Citizens National Bank of Paintsville v. MCNB Bank and Trust Company
OPINION AND ORDER: 1) Citizens' motion in limine (DE 56 ) to exclude opinion of dft's expert, Dr. Donald J. Mullineaux, and to prohibit any testimony or evidence that Citizens should have purchased mortgage-backed securities to mitigate d amages is DENIED; and 2) Citizens' motion (DE 72 ) to treat its motion in limine as a motion for summary judgment on MCNB's mitigation-of-damages defense is DENIED. Signed by Judge Karen K. Caldwell on 9/30/2015. (RCB)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION at PIKEVILLE
CIVIL ACTION NO. 7:12-CV-102-KKC
CITIZENS NATIONAL BANK OF PAINTSVILLE,
OPINION AND ORDER
MCNB BANK AND TRUST COMPANY
This matter is before the Court on the motion (DE 56) by Citizens National Bank of
Paintsville to exclude the opinion of defendant’s expert, Dr. Donald J. Mullineaux, and any
evidence that Citizens should have purchased mortgage-backed securities in order to
mitigate the damages caused by Defendant MCNB Bank and Trust Company’s breach of
four agreements between the parties.
The parties entered into four “participation agreements.” In such an
agreement, there are three principal players: the participant, the lender, and the
borrower. The participant provides funds to the lender and the lender uses those
funds to make loans to the borrower. See In re Autostyle Plastics, Inc., 269 F.3d 726,
736 (6th Cir. 2001).
In this case, the lender was defendant MCNB Bank and Trust Company, the
participant was Citizens National Bank of Paintsville, and the borrowers were four
different entities. The participation agreements were between only MCNB and
Citizens. The borrowers were not parties to those agreements. The loan agreements,
however, were between MCNB and the four borrowers. Citizens was not a party to
those contracts. Thus, Citizens did not enter into any agreement with the
Pursuant to the participation agreements, MCNB sold to Citizens a portion of
its interest in four commercial loans made to the four different borrowers. (DE 1-1,
Agreement, ¶ 1.) The parties refer to the loans as the Weston Lodging Loan, the
Greenbrier County Loan, the Jackson County Loan, and the American Pride Loan.
The language of the four participation agreements is identical except for the
description of the underlying loan. In this opinion, the Court will cite to the
agreement dated January 19, 2007, which the parties have denominated the
“Weston Lodging Agreement.” (DE 1-1, Agreement.)
The total amount of the four loans was approximately $19 million and all
were made for the construction of hotels in West Virginia. In total, Citizens paid
MCNB about $ 6 million for its interest in the four loans.
There does not appear to be any dispute that MCNB sold Citizens an interest
in the loans in order to comply with statutory lending limits on the dollar amount of
loans any single bank can make to a single borrower or affiliated borrowers. (DE 59,
Mem. at 2-4.) MCNB offered for Citizens to purchase the amount of the loan that
was above MCNB’s lending limit. Citizens agreed to purchase the interest in the
loans because it was facing a weak demand for loans in Eastern Kentucky. (DE 59,
Mem. at 3.)
The loans were for varying terms ranging from five to 21 years. The
American Pride loan matured August 5, 2014. The Weston Lodging, Greenbrier,
and Jackson County loans matured in 2028, 2029, and 2030, respectively. (DE 55-1,
Mem. at 17.) Citizens purchased varying percentages in the four loans, ranging
from 19.13% to 68.53%.
Citizens argues that it believed when in purchased the interest in the loans,
it would receive payments of its portion of the principal and interest for as long as
the borrower made payments on the loan. Thus, for example, it believed it would
receive its portion of the payments made by Weston Lodging on the Weston Lodging
agreement for as long as Weston Lodging made those payments, which could be up
until February 1, 2028, the maturity date of that loan.
That is not what happened. Instead, before the maturity date of the loans,
MCNB wired Citizens an amount equal to Citizens’ percentage in the outstanding
loan principal balances at the time and Citizens’ percentage of the interest that had
accrued at that point. The payments totaled roughly $5.3 million. These payments
were wired on December 2, 2011 for the Weston Lodging Loan and on July 13, 2012
for the other three loans. None of the underlying loans had been paid off at that
point. The borrower on each of these loans remained obligated to continue paying
the principal and interest due on the loans.
Citizens asserts that it has maintained the $5.3 million in its account at the
Federal Reserve Bank of Cleveland where it is earning .25 % interest annually.
MCNB argues that it decided to repurchase Citizens’ participation interest in
the four loans because it had entered into another participation loan with Citizens
that went badly. (DE 55-1, Mem. at 5.) On that loan, Citizens was the original
lender and MCNB was the participant. The borrower defaulted on that loan. Lee
Ellis, MCNB’s CEO during the relevant time period, testified that MCNB and
Citizens disagreed about how to handle the defaulted loan and that the transaction
left a “bad taste in [MCNB’s] mouth with respect to Citizens.” (DE 55-7, Ellis Dep.
at 67-68.) Ellis testified that ending its relationship with Citizens under the loans
also made sense because, at that point, MCNB “had more borrowing capacity under
the legal lending limits that we did previously.” (DE 55-7, Ellis Dep. at 67.)
By prior order, this Court granted Citizens summary judgment and found
that MCNB breached the agreements by purporting to repurchase Citizens’ interest
in the loans and ceasing to make any further payments to Citizens. The Court
determined that issues of fact remained, however, regarding Citizens’ damages.
MCNB has asserted an affirmative defense of mitigation of damages. In
support of that defense, it offers Mullineaux’s report and testimony. In the portion
of his report at issue on this motion, Mullineaux opines that Citizens could have
mitigated its damages by taking the $5.3 million from its Federal Reserve account
and investing in mortgage-backed securities. (DE 57-1, Mullineaux Report.) He
asserts that at the time that MCNB wired the first payment to Citizens’ Federal
Reserve account, mortgage-backed securities paid interest at 3.23% annually and
that at the time of the final three payments, mortgage-backed securities paid 2.76%.
Mullineaux opines that, had Citizens invested in mortgage-backed securities, its
cash flow from the securities would have exceeded the lost cash flow on the
participation interests. Thus, Mullineaux opines, Citizens would have suffered no
damages as a result of MCNB’s termination of the agreements.
Citizens moves to exclude the Mullineaux report, arguing that it has no
obligation, as a matter of law, to take steps to mitigate damages if the steps entail
the risk of further damages. Citizens also argues that Mullineaux’s opinion must be
excluded because is not based upon sufficient facts or data or reliable principles or
Citizens argues that Mullineaux’s opinion must be excluded because it is
contrary to the applicable law on mitigation of damages. Both parties agree that law
is found in Restatement (Second) of Contracts § 350 which provides as follows:
(1) Except as stated in Subsection (2), damages are not recoverable for
loss that the injured party could have avoided without undue risk,
burden or humiliation.
(2) The injured party is not precluded from recovery by the rule stated
in Subsection (1) to the extent that he has made reasonable but
unsuccessful efforts to avoid loss.
Restatement (Second) of Contracts § 350.
Citizens argues that Mullineaux’s opinion must be excluded because it is
undisputed that there is a risk that mortgage-backed securities will lose their value
if interest rates rise. (DE 57, Mem. at 21.) It argues that, because mortgage-backed
securities carry a known risk, “[a]s a matter of law, [Citizens] was under no
obligation to use the money MCNB wired to [Citizens] to purchase mortgage-backed
securities to mitigate damages.” (DE 57, Mem. at 26.)
In essence, this motion in limine asks the Court to first find as a matter of
law that investing in mortgage-backed securities was unduly risky and then to rule
that Mullineaux’s testimony is contrary to that finding and, therefore, must be
excluded. “[T]he reasonableness of mitigation is a question of fact. . . and thus
properly resolved by a jury.” C & O Motors, Inc. v. Gen. Motors Corp., 323 F. App'x
193, 197 (4th Cir. 2009) (quoting 22 Am.Jur.2d Damages § 344). ”What is a
reasonable effort to avoid the injurious consequences of a breach is a question of
fact. So, too, is what is undue risk or expense.” 24 Williston on Contracts § 64:27
(4th ed.). See also R.K. Chevrolet, Inc. v. Bank of Commonwealth, 501 S.E.2d 769,
While Citizens presents evidence that mortgage-backed securities carry risks,
MCNB responds with evidence that the risks are not undue. (DE 67, Mem. at 1617.) The Court cannot say as a matter of law based on the facts presented at this
point that the risks of investing in mortgage-backed securities were “undue.” Nor
can the court resolve at this point whether Citizens’ efforts to avoid loss were
“reasonable.” Accordingly, the Court cannot find Mullineaux’s testimony is contrary
to law and will not exclude it on that basis.
Citizens also argues that Mullineaux’s testimony should also be excluded
because it is not “based on sufficient facts or data” and is not “the product of reliable
principles and methods” as required by Federal Rule of Evidence 702. Citizens
asserts that Mullineaux’s opinion that Citizens could have invested in mortgagebacked securities is deficient because he did not look at the “relevant liability side of
[Citizens’] balance sheet” and did not analyze whether mortgage-back securities
were a good investment under Citizens’ own “Investment Policy.” (DE 57, Mem. at
Nevertheless, Mullineaux did rely on facts in developing his opinion including
Citizens’ call reports, its prior investments in mortgage-backed securities, and its
liquidity. These are sufficient facts and data to permit the jury to hear his opinion
that Citizens could have invested the wired funds in mortgage-backed securities. To
the extent that he failed to consider other relevant factors that make his opinion
less credible, that is a subject that can be explored in cross examination, direct
examination of Citizens’ own witnesses, and argued to the jury.
Citizens argues that Mullineaux’s testimony should be excluded because
Mullineaux testified that investing in mortgage-backed securities was only
something that Citzens could have done but not necessarily that it should have
done that. Again, this is an issue that Citizens can explore in front of the jury on
cross examination or on direct examination of witnesses who can provide testimony
as to why mortage-backed securities were not a good investment option for Citizens.
These deficiencies do not, however, render inadmissible Mullineaux’s opinion that
Citizens could have invested in such securities and the consequences of that
After MCNB filed its response to Citizens’ motion in limine, Citizens filed a
separate motion asking this Court, “to the extent necessary or appropriate,” to treat
the motion in limine as a motion for summary judgment on MCNB’s mitigation-of-
damages affirmative defense. The Court will deny this motion. It comes after
MCNB responded to the motion in limine. The Court agrees with MCNB that it
would be unfairly prejudicial to rule on the motion in limine employing a standard
different than that requested in the motion. Further, the above discussion makes
clear that there are issues of fact with regard to MCNB’s mitigation-of-damages
defense and, thus, it cannot be resolved on summary judgment.
For all these reasons, the Court hereby ORDERS as follows:
1) Citizens’ motion in limine (DE 56) to exclude the opinion of defendant’s expert,
Dr. Donald J. Mullineaux, and to prohibit any testimony or evidence that
Citizens should have purchased mortgage-backed securities to mitigate damages
is DENIED; and
2) Citizens’ motion (DE 72) to treat its motion in limine as a motion for
Dated September 30, 2015.
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