Whitney Bank v. S M I Companies Global Inc et al
Filing
57
MEMORANDUM RULING re 46 MOTION for Summary Judgment Against Defendants SMI Companies Global, Inc. and Vaughn S. Lane and for Certification as Final Judgment filed by Whitney Bank. Considering the evidence, the law, and the arguments of the parties, and for the reasons fully explained herein, the motion is DENIED. Signed by Magistrate Judge Patrick J Hanna on 6/14/2018. (crt,Alexander, E)
UNITED STATES DISTRICT COURT
WESTERN DIVISION OF LOUISIANA
LAFAYETTE DIVISION
WHITNEY BANK
CIVIL ACTION NO. 6:16-cv-01427
VERSUS
MAGISTRATE JUDGE HANNA
SMI COMPANIES GLOBAL, INC.
AND VAUGHN S. LANE
BY CONSENT OF THE PARTIES
MEMORANDUM RULING
Currently pending is the motion for summary judgment (Rec. Doc. 46), which
was filed by the plaintiff, Whitney Bank. The motion is opposed, and oral argument
was heard on May 31, 2018. Considering the evidence, the law, and the arguments
of the parties, and for the reasons fully explained below, the motion is DENIED.
Background
In this commercial dispute, Whitney Bank is seeking to collect amounts
allegedly owed by the defendants pursuant to two promissory notes executed by SMI
Companies Global, Inc. and guaranteed by SMI’s director, officer, and shareholder,
Vaughn S. Lane. The bank is also seeking recognition of the enforceability of the
bank’s security interest in SMI’s accounts receivables. The defendants asserted
affirmative defenses and counterclaims against the bank.
It is undisputed that the bank entered into two agreements with the defendants,
by which the bank loaned money to SMI and the loans were guaranteed by Mr. Lane.
On December 12, 2012, SMI executed a promissory note in favor of Whitney
Bank in the principal amount of $1 million along with a commercial security
agreement. The loan agreement was perfected by the filing of a UCC financing
statement.
On December 5, 2013, the note was renewed as evidenced by a
promissory note dated December 5, 2013 in the principal amount of $1 million. On
August 12, 2014, the bank increased the amount of the loan as evidenced by a
promissory note dated August 12, 2014 in the principal amount of $1.5 million. On
that same date, SMI executed a commercial security agreement. On June 22, 2015,
the August 2014 note was renewed as evidenced by a promissory note dated June
22, 2015 in the principal amount of $1.5 million. This note had a maturity date of
July 31, 2016. This loan is sometimes referred to in the parties’ briefing as “Loan
1” or “Line 1.”
On April 3, 2015, Whitney Bank and SMI entered into a Business Loan
Agreement, and SMI executed a promissory note payable to Whitney Bank in the
amount of $900,000. The original maturity date of the note was extended to July 3,
2016 by an allonge dated April 4, 2016. On that same date, SMI executed a
commercial security agreement, which was perfected by the filing of a UCC
financing statement. This loan is sometimes referred to in the parties’ briefing as
“Loan 2” or “Line 2.” The purpose of this loan was to “provide funds for a particular
contract with Halliburton.” (Rec. Doc. 50-10 at 1).
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Whitney Bank contends that both loans are in default, that the amounts due
under the loans are undisputed, that only the obligations expressly set forth in writing
in the loan documents may be enforced, and that it did not breach any contractual
obligations in its dealings with SMI. The defendants contend, however, that their
failure to repay any amounts owed should be excused because Whitney Bank
substantially breached the contract between them.
The defendants contend that Whitney Bank undertook the second loan –
which was in the nature of a revolving line of credit – in order to finance SMI’s
construction of eight tanks or vessels that were to be installed in ships pursuant to a
contract between SMI and Halliburton. The defendants contend that the bank was
fully apprised of the terms and conditions of the contract between SMI and
Halliburton and committed to continue loaning money under the line of credit until
the Halliburton job was completed. The defendants contend that the bank knew that
Halliburton intended to pay for the vessels only after all of them had been completed
and that the project was to be completed approximately in September 2016, and
Henry Schexnayder, Whitney Bank’s Metro Baton Rouge market president at
relevant times, confirmed in his deposition testimony that he was aware of that
arrangement. (Rec. Doc. 50-5 at 23, 26). The Business Loan Agreement executed
on April 3, 2015 states that the purpose of the loan is for a temporary overline to
provide funds for a particular contract with Halliburton. (Rec. Doc. 50-10 at 1). The
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Business Loan Agreement became effective on April 3, 2015 and was to “continue
in full force and effect until such time as all of Borrower’s Loans in favor of Lender
have been paid in full. . . or the parties may agree in writing to terminate this
Agreement.” Under the agreement, “Lender has agreed to consider making Loan
Advances to Borrower, from time to time, one or more times, on a revolving line of
credit basis up to a maximum principal amount. . . [of] $900,000.00 or such other
amounts as to which Lender may agree.” The Business Loan Agreement also stated
that the lender would have no obligation to make loan advances or to disburse loan
proceeds if any one of four things occurred: (a) the borrower or guarantor was in
default under this agreement or any other agreement with the bank; (b) the borrower
or guarantor died, became incompetent, became insolvent, or filed for bankruptcy
protection; (c) a materially adverse change in the borrower’s or guarantor’s financial
condition or the value of the collateral occurred; or (d) a guarantor sought to revoke
its guaranty of this or any other loan. (Rec. Doc. 50-10 at 3). Additionally, the
lender could refuse to extend Loan Advances (as defined in the agreement) if (a) the
maximum line of credit was exceeded; (b) the borrower failed to comply with the
lender’s procedure or requirements; (c) the borrower failed to provide the lender
with satisfactory documentation supporting its requests; (d) the lender believed the
borrower was not complying with the terms or conditions of the agreement or was
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in default; or (e) the lender deemed itself insecure with regard to repayment of the
loan. (Rec. Doc. 50-10 at 1).
The defendants contend that the bank substantially breached the contract on
June 28, 2016, when the bank first confirmed that it would fund SMI’s payroll but
then, two hours before the funding was to occur, withdrew its commitment to do so,
forcing Mr. Lane to use $87,000 from VS Lane & Company to cover SMI’s payroll.
(Rec. Doc. 50-3 at 63-68).
The defendants also contend that, on July 10, 2016, Whitney Bank dishonored
a check written by SMI to Corrosion Materials, a critical vendor on the Halliburton
project, after having expressly agreed to fund the check. (Rec. Doc. 50-3 at 101104).
The defendants also contend that, thereafter, SMI approached Halliburton and
secured Halliburton’s agreement to pay its vendors directly and – at the suggestion
of Henry Schexnayder of Whitney Bank – secured Halliburton’s agreement that it
would make interim payments on its contract with SMI. (Rec. Doc. 50-3 at 105108). The defendants contend that Halliburton actually paid for the first two vessels
soon after they were completed rather than waiting for all eight of the vessels to be
finished. (Rec. Doc. 50-3 at 108-109).
The defendants contend that, at some point in June or July 2016, Whitney
Bank employee Omer Davis devised a workout plan by which the bank would
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continue to fund the Halliburton project through its completion and advance a sum
of $270,000 over-line but the plan was never reduced to writing and the bank failed
– without explanation – to implement the plan. (Rec. Doc. 50-6 at 15-16, 37-41, 5455). At relevant times, Mr. Davis was an executive vice president and credit
approver for the bank. (Rec. Doc. 50-6 at 5-6). In his deposition testimony, Mr.
Davis confirmed that he approved a workout plan (Rec. Doc. 50-6 at 15-16, 37, 87)
and did not know why that plan was not implemented. (Rec. Doc. 50-6 at 55).
The defendants contend that Whitney Bank merged the two loans and
transferred both of them to the bank’s special assets department. (Rec. Doc. 50-3 at
111-113). Mr. Davis testified that he does not know why the loans were transferred
to the bank’s special assets department. (Rec. Doc. 50-6 at 55). David Campbell,
the commercial loan officer with whom SMI primarily dealt, testified that the
transfer was Mr. Davis’s decision. (Rec. Doc. 50-4 at 104). Louis Dubos, the bank’s
supervisor of special assets (Rec. Doc. 50-7 at 6) does not know who made the
decision to transfer the loans to special assets. (Rec. Doc. 50-7 at 8). Calvin
Cranfield, a team leader for the bank’s special assets department (Rec. Doc. 50-8 at
6), assumes that it was a committee decision. (Rec. Doc. 50-8 at 8).
The defendants contend that, on July 21, 2016, Mr. Campbell advised Mr.
Lane that there would be no further communications between Whitney Bank’s
Commercial Loans Department and SMI or Halliburton. (Rec. Doc. 50-3 at 1136
115). Mr. Campbell confirmed that he advised SMI that the commercial loan
department would take no future phone calls from SMI or Halliburton even though
the line of credit was still in existence. (Rec. Doc. 50-4 at 109). Halliburton then
canceled its contract with SMI. (Rec. Doc. 50-3 at 115).
The defendants contend that, after the loans were transferred to the bank’s
special assets department and communication with SMI and Mr. Lane was
discontinued, Whitney Bank and its counsel refused to provide information to SMI
or Mr. Lane regarding its collection efforts. (Rec. Doc. 50-3 at 127-128, 132).
The defendants contend that certain collection efforts undertaken by Whitney
Bank were inappropriate. For example, the defendants contend that Whitney Bank’s
counsel sent notices to SMI’s customers without coordinating collection efforts with
SMI, resulting in demand letters being sent to customers who did not owe money to
SMI or from whom SMI had already collected in the normal course of business.
(Rec. Doc. 50-2 at 115-116; Exhibit 50-3 at 253-256, 259-260).
On August 18, 2016, Whitney Bank sent a demand letter to SMI and Mr. Lane,
declaring the April 2015 and the June 2015 promissory notes in default, advising of
the amounts due on both loans, and demanding payment not later than August 29,
2016. (Rec. Doc. 46-2). Ultimately, SMI’s customers cancelled every contract that
they had with SMI. (Rec. Doc. 50-3 at 123).
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The bank now seeks to be paid the sums it claims are owed under the two
loans, while the defendants argue that their performance under the loan agreements
should be excused because the bank substantially breached the loan agreements.
Analysis
A.
The Applicable Standard
Under Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment
is appropriate when there is no genuine dispute as to any material fact, and the
moving party is entitled to judgment as a matter of law. A fact is material if proof
of its existence or nonexistence might affect the outcome of the lawsuit under the
applicable governing law.1 A genuine issue of material fact exists if a reasonable
jury could render a verdict for the nonmoving party.2
The party seeking summary judgment has the initial responsibility of
informing the court of the basis for its motion and identifying those parts of the
record that demonstrate the absence of genuine issues of material fact.3 If the
moving party carries its initial burden, the burden shifts to the nonmoving party to
1
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Sossamon v. Lone Star
State of Tex., 560 F.3d 316, 326 (5th Cir. 2009); Hamilton v. Segue Software, Inc., 232 F.3d 473,
477 (5th Cir. 2000).
2
Brumfield v. Hollins, 551 F.3d 322, 326 (5th Cir. 2008) (citing Anderson v. Liberty
Lobby, Inc., 477 U.S. at 252); Hamilton v. Segue Software, Inc., 232 F.3d at 477.
3
Washburn v. Harvey, 504 F.3d 505, 508 (5th Cir. 2007) (citing Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986)).
8
demonstrate the existence of a genuine issue of a material fact.4 All facts and
inferences are construed in the light most favorable to the nonmoving party. 5
If the dispositive issue is one on which the nonmoving party will bear the
burden of proof at trial, the moving party may satisfy its burden by pointing out that
there is insufficient proof concerning an essential element of the nonmoving party's
claim.6 The motion should be granted if the nonmoving party cannot produce
evidence to support an essential element of its claim.7
When both parties have submitted evidence of contradictory facts, a court is
bound to draw all reasonable inferences in favor of the nonmoving party.8 The court
cannot make credibility determinations or weigh the evidence, and the nonmovant
cannot meet his burden with unsubstantiated assertions, conclusory allegations, or a
scintilla of evidence.9 AWhen all of the summary judgment evidence presented by
both parties could not lead a rational trier of fact to find for the nonmoving party,
4
Washburn v. Harvey, 504 F.3d at 508.
5
Brumfield v. Hollins, 551 F.3d at 326 (citing Matsushita Elec. Indus. Co. v. Zenith
Radio, 475 U.S. 574, 587 (1986)).
6
Norwegian Bulk Transport A/S v. International Marine Terminals Partnership, 520
F.3d 409, 412 (5th Cir. 2008) (citing Celotex Corp. v. Catrett, 477 U.S. at 325).
7
Condrey v. Suntrust Bank of Ga., 431 F.3d 191, 197 (5th Cir. 2005).
8
Boudreaux v. Swift Transp. Co., Inc., 402 F.3d 536, 540 (5th Cir. 2005).
9
Boudreaux v. Swift Transp. Co., Inc., 402 F.3d at 540.
9
there is no genuine issue for trial and summary judgment is proper.@10 On the other
hand, a genuine issue of material fact exists if a reasonable jury could return a verdict
for the nonmoving party.11
B.
The Law to Be Applied
This action is before the court on diversity jurisdiction. (Rec. Doc. 1 at 2-3).
A federal court sitting in diversity must apply state substantive law and federal
procedural law.12 Therefore, Louisiana’s substantive law must be applied in this
case.13
C.
Genuine Issues of Material Fact Preclude Summary Judgment in the
Bank’s Favor
Whitney Bank takes the position that its motion for summary judgment should
be decided on the basis that this is a simple collection matter and that all the bank
needs to establish is that loan documents were signed, the borrower defaulted on the
loans, and the bank has calculated the amounts that are due under the loans, as though
this were a simple case on an open account subject to the calculation of a sum certain
10
Greene v. Syngenta Crop Protection, Inc., 207 F.Supp.2d 537, 542 (M.D. La. 2002)
(citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).
11
Pylant v. Hartford Life and Accident Insurance Company, 497 F.3d 536, 538 (5th
Cir. 2007) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. at 248).
12
Erie R. R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Gasperini v. Ctr. for
Humanities, Inc., 518 U.S. 415, 427 (1996); Coury v. Moss, 529 F.3d 579, 584 (5th Cir. 2008).
13
See, e.g., Moore v. State Farm Fire & Cas. Co., 556 F.3d 264, 269 (5th Cir. 2009).
10
as liquidated damages.
In this case, however, the defendants have asserted
affirmative defenses and have made allegations in a cross-claim that raise factual
issues relevant to the bank’s claims.
In response to Whitney Bank’s complaint, the defendants alleged that their
default under the promissory notes was caused by the bank’s violation of its
contractual obligations, by the bank’s breach of its fiduciary duties, by the bank’s
negligence in dealing with the defendants and their customers, by the bank’s abuse
of rights, by the bank’s negligent misrepresentation, by the bank’s tortious
interference with SMI’s business, by the bank’s intentional interference with SMI’s
contracts and working relationships with its customers, and by the bank’s willful
actions. (Rec. Doc. 15 at 8-9).
Under Louisiana law, contracts must be performed in good faith,14 and an
obligor in bad faith is liable for the damage that results from his failure to perform. 15
Furthermore, when one party substantially breaches a contract, the other party to the
contract has a defense and an excuse for nonperformance.16 In the more particular
14
Louisiana Civil Code Article 1983.
15
Louisiana Civil Code Article 1997.
16
Olympic Ins. Co. v. H. D. Harrison, Inc., 463 F.2d 1049, 1053 (5th Cir. 1972), cert.
denied 410 U.S. 930 (1973); LAD Services of Louisiana, L.L.C. v. Superior Derrick Services,
L.L.C., 2013-0163 (La. App. 1 Cir. 11/7/14), 167 So.3d 746, 755, writ not considered, 2015-C0086 (La. 04/01/15), 162 So.3d 392; Commerce Ins. Agency, Inc. v. Hogue, 618 So.2d 1048, 1052
(La. App. 1 Cir.), writ denied, 626 So.2d 1171 (La. 1993). See, also, Louisiana Civil Code Article
2013, which states that “[w]hen the obligor fails to perform, the obligee has a right to the judicial
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context of commercial loan transactions, every contract subject to the UCC, such as
the loan agreements between Whitney Bank and SMI, imposes an obligation of good
faith and reasonable commercial standards of fair dealing.17
In Olympic Ins. Co. v. H.D. Harrison, the court recognized that undisputed
multiple breaches of a contract between a principal and agent that “went to the very
foundation of the business relationship” constituted a substantial breach that excused
performance.18 In LAD Services of Louisiana, L.L.C. v. Superior Derrick Services,
L.L.C.,19 the court indicated that a breach is substantial if it is an “actual cause of [in
this case SMI’s] failure to comply with its obligations.”
Therefore, the defendants’ allegation that Whitney Bank breached the contract
between them, supported by the deposition testimony submitted by the defendants
in opposition to the bank’s motion for summary judgment, demonstrates that there
are factual disputes precluding summary judgment in the bank’s favor. More
particularly, whether the bank breached the Business Loan Agreement by, for
example, failing to fund the Halliburton project to completion, failing to fund the
dissolution of the contract or, according to the circumstances, to regard the contract as dissolved.
In either case, the obligee may recover damages.”
17
La. R.S. 10:1-201, 10:1-304, 10:9-607.
18
463 F.2d. at 1054.
19
2013-0163 (La. App. 1 Cir. 11/17/14), 167 So.3d 746, 756, writ not considered,
2015-C-0086 (La. 04/02/15), 162 So.3d 392.
12
$87,000 payroll call, dishonoring the check to Corrosion Materials, or requiring the
defendants to ask Halliburton to change the terms of its contract with SMI, are
genuine issues of material fact that cannot be resolved at this time. Further, there is
a genuine issue of material fact concerning whether the bank stopped funding the
Halliburton project without at least one of the conditions for cessation of funding set
forth in the Business Loan Agreement being satisfied.
Additionally, there is a genuine issue of material fact before the court
concerning the amount due on the loans. The bank claims that the amount due is a
sum certain that has been calculated in accordance with the bank’s procedures but
the defendants dispute the amount sought to be recovered by the bank on the basis
that the bank has refused to share with the defendants the amount collected since the
loans were transferred to the bank’s special assets department. At the hearing, the
bank’s counsel represented that the amounts due under both loans were made known
to the defendants in the default letter of August 18, 2016 (Rec. Doc. 46-2). But the
amounts stated to be owed in that letter are very different from the amounts stated
in the bank’s memorandum in support of its motion for summary judgment as being
currently due (Rec. Doc. 46-3 at 21-22). In the default letter, the principal amounts
due were stated as $457,477.20 and $1,088,465.73 while the principal amounts
stated to be due in the motion for summary judgment were $963,528.83 and
$105,256.20. No explanation for the difference was offered in the briefing or at oral
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argument, but this Court presumes that both numbers are lower because the
defendants’ accounts receivable or other collateral has been used to decrease the
indebtedness.
The defendants maintain, however, that there has been no
communication from the bank or its counsel documenting the bank’s collections
efforts or the calculation of the amounts owed. Therefore, there is a genuine dispute
concerning the amount owed by the defendants to the bank, which precludes
summary judgment at this time.
Conclusion
Having found that genuine issues of material fact exist,
IT IS ORDERED that Whitney Bank’s motion for summary judgment (Rec.
Doc. 46) is DENIED.
Signed at Lafayette, Louisiana, this 14th day of June 2018.
____________________________________
PATRICK J. HANNA
UNITED STATES MAGISTRATE JUDGE
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