Williams et al v. Porter Bancorp, Inc. et al

Filing 31

MEMORANDUM OPINON AND ORDER granting 4 Motion or Defendant Porter Bancorps to Dismiss for Failure to State a Claim. Plaintiffs claims against it are DISMISSED WITH PREJUDICE. Signed by Senior Judge John G. Heyburn, II on 8/22/2014. cc: Counsel(JBM)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:13-CV-1166-H

JONATHAN C. WILLIAMS, et al.

PLAINTIFFS/COUNTER-DEFENDANTS

V.
PORTER BANCORP, INC., et al.
PBI BANK, INC.

DEFENDANTS
DEFENDANT/COUNTER-PLAINTIFF

V.
MITCH TAYLOR, et al.

COUNTER-DEFENDANTS
MEMORANDUM OPINION AND ORDER

Before the Court is Defendant Porter Bancorp, Inc.’s (“Porter Bancorp”) motion to
dismiss Plaintiffs’ Complaint pursuant to Rule 12(b)(6). Plaintiffs1 are customers of PBI Bank,
Inc. (“PBI”), who sued various parties allegedly involved in an illegal tying arrangement,
including PBI, Porter Bancorp, and three individuals, Mark Delcotto, Wayne Stefanovich, and
Maria Bouvette.2 Plaintiffs allege (1) breach of contract and breach of the duty of good faith and
fair dealing against PBI; (2) negligence against PBI, Porter Bancorp, Delcotto, Stefanovich, and
Bouvette; and (3) illegal tying in violation of 12 U.S.C. § 1972 against PBI and Porter Bancorp,
as well as punitive damages based upon these claims. Plaintiffs Daniel Sexton and Fayette
Aviation only allege an additional cause of action against PBI for improper re-possession and

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Plaintiffs include Jonathan C. Williams, Daniel E. Sexton, Mobile Home Sales of Central Kentucky, LLC, Fayette
Aviation, Inc., Star Lite Development, LLC, 3660 Realty, LLC, Food Service of Lexington, LLC, and Georgetown
Mobile Estates, LLC.
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Defendant PBI filed a counterclaim against Williams, Sexton, Mobile Home Sales, Fayette Aviation, and Star Lite,
as well as a Third-Party Complaint against Mitch Taylor, Sarah Taylor, AES Realty, LLC, FTS Realty, LLC, Andrei
Korossy, Rosenbaum & Rosenbaum, PSC, American Tax Funding, LLC, DES Realty, LLC, and Jamos Fund I, LP.

violation of K.R.S. § 355.9-207. The current motion only directly affects claims against Porter
Bancorp.
I.
According to Plaintiffs, the facts are these.
On January 30, 2008, Plaintiff Jonathan Williams obtained a loan with PBI for $4.25
million, which was set to mature on June 30, 2008, and secured by real estate owned by Plaintiff
Daniel Sexton.
On February 19, PBI, through its Vice President Joseph Tobin, told Williams that PBI
had a loan to Brooklyn Pizza guaranteed by Brad and Matt Schooler, and that Brooklyn Pizza
was facing a forcible detainer suit and would have to close unless $24,000 in delinquent lease
payments were made. PBI also told Williams that if Brooklyn Pizza closed, PBI’s loan to it
would go unpaid and would have to be written off. PBI told Williams and Sexton that in order
for PBI to renew the $4.25 million loan or to make a new loan to pay off the $4.25 million under
workable terms, Williams and Sexton must pay the $24,000 owed by Brooklyn Pizza and obtain
a 51% ownership in that company, thereby taking over the debt from Brooklyn Pizza to PBI.
Williams and Sexton reluctantly agreed.
After Williams and Sexton began operating Brooklyn Pizza through Plaintiff Food
Service of Lexington, Inc., PBI told them that another condition for renewing the $4.25 million
loan was to allow a PBI agent to pick up the daily deposits of Brooklyn Pizza and deposit them
at PBI, for a fee of $150 per week.
On June 13, 2008, Williams, Sexton, Mobile Home Sales, Star Lite, and Fayette Aviation
entered into a loan agreement with PBI in the amount of $5.25 million, which paid off the $4.25
million loan and which new loan matured on June 13, 2009. By December 2008, Plaintiffs knew

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that as a result of the economic downturn, they would not be able to pay off the $5.25 million
PBI loan on June 13 and would thus need a renewal, extension, or new loan.
On December 26, 2008, PBI, through Tobin, and Porter Bancorp, through Delcotto, told
Williams and Sexton that PBI would only extend credit of the $5.25 million loan if they assumed
the $66,000 debt of Chance Farley, which was in default. Williams and Sexton reluctantly
agreed. On December 31, Tobin and Delcotto told Williams and Sexton that another condition
of the $5.25 million loan was that they had to purchase from PBI OREO (other real estate
owned) property located at 3660 Barrowood, Lexington, Kentucky, for $850,000, which was
more than it was worth, as well as obtain a $300,000 line of credit from PBI to finish the
property. Williams and Sexton again felt forced to agree.
Despite assurances to the contrary, at the closing for the 3660 property, PBI took a
mortgage on all of Sexton’s property including property leased to Penske. PBI knew that the
lease contained a restriction of no additional mortgages and thus Penske would be able to
terminate its lease, causing Sexton loss of monthly income. Penske did terminate its lease.
Finally, in November 2010, PBI set off money in the amount of $27,000 from its
customer, Georgetown Mobile Estates, LLC’s bank account at PBI in violation of its contractual
agreement.
II.
Porter Bancorp moves to dismiss Plaintiffs’ claims against it for failure to state a claim
upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). “The defendant has the burden of
showing that the plaintiff has failed to state a claim for relief.” DirecTV, Inc. v. Treesh, 487 F.3d
471, 476 (6th Cir. 2007) (citing Carver v. Bunch, 946 F.2d 451, 454–55 (6th Cir. 1991)). A
claim meets the plausibility standard “when the plaintiff pleads factual content that allows the

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court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556
(2007)).
When considering a 12(b)(6) motion to dismiss, courts must “construe the complaint in
the light most favorable to the plaintiff” and “accept all well-pleaded factual allegations as true.”
La. Sch. Emps.’ Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 47778 (6th Cir. 2010) (citing
League of United Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007)). The Court
will draw all reasonable inferences in favor of the plaintiff. See Twombly, 550 U.S. at 556. But
the Court “need not accept as true legal conclusions or unwarranted factual inferences.” Gregory
v. Shelby Cnty., 220 F.3d 433, 446 (6th Cir. 2000) (citing Mixon v. State of Ohio, 193 F.3d 389,
400 (6th Cir. 1999)).
III.
The Court will first address Porter Bancorp’s motion to dismiss Plaintiffs’ claim for
illegal tying in violation of 12 U.S.C. § 1972, the Bank Holding Company Act. The purpose of
this Act is “to apply the general principles of the Sherman Antitrust Act prohibiting
anticompetitive tying arrangements specifically to the field of commercial banking.” Kenty v.
Bank One, Columbus, N.A., 92 F.3d 384, 394 (6th Cir. 1996) (quoting Parsons Steel, Inc. v. First
Ala. Bank of Montgomery, N.A., 679 F.2d 242, 245 (11th Cir. 1982)) (internal quotation marks
omitted); see also S.Rep. No. 1084, 91st Cong., 2d Sess. (1970), reprinted in 1970 U.S. Code
Cong. & Ad. News 5519, 5535 (The Act was passed “to prohibit anti-competitive practices
which require bank customers to accept or provide some other service or product or refrain from
dealing with other parties in order to obtain the bank product or service they desire.”).

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A.
Porter Bancorp first argues that, by its express terms, Section 1972 prohibits only conduct
by a “bank.” Indeed, the language of Section 1972 indicates that only the actions of banks are
covered:
(1) A bank shall not in any manner extend credit, lease or sell property of any
kind, or furnish any service, or fix or vary the consideration for any of the
foregoing, on the condition or requirement . . .
12 U.S.C. § 1972(1) (emphasis added). That very provision refers to bank holding companies
separately. For example, “on the condition or requirement (D) that the customer provide some
additional credit, property, or service to a bank holding company of such bank. . . .” Id.
Courts agree that § 1972 applies only to the conduct of banks. See, e.g., Flintridge
Station Assocs. v. Am. Fletcher Mortg. Co., 761 F.2d 434, 43738 (1985) (“This narrow
definition was purposefully provided by Congress, see 1970 U.S. Code Cong. & Ad. News 5541,
and has been explicitly recognized by the courts.”); B. C. Recreational Indus. v. First Nat’l Bank
of Bos., 75-5053-MA, 1980 WL 1865, at *4 (D. Mass. Apr. 30, 1980), aff’d, 639 F.2d 828 (1st
Cir. 1981); see also S & N Equip. Co. v. Casa Grande Cotton Fin. Co., 97 F.3d 337, 343 (9th
Cir. 1996) (assuming that an entity must be a bank).3
Indeed, the Sixth Circuit’s formulation of the requirements to make out a Section 1972
claims incorporate this distinction:
To make out a claim under Section 1972, . . . the plaintiff must prove that (1) the
bank imposed an anti-competitive tying arrangement, that is, it conditioned the
extension of credit upon the borrower's obtaining or offering additional credit,
property or services to or from the bank or its holding company; (2) the
arrangement was not usual or traditional in the banking industry; and (3) the
practice conferred a benefit on the bank.

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Although courts have considered whether a non-bank affiliate was acting as a bank’s agent, Plaintiff has not argued
this point. See Flintridge, 761 F.2d at 438.

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Highland Capital, Inc. v. Franklin Nat’l Bank, 350 F.3d 558, 565 (6th Cir. 2003) (citing Kenty,
92 F.3d at 394) (emphasis added).
For these reasons, the Court finds that a bank holding company cannot be held liable for
illegal tying under 12 U.S.C. § 1972.
B.
At issue next is whether Porter Bancorp can be held liable as a bank under the Bank
Holding Company Act. For the purposes of Section 1972, a “bank” includes both an “insured
bank” and “an institution organized under the laws of the United States [or any U.S. state or
territory] which both (i) accepts demand deposits or deposits that the depositor may withdraw by
check or similar means for payment to third parties or others; and (ii) is engaged in the business
of making commercial loans.” 12 U.S.C. § 1841(c)(1)(A)-(B).
Porter Bancorp argues that it is not a bank, citing a record from the National Information
Center of the Federal Reserve which lists it as a “bank holding company.” It further argues that
it neither accepts deposits nor makes commercial loans. In general, when a court is presented
with matters outside the pleadings on a Rule 12(b)(6) motion to dismiss, the court must either
exclude the materials or convert the motion into one for summary judgment. See Fed. R. Civ. P.
12(d). The Sixth Circuit, however, takes “a liberal view of what matters fall within the pleadings
for purposes of Rule 12(b)(6).” Armengau v. Cline, 7 F. App’x 336, 344 (6th Cir. 2001). “If
referred to in a complaint and central to the claim, documents attached to a motion to dismiss
form part of the pleadings.” Id. (citing Jackson v. City of Columbus, 194 F.3d 737, 745 (6th Cir.
1999), abrogated on other grounds by Swierkiewicz v. Sorema N. A., 534 U.S. 506 (2002)).
“[C]ourts may also consider public records, matters of which a court may take judicial notice,
and letter decisions of governmental agencies.” Id. (citing Jackson, 194 F.3d at 745). Although

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the Federal Reserve document is not mentioned in Plaintiffs’ Complaint, it is a public record.
The Court takes judicial notice of this record but does not convert Porter Bancorp’s motion into
one for summary judgment.
Plaintiffs do not specifically contest these assertions but rather argue that on a motion to
dismiss, the Court must accept their factual allegations as true. The relevant allegations in the
Compliant are the following:
9. Defendant, Porter Bancorp, Inc., is a Kentucky corporation and bank holding
company with PBI Bank as its wholly owned subsidiary. Porter Bancorp is
regulated by the Federal Reserve Bank of St. Louis.
53. PBI and PBI Bancorp are banks within the meaning of 12 U.S.C. § 1971 and
12 U.S.C. § 1841(c).
A similar situation recently arose in Adelphia Recovery Trust v. Bank of America, N.A..
See 646 F. Supp. 2d 489, 49596 (S.D.N.Y. 2009). TD Texas argued that it was not a bank
within the meaning of Section 1972 and presented to the court the National Information Center
of the Federal Reserve Board’s document identifying it as a finance company. See id. at 495. It
also presented information showing that the FDIC omitted it from the list of FDIC insured bank
and thrift subsidiaries of TD Bank. See id. Without converting TD Texas’s motion into a
motion for summary judgment, the court took judicial notice of those two public records and,
there being no contrary evidence presented by the plaintiff, held that “TD Texas [was] not a bank
within the meaning of the [Bank Holding Company Act] and accordingly” dismissed the claim.
Id. at 496.
The Court finds that it is presented with a similar situation here. Because of the public
record cited by Porter Bancorp, and because Plaintiffs do not make any specific allegations or
arguments contradicting this record, the Court finds that Porter Bancorp is not a bank and
accordingly dismisses Plaintiffs’ Section 1972 claim against it.

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IV.
The Court will next address Porter Bancorp’s motion to dismiss Plaintiffs’ other counts
against it for failure to state a claim upon which relief can be granted.

The Complaint

specifically defines Porter Bancorp as “PBI Bancorp.” The few paragraphs that contain factual
allegations against Porter Bancorp allege that it, through Delcotto, conditioned the extension of
the $5.25 million loan on the purchase of OREO property and the assumption of Farley’s
$66,000 debt.
A.
Count I alleges breach of contract and breach of the duty of good faith and fair dealing
against PBI alone. Plaintiffs, in their response to this motion, indicate that this claim is also
against Porter Bancorp.
To recover for breach of contract under Kentucky law, a plaintiff must show “the
existence and the breach of a contractually imposed duty.” Lenning v. Commercial Union Ins.
Co., 260 F.3d 574, 581 (6th Cir. 2001) (citing Strong v. Louisville & Nashville R. Co., 43 S.W.2d
11, 13 (Ky. 1931)). The Complaint here does not allege any contractual relationship between
Plaintiffs and Porter Bancorp that would allow a breach of contract claim or give rise to the
implied covenant of good faith and faith dealing. See Farmers Bank & Trust Co. of Georgetown,
Ky. v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005) (“Within every contract, there is
an implied covenant of good faith and fair dealing, and contracts impose on the parties thereto a
duty to do everything necessary to carry them out.”). Although the Complaint does seem to
allege that Delcotto, who may have been acting for Porter Bancorp, participated in negotiations,
it only alleges that PBI was involved in the actual extension of credit for the loan.
For these reasons, Count I is dismissed as to Porter Bancorp.

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B.
Count II alleges negligence against PBI, Porter Bancorp, Bouvette, Delcotto, and
Stefanovich. Specifically, Plaintiffs allege that Porter Bancorp had a duty to exercise safe,
sound, and legal banking practices, as well as a duty to supervise its employees “from illegal
behavior, including illegal tying arrangements.” Porter Bancorp allegedly breached its duty
when it “allowed PBI to commit illegal tying arrangements in violation of law.”
Parent companies are generally not liable for the actions of their subsidiaries, which are
distinct legal entities. See Dole Food Co. v. Patrickson, 538 U.S. 468, 474 (2003). Therefore,
Porter Bancorp cannot be held liable for the actions of PBI or its employees, nor can it be held
liable for failing to supervise PBI employees. In addition, Plaintiffs do not argue any grounds for
piercing the corporate veil in this case. See Corrigan v. U.S. Steel Corp., 478 F.3d 718, 724 (6th
Cir. 2007) (“The burden of proof to demonstrate grounds for piercing the corporate veil is on the
party seeking to impose liability on the parent corporation.”).
Therefore, any action for negligence must be based on the conduct of Porter Bancorp or
its agents.

Plaintiffs allege that Porter Bancorp, through Delcotto, committed illegal tying

violations. However, Plaintiffs identify Delcotto as “the former market president for PBI,” not
Porter Bancorp. Porter Bancorp is not liable for the actions of an employee of a separate legal
entity, PBI.4
The Complaint identifies Stefanovich as “the Community President of Lexington for
Porter Bancorp.” The Complaint does not allege any specific acts on the part of Stefanovich, so
his liability is presumably predicated on some supervisory role at Porter Bancorp. Since no

4

The Court dismisses the negligence claim against Porter Bancorp with the understanding that Delcotto was an
employee of PBI, not Porter Bancorp. If this understanding is incorrect, Plaintiffs may allege the relationship
between Delcotto and Porter Bancorp more specifically.

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improper acts by Porter Bancorp have been alleged, no supervisory liability can be predicated on
those acts.
For these reasons, Count II is dismissed as to Porter Bancorp.
Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Defendant Porter Bancorp’s motion to dismiss is
SUSTAINED and Plaintiffs’ claims against it are DISMISSED WITH PREJUDICE.

August 22, 2014

cc:

Counsel of Record

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