First-Citizens Bank & Trust Company v. Tennessee Hospitality Group, Inc. et al
Filing
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MEMORANDUM OPINION OF THE COURT. Signed by District Judge Kevin H. Sharp on 7/15/2014. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(eh)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
FIRST-CITIZENS BANK & TRUST
COMPANY, as successor-in-interest
to Temecula Valley Bank, National
Association,
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Plaintiff,
v.
TENNESSEE HOSPITALITY GROUP,
INC., and KELVIN D. JONES,
Defendants/Third-Party Plaintiffs,
v.
GEORGIA CERTIFIED DEVELOPMENT
CORPORATION,
Third-Party Defendant.
No. 3:12-00061
Judge Sharp
MEMORANDUM
This litigation involves the default on a loan secured to purchase and construct a 63-unit
Microtel Inn and Suites off Interstate 24 in Manchester, Tennessee. The essence of Plaintiff FirstCitizens Bank & Trust Company’s (“FCB’s”) Complaint is that Defendant/Third-Party Plaintiff
Tennessee Hospitality Group, Inc. (“THG”) executed a Promissory Note (“Note”) promising to
repay more than $1 million in funding, and that, as partial security for repayment of the note,
Defendant/Third Party Plaintiff Kelvin D. Jones (“Mr. Jones”) executed a Commercial Guaranty
(“Guaranty”) obliging himself to pay THG’s obligations to FCB, making THG and Mr. Jones
jointly and severally liable for the default. The essence of the Third-Party Complaint filed against
Third-Party Defendant Georgia Certified Development Corporation (“GCDC”) is that GCDC bears
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responsibility for the default because it did not secure Small Business Administration (“SBA”)
funding for the project as promised.
Pending before the Court are Motions for Summary Judgment filed by FCB and GCDC. The
Court considers those motions in turn after a brief review of the standards governing summary
judgment.
I. STANDARD OF REVIEW
A party may obtain summary judgment if the evidence establishes that there are no genuine
issues of material fact for trial and the moving party is entitled to judgment as a matter of law. See
Fed.R.Civ.P. 56(c); Covington v. Knox Cnty. Sch. Sys., 205 F.3d 912, 914 (6th Cir. 2000). The
moving party bears the initial burden of satisfying the Court that the standards of Rule 56 have been
met. See Martin v. Kelley, 803 F.2d 236, 239 n.4 (6th Cir. 1986). The ultimate question is whether
any genuine issue of material fact is in dispute. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248 (1986); Covington, 205 F.3d at 914 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)).
If so, summary judgment is inappropriate.
To defeat a properly supported summary judgment motion, the nonmoving party must set
forth specific facts that show a genuine issue of material fact for trial. If the party does not do so,
summary judgment may be entered. Fed. R. Civ. P. 56(e). The nonmoving party’s burden to point
to evidence demonstrating a genuine issue of material fact for trial is triggered once the moving
party shows an absence of evidence to support the nonmoving party’s case. Celotex, 477 U.S. at
325. A genuine issue exists “if the evidence is such that a reasonable jury could return a verdict for
the nonmoving party.” Anderson, 477 U.S. at 248.
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II. FCB’S MOTION FOR SUMMARY JUDGMENT
In support of its Motion for Summary Judgment, FCB forwards the following facts:
On or about November 14, 2007, THG executed the Note in favor of Temecula Valley Bank,
National Association (“TVB”) in the original principal amount of $1,066,500.00. TVB funded the
Note, which required payments to be made on the fourteenth day of each month, with a final
payment due SunTrust on November 14, 2008. On the day the Note was signed (and as partial
security for the Note), Mr. Jones executed the Guaranty in favor of TVB obligating himself for
THG’s repayment of the Note.
Afterwards, TVB and THG entered into five “Changes in Terms Agreements” and one
“Note Modification,” all of which extended the maturity date of the Note, and some or all of which
extended an interest payment only period. The last such extension was on March 7, 2011, which
extended the maturity date of the Note through and including July 14, 2011. Payments were not
made in accordance with the terms of the Note and the extensions.
On September 15, 2011, FCB notified THG and Mr. Jones of the default on the Note and
accelerated the entire amount due and owing thereunder. As of March 22, 2013, the outstanding
principal amount owed under the Note was $762,580.10, exclusive of interest, costs, and attorney’s
fees. The unpaid amounts continue to accrue pursuant to the terms of the Note.
Based upon the foregoing, FCB filed a two-count Complaint in this Court. In Count One,
FCB sues THG for breach of the terms of the Note for failing to pay the amounts due in accordance
with the repayment schedule. In Count Two, FCB sues Mr. Jones for failing to pay the amounts due
under the Guaranty. FCB moves for summary judgment on both Counts.
In responding to the Motion and FCB’s Statement of Uncontested Material Facts, THG and
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Mr. Jones wholly fail to comply with Local Rule 56.01 which provides:
(c) Response to Statement of Facts. Any party opposing the motion for summary
judgment must respond to each fact set forth by the movant by either (I) agreeing that
the fact is undisputed; (ii) agreeing that the fact is undisputed for the purpose of
ruling on the motion for summary judgment only; or (iii) demonstrating that the fact
is disputed. Each disputed fact must be supported by specific citation to the record.
The response must be made on the document provided by the movant or on another
document in which the non-movant has reproduced the facts and citations verbatim
as set forth by the movant. In either case, the non-movant must make a response to
each fact set forth by the movant immediately below each fact set forth by the
movant.
(g) Failure to Respond. Failure to respond to a moving party’s statement of
material facts, or a non-moving party’s statement of additional facts, within the time
periods provided by these Rules shall indicate that the asserted facts are not disputed
for purposes of summary judgment.
L.R. 56.01 (c) & (g). Instead of responding to each of the facts specified by FCB, THG and Mr.
Jones provide their own “Statement of Disputed Facts” that, in its entirety, reads:
2. SunTrust is not now nor has it ever been a [sic] any monies from
Defendants/Third-Party Plaintiffs.
(Docket No. 63-1 at 1). Presumably this is a response to FCB’s statement of fact number two, which
states that the amounts due and owing under the Note were payable to SunTrust.
How, or if, SunTrust ever figured into this case is unclear.1 What is clear, however, is that
THG and Mr. Jones do not dispute or point to any evidence that would suggest that FCB is not the
successor-in-interest to TVB or the holder of the Note.2 Under Tennessee law and Article 3 of the
Uniform Commercial Code, the holder of a note has the right to enforce the instrument. See Jestes
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Elsewhere in its brief, FCB talks about the applicable burden-shifting standards and then states that
“Fifth Third has the burden of proof at trial.” (Docket No. 37 at 3 n. 1). What Fifth Third has to do with this
case is also unclear. Perhaps the references to “SunTrust” and “Fifth Third” banks are scrivener’s errors.
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An Allonge to the Note indicates that it was transferred to FCB immediately after TVB was closed
by the California Department of Financial Institutions on July 17, 2009, and the Federal Deposit Insurance
Corporation was appointed receiver.
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v. Saxon Mtg. Serv., Inc., 2014 WL 1847806, at *3 (M.D. Tenn. May 8, 2014); Dauenhauer v.
Bank of New York Mellon, 2013 WL 2359602, at *6 (M.D. Tenn. Jan. 16, 2013). Moreover, the
Note itself states that the borrower’s obligations and the terms of the Note “shall inure to the benefit
of Lender and its successors and assigns.” (Docket No. 1-1 at 2).
As for FCB’s truistic arguments that “[u]nder Tennessee law, the rights and obligations of
contracting parties are governed by their written agreements” and that “[w]hen the agreement is
unambiguous, its meaning is a question of law and the court must enforce the agreement according
to its plain terms” (Docket No. 37 at 4, citing Hillsboro Plaza Enters. v. Moon, 860 S.W.2d 45, 47
(Tenn. Ct. App. 1993) & Richland Country Club, Inc. v. CRC Equities, Inc., 832 S.W.2d 554, 557
(Tenn. Ct. App. 1991)), THG and Mr. Jones offer no response. In fact in their three-page
Memorandum, they make no legal arguments and cite no legal authority.
Instead, THG and Mr. Jones begin their response by stating that “[a]s a condition precedent
to Plaintiff making a loan to Defendants/Third-Party Plaintiffs,” GCDC “committed to make
application to the [SBA] on behalf of [THG] for $1,112,000.00 in permanent financing for the
acquisition of land and construction of” the hotel. (Docket No. 62-1 at 1). They then go on to list
how GCDC allegedly failed to carry-through on its promise. However, THG and Mr. Jones fail to
cite to a single piece of evidence that would support their contention that GCDC’s commitment to
apply for a loan (or securing approval of a loan by the SBA) was a condition precedent to their
receiving and repaying $1,066,500.00 from TVB.
What the undisputed evidence does show is that (1) TVB loaned THG money that THG
promised to repay with interest, (2) Mr. Jones guaranteed that repayment; and (3) the money has not
been repaid, either in accordance with the Note or the agreed-upon extensions and modification.
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Accordingly, FCB, as the holder of the Note, and successor-in-interest to TVB, is entitled to recover
on the Note. As of March 22, 2013, the amount due and owing was $813,019.54, consisting of the
underlying obligation, accrued interest, late fees, and costs. FCB will be afforded an opportunity
to update that amount.
Under the terms of the Note and the Guaranty, FCB is also entitled to recover attorney’s fees.
FCB requests $136,114.73, which represents the pre-judgment fees that it has already incurred, plus
a post-judgment award of 10% of the amount of the indebtedness owed to FCB. In the Court’s
opinion this request is too steep.
The Note provides:
ATTORNEYS' FEES: EXPENSES. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's attorneys’ fees and
Lender's legal expenses, whether or not there is a lawsuit, including attorneys’ fees,
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction) and appeals. Borrower also will pay any court costs,
in addition to all other sums provided by law.
(Docket No. 1-1 at 2). The Guaranty contains similar language: “Guarantor agrees to pay upon
demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and lender’s legal
expenses, incurred in connection with the enforcement of this Guaranty.” (Docket No. 1-2 at 1).
According to the Affidavit of Ronald G. Steen, Esq., FCB expended $55,237.75 in attorney’s
fees and costs through the summary judgment proceedings. Under the terms of both the Note and
the Guaranty, FCB is entitled to that amount. In addition, under both, FCB is entitled to recover the
fees and costs of any post-judgment collection efforts. Obviously, what that amount may be is
unknown at present, but a post-judgment attorney’s fees and costs award in excess of $80,000.00
is too high, particularly since FCB spent substantially less in securing a judgment in its favor. More
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appropriate in the Court’s view is an award reflecting roughly half of that which was expended to
prevail on summary judgment . The award of attorney’s fees and costs for post-judgment work will
be $25,000, for a combined amount of $80,237.75.
III. GCDC’S MOTION FOR SUMMARY JUDGMENT
In support of its Motion for Summary Judgment, GCDC presents the following facts (among
others):
GCDC is a Certified Development Company (“CDC”). It is a non-profit corporation
authorized by the SBA to deliver financing to small businesses via 504 loans.3
GCDC committed itself to make an application to the SBA on behalf of THG for the
permanent financing of the acquisition of land and construction of the Microtel Inn & Suites in
Manchester. Thereafter, GCDC filed the application and, on August 28, 2007, the SBA issued an
authorization for debenture guaranty for permanent financing of the hotel project. The authorization
period ended August 28, 2011.
Prior to a debenture sale, the CDC must conduct a 504 Loan Closing, and forward the closing
documents to the SBA for approval. A debenture closing and sale (resulting in the closing and
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The SBA 504 loan program has been described as follows:
SBA’s 504 loan program . . . provides financial assistance through 10 or 20 year
loans to small businesses. Under the program, a certified development company or CDC
issues a debenture to fund the borrower’s acquisition of the real property, machinery and
equipment needed for a business venture. The debenture, which is guaranteed 100 percent
by the SBA, is sent to a central servicing agent which disburses or sells the debenture to a
pool of private investors. The proceeds of the debenture are used to fund the 504 loan. The
central servicing agent then disburses the funds from the sale of the debenture to the
appropriate parties. The central servicing agent also receives monthly payments from the
borrower, which it holds in an interest-bearing escrow account until remitting the payments
to the investors pursuant to the SBA's instructions.
United States v. Sobecki, 1998 WL 175870, at *2 (N.D. Ind. Mar. 26, 1998); see also
http://www.sba.gov/content/cdc504-loan-program-eligibility (describing eligibility requirements for 504
loans) (last visited July 9, 2014).
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approval of the sale of the debenture to actually fund the 504 loan) is subject to SBA authorization.
Also prior to a 504 loan closing, the CDC is required to issue a certification to the SBA that in the
CDC’s opinion there have been no substantial adverse changes in the borrower’s ability to repay the
loan since submission of the initial loan application.
In this case, following completion of the project and prior to the 504 loan closing, GCDC
formed the opinion that THC was not in a position to close on the SBA 504 loan, an opinion that did
not change through the end of the authorization period. The opinion was based on the fact that, once
the hotel began operating, the business was not self-sustaining. Rather, THC had to turn to Mr.
Jones in order to solve cash-flow problems. The hotel did not have the money to satisfy its debts
on a monthly basis and there was a considerable difference between the projected revenue and
actual performance of the hotel once it became operational.
GCDC asserts that it performed all actions necessary to secure a loan in accordance with 504
loan program requirements as set forth by statute, regulations, and SBA requirements, but it was
unable to make the necessary certification that there were no substantial unremedied adverse
changes since the filing of the application. Because of the lack of certification, closing of the 504
loan and issuance of the debenture did not take place.
Based upon the foregoing, GCDC argues that it is entitled to summary judgment on each of
the claims advanced in the Third-Party Complaint. The breach of contract claim fails, GCDC
argues, because certification was a condition precedent to SBA approval both under the
authorization and the federal regulations, and GCDC simply could not make the required
certification. The promissory estoppel claim fails because that cause of action cannot exist when
there is an express contract that covers the same subject. Finally, GCDC argues that the implied
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duty of good faith and fair dealing is not an independent cause of action because such attributes are
implied in every contract.
The response in opposition to GCDC’s Motion for Summary Judgment
again does not comply with this Court’s rules. Rather than responding to each of the factual
assertions made, THG and Mr. Jones filed their own statement of disputed facts utilizing numbers
that appear to correspond with statements of fact made by GCDC. Further, in their brief, THG and
Mr. Jones cite no legal authority and never mention the causes of actions they have advanced, let
alone link evidence to those causes of action that would make summary judgment inappropriate.
Rather, THG and Mr. Jones set forth a dozen statements of disputed fact that actually consist
of the reiteration of two points. First, they claim that the application submitted by GCDC to the
SBA was not signed by Mr. Jones nor signed with his permission; it was a forgery. Second, they
point to two emails to support the proposition that GCDC had resolved the questions that it had
about THG’s financial situation and notified the SBA that there had been no adverse change. In one,
Nancy McCarroll writes to Melody Trica on December 17, 2009, the following:
I just got a phone call from Binta with CDC. She told me they have resolved all the
questions they had about the financials and have received approval from their
attorney to proceed with the debenture funding. The loan matures in January and
Binta suggested extending it for at least 3 months. The interim loan is fully funded
with the interest payments being paid from the 1st loan through January. We just got
updated financials from CDC.
(Docket No. 67-7 at 3). The other is an email from Binta Edwards to Marianne Wiemmann dated
March 2, 2010, that states:
Our “no adverse” stamp action was submitted to SBA on Friday (2/26). Upon
approval from SBA, we will schedule a closing date.
(Id. at 1). THG and Mr. Jones do not specify who those individuals are in their opposition papers,
but a review of the email addresses and depositions suggest that Ms. McCarroll and Ms. Trica are
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employees of FCB, Ms. Edwards is employed by GCDC, and Ms. Wiemmann worked for TVB.
The claim that Mr. Jones’s signature on the application submitted to the SBA was forged is
startling, but irrelevant. The entire premise of the Third-Party Complaint is that GCDC was required
to seek the SBA’s guarantee for the debentures to fund THG’s project. There is no dispute that an
application was the first step necessary to achieve that purpose, that the application actually
submitted contained any falsehoods or misrepresentations, or that the application was insufficient
or incomplete.
Ms. McCarroll’s email, insofar as it pertains to the claims against GCDC, consists entirely
of hearsay. She merely parrots what Ms. Binta allegedly told her. Assuming that the email can “be
presented in a form that would be admissible in evidence,” Fed. R. Civ. P. 56(c)(2), it raises more
questions than it answers. Nowhere does THG or Mr. Jones explain what Ms. Binta meant about
resolving the questions of “the financials,” or what she meant by receiving the attorney’s approval
to proceed with debenture funding.
Similarly, no explanation is given for what Ms. Binta meant by a “‘no adverse’ stamp” being
submitted to the SBA. THG and Mr. Jones rely upon the deposition testimony of Abel D. Tellez,
a Senior Vice President and Senior Commercial Resolution Officer with FCB, to explain what Ms.
Binta meant. However, Mr. Tellez stated in his deposition that he did not have direct knowledge
of the email exchanges because he was not involved at that point in time and, in any event, could
not speak for GCDC. (Docket No. 67-8, Tellez Depo. at 37).
The basis for all of THG’s and Mr. Jones’s causes of action against GCDC is that it
committed to securing permanent financing for the project through the issuance of debentures in
accordance with the 504 loan program. It is undisputed, however, that SBA had to guaranty the
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debentures and that this required its approval. It is also undisputed that, as a part of the approval
process, certain certifications must be made, and the applicant has to be creditworthy.
The Code of Federal Regulations provide:
Following completion of the Project, the following certifications must be made
before the 504 loan closing:
(a) The interim lender must certify to the CDC that it has no
knowledge of any unremedied substantial adverse change in the
condition of the small business since the application to the interim
lender;
(b) The Borrower (or Operating Company) must certify to the CDC
that there has been no unremedied substantial adverse change in its
financial condition or its ability to repay the 504 loan since the date
of application, and must furnish interim financial statements, current
within 120 days of closing; and
(c) The CDC must issue an opinion to the best of its knowledge that
there has been no unremedied substantial adverse change in the
Borrower's (or Operating Company's) ability to repay the 504 loan
since its submission of the loan application to SBA.
13 C.F.R. § 120.892. The Code also provides that “[t]he applicant (including an Operating
Company) must be creditworthy,” that [l]oans must be so sound as to reasonably assure repayment,”
and that, in making this determination, the SBA will consider (among other things) the strength of
the business; past earnings, projected cash flow and future prospects; and the “[a]bility to repay the
loan with earnings from the business[.]” Id. § 120.150.
GCDC claims that after the hotel became operational it was unable to make the certification
required by Section 120.892(c) because the hotel was not self-sustaining and there was a
considerable difference between the projected revenue and actual revenue once the hotel opened.
THG and Mr. Jones have proffered no evidence to show that GCDC’s opinion was not based in fact
or that the opinion was not made in good faith. To the contrary, Mr. Jones admitted in his deposition
that while there was a boon in business during the weeks leading up to and including the Bonaroo
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festival, “the business was not, on an annual basis profitable,” and that he was required to make
contributions to the business until it “stabilized” but did not know how long this would be. (Docket
No. 60-1 at 120-21). He also conceded that THG was not able to meet both principal and interest
payments and that the original projected 65% occupancy rate turned out to be 30% as of the end of
2009. Finally, Mr. Jones admitted in his deposition that, just weeks after the “no adverse change’
stamp” email, he received an email dated March 18, 2010, from Ms. Edwards which indicated that
GCDC was putting the 504 loan closing on hold to give THG additional time for business to ramp
up so that the hotel could support its debts. (Id. at 123-140). THG and Mr. Jones offer no evidence
that the business did in fact pick up prior to the expiration of the authorization period and, as a
consequence, GCDC’s Motion for Summary Judgment will be granted.
IV. CONCLUSION
On the basis of the foregoing, the Motions for Summary Judgment filed by FCB and GCDC
will be granted.
An appropriate Order will be entered.
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KEVIN H. SHARP
UNITED STATES DISTRICT JUDGE
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