Power & Telephone Supply Co. v. Suntrust Banks, Inc.
Docket: No. 05-5966
Court: Court of Appeals for the Sixth Circuit; May 17, 2006; Federal Appellate Court
Plaintiff Power Telephone Supply Company, Inc. (P.T.) initiated a lawsuit against SunTrust defendants, seeking $6 million for costs incurred from two derivative interest rate swap agreements, which P.T. utilized to hedge against rising variable interest rates on its syndicated lines of credit. P.T.’s third amended complaint included claims of breach of contract, breach of fiduciary duty, agency, 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, while also allowing the defendants' counterclaim for indemnification of attorney fees, resulting in a judgment of $802,535.93 against P.T.
On appeal, P.T. contested the dismissal of its intentional misrepresentation claim due to failure to meet the specificity required by Fed. R. Civ. P. 9(b), and the TCPA claim was challenged as being barred by the one-year statute of limitations. Although P.T. abandoned its breach of fiduciary duty claim, it argued that the district court improperly granted summary judgment on its negligence claim. Additionally, P.T. contended that the defendants were not entitled to indemnification under the written agreements. The appeal did not challenge the reasonableness of the judgment amount. After reviewing the record, the court affirmed the district court’s decisions.
P.T., a Tennessee corporation based in Memphis, provides telecom products and utilized banking services from First Tennessee Bank, which was the lead bank on its syndicated line of credit (SLOC). SunTrust-Nashville joined the SLOC in August 1996 and later became P.T.’s primary bank in November 1998. P.T. alleged that SunTrust misrepresented the standard of care associated with their services during presentations made in September 1996 and January 1997, emphasizing the accountability and dedication of SunTrust’s staff in managing client transactions.
Risk management practices emphasized the commitment to recommend only suitable strategies for clients, avoiding inappropriate or high-risk transactions. In April 1997, First Tennessee and SunTrust suggested that P. T hedge against rising interest rates on its Standby Letter of Credit (SLOC), comparing an interest-rate cap and swap. P. T opted for a five-year 8% interest rate cap on $20 million instead of the swap and only transitioned the SLOC to SunTrust in November 1998, after its maturity. SunTrust-Nashville became P. T's primary bank in that month, leading a new $60 million SLOC, documented to exclude any fiduciary relationship with P. T.
By June 1999, as P. T's SLOC borrowing increased, SunTrust proposed an interest-rate swap to manage variable interest rate risks. SunTrust Equitable Securities Corporation provided a written proposal that clarified it had no advisory role and advised P. T to independently assess the transaction's risks. P. T accepted the proposal, entering a five-year swap for $20 million with fixed payments at 6.56% against a floating LIBOR rate. The transaction was governed by an ISDA Master Agreement, which included disclosures disavowing any advisory or fiduciary relationship unless expressly stated.
The swap agreement acknowledged inherent risks, including market risk from interest rate fluctuations and liquidity risk related to termination options. Initially, the 1999 Swap was beneficial for P. T as interest rates rose, resulting in a positive unwind value reported at various intervals between December 1999 and May 2000. Due to increased credit demand in spring 2000 and concerns over rising interest rates, P. T evaluated various hedging options and ultimately chose to retain the 1999 Swap while entering a second swap for $20 million at a fixed rate of 7.37% against LIBOR.
A second interest rate swap was executed on July 3, 2000, under the terms of a confirmation that referenced a prior master agreement and acknowledged market risks, while disavowing any advisory relationship unless stated in writing. In August 2000, SunTrust and STES committed to providing P. T with a $75 million Standby Letter of Credit (SLOC), contingent upon P. T hedging at least 50% of the SLOC and cross-collateralizing it with the swaps. P. T claims the swap was made at the defendants' suggestion to meet this hedging requirement. The SLOC was finalized in October 2000, and interest rates, particularly LIBOR, began declining significantly in November 2000. P. T's borrowing under the SLOC decreased from approximately $60 million in June 2000 to $0 by February 2002, while obligations under the swap agreements increased. Market estimates indicated that unwinding the unfavorable swaps would cost P. T approximately $1.5 million in March 2001, escalating to $8.5 million by November 2001. After transferring the SLOC to another bank in October 2002, P. T incurred a $3,475,500 termination fee for the swaps. P. T filed a complaint in state court on March 13, 2003, later moved to federal court, and subsequently amended the complaint multiple times seeking around $6 million due to the swaps, alleging deception by defendants regarding their role as financial advisors. The district court dismissed several claims but allowed breach of fiduciary duty, agency, and negligence claims to proceed, pending evidence of a fiduciary relationship. P. T sought reconsideration on dismissed claims, while defendants pursued summary judgment on remaining claims. On May 10, 2005, the court denied P. T’s reconsideration motion and granted summary judgment for defendants. P. T's motion to dismiss defendants' counterclaim was denied, resulting in judgment for defendants and subsequent appeal. The district court's dismissal of claims was reviewed de novo, with the requirement to interpret the complaint favorably to the plaintiff while disregarding legal conclusions or unfounded inferences.
The Tennessee Consumer Protection Act (TCPA) allows individuals to sue for monetary losses due to another's unfair or deceptive acts, with a one-year statute of limitations starting from the discovery of the unlawful act. A claim under the TCPA accrues when the injury is discovered or should have been discovered through reasonable diligence. In this case, P. T contended that the district court misapplied the discovery rule by not acknowledging that knowledge of injury also requires awareness of its wrongful cause. However, the court concluded that P. T's claims were time-barred as they knew or should have known about their financial injury from the allegedly deceptive practices before March 12, 2002. P. T's allegations indicated they were misled by the "SunTrust Entities" regarding their roles as financial advisors and the suitability of swap transactions, which they began paying for in July 2000, while experiencing financial difficulties as interest rates fell.
Additionally, intentional misrepresentation is treated as fraud under Tennessee law, requiring particularity in pleading, including details of the misrepresentation, intent, scheme, and resulting injury. The elements of fraud include intentional misrepresentation of material fact, knowledge or recklessness regarding its truth, reasonable reliance by the plaintiff, and relation to existing facts or a promise of future action without intent to fulfill it. P. T claimed that defendants misrepresented their advisory role and the viability of the swaps.
The district court dismissed P. T's claim due to insufficient specificity in alleging the circumstances of misrepresentations, fraudulent intent, or an overarching fraudulent scheme. P. T subsequently focused on misrepresentations made during the 1996 and 1997 sales presentations, asserting that defendants misrepresented their intent to act as P. T's financial advisor. However, such statements of future intention or opinion are typically not actionable, as they do not represent material past or present facts. The court noted that the representations were generalized sales pitches rather than specific factual claims. Furthermore, P. T failed to allege that defendants made promises without the intention to fulfill them, a necessary element for a claim of fraudulent inducement under Tennessee law. The representations were aimed at persuading P. T to engage with SunTrust generally, not to rely on their advice for specific swap agreements entered into two years later.
Regarding summary judgment, the court reviews such decisions de novo, determining if any material facts are in dispute and whether the moving party is entitled to judgment as a matter of law. In negligence claims, a plaintiff must establish a duty of care, a breach of that duty, injury or loss, causation in fact, and proximate causation. Both motions to dismiss and for summary judgment highlighted the question of duty, which is a legal determination. Tennessee law typically does not impose fiduciary duties on banks to their customers without special circumstances, reflecting the nature of arm’s-length transactions in bank-depositor relationships.
The district court determined that no fiduciary or advisory relationship existed regarding the swap transactions, leading to summary judgment for the defendants on the agency and breach of fiduciary duty claims, a decision not appealed by P. T. However, P. T contested the summary judgment on its common law negligence claim, which was based solely on the alleged fiduciary duty to advise on the swaps' appropriateness. P. T argued this should be framed as "professional negligence," asserting that the defendants, identified as "market professionals" and "financial advisors," had a legal duty to exercise reasonable care, as established by expert testimony on banking standards. Citing Wood v. Clapp, P. T maintained that professionals are responsible for damages resulting from insufficient knowledge or skill. Nonetheless, the court concluded that this claim did not differ from the breach of fiduciary duty claim and that P. T failed to prove a distinct legal duty owed by the defendants regarding the swaps. Therefore, the court upheld the summary judgment on the professional negligence claim.
On indemnification, Tennessee follows the American Rule, requiring parties to bear their own attorney fees unless specified otherwise by statute or agreement. The district court found that defendants were entitled to indemnification for reasonable attorney fees and costs under certain indemnity provisions, though not all. P. T contested both the obligation under these clauses and the collective recovery by defendants. The court affirmed the district court's findings concerning the specific indemnity provisions cited.
The 2000 Loan Commitment Letter included an indemnification provision requiring P. T to indemnify SunTrust Bank and related parties (collectively referred to as "Indemnified Persons") for any losses, claims, damages, or expenses arising from the Commitment Letter, the Fee Letter, or related financing activities, including legal proceedings. P. T alleged that the "SunTrust Entities" improperly mandated that P. T hedge 50% of the 2000 SLOC and cross-collateralize the loan, claiming this constituted unlawful tying in Count VIII. The court determined that the attorney fees and costs from the litigation were tied to the Commitment Letter. P. T argued that the indemnity provision was superseded by the 2000 Restated Credit Agreement, citing its integration clause, which declared the Restated Credit Agreement and related documents as the entire agreement, overriding prior agreements. However, the court found that the language in the integration clause did not restrict "credit documents" to those executed concurrently with the Credit Agreement, as other related documents were not executed at the same time. P. T also contended that the indemnity clause in the Commitment Letter was inconsistent with a narrower clause in the Restated Credit Agreement, suggesting it was therefore superseded.
The action is connected to the terms of the Commitment Letter, which led to an allegedly improper swap transaction and unlawful bank tying. The indemnity clause in Paragraph F.1 specifies that it applies regardless of whether definitive financing documentation is executed and remains effective even after the Commitment Letter's termination. The 1998 and 2000 Restated Credit Agreements include a similar indemnification provision in section 10.4(iii), requiring the Borrower, P.T., to indemnify agents and lenders against costs and liabilities related to the use of loan proceeds or the Borrower's performance under various Credit Documents, except in cases of gross negligence or willful misconduct by the indemnified parties. The district court ruled that the indemnity clause covered attorney fees and costs due to the litigation being related to P.T.'s involvement with the Swap Agreements and other Credit Documents. While the court found the first swap agreement too distant in time to be considered connected to the November 1998 Restated Credit Agreement, it determined that the second swap agreement was executed in connection with the 2000 Credit Agreement, allowing recovery of attorney fees and costs under its indemnification clause. Additionally, the district court recognized entitlement to indemnification under section 14(Z) of the 1998 Restated Security Agreement, which obligates the Borrower to cover reasonable expenses incurred by the Agent and Lenders related to the agreement's management, including legal fees incurred during enforcement or rights protection efforts. Section 14(j) was not found to support indemnification in this case.
The district court ruled that defendants are entitled to indemnification for "reasonable out-of-pocket costs and expenses" related to the interpretation of the Agreement, specifically clause 14(j), which clarifies that no partnership or fiduciary relationship is created between the Agent and Borrower or Lenders. While defendants referred to clause 14(Z) to argue against the existence of a fiduciary relationship, the plaintiff, P. T, did not claim any breach of fiduciary duty regarding the 1998 Security Agreement or the 1998 SLOC. Consequently, any attorney fees related to interpreting clause 14(Z) were deemed minimal, and thus the provision could not justify full indemnification of all costs incurred by defendants in this litigation.
The court addressed P. T’s argument that only the parties to the indemnity agreements should receive indemnification. The district court determined that the defendants were collectively entitled to a single recovery of reasonable attorney fees and costs due to their interconnected defense and the relevant indemnification provisions. Although the Third Amended Complaint initially identified six "SunTrust Entities," only three remained: SunTrust Banks, Inc., SunTrust Bank, and SunTrust Capital Markets, Inc., all of which had indemnity agreements with P. T. Under the 2000 Loan Commitment Letter and the 2000 Restated Credit Agreement, P. T agreed to indemnify SunTrust entities for expenses related to those agreements. The court concluded that these indemnity agreements adequately covered the attorney fees and costs incurred during the litigation, especially since P. T's claims were presented against the SunTrust entities as a collective under a joint enterprise theory, requiring joint defense. The ruling was affirmed. Additionally, an "interest-rate swap" was defined as a derivative contract where two parties exchange interest payments on hypothetical loans at specified intervals, one paying a fixed rate and the other a variable rate.
The notational amount in the financial transactions remains unchanged, with only the differences between fixed and variable interest payments being exchanged. The financial outcome for each party hinges on the relative values of these rates at specified times. The SunTrust defendants include SunTrust Banks, Inc., SunTrust Bank (including its consolidated entities), and SunTrust Capital Markets (previously known as STES). P. T criticizes the district court's reliance on an internal email from October 2000, which indicated P. T's awareness of potential issues with the 1999 and 2000 Swap Agreements. While the email did not explicitly question the swaps' appropriateness, it expressed concerns about the 2000 SLOC terms and suggested a belief that SunTrust may not have acted in P. T's best interest. The email communicated to P. T’s CFO and CEO conveyed feelings of being taken advantage of, which is relevant to the case.
Defendants claim 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 supports its allegations of breach of standard care with expert opinions asserting that defendants failed to adhere to industry standards in assessing the suitability of derivative transactions for P. T, including issues of over-hedging and lack of risk understanding by P. T's management. P. T cites regulatory expectations that banks assess the appropriateness of derivative transactions, as outlined in Banking Circular 277, although the regulations focus on the bank's operational soundness rather than customer protection. The summary does not address additional indemnification provisions claimed by the defendants.
