The Hurd Family Partnership, L.P. v. The Farmers Bank et al
Filing
91
MEMORANDUM OPINION AND ORDER by Judge David J. Hale on 12/19/2016 - The plaintiff's motion to alter judgment or vacate 87 is DENIED. The plaintiff's motion to substitute a party 90 is GRANTED. This matter is referred to Magistrate Judge Colin H. Lindsay to conduct a status conference. cc: Counsel(DAK)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
THE HURD FAMILY PARTNERSHIP, L.P.,
Plaintiff,
v.
Civil Action No. 3:13-cv-485-DJH-CHL
THE FARMERS BANK, et al.,
Defendants.
* * * * *
MEMORANDUM OPINION AND ORDER
Defendant Farmers Bank filed two motions for summary judgment, (Docket No. 59; D.N.
60) and the Court granted both motions. (D.N. 84) Plaintiff Hurd Family Partnership now
moves the Court to alter or vacate its judgment pursuant to Rule 59(e). (D.N. 87) Because the
plaintiff makes arguments that should have been raised earlier without alleging any errors of law
or fact, presenting new evidence, introducing an intervening change in controlling law, or
arguing that there will be manifest injustice, the Court will deny the plaintiff’s motion to alter or
vacate the Order.
Additionally, because of the death of Defendant William Bennett Collett, Sr., the
Partnership has filed an unopposed motion to substitute Defendant William Collett, Jr. in the
place of his father. (D.N. 90) The Court will grant this motion.
I.
BACKGROUND
Many of the facts are undisputed, and remain unchanged from the Court’s Memorandum
and Opinion issued on March 10, 2016. (D.N. 84) Therefore, the facts will not be repeated here,
except for what is necessary for resolution of the instant motion.
Plaintiff Hurd Family
Partnership was a minority owner of Freedom Holding. (D.N. 59-1, PageID # 341) Defendants
W. Bennett Collett, Sr. and W. Bennett Collett, Jr. owned the remainder of Freedom Holding’s
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stock. (Id.) In early 2008, the Colletts asked King Southern Bank for a loan to be used to
exercise stock options in Freedom Holding’s subsidiary. (Id., PageID # 343) After negotiating
with the Colletts, King Southern agreed to loan $1.3 million to Freedom Holding. (Id.) In
February or March 2008, Jim King, president of King Southern, contacted Farmers to gauge its
interest in buying the $1.3 million loan to Freedom Holding. (Id.) King was worried about a
conflict of interest because, in addition to being the president of King Southern Bank, he also
provided accounting services to Freedom Holding and its subsidiary as a Certified Public
Accountant. (Id.) Instead of buying the loan outright, however, King Southern and Farmers
agreed to the terms of a loan participation agreement: Farmers provided $650,000 of the loan and
its sister bank, Leitchfield Deposit Bank, provided the other $650,000. (Id., PageID # 345)
In March 2010, Jim King essentially asked Farmers to buy out the participation
agreement with King Southern and make a new loan in the same principal amount directly to
Freedom Holding. (Id., PageID # 349) Farmers agreed and completed a transaction in March
2010 that resulted in it becoming the lending bank from that point forward. (Id.) The loan
became delinquent in February 2013, and the Partnership eventually filed the instant action
claiming that Farmers had a duty to determine that the loans were properly used for Freedom
Holding’s corporate purposes. (Id., PageID # 350) It further alleged that the Freedom Holding’s
board of directors failed to approve the loan properly, and that King Southern and Farmers were
aware of the ultra vires purpose behind the loan. (Id.)
Farmers filed two motions for summary judgment. The first motion requested judgment
against the Partnership on its claims that Farmers improperly loaned money to Freedom Holding
in 2008. (Docket No. 59) The second motion requested judgment on Farmers’ cross-claims
against two of Farmers’ co-defendants, W. Bennett Collett, Sr. and Freedom Holding. (D.N. 60)
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Collett, Sr. and Freedom Holding admitted that Farmers Bank was entitled to summary judgment
and did not “dispute the amount sought.” (D.N. 63, PageID # 553)
The Court granted both motions for summary judgment. (D.N. 84) The Court found that
“Farmers was just a participant in the original loan,” and thus did not owe any duty to the
Partnership. (Id., PageID # 618) Specifically, the Court held that the participation agreement at
issue met the Sixth Circuit’s four-factor AutoStyle definition of a “true” participation agreement.
(Id., PageID # 620) Therefore, “there was no relationship between Farmers and Freedom
Holding,” and Farmers did not owe Freedom Holding or the Partnership any duty. (Id., PageID #
622) The Court found that it was irrelevant that Farmers ultimately bought out its participation
agreement in 2010 because “by then, the harms the Partnership complain[ed] of had already been
done.” (Id.) Finally, the Court rejected the plaintiff’s argument that Farmers was liable under
Kentucky’s ultra vires statute.
(Id., PageID # 622–23)
The Court held that it would be
inequitable to apply this statute because “Farmers was not responsible for the underwriting on
this loan; at the outset, it merely participated in the loan.” (Id., PageID # 623)
In response to the Court’s Memorandum Opinion and Order, the Hurd Family Partnership
now moves the Court to alter or vacate its judgment pursuant to Rule 59(e). (D.N. 87) The
Partnership argues that the judgment should be altered or vacated because (1) the Partnership
should be considered a third-party beneficiary of the participation agreement, (2) Farmers did not
simply buy out King Southern, they “ratified” the agreement, and thus were put “in the shoes of
[King Southern] as of the date of the original loan,” (3) the agreement does not meet the
AutoStyle definition of a “true” participation agreement, and (4) the loan “fell within the doctrine
of ultra vires” because “it was actually a loan for the benefit of the Colletts and others not even
owners of Freedom Holding.” (See id.)
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Farmers responds that the Partnership has not established grounds for altering or vacating
the judgment pursuant to Rule 59(e) because its first three arguments are new arguments that
were previously unraised, and the fourth argument is “a rehashing of an old argument.” (D.N.
88, PageID # 645) Furthermore, Farmers contends that each argument fails as a matter of law.
(See D.N. 88)
The Partnership has also filed an unopposed motion to substitute Defendant William
Bennett Collett, Jr. in the place of Defendant William Bennett Collett, Sr. due to the death of the
elder Collett. (Docket No. 90)
II.
DISCUSSION
A. Motion to Alter or Vacate Judgment
Under Rule 59(e) “the court may grant a motion to alter or amend ‘if there is a clear error
of law, newly discovered evidence, an intervening change in controlling law, or to prevent
manifest injustice.’” Boling v. Prospect Funding Holdings, LLC, No. 1:14-CV-00081-GNSHBB, 2016 WL 1611383, at *2 (W.D. Ky. Apr. 21, 2016) (citing GenCorp v. Am. Int’l, 178 F.3d
804, 834 (6th Cir. 1999) (citations omitted)).
“The moving party bears ‘[t]he burden of
demonstrating the existence of a manifest error of fact or law.’” Id. at *2 (citing Doe v. Patton,
381 F. Supp. 2d 595, 605 (E.D. Ky. 2005), aff’d sub nom. Doe v. Magoffin Cty. Fiscal Court,
174 F. App’x 962 (6th Cir. 2006)). Notably, “the rule does not afford ‘defeated litigants a
second chance to convince the court to rule in his or her favor by presenting new explanation,
new legal theories, or proof.’” Ohio Midland, Inc. v. Proctor, No. 2:05-CV-1097, 2012 WL
580407, at *1 (S.D. Ohio Feb. 22, 2012) (citing Burnley v. Bosch Ams. Corp., 75 F. App’x 329,
333 (6th Cir. 2003)); see also Whitehead v. Bowen, 301 F. App’x 484, 489 (6th Cir. 2008) (“A
motion under Rule 59(e) does not simply provide an opportunity to reargue a case.”); Ky. Petrol.
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Operating Ltd. v. Golden, No. CIV. 12-164-ART, 2015 WL 2153344, at *3 (E.D. Ky. May 7,
2015) (citing Sault Ste. Marie Tribe of Chippewa Indians v. Engler, 146 F.3d 367, 374 (6th Cir.
1998)) (“A Rule 59 motion is not the place ‘to raise arguments which could, and should, have
been made before judgment issued.’”).
The Partnership first contends that it should be considered a third-party beneficiary of the
participation agreement. (D.N. 87-1, PageID # 629–31) The Partnership argues that Farmers
provided the loan funds “to expressly benefit Freedom Holding, knowing that [King Southern]
needed to get out of the loan.” (Id., PageID # 630–31) If it is a third-party beneficiary of the
participation agreement, then the Partnership contends that “the promises made by Farmers to
[King Southern,] which the Memorandum concluded gave rights only to [King Southern], in
effect conferred rights on the Partnership, making summary judgment inappropriate.”
(Id.,
PageID # 631) This motion is the first time the plaintiff has raised this argument in the course of
this litigation; however, because this litigation has centered on interpretation of this participation
agreement, this argument could have, and should have, been raised before the judgment issued.
See Golden, 2015 WL 2153344, at *3 (citing Engler, 146 F.3d at 374).
In
making
this
argument, the Partnership does not allege any mistake of law or fact, does not provide any new
evidence or intervening change in controlling law, and does not argue that manifest justice would
be prevented. See Boling, 2016 WL 1611383, at *2.
Nevertheless, the Court rejects the contention that the Partnership should be considered a
third-party beneficiary to the participation agreement. There is a “longstanding rule in Kentucky
that for a stranger to recover under a contract to which he is not a party, ‘it is indispensably
essential that he allege and prove that the contract was intended for his benefit in the sense that it
embraces the claim asserted by him.’” United States v. Allstate Ins. Co., 754 F.2d 662, 664–65
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(6th Cir. 1985) (citing Louisville & Nashville R.R. Co. v. Dry Branch Coal Co., 252 Ky. 124, 65
S.W.2d 1008, 1011 (1933)). In other words, “Kentucky courts have consistently held that for a
person to qualify as a third-party beneficiary, the contract in question must have been made and
entered into directly or primarily for the benefit of such third person.” Pruitt v. Genie Indus.,
Inc., No. CIV.A. 3: 10-81-DCR, 2013 WL 139701, at *2 (E.D. Ky. Jan. 10, 2013) (internal
quotation marks omitted) (citing King v. Nat’l Indus., Inc., 512 F.2d 29, 32 (6th Cir. 1975)).
“Intent to benefit is determined primarily by looking at the ‘purpose of the promisee in light of
the terms of the promise and the accompanying circumstances.’” Allstate Ins. Co., 754 F.2d at
664–65.
In its motion, the Partnership contends that
By providing all of the loan funds, Farmers and it[s] affiliate, provided the money
to expressly benefit Freedom Holding, knowing that [King Southern] needed to
get out of the loan due to Mr. King’s conflict and that Freedom Holding needed
the money on an expedited basis (the stock options were about to expire).
(D.N. 87-1, PageID # 630–31) The Partnership then argues that it should be considered a thirdparty beneficiary because it was “a shareholder of the party to whom the money was loaned,
Freedom Holding.” (Id., PageID # 631) The Partnership cites no direct authority in which this
argument has been applied in the context of loan participation agreements to a party situated as
the Partnership is here.
Applying the doctrine of third-party beneficiaries in this context would be inconsistent
with Sixth Circuit authority regarding the function of participation agreements.
The Sixth
Circuit has explained that because participation agreements are not loans, “the participant’s only
contractual relationship is with the lender; [and] the participant has no ability to seek legal
recourse against the borrower.” In re AutoStyle Plastics, Inc., 269 F.3d 726, 736 (6th Cir. 2001)
(cting W. Crews Lott et al., Structuring Multiple Lender Transactions, 112 Banking L.J. 734,
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736 (1995); Patrick J. Ledwidge, Loan Participations Among Commercial Banks, 51 Tenn.
L.Rev. 519, 528 (1984)). “By entering into participation agreements, then, the lender obtains the
benefit of being able ‘to make a loan which is greater than its lending authority.’ The participant,
on the other hand, ‘obtains the benefits of the lender’s security interest and priority of payment.’”
Id. (emphasis omitted) (citing Natwest USA Credit Corp. v. Alco Standard Corp., 858 F. Supp.
401, 408 (S.D.N.Y. 1994); First Bank of WaKeeney v. Peoples State Bank, 758 P.2d 236, 238
(Kan. Ct. App. 1988)).
Here, the participation agreement was a contract between King Southern, as lender, and
Farmers, as participant. (See D.N. 61-8) The agreement allowed King Southern to participate in
a loan that it otherwise may not have been able to, which is the primary purpose of such a loan
participation agreement according to the Sixth Circuit. See id. (citing W. Crews Lott et al.,
Structuring Multiple Lender Transactions, 112 Banking L.J. 734, 736 (1995); Patrick J.
Ledwidge, Loan Participations Among Commercial Banks, 51 Tenn. L.Rev. 519, 528 (1984)).
The agreement did not create any contractual relationship between Farmers and Freedom
Holding or any of Freedom Holding’s shareholders. See id. Therefore, because the primary
purpose of the participation agreement was not to benefit Freedom Holding or the Partnership,
the Partnership is not a third-party beneficiary to the participation agreement. See Allstate Ins.
Co., 754 F.2d at 664–65; Pruitt, 2013 WL 139701, at *2.
The Partnership next disputes the Court’s conclusion that Farmers “bought out” its
participation agreement. (D.N. 87-1, PageID # 631–35) The Partnership argues that because
Farmers “actually provided the money . . . to fund the original loan to Freedom Holding,” the
“buy out” was, in fact, a “ratification of the events which took place in 2008 and put Farmers in
the shoes of [King Southern] as of the date of the original loan.” (Id., PageID # 631–32)
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Therefore, Farmers “approved the acts of [King Southern] in the original loan,” making
summary judgment inappropriate. (Id., PageID # 633)
The Partnership’s contention contradicts the Court’s March 10, 2016 Memorandum
Opinion and Order, which found that Farmers did not owe Freedom Holding or the Partnership
any duty because, by the time Farmers bought out the participation agreement in 2010, “the
harms the Partnership complains of had already been done.” (D.N. 84, PageID # 622) While the
plaintiff may disagree with the Court’s conclusion, as with the first argument, the Partnership has
not alleged that the Court made a clear error of law or fact, provided any new evidence,
presented an intervening change in controlling law, or argued that granting the motion would
prevent manifest injustice. Whitehead, 301 F. App’x at 489. Instead, they are attempting to
reargue the case by raising an argument that could, and should, have been raised earlier. See
Golden, 2015 WL 2153344, at *3 (citing Engler, 146 F.3d at 374).
Nevertheless, the Partnership’s argument is unavailing. The Kentucky Supreme Court
has explained that for ratification to be effective, “‘there must be an intention to ratify, although
the intention may be inferred from the facts and circumstances. As a consequence, ratification
cannot be inferred from acts which may be readily explained without involving any intent to
ratify.’” Saint Joseph Healthcare, Inc. v. Thomas, 487 S.W.3d 864, 874 (Ky. 2016) (quoting
Wolford v. Scott Nickels Bus Co., 257 S.W.2d 594, 596 (Ky. 1953)).
The Partnership argues that Farmers’ claim that it was ignorant and relied on King
Southern’s due diligence “does not absolve it from liability.” (D.N. 87-1, PageID # 634) The
Partnership provides:
[W]here ignorance of the facts arises from the principal’s own failure to
investigate and the circumstances are such as to put a reasonable person upon
inquiry, the principal may be held to have ratified despite lack of full knowledge.
Thus, the general rule, that in order for ratification to bind the principal he or she
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must have been shown to have had full knowledge of the material facts relating to
the unauthorized transaction, does not apply if the principal intentionally assumed
the responsibility without inquiring, or deliberately ratified, having all the
knowledge with respect to the act which he or she cared to have.
(Id. (citing Papa John’s Int’l, Inc. v. McCoy, 244 S.W.3d 44, 53 (Ky. 2008)) However, like the
plaintiff in McCoy, the Partnership “fail[ed] to cite the rest of the rule, which continues as
follows: ‘Even then, however, for this exception to apply, the principal must have had actual
knowledge of the facts relied upon to put him or her on inquiry.’” (D.N. 88, PageID # 648)
McCoy, 244 S.W.3d at 53 (citing 3 Am.Jur.2d Agency § 185 (2007); Restatement (Third) Of
Agency § 4.06 (2006)).
As Farmers points out, there is nothing in the record that would indicate “that Farmers
had any knowledge of any improper conduct or breach of fiduciary duty on the part of King
Southern.” (D.N. 88, PageID # 649) Additionally, Farmers did not underwrite the loan, was not
required to conduct the same level of due diligence as King Southern, and had no fiduciary duty
to the Partnership to do so. (D.N. 84; PageID # 623) Simply entering into the participation
agreement and buyout agreement with King Southern does not indicate that Farmers intended to
ratify “the events which took place in 2008.” (D.N. 87-1, PageID # 631–32) As explained
earlier, Farmers entered into these agreements to help King Southern participate in a loan that it
otherwise may not have been able to, and in doing so obtained the benefit of King Southern’s
“security interest and priority of payment.” AutoStyle, 269 F.3d at 736. Therefore, Farmers’ acts
do not demonstrate an intention to ratify the acts of King Southern in making the original loan.
See Saint Joseph Healthcare, Inc., 487 S.W.3d at 874.
Next, the plaintiff challenges the Court’s finding that the agreement in question was a
“true” participation agreement under the Sixth Circuit’s AutoStyle test. (D.N. 87-1, PageID #
636–37) In AutoStyle, the Sixth Circuit established the following four-part test for determining
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“true” participation agreements: “(1) money is advanced by a participant to a lead lender; (2) the
participant’s right to repayment only arises when the lead lender is paid; (3) only the lead lender
can seek legal recourse against the borrower; and (4) the document is evidence of the parties’
true intentions.” In re AutoStyle Plastics, Inc., 269 F.3d 726, 736–37 (6th Cir. 2001). The
plaintiff argues that the fourth factor was not met because the agreement was a boilerplate form
that “did not discuss the fact that [King Southern] had a conflict of interest and needed to exit the
loan,” and thus does not reflect the parties’ true intentions. (D.N. 87-1, PageID # 636–37) The
Court previously found that this participation agreement satisfied the AutoStyle four-part test,
and will not repeat its reasoning here. (See D.N. 84, PageID # 619–20) Furthermore, the Court
does not find it necessary to revisit its conclusion because the plaintiff has not alleged any clear
error of law or fact, presented new evidence, introduced an intervening change in controlling
law, or argued that granting the motion will prevent manfiest injustice. Instead, the Partnership
is again raising an argument that should have been raised earlier.
See Golden, 2015 WL
2153344, at *3 (citing Engler, 146 F.3d at 374).
Finally, the Partnership argues that Farmers authorized an ultra vires loan when it
accepted King Southern’s investigation despite knowing that King Southern had a conflict of
interest. (D.N. 87-1, PageID # 637) The plaintiff previously raised this argument and it was
addressed in the Court’s opinion granting summary judgment. (D.N. 84, PageID # 615, 621)
The Court will not restate why this argument fails because the Partnership has not alleged that
the Court made a clear error of law or fact in reaching its conclusion, nor has it provided any new
evidence or introduced any other grounds that would lead the Court to reach a different
conclusion. (See D.N. 87-1, PageID # 637–38)
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Because the Partnership has not met its burden pursuant to Rule 59(e) of providing a
basis for altering or vacating the judgment, the motion will be denied. The Partnership’s motion
does not allege a mistake of law or fact, present new evidence, introduce an intervening change
in controlling law, or argue that manifest injustice will be prevented. Instead, the Partnership’s
arguments should have been made earlier or have already been made and will not be rehashed
here. See Golden, 2015 WL 2153344, at *3.
B. Motion to Substitute Party
The Partnership also filed an unopposed motion to substitute a party, seeking leave to
substitute Defendant William Bennett Collett, Jr. in the place of Defendant William Bennett
Collett, Sr. because of the death of the elder Collett. (D.N. 90) While Plaintiff cited Ky. Rev. St.
§ 395.278 as the basis for their motion, Fed. R. Civ. P. 25 governs the substitution of a party in
this case. See Boggs v. Blue Diamond Coal Co., 497 F. Supp. 1105, 1124 (E.D. Ky. 1980). Rule
25 provides that if a motion for substitution “is not made within 90 days after service of a
statement noting the death, the action by or against the decedent must be dismissed.” Fed. R.
Civ. P. 25. However, because a motion for substitution “can be filed even if no suggestion of
death has been filed,” the Court will grant this motion. United States v. Currency $11,331, 482
F. Supp. 2d 873, 885–86 (E.D. Mich. 2007).
III.
CONCLUSION
For the reasons explained above, and the Court being otherwise sufficiently advised, it is
hereby
ORDERED as follows:
(1)
The plaintiff’s motion to alter judgment or vacate (D.N. 87) is DENIED.
(2)
The plaintiff’s motion to substitute a party (D.N. 90) is GRANTED.
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(3)
This matter is referred to Magistrate Judge Colin H. Lindsay to conduct a status
conference.
December 19, 2016
David J. Hale, Judge
United States District Court
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