claims this indemnity provision was superseded by the 2000 Restated Credit Agreement due to an integration clause stating that it constitutes the entire agreement among the parties, superseding prior agreements. P. T argues the Commitment Letter, executed two months prior, is not part of the "Credit Documents" connected with the Credit Agreement. However, the district court determined that the language does not restrict "credit documents" to contemporaneous agreements.
The phrase "in connection herewith" in the credit documents implies a broader connection that is not limited to timing. P. T argues that the indemnity clause in the Commitment Letter is superseded by the narrower clause in the Restated Credit Agreement, but the action relates directly to the Commitment Letter, which allegedly led to an improper swap transaction and unlawful bank tying. The indemnity clause in Paragraph F.1. explicitly states it remains effective regardless of whether definitive financing documentation is executed or if the Commitment Letter is terminated.
The 1998 and 2000 Restated Credit Agreements include identical language in section 10.4(iii), obligating P. T to indemnify the Agent and Lenders for all costs and liabilities related to any actual or proposed use of loan proceeds or the performance of the Credit Documents, excluding cases of gross negligence or willful misconduct by the Indemnitees. The district court determined that this indemnity clause covers attorney fees and costs since the litigation was related to P. T's performance of Credit Documents, including the Swap Agreements.
However, it is contested whether the initial swap agreement, which was not in existence during the November 1998 Restated Credit Agreement, can be considered "in connection with" it. Nevertheless, it was found that the second swap agreement was executed in connection with the 2000 Credit Agreement, making the associated attorney fees recoverable under the indemnity clause of that agreement.
Additionally, the district court ruled that defendants were entitled to indemnification under section 14(l) of the 1998 Restated Security Agreement, which mandates the Borrower to cover reasonable out-of-pocket costs related to the preparation and enforcement of the Agreement, including legal fees. However, indemnification under section 14(j) was not granted.
The district court determined that defendants were entitled to indemnification for reasonable out-of-pocket costs incurred in interpreting the agreement, specifically section 14(j). However, it clarified that the indemnification could not be based solely on section 14(l), which negated any fiduciary relationship between the Agent and Borrower, since there were no claims of fiduciary breach regarding the 1998 Security Agreement. The court found that any attorney fees related to the interpretation of section 14(l) would be minimal and insufficient to justify comprehensive indemnification for all litigation costs.
Regarding joint indemnification, the court ruled that the defendants were collectively entitled to recover total reasonable attorney fees and costs rather than each defendant being granted separate indemnification. This conclusion was supported by the interconnected nature of the defendants, their shared defense, and the broad scope of the indemnification provisions.
The document noted that of the six "SunTrust Entities" originally named, three remained relevant: SunTrust Banks, Inc., SunTrust Bank, and SunTrust Capital Markets, Inc. P. T. had agreed to indemnify SunTrust Bank and STES for expenses linked to the 2000 Loan Commitment Letter and related litigation costs from the 2000 Restated Credit Agreement. The court affirmed that these indemnity agreements covered the reasonable attorney fees and costs incurred throughout the litigation, especially as P. T. asserted claims collectively against the "SunTrust Entities" under a joint enterprise theory, which necessitated joint legal representation. The judgment was ultimately upheld.
SunTrust defendants include SunTrust Banks, Inc., SunTrust Bank, and SunTrust Capital Markets (formerly SunTrust Equitable Securities Corporation). P. T criticizes the district court for using an internal email to suggest that P. T began investigating the 1999 and 2000 Swap Agreements in October 2000. While the email did not explicitly question the swaps' appropriateness, it indicated concerns about the 2000 SLOC terms and implied that P. T felt SunTrust might not be acting in its best interest. This email, addressed to P. T's CFO and CEO, expressed a sentiment of being taken advantage of, which was seen as inconsistent with P. T's long-term goals.
Defendants contend that the parol evidence rule prevents consideration of statements made during sales presentations; however, this rule does not apply to fraudulent misrepresentation claims. P. T utilized expert witness opinions to demonstrate that the defendants breached the standard of care by not adhering to industry practices for evaluating derivative transactions. Experts noted failures in assessing the swaps' suitability for P. T's business, recognizing over-hedging of interest-rate risks, and ensuring that P. T's management understood the risks involved. Additionally, P. T argues that banking regulators expect banks to evaluate the appropriateness of such transactions, as outlined in Banking Circular 277, although this assessment is aimed at the banks' operational soundness rather than customer protection.
The document does not address other indemnification provisions claimed by the defendants, specifically referencing sections from the 1998 and 2000 Restated Credit Agreements, the ISDA Master Agreement, and the Revolving Credit Note.
