Sweetwater Investors, LLC v. Sweetwater Apartments Loan, LLC et al
MEMORANDUM OPINION AND ORDER that Defendants' motion for summary judgment 76 is GRANTED in part and DENIED in part as further set out. Signed by Chief Judge William Keith Watkins on 8/30/2011. (Attachments: # 1 Civil Appeals Checklist)(jg, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
SWEETWATER INVESTORS, LLC,
LOAN LLC, et al.,
) CASE NO. 1:10-CV-223-WKW
MEMORANDUM OPINION AND ORDER
Plaintiff Sweetwater Investors, LLC, brings this diversity action against
Defendants Sweetwater Apartments Loan, LLC, SIMA Corp. and James T. Knell,
alleging breach of contract and fraud in connection with its purchase of a loan.
Before the court is Defendants’ motion for summary judgment (Doc. # 76), which has
been fully briefed. (Docs. # 77, 93, 97.) After careful consideration of the arguments
of counsel, the relevant law, and the record as a whole, the court finds that the motion
is due to be granted in part and denied in part.
I. JURISDICTION AND VENUE
Subject matter jurisdiction is exercised pursuant to 28 U.S.C. § 1332(a).
Personal jurisdiction and venue are not contested, and there are adequate allegations
II. STANDARD OF REVIEW
On summary judgment, the evidence and the inferences from that evidence
must be viewed in the light most favorable to the nonmovant. See Jean–Baptiste v.
Gutierrez, 627 F.3d 816, 820 (11th Cir. 2010). Hence, “‘facts, as accepted at the
summary judgment stage of the proceedings, may not be the actual facts of the case.’”
Lee v. Ferraro, 284 F.3d 1188, 1190 (11th Cir. 2002) (quoting Priester v. City of
Riviera Beach, 208 F.3d 919, 925 n.3 (11th Cir. 2000)).
“Summary judgment is appropriate if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show there
is no genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law.” Greenberg v. BellSouth Telecomms., Inc., 498 F.3d
1258, 1263 (11th Cir. 2007) (per curiam) (citation and internal quotation marks
omitted); see Fed. R. Civ. P. 56(a) (“The court shall grant summary judgment if the
movant shows that there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.”).
The party moving for summary judgment “always bears the initial
responsibility of informing the district court of the basis for its motion, and
identifying those portions of [the record, including pleadings, discovery materials and
affidavits], which it believes demonstrate the absence of a genuine issue of material
fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The movant may meet this
burden by presenting evidence indicating there is no dispute of material fact or by
showing that the nonmoving party has failed to present evidence in support of some
element of its case on which it bears the ultimate burden of proof. Id. at 322–24.
If the movant meets its evidentiary burden, the burden shifts to the nonmoving
party to establish, with evidence beyond the pleadings, that a genuine issue material
to each of its claims for relief exists. Shiver v. Chertoff, 549 F.3d 1342, 1343 (11th
Cir. 2008); Fed. R. Civ. P. 56(c). When the nonmovant fails to set forth specific facts
supported by appropriate evidence sufficient to establish the existence of an element
essential to its case and on which the nonmovant will bear the burden of proof at trial,
summary judgment is due to be granted in favor of the moving party. Celotex Corp.,
477 U.S. at 323 (“[F]ailure of proof concerning an essential element of the
nonmoving party’s case necessarily renders all other facts immaterial.”).
Today, Sweetwater Apartments is advertised as a luxury apartment
development in beautiful Gulf Shores, Alabama, complete with an elegant clubhouse
and a pool, a tiki hut for outdoor entertaining, tree-lined streets, lighted sidewalks,
and three beautiful ponds with lighted fountains.1 While the Gulf Coast can almost
Sweetwater Apartments, http://www.sweetwaterapts.net (Last visited August 30, 2011).
be seen from there, the visionaries behind the development, Sarah L. Edington and
William E. Ware, faded out several years ago, when their limited liability company
(Sweetwater Apartments GSA, LLC) defaulted on the $13.5 million loan obtained to
finance the development and they became personally liable on the loan for millions
of “clams.” A number of investors, who also signed limited guaranties for payment
in favor of the lending bank (now Regions Bank), also are now personally liable for
repayment of the loan in amounts ranging from $1 million to $7.2 million. In January
2010, twelve of these investors formed their own Alabama limited liability company,
Sweetwater Investors, LLC, which is the Plaintiff in this case. Edington and Ware
are not members of Plaintiff.
There are three Defendants. Defendants Sweetwater Apartments Loan, LLC
(“SW Loan”) and SIMA Corp. (“SIMA”) are affiliated California entities. The
individual Defendant is James Knell (“Knell”). He wholly owns SIMA, and is an
agent of both SIMA and SW Loan.
The convergence of the business interests of the Alabama Plaintiff and the
California Defendants began in October 2009, when SIMA bought the loan and the
limited guaranties of payment from Regions Bank for $6.25 million. (See SIMARegions Agreement (Doc. H to Doc. # 79); Pretrial Order ¶ 5 (Stipulations) (Doc.
# 116).) Plaintiff’s members were in possession of and operating the property. When
the sale was completed, the loan and guaranties were assigned to SIMA’s affiliated
entity, SW Loan. (SW Loan Assignment (Ex. J to Doc. # 79); Pretrial Order § 5
(Stipulations).) When representatives of the soon-to-be-formed Plaintiff learned of
the sale and assignment of the loan, they set up a meeting with Mr. Knell in an effort
to manage the impending foreclosure and their liabilities on the guarantees. (Pretrial
Order § 5 (Stipulations).) At that meeting held on November 18, 2009, Mr. Knell
informed them in no uncertain terms that SW Loan would execute on the limited
guarantees of payment, unless an agreement was reached between SW Loan and the
guarantors. (John Buck Dep. 45-46 (Ex. K to Doc. # 79); Knell Dep. 90-93 (Ex. A
to Doc. # 93).) An agreement was reached, and that agreement is the Contract
underlying this action.
SW Loan foreclosed the loan and bought Sweetwater Apartments at the
foreclosure sale with a credit bid of $9.5 million. On January 11, 2010, seven days
later, SW Loan and Plaintiff executed a contract for Plaintiff’s purchase of the loan.2
(Contract (Ex. Q to Doc. # 79); Pretrial Order § 5 (Stipulations).) That purchase
included the transfer and assignment of nineteen documents identified in Schedule
1 of the Contract. Those documents, which comprised the “Loan” and the “Loan
In essence, SW Loan had the right to possess the property and to collect the guaranties
File” as defined in the Contract, included the limited guaranties of payment executed
by Plaintiff’s members, as well as the Edington/Ware limited guaranty of payment
(“Schedule 1 Documents”). (See Contract, at 1 (Recitals) & Art. III, § 3.01
(Definitions).) Plaintiff agreed to pay SW Loan $1 million, and amounts equaling
security deposits and January rents, on or before January 12, 2010. SW Loan agreed
that, “[u]pon receipt” of the $1 million payment, security deposits, and January rents,
it would, among other things, “sell, assign, transfer and convey the Loan” to Plaintiff.
(Contract ¶ (e).) SW Loan further agreed that it would “cause to be delivered to
[Plaintiff] all documents listed in Schedule ‘1.’” (Contract ¶ (e).) The Schedule 1
Documents were paramount to Plaintiff because, without lawful ownership of them,
Plaintiff would be unable to collect on the limited guaranty from Edington or Ware,
who were non-participants in the deal with SIMA, SW Loan and Mr. Knell. (See
Kathleen Ferrell Dep. 99 (explaining that Plaintiff’s “whole purpose” was to purchase
the limited guarantees of payment “so [its members] could turn around and go back
after” Mr. Ware and Ms. Edington and their company, and also obtain Plaintiff’s
members’ “personal release . . . from Regions [Bank]” (Ex. B to Doc. # 79).) When
it was all said and done, SW Loan had purchased the real property in foreclosure and
had possession of it, and Plaintiff had bought its peace with SW Loan by the payment
of the $1 million.
Plaintiff paid the $1 million and $33,737.90 for security deposits and January
rents by the Contract deadline. (Knell Dep. 123.) Further calculations revealed that
the $33,773.90 payment omitted approximately $3,000 for prepaid January rents, but
that shortfall was rectified on January 27, 2010. (John Buck Aff. 1 (Ex C to Doc.
# 93).) However, the Schedule 1 Documents were not forthcoming “upon receipt”
of Plaintiff’s payment.
In March 2010, having yet to receive the Schedule 1 Documents, Plaintiff filed
this lawsuit against Defendants, alleging breach of contract, fraud and fraudulent
suppression. Plaintiff still was waiting for the Schedule 1 Documents when it
amended the Complaint in May 2010; hence, the allegation remained that the
Contract had been breached by SW Loan’s refusal to the transfer the Schedule 1
Documents.3 (Compl. ¶ 23 (Doc. # 1); Am. Compl. ¶ 23 (Doc. # 18).) The Amended
Complaint also includes a claim for fraud and fraudulent suppression against
Defendants collectively. Plaintiff contends that, in pre-contractual negotiations, Mr.
Knell falsely represented that Defendants “had full control of and right to transfer all
documents referenced in the [Contract].” (Pl. Answers to Defs. Interrog. ¶ 3 (Ex. W
Although Plaintiff brought the breach-of-contract claim against all Defendants, SIMA
and Mr. Knell have been dismissed on this count. Hence, SW Loan is the only Defendant as to
the breach-of-contract claim. (Mem. Op. & Order (Doc. # 39).) SIMA and Mr. Knell remain
Defendants on the fraud and fraudulent suppression claims.
to Doc. # 79); see also Knell Dep. 150 (testifying that he “was always under the
assumption” that he “had to right to transfer the documents . . . or the personal
guaranties” and that he “conveyed that assumption” to Plaintiff’s representatives);
Am. Compl. ¶ 20.) As grounds for its fraud claim, Plaintiff alleges that Defendants
“either knew that the representations were false or without knowledge of the true
facts, recklessly misrepresented them to Plaintiff or made the representations by
mistake but with the intention that Plaintiff should rely upon them.” (Am. Compl.
¶ 24.) Additionally as grounds for its fraudulent suppression claim, Plaintiff alleges
that “Defendants had a duty to disclose [to Plaintiff] the fact that Defendants did not
have possession or ownership of the [Schedule 1 Documents].” (Am. Compl. ¶ 32.)
Compensatory and punitive damages are sought on the fraud and fraudulent
It is undisputed that in November 2010, approximately ten months after
Plaintiff’s payment to SW Loan of the $1 million and eight months after this lawsuit
was filed, SW Loan assigned and delivered the Schedule 1 Documents to Plaintiff.
(Pretrial Order § 5 (Stipulations).) As to SW Loan’s reason for the ten-month delay,
it asserts that, after the Contract was executed, SW Loan discovered the anti-
assignment clause in the Regions-SIMA Agreement.4 The anti-assignment clause
provides, in part, that “[t]his Agreement may not be assigned by either party without
the express written consent of the other party[,]” and “[a]ny purported sale, transfer
or assignment of the Asset without compliance with [this] Section . . . shall be null
and void and of no effect.” (Regions-SIMA Agreement ¶ 25; see also SW Loan
Assignment ¶ 4 (“Buyer shall not assign, sell or otherwise transfer the Asset without
the prior written consent of Seller . . . .”).) SW Loan initially questioned whether that
clause (that it had agreed to) precluded the transfer of the Schedule 1 Documents
from SW Loan to Plaintiff, absent Regions Bank’s consent.5 (Jeremy Retherford Dep.
108-09, 114, 122 (Ex. P to Doc. # 79); Email from Jeremy Retherford, Esq., to Ed
Price, Esq., dated Jan. 11, 2010 (Ex. H to Doc. # 98).)6
This “discovery” is odd, in that Mr. Knell, an agent for both SW Loan and SIMA,
signed the Regions-SIMA Agreement in his capacity as SIMA’s chairman. (Regions-SIMA
The Regions-SIMA Agreement gave SIMA the right to transfer the purchased assets to
an “affiliated entity,” here SW Loan. (Regions-SIMA Agreement ¶ 25.) There is no challenge in
this lawsuit to the validity of this assignment. As to the assignment from SW Loan to Plaintiff,
restrictive terms for Regions Bank’s consent were offered to Plaintiff in January 2010, to include
a provision that Plaintiff release Regions Bank from any liability on the loan, but those terms
were not agreeable to Plaintiff. (Email between SW Loan and Regions (Ex. S to Doc. # 79);
Jeremy Retherford Dep. 108, 121 (Ex. P to Doc. # 79); see generally Defs. Summ. J. Br. 7).)
Jeremy Retherford, Esq., represented SW Loan in purchase of Sweetwater Apartments
out of foreclosure. (Retherford Dep. 15.)
In their summary judgment briefs, the parties vigorously dispute whether the
anti-assignment clause is valid in the first instance. (Compare Defs. Summ. J. Br.
13-18 (Doc. # 77), with Pl. Summ. J. Resp. 15-20 (Doc. # 93).) Defendants now say
that the anti-assignment clause is not enforceable. This is because, according to
Defendants, an anti-assignment clause becomes inoperative and cannot prevent an
assignment when the contract containing the anti-assignment clause has been fully
performed. Defendants contend that the Regions-SIMA Agreement was fully
performed prior to the execution of the Contract between Plaintiff and SW Loan.
(Defs. Summ. J. Br. 12-14.) However, for reasons unexplained in the record, this
conclusion apparently was not reached until November 2010, when SW Loan
assigned and delivered the Schedule 1 Documents to Plaintiff.
Plaintiff, on the other hand, says that the anti-assignment clause voids the
assignment, absent Regions Bank’s consent, and, thus, “clouds [Plaintiff’s] title to the
guaranties.” (Pl. Summ. J. Resp. 19; Retherford Dep. 122-23.) As urged by Plaintiff,
“tender of a clouded title is [not] sufficient performance [under a contract] when clear
title was bargained for.” (Pl. Summ. J. Resp. 19; see also Pretrial Order § 4 (Pl.
Contentions).) Regardless of which party is correct, at the very least, the evidence
establishes that the existence of the anti-assignment clause in the Regions-SIMA
Agreement is the reason for the holdup in the assignment and delivery of the
Schedule 1 Documents. (See, e.g., Retherford Dep. 121-22; see also Buck Aff.
(attesting that Defendants informed Plaintiff, after payment of the $1 million, that
“they could not deliver” the Schedule 1 Documents without violating the antiassignment clause in the Regions-SIMA Agreement).)
Plaintiff further contends that the untimely delivery of the Schedule 1
Documents is a breach of the Contract in and of itself, and that it has been damaged
in its inability to proceed earlier against the now bankrupt makers of the
Edington/Ware limited guaranty of payment. (See, e.g., Pl. Summ. J. Resp. 20-21,
29.) Against this backdrop, the court turns to the merits of the pending summary
Breach of Contract
Plaintiff proceeds on a breach-of-contract claim against SW Loan. Under
Alabama law, to state a claim for breach of contract, a plaintiff must allege “‘(1) a
valid contract binding the parties; (2) the plaintiff’s performance under the contract;
(3) the defendant’s nonperformance; and (4) resulting damages.’”
Radjabi-Mougadam, 39 So. 3d 95, 98 (Ala. 2009) (quoting Shaffer v. Regions Fin.
Corp., 29 So. 3d 872, 880 (Ala. 2009)). Element one is not disputed. Elements two,
three and four are.
Plaintiff’s Performance Under the Contract (Element Two)
Defendants argue that Plaintiff materially breached the Contract by failing to
remit the $3,000 payment for prepaid January rents by the January 12, 2010 Contract
deadline. Plaintiff contends, however, that the arguably seventeen-day late payment
of “.00386% of the [total] purchase price was a minor error in calculation that was
corrected immediately upon discovery and does not relieve . . . SW Loan of its duty
to perform under the Contract.” (Pl. Summ. J. Resp. 23.)
“[T]o prevail on a breach-of-contract claim, a plaintiff must prove . . . [its] own
performance under the contract.” Superior Wall & Paver, LLC v. Gacek, No.
2090967, 2011 WL 2279215, at *6 (Ala. Civ. App. June 10, 2011) (published) (citing
State Farm Fire & Cas. Co. v. Williams, 926 So. 2d 1008, 1013 (Ala. 2005)). This
means that “the plaintiff must prove that it substantially performed its obligations
under the contract.” Id. (citing Mac Pon Co. v. Vinsant Painting & Decorating Co.,
423 So. 2d 216, 218 (Ala. 1982)). “Substantial performance of a contract does not
contemplate exact performance of every detail but performance of all important
parts.” Id. “Whether a party has substantially performed a promise under a contract
is a question of fact to be determined from the circumstances of each case.” Cobbs
v. Fred Burgos Constr. Co., 477 So. 2d 335, 338 (Ala. 1985).
Here, there is evidence that by the January 12, 2010 Contract deadline, Plaintiff
had paid SW Loan $1,060,353.90. That amount was more than 99.5 percent of the
monetary obligation Plaintiff owed under the Contract. There also is evidence that
seventeen days later, Plaintiff remitted the approximate $3,000 shortfall for prepaid
January rents, and there is no evidence that the payment was rejected. Applying
Superior Wall & Paver’s holding, the court finds that the evidence is sufficient to
create a genuine issue of material fact as to whether Plaintiff substantially performed
its obligations under the Contract. Therefore, that issue is for the jury to decide, not
the court at summary judgment.
SW Loan’s Performance (Element Three)
SW Loan points to the undisputed fact that, in November 2010, SW Loan
tendered to Plaintiff all of the documents it was obligated to deliver under the
Contract. SW Loan argues that this performance is “full performance of the
Contract” and “renders a breach of contract claim impossible as a matter of law.”
(Defs. Summ. J. Br. 13.) In its opening summary judgment brief, SW Loan does not
address the timing of the delivery of the Schedule 1 Documents, i.e., ten months after
the January 2010 payment of $1 million from Plaintiff to SW Loan and eight months
after the March 2010 filing of this lawsuit. However, in reply to Plaintiff’s response
that SW Loan’s performance came too late (Pl. Summ. J. Resp. 20-21), SW Loan
retorts that “[b]ecause the failure to deliver the [Schedule 1] [D]ocuments [is] the
singular breach alleged . . . in [the] complaint, there are no other grounds Plaintiff
can now claim to support its breach of contract claim.” (Defs. Summ. J. Reply 19
(Doc. # 97); see also Am. Compl. ¶ 16 (“Defendants have failed or refused to transfer
the Loan and Loan File to Plaintiff despite Plaintiff’s performance under the
Agreement and demand for said transfer.”).) The essence of SW Loan’s argument is
that it remedied the allegation in ¶ 16 of the Amended Complaint by delivering the
Schedule 1 Documents to Plaintiff in November 2010, and, therefore, Plaintiff’s
breach-of-contract claim fails, at least absent an amendment to the Amended
Complaint expressly alleging that SW Loan’s post-lawsuit contractual performance
in November 2010 was untimely. This argument lacks a principled foundation.
In the Complaint, filed in March 2010, Plaintiff alleges that SW Loan’s failure
to transfer the Schedule 1 Documents is the act that breached the Contract. (Compl.
¶ 23; see also Am. Compl. ¶ 16.) SW Loan does not dispute that in March 2010, it
had not assigned or transferred those documents, and there is no evidence that it had.
In fact, SW Loan’s summary judgment brief notably lacks any argument that SW
Loan was not in breach of the Contract in March 2010. Nor does SW Loan’s brief
explain why its subsequent performance in November 2010 should be deemed timely
as a matter of law. On this record, whether the breach was complete when the
Complaint was filed is an issue for the jury to decide, the same as the argument, if it
is to be made, that the November 2010 performance was timely.
Moreover, it should have been no surprise to SW Loan that, in its summary
judgment response, Plaintiff challenged the timeliness of the post-lawsuit delivery of
the Schedule 1 Documents. (Pl. Summ. J. Resp. 20-21 (arguing that SW Loan’s
performance under the Contract was not timely); see also Pl. Summ. J. Resp. 29
(“[T]he factual predicate for damages is the breach of the Contract by [SW Loan]
when it failed to timely deliver the Schedule 1 Documents . . . .”).) Under Plaintiff’s
interpretation of the Contract, i.e., that no time was prescribed in the contract for SW
Loan’s delivery of the Schedule 1 Documents (an interpretation which presently is
not challenged by SW Loan), “the law requires the obligated party to perform within
a ‘reasonable time.’” Lemon v. Golf Terrace Owners Ass’n, 611 So. 2d 263, 265
(Ala. 1992). It can be inferred from the Amended Complaint, without stretch, that,
when the Complaint was filed, Plaintiff deemed that a reasonable period of time had
elapsed without SW Loan having performed its end of the Contract. Additionally, it
is reasonable to infer from the Amended Complaint that, as Plaintiff argues, SW
Loan’s “ability to transfer the Schedule 1 Documents without further approval,
consent or permission was an item for which Plaintiff specifically bargained . . . .”
(Pl. Summ. J. Resp. 20.) Accordingly, permitting Plaintiff to proceed on its claim that
SW Loan’s performance was untimely will not prejudice SW Loan.
On this record, both the length of the delay (ten months) and the timing of the
delay (eight months after this lawsuit was filed) present sufficient circumstances to
raise a genuine issue of material fact as to whether SW Loan’s performance under the
Contract was timely. Lemon supports this conclusion.7 See 611 So. 2d at 265 (“What
is a reasonable time depends on the nature of the act to be done and all of the
circumstances relating to that act. This, necessarily, is a question to be determined
by the trier of fact.”).
Damages (Element Four)
Damages for breach of contract are that sum which would place the injured
party in the same condition he would have occupied if the contract had not been
breached. See Brendle Fire Equip. v. Elec. Eng’g, Inc., 454 So. 2d 1032, 1034 (Ala.
As stated earlier in this opinion, Plaintiff also contends that an anti-assignment clause in
the contract governing the bank’s sale of the loan and guaranties to SIMA “clouds [Plaintiff’s]
title to the guaranties.” (Pl. Summ. J. Resp. 19.) As urged by Plaintiff, “tender of a clouded title
is [not] sufficient performance [under a contract] when clear title was bargained for.” (Pl.
Summ. J. Resp. 19.) Because summary judgment on the breach of contract claim is due to be
denied on timeliness grounds, it is unnecessary at present to reach Plaintiff’s other arguments,
and no opinion on the merits of those arguments is expressed in this opinion.
Additionally, Plaintiff argues that SW Loan breached the Contract by failing to pay
Plaintiff’s attorney’s fees. (See Contract Art. IV, § 4.13 (providing that in any litigation dispute,
the prevailing party “shall be entitled to attorneys’ fees . . . incurred by reason of such action”;
Am. Compl. ¶ 17.) As the court indicated at the pretrial hearing, the issue of attorney’s fees will
be decided post-trial, when there is a prevailing party.
Civ. App. 1984). Plaintiff alleges that it has been damaged by SW Loan’s untimely
performance because “it has been deprived of an asset worth $3,850,000.00.”
(Pretrial Order § 4 ¶ l.) That asset is the Ware/Edington limited guaranty of payment.
(Pl. Summ. J. Resp. 25.) Defendants argue that these guarantors are insolvent, in part,
based upon their bankruptcy filings and, thus, that they have no recoverable assets.
Defendants also contend that, at best, the recovery of damages is speculative. (Defs.
Summ. J. Br. 20-22.)
Plaintiff may well have a difficult road in proving that, but for the alleged
breach, it could have enforced and collected on the Edington/Ware limited guaranty.
However, the court finds that the issue of damages is better sifted during trial than on
the present summary judgment record. Moreover, whether Plaintiff can prove actual
damages is not dispositive of the breach-of-contract claim. “Alabama law provides
for nominal damages if a breach of contract is proven, even if a breach-of-contract
plaintiff cannot prove actual damages.” Knox Kershaw, Inc. v. Kershaw, 552 So. 2d
126, 128 (Ala. 1989); see also James S. Kemper & Co. Se., Inc. v. Cox & Assocs.,
Inc., 434 So. 2d 1380, 1385 (Ala. 1983) (“When the evidence establishes a breach,
even if only technical, there is nothing discretionary about the award of nominal
damages.”). Accordingly, summary judgment on Plaintiff’s breach-of-contract claim
could not properly be entered solely on the basis of a lack of proof of actual damages,
given the availability of nominal damages.
“The elements of fraud are: (1) a misrepresentation of a material fact, (2) made
willfully to deceive, recklessly, without knowledge, or mistakenly, (3) that was
reasonably relied on by the plaintiff under the circumstances, and (4) that caused
damage as a proximate consequence.” McCutchen Co., Inc. v. Media Gen., Inc., 988
So. 2d 998, 1001 (Ala. 2008).
Defendants argue that Plaintiff’s fraud claim fails because (1) there is no
evidence of any misrepresentation of a material fact, (2) there is no evidence that
Plaintiff reasonably relied on any alleged pre-contractual representation, (3) there is
no evidence of an intent to deceive sufficient to warrant punitive damages, (4) the
release clause in the Contract bars the fraud claim, and (5) this claim is nothing more
than a breach-of-contract claim. These arguments are addressed in turn.
The Alleged Misrepresentation of Material Fact
Plaintiff predicates its fraud claim on pre-contractual representations allegedly
made by Mr. Knell that he “had full ownership” of the Schedule 1 Documents and
“could negotiate [their] sale and transfer.” (Am. Compl. ¶ 20.) Defendants argue that
there is no evidence to back up the “bald allegations of the Amended Complaint.”
(Defs. Summ. J. Br. 26.) They contend that deposition testimony, from both
Plaintiff’s and Defendants’ representatives, reveals that “the statements actually made
by [Mr.] Knell are not remotely like the alleged representations Plaintiff allegedly
relied upon.” (Defs. Summ. J. Br. 26; see also Defs. Mot. Strike 2-3 (Doc. # 99).)
Defendants contend that the evidence reveals only that Mr. Knell informed Plaintiff’s
representatives that “he was the man to talk to regarding the loan and guaranties and
that he would move against the . . . guarantors unless a deal was made.” (Defs.
Summ. J. Br. 27.)
This line of argument ignores Plaintiff’s answer to an interrogatory propounded
by Defendants. In that interrogatory answer, Plaintiff attests that Defendants
represented to it that they “had full control of and right to transfer all documents
referenced in the [Contract].” (Pl. Answers to Defs. Interrogs. ¶ 3; see also Pl. Summ.
J. Resp. 3, 30-31.) An answer to an interrogatory is evidence that a plaintiff can use
to show that a fact “is genuinely disputed.” Fed. R. Civ. P. 56(c). No reason has been
given by Defendants that would permit the court to disregard this evidence at the
summary judgment stage. (See Defs. Summ. J. Br. 26-27.) Hence, even assuming
that Defendants are correct that Plaintiff inaccurately summarized the deposition
testimony, the clear interrogatory answer cannot be ignored. Because weighing the
evidence is not permitted at the summary judgment stage, the contradiction in the
evidence creates a “genuine dispute as to [a] material fact.” Fed. R. Civ. P. 56(a).
Alternatively, Defendants argue that, even assuming that Mr. Knell said what
Plaintiff claims he said, no claim for fraud can lie because Mr. Knell’s statement
actually turned out to be true.8 The representation is true because, according to
Defendants, the anti-assignment clause in the Regions-SIMA Agreement was
unenforceable in and of itself or, at the very least, by Plaintiff. (Defs. Summ. J. Brief
25-26.) This argument overlooks the necessary implication arising from Mr. Knell’s
representation concerning his “full control of and right to transfer” the Schedule 1
Documents (Pl. Answers to Defs. Interrogs. ¶ 3), namely, that he could transfer the
Schedule 1 Documents to Plaintiff immediately (and certainly without a ten-month
delay). Even if, as Defendants argue, the anti-assignment clause was unenforceable,
there is evidence that Mr. Knell’s power to transfer the Schedule 1 Documents to
Plaintiff was hindered and delayed ten months during the pendency of the
investigation into the enforceability of the anti-assignment clause in the RegionsSIMA Agreement.
In this regard, there is sufficient evidence from which a
reasonable jury could infer that Mr. Knell’s statement was false.
As framed by Defendants, whether Mr. Knell’s statement was true hinges on the
conclusion that the anti-assignment clause in the Regions-SIMA Agreement is not enforceable,
an issue not addressed in this opinion, see supra note 7.
Defendants argue that certain provisions in the Contract make Plaintiff’s
reliance on Mr. Knell’s alleged pre-contractual representation unreasonable as a
matter of law. One provision expressly excludes Plaintiff’s reliance on any extracontractual oral or written statements made by SW Loan’s agents, “other than those
specifically contained in th[e] [Contract].”9 (Contract ¶ (f).) The other provision is
a merger clause that indirectly excludes reliance on extra-contractual statements “not
expressly set forth or referred to” in the Contract by barring extraneous evidence to
prove the Contract’s terms. (Defs. Suppl. Summ. J. Mem. 2-3 (Doc. # 89).) Both
clauses, in effect, invoke the parol evidence rule, “which precludes a court from
considering extrinsic evidence of prior or contemporaneous agreements in order to
‘change, alter, or contradict’ the terms of the integrated contract.” Ritter v. Grady
Auto. Group, Inc., 973 So. 2d 1058, 1062 (Ala. 2007); see also Harbor Vill. Home
Ctr., Inc. v. Thomas, 882 So. 2d 811, 816 (Ala. 2003) (“A merger clause, also known
as an integration clause, ‘is a portion of a particular contract that restates the rationale
of the parol evidence rule within the terms of the contract.’” (quoting Envtl. Sys., Inc.
v. Rexham Corp., 624 So. 2d 1379, 1383 (Ala. 1993))).
This provision will be referred to as the “no-reliance” clause.
Mr. Knell’s alleged pre-contractual false statement is embodied in the Contract
provision providing that SW Loan “represents to [Plaintiff] that [SW Loan] is the
owner of Loan and has the authority to transfer the Loan as provided in this
[Contract].” (Contract 2.) Hence, Mr. Knell’s alleged extraneous false statement
mirrors, rather than contradicts, the Contract’s terms, and the parol evidence rule does
not bar evidence of a prior, consistent statement that neither changes, alters nor
contradicts the terms of the integrated Contract. Additionally, the language in both
clauses does not operate to abrogate reliance on a false statement that is expressly
included in the Contract. Therefore, it cannot be said as a matter of law that either
the no-reliance clause or the merger clause forecloses the reliance element of
Plaintiff’s fraud claim predicated on alleged extraneous misrepresentations that
subsequently were incorporated into the Contract.
Moreover, Defendants’ argument omits mention of the well established,
Alabama law that the parol evidence rule “has no application in an action alleging
fraud.” Envtl. Sys., Inc., 624 So. 2d at 1382 (collecting cases). “Parol evidence is
admissible to show that a written agreement was procured by fraud,” id. (internal
quotation marks and citations omitted), and “[a] stipulation in the written contract that
there are no verbal understandings not incorporated herein does not estop the party
to set up fraud in verbal misrepresentations inducing the contract as a whole.” Id.
(internal quotation marks and citations omitted). Similarly, because a merger clause
“restates the rationale of the parol evidence rule within the terms of the contract,” it
“is also not applicable to exclude evidence relating to fraud claim.” Id. at 1383.
Here, because Plaintiff’s claim avers fraud, neither the parol evidence rule nor the
merger clause would exclude extraneous evidence of representations made before, or
contemporaneously with, the execution of the written Contract.
Under Alabama law, “upon a finding of an intent to deceive or defraud,
punitive damages may be awarded.” Ford Motor Co. v. Sperau, 708 So. 2d 111, 116
(Ala. 1997) (per curiam). By statute, an award of punitive damages in this case would
require proof “by clear and convincing evidence that [Defendants] consciously or
deliberately engaged in . . . fraud . . . .” Ala. Code § 6-11-20(a). Fraud is defined as
“[a]n intentional misrepresentation, deceit, or concealment of a material fact the
concealing party had a duty to disclose, which was gross, oppressive, or malicious
and committed with the intention on the part of the defendant of thereby depriving a
person or entity of property or legal rights or otherwise causing injury.” Id.
Defendants argue that there is no evidence that, when Mr. Knell allegedly
represented that he had full authority to transfer the Schedule 1 Documents to
Plaintiff, that he knew that he would not be able to effectuate that transfer until some
ten months later. Hence, Defendants argue that the absence of evidence that Mr.
Knell made any representation with an intent to deceive precludes an award of
punitive damages on the fraud claim. (Defs. Summ. J. Br. 30.)
All of the evidence has been studied. It seems highly dubious that the summary
judgment record contains sufficient evidence to raise a genuine issue of material fact
that Defendants’ conduct was “gross, oppressive or malicious.” The merits of
Defendants’ argument need not be analyzed any further, however, because the court
finds that Plaintiff has abandoned any right to the recovery of punitive damages. In
its summary judgment response, Plaintiff does not argue that punitive damages are
appropriate or point to any evidence of an intent to deceive. In fact, Plaintiff takes
the position that its fraud claim does not require proof of an intent to deceive.10 (Pl.
Summ. J. Resp. 39.) Absent any citation to evidence indicating an intent to deceive
or relevant argument, Plaintiff fails to demonstrate that the evidence “is genuinely
Plaintiff is correct that the absence of evidence of an intent to deceive would not
foreclose Plaintiff’s legal fraud claim in toto. Compensatory damages still would be available for
innocent fraud. See Lewis v. First Tuskegee Bank, 964 So. 2d 36, 42 (Ala. Civ. App. 2007)
(Even where a misrepresentation is “made by mistake and without any intent to deceive, it may
constitute legal fraud if it is regarding a material fact and is acted upon with belief in its truth by
one to whom it is made” (citation omitted)); see also Ex parte Lewis, 416 So. 2d 410, 412 (Ala.
1982) (“A claim of fraud . . . of the ‘innocent’ or ‘legal’ species carries no requirement of proof
that the defendant had knowledge of the falsity of the matter represented, only that the defendant
misrepresented a material fact which was acted upon to the injury of the other party. While
liability for innocent fraud is not dependent upon knowledge of the falsehood (and, therefore, not
dependent upon an intent to deceive), compensatory damages only may be awarded.”).
disputed” on the issue of punitive damages. Fed. R. Civ. P. 56(c). Moreover,
Plaintiff did not preserve the issue of punitive damages in its contentions in the
Pretrial Order. See Fed. R. Civ. P. 16(d) (explaining that the pretrial order “controls
the course of the action . . .”); see also Morro v. City of Birmingham, 117 F.3d 508,
515 (11th Cir. 1997) (“We have not hesitated to back up district courts when they put
steel behind the terms of pretrial orders and hold parties to them.”); see also Pretrial
Order § 4, ¶ l (Pl. Contentions).) Accordingly, summary judgment is due to be
granted in Defendants’ favor on Plaintiff’s claim for punitive damages on the fraud
Defendants argue that Plaintiff cannot bring a fraud claim “for actions taken
by Defendants as part of preliminary discussions,” given that the Contract released
SW Loan from liability on any cause of action relating to the loan. (Defs. Suppl.
Summ. J. Mem. 3; Contract, Art. II, § 2.01 (Release).) Defendants did not raise
release as an affirmative defense in their answers. See Fed. R. Civ. P. 8(c)(1) (“In
responding to a pleading, a party must affirmatively state any avoidance or
affirmative defense, including . . . release.” ); see also Fed. R. Civ. P. 12(b) (“Every
defense to a claim for relief in any pleading must be asserted in the responsive
pleading if one is required.”). There being no argument that persuades otherwise, the
defense is waived. See Proctor v. Fluor Enter., Inc. 494 F.3d 1337, 1350 (11th Cir.
2007) (“In general, a party’s failure to raise an affirmative defense in the pleadings
results in a waiver of the defense.”). The affirmative defense of release, thus, does
not provide Defendants with a viable ground for summary judgment.
More Than a Mere Breach of Contract
It is well established, under Alabama law, that “[a] mere breach of a contractual
provision is not sufficient to support a charge of fraud.” Brown-Marx Assoc., Ltd. v.
Emigrant Sav. Bank., 703 F.2d 1361, 1370-71 (11th Cir. 1983) (applying Alabama
law). Defendants argue that Plaintiff is trying to erect a fraud claim out of a simple
breach-of-contract claim, but that, in fact, Plaintiff’s entire case is that Defendants did
not comply with the Contract provision requiring delivery of the Schedule 1
Documents, and “nothing more.” (Defs. Summ. J. Br. 24.) Defendants raised the
identical argument at the motion to dismiss stage. After examining the relevant
Alabama case law, the court rejected the argument:
As alleged, not only did [SW Loan] breach the [Contract] when it failed
to deliver the [Schedule 1 Documents] to Plaintiff, but Defendants also
induced Plaintiff to enter into the [Contract] knowing that they did not
have the authority or ability to transfer the [Schedule 1 Documents] to
Plaintiff, but representing that they did have such authority. In reliance
upon those representations, Plaintiff entered into the [Contract] with
[SW Loan]. . . . . In other words, as grounds for the fraud claim[ ],
Plaintiff alleges that, prior to consummation of the Agreement,
Defendants misrepresented . . . material facts regarding the difficulty or
impossibility of obtaining ownership and possession of the [Schedule 1
Documents] and permission from Regions Bank to transfer the
[Schedule 1 Documents] to Plaintiff.
(Mem. Op. & Order 12 (Doc. # 39) (internal citations omitted).)
Of course, Plaintiff can no longer stand on the allegations in the Amended
Complaint to defeat summary judgment. Indeed, the court observed in its prior
opinion that, “[w]hether the evidence bears out these allegations is an issue suitable
for presentation after discovery.” (Mem. Op. & Order 13.) Discovery now has been
conducted, and evidence submitted on summary judgment. As discussed earlier in
this opinion, the evidence reveals a genuine issue of material fact whether during precontractual negotiations, Mr. Knell misrepresented to Plaintiff that Defendants “had
full control of and right to transfer all documents referenced in the [Contract],” and,
conversely, whether Mr. Knell fraudulently suppressed that “full control” and “right
to transfer” meant “full control” and “right to transfer” in ten months. (Pl. Answers
to Defs. Interrogs. ¶ 3.) Because the evidence “bears out the allegations,” summary
judgment is due to be denied on this ground.
In the Amended Complaint, Plaintiff brings a fraudulent suppression claim
against all Defendants. It contends that Mr. Knell’s alleged statement – that he had
full authority to assign the Schedule 1 Documents – is fraudulent not only because
of what it misrepresents but also because of what it suppresses or conceals.
Defendants argue that they are entitled to summary judgment on this claim.
The summary judgment motion and briefing preceded the entry of the Pretrial
Order. In its contentions in the Pretrial Order, Plaintiff does not include a claim for
fraudulent suppression. Plaintiff’s claims are limited to fraudulent misrepresentation
and breach of contract. (See Pretrial Order § 4, ¶¶ b, e, g.) Accordingly, Plaintiff has
abandoned reliance on the fraudulent suppression claim by its failure to preserve the
claim in its contentions incorporated in the Pretrial Order. See Fed. R. Civ. P. 16(d)
(explaining that the pretrial order “controls the course of the action . . .”); see also
Morro, 117 F.3d at 515. The summary judgment motion on this claim is, thus, due
to be granted.
Based on the foregoing, Plaintiff Sweetwater Investors, LLC’s breach-ofcontract claim against SW Loan, and the fraud claim against all Defendants for
compensatory damages, survive summary judgment. However, summary judgment
is due to be entered in Defendants’ favor on Plaintiff’s fraud claim for punitive
damages and on the fraudulent suppression claim. Accordingly, it is ORDERED that
Defendants’ motion for summary judgment (Doc. # 76) is GRANTED in part and
DENIED in part.
DONE this 30th day of August, 2011.
/s/ W. Keith Watkins
CHIEF UNITED STATES DISTRICT JUDGE
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