GRB Enterprises et al v. JP Morgan Chase Bank National Association
Filing
44
MEMORANDUM DECISION AND ORDER granting in part and denying in part 15 Motion to Dismiss - the only remaining cause of action is GRB's breach of contract claim; denying 29 Motion for Summary Judgment. Signed by Judge Dale A. Kimball on 3/12/12 (alt)
______________________________________________________________________________
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
GRB ENTERPRISES LLC, and
GREGORY BLANCHARD,
MEMORANDUM DECISION AND
ORDER
Plaintiffs,
vs.
Case No. 2:11CV833DAK
JPMORGAN CHASE BANK, N.A.,
Judge Dale A. Kimball
Defendant.
This matter is before the court on Defendant JPMorgan Chase Bank, N.A.’s Motion to
Dismiss Under Federal Rule of Civil Procedure 12(b)(6) and Plaintiff GRB Enterprises, LLC’s
Motion for Partial Summary Judgment Under Federal Rule of Civil Procedure 56(c). The court
held a hearing on the motions on February 15, 2012. At the hearing, Plaintiffs were represented
by Dennis K. Egan and Reid Tateoka, and Defendant was represented by David E. Leta and
Blakely J. Denny. After hearing argument, the court took the matter under advisement. The
court has considered the memoranda and other materials submitted by the parties, as well as the
law and facts relating to the motions. Now being fully advised, the court renders the following
Memorandum Decision and Order.
BACKGROUND
In April of 2007, GRB Enterprises LLC signed a $2.4 million loan agreement with
JPMorgan Chase Bank, N.A. (“JPMorgan”) to finance the purchase of a Honda motorcycle
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dealership in Park City, Utah. The Dealership Loan had a variable interest rate.
Six months after entering into the loan, GRB and Blanchard, the sole member and
manager of GRB, entered into an interest rate swap agreement with JPMorgan. The purpose of
the interest rate swap agreement was to hedge against interest rate fluctuations on the Dealership
Loan. If interest rates went down, GRB would make payments on the Swap Agreement but
would have lower interest payments on the Dealership Loan. Whereas, if interest rates went up,
GRB would have higher payments on the dealership but would receive money form JPMorgan on
the Swap Agreement.
The Swap Agreement contains three documents: a Master Agreement; a Schedule to the
Master Agreement; and a Confirmation. Section 1(c) of the Master Agreement states that the
documents form a single agreement. In the event of any inconsistencies, the Schedule prevails
over the Master Agreement as does the Confirmation.
In October 2010, GRB informed JPMorgan of its intent to payoff the Dealership Loan
and requested a payoff amount. On October 26, 2010, a JPMorgan employee in Arizona
informed GRB that if GRB elected to payoff the Dealership Loan early, it would be obligated to
pay JPMorgan a swap “breakage fee.” Blanchard was confused by this response because he
recalled from discussion prior to entering into the Swap Agreement that there were no penalties
for pre-payment.
The parties agree that JPMorgan gave GRB a promotional presentation on the benefits of
entering into the Swap Agreement. A power point of the presentation is an exhibit. The parties
disagree, however, as to the meaning of the information that was provided. GRB and Blanchard
believe that the Dealership Loan and Swap Agreement were linked and that pre-payment of the
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Dealership Loan would not affect the Swap Agreement. The promotional materials state that the
swaps can be terminated prior to maturity without pre-payment penalties.
JPMorgan, however, states that there is no penalty for pre-payment but the materials
made clear that there was a breakage fee or termination value to terminate the Swap Agreement.
The promotional materials provided that “swaps can be terminated prior to maturity without prepayment penalties . . . if rates are lower, Client pays swap market value to JPMorgan.” The
materials also state that “interest rate swaps can be terminated prior to their maturity . . . the
process involves contacting JPMorgan, obtaining a termination value for the swap and agreeing
to the termination.” The promotional materials also state that the maturity of the Swap
Agreement can be shorter or longer than the loan.
The promotional materials explicitly state that they are a summary of proposed terms and
were not intended to be a complete description of all material terms included in any subsequent
transaction. The final Swap Agreement contains all of the terms of the agreement and includes a
full integration clause.
After learning from JPMorgan that it sought approximately $140,000 for terminating the
Swap Agreement, GRB demanded an explanation of how the number was calculated. Section
6(d)(i) of the Master Agreement requires JPMorgan to provide GRB with a statement showing in
reasonable detail the close-out amount calculations, specifying any early termination amount
payable, and giving details of the relevant account to which the amount is to be paid. The parties
dispute whether this was provided.
JPMorgan told GRB that the “swap breakage fee reflects the difference between the rate
under which GRB could execute a swap with the same terms today relative to the fixed rate,
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multiplied by the duration.” JPMorgan then asked GRB to call so that they could walk GRB
through the calculations for un-winding the GRB swap. GRB did not call for that further
discussion and considers JPMorgan’s response a breach of the Swap Agreement.
In an email two days after GRB notified JPMorgan of its intent to pay off the Dealership
Loan, GRB’s attorney told JPMorgan that “we are still weighing whether to terminate the swap
facility and pay the breakage fee. It is highly likely that we will leave the swap in place. We
understand that the mortgage would remain a lien until the obligations under the swap are
terminated.”
On November 17, 2010, GRB paid off the Dealership Loan. GRB did not notify
JPMorgan as to whether it was also terminating the Swap Agreement. However, GRB did not
make its payments on December 6, 2010 or January 6, 2011. On January 26, 2011, GRB’s
counsel sent a letter to the JPMorgan employee in Arizona stating that JPMorgan had failed to
provide GRB with a calculation of the swap breakage fee, that GRB considered JPMorgan in
breach of the Swap Agreement, and that GRB would be making no further payments under the
Swap Agreement.
On February 1, 2011, and February 3, 2011, JPMorgan provided GRB with written notice
that GRB had failed to make timely payments under the Swap Agreement in December 2010 and
January 2011 and demanding that GRB remedy its failure by February 7, 2011. When GRB did
not make payment on February 7, JPMorgan did a notice of default and designated February 9,
2011 as the Early Termination Date pursuant to Section 6(a) of the Master Agreement. On
February 10, 2011, JPMorgan demanded that GRB pay an Early Termination Amount of
$138,810.95 and provided a calculation of the amount.
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JPMorgan calculated the breakage fee or “early termination amount” pursuant to Section
6(e) of the Master Agreement. The amount consists of two parts: a “Close-out Amount”
determined by the non-defaulting party and any amounts past due. The “Close-Out Amount” is
defined in the Master Agreement as the amount of losses or costs incurred by JPMorgan under
the then prevailing circumstances in replacing, or in providing the economic equivalent value of,
the material terms of the terminated Swap Agreement. Under the Swap Agreement, JPMorgan is
given the discretion and authority to calculate this amount. GRB, however, argues that Swap
Agreement grants JPMorgan too much discretion in calculating the amount and that the
definition of the Close-Out Amount is vague and ambiguous.
JPMorgan contends that GRB defaulted under the Swap Agreement by not paying in
December 2010 and January 2011 and, thus, caused a termination event . GRB contends that its
pre-payment of the Dealership Loan in November 2010 was a termination event and JPMorgan
breached the swap agreement by not giving it notice of its breakage fee by the time GRB wrote to
JPMorgan in January 2011.
GRB does not believe that JPMorgan gave an adequate explanation of the calculation of
the breakage fee and refused to pay the amount. GRB asserts that, on April 14, 2011, after
JPMorgan still failed to provide GRB with a calculation of the swap breakage fee and continued
to demand payment, GRB filed suit for breach of contract, declaratory judgment, fraud, and
misrepresentation in Michigan. JPMorgan filed suit in this court for foreclosure on the
motorcycle dealership based on GRB’s failure to pay the swap breakage fee. JPMorgan
successfully moved to have venue of GRB’s Michigan action transferred to this court, and the
two cases have been consolidated.
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DISCUSSION
JPMorgan moves to dismiss GRB’s Complaint, arguing that the plain language of the
Swap Agreement gives it discretion to calculate the close-out amount and the standards in the
Swap Agreement were not breached. JPMorgan also argues that there was a meeting of the
minds as to all material aspects of the contract and GRB fails to demonstrate how it has been
damaged. Finally, JPMorgan asserts that GRB’s fraud and misrepresentation claims are barred
by the integration clause in the Swap Agreement.
In response to JPMorgan’s motion to dismiss, GRB opposed the motion and moved for
partial summary judgment in its favor on its declaratory judgment and breach of contract claims.
The declaratory judgment claim asks the court to find that the Swap Agreement in unenforceable
because there was never a meeting of minds and that Swap Agreement is ambiguous. The breach
of contract claim alleges that JPMorgan breached the Swap Agreement because it failed to give
GRB adequate notice of its close-out calculations and the sources it used in determining the
amount.
Because both motions deal with the same issues, the court will analyze the motions
together. Prior to dealing with the causes of action at issue, the court will first address the
preliminary question of which state’s law governs the Swap Agreement.
1. Governing Law
First, JPMorgan argues that the Swap Agreement states that New York law applies and
the court should honor the choice of law provision. GRB, however, argues that Utah law should
apply in this case despite the choice of law provision in the Swap Agreement because there is a
conflict in the law of the two jurisdictions and Utah has a stronger interest in the dispute.
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To decide the effect of a contractual choice-of-law clause, courts look to the choice-oflaw rules in the forum state. Been v. O.K. Indus., 495 F.3d 1217, 1236 (10th Cir. 2007). Utah
courts generally uphold choice-of-law provisions based on the intent of the contracting parties
and a respect of the parties’ right to choose the governing law for a contract. Innerlight, Inc. v.
Matrix Group, LLC, 214 P.3d 854, 857-58 (Utah 2009). More specifically, Utah law provides
that “[t]he law of the state chosen by the parties to govern their contractual rights and duties will
be applied unless either (a) the chosen state has no substantial relationship to the parties or the
transaction and there is no other reasonable basis for the parties’ choice or (b) application of the
law of the chosen state would be contrary to a fundamental policy of a state which has a
materially greater interest than the chosen state in the determination of the particular issue which
. . . would be the state of the applicable law in the absence of an effective choice of law by the
parties.” Electrical Distributors, Inc. v. SFR, Inc., 166 F.3d 1074, 1084 (10th Cir. 1999).
In this case, JPMorgan asserts that New York has a substantial relationship to the case
because it is the place of its incorporation and where its swap agreements originate and are
administered. GRB, however, asserts that New York has no other connection to the parties or
underlying agreements. The agreements related to a dealership in Utah and were negotiated in
Utah, Illinois, and Arizona. The discussions relating to the termination of the agreements were
mainly between Michigan and Arizona. GRB’s arguments, however, ignore the fact that the
parties agreed to a choice of law provision in the contract and ask the court only to focus on
which forum appears to have a greater relationship with the dispute. However, given the fact that
the parties chose New York law to govern, the court need only determine whether that forum has
a substantial relationship, not a greater relationship than Utah. While GRB claims that New
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York law has no real relevance to the case, it has a substantial relationship to one of the parties in
the case and there is no public policy of the State of Utah that would be impaired by the
application of New York law.
Therefore, the court concludes that the Swap Agreement is
governed by New York law.
2. Contract Claims
JPMorgan argues that GRB’s two contract claims, Count I for declaratory judgment and
Count II for breach of contract, fail as a matter of law. As an initial matter, GRB alleges in the
Complaint that the Swap Agreement does not refer to the correct business loan. However, GRB
entered into a Business Loan Agreement in October 2007, which incorporated the Note used for
the Dealership Loan. Therefore, the Swap Agreement, which refers to the Business Loan
Agreement, referenced the Dealership Loan.
A. Declaratory Judgment Claim
Next, GRB’s Complaint seeks a declaration that the Swap Agreement does not contain
the essential terms for a binding agreement and does not reflect a meeting of the minds between
the parties. GRB argues that it has sufficiently pleaded its claim for declaratory judgment and
there is no genuine issue of material fact that the Swap Agreement is unenforceable.
“Contractual mutual assent requires assent by all parties to the same thing in the same sense so
that their minds meet as to all the terms.” Cessna Fin. Corp. v. Meyer, 575 P.2d 1048, 1050
(Utah 1978). GRB contends that the Swap Agreement contains no formula, methodology, or
definition of how to compute the swap breakage fee and is, therefore, too indefinite to
demonstrate a meeting of the minds and too indefinite to be performed. JPMorgan, however,
argues that this is not a case of a preliminary agreement or non-binding letter of intent where a
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meeting of the minds may be in question. This is a case involving a detailed financial transaction
that consisted of three comprehensive documents. All parties agreed that these documents were
binding as to their terms.
More specifically, GRB claims that there is no meeting of the minds because the Swap
Agreement lacks essential terms. GRB asserts that instead of providing a mathematical formula
to calculate the close-out amount, it gives JPMorgan too much unfettered discretion in
calculating it. The Swap Agreement, however, provides standards for JPMorgan to use and
requires it to act in good faith and use commercially reasonable procedures. The Swap
Agreement provides that JPMorgan may consider quotations for replacement transactions
supplied by third parties, relevant market data in the relevant market supplied by third parties,
and similar information supplied by internal sources.
There is no requirement that a contract contain a mathematical formula to be enforceable.
See Lee v. Joseph E. Seagram & Sons, Inc., 552 F.2d 447, 454 (2d Cir. 1977). Contracts often
vest discretion in one party with given parameters or a good faith standard. While GRB contends
that JPMorgan has too much discretion in the Swap Agreement, GRB agreed to give JPMorgan
that much discretion and the discretion is not untethered. The agreement cotnains specific
standards for JPMorgan to follow. Moreover, GRB does not allege that JPMorgan violated its
duty to act in good faith or failed to use a commercially reasonable procedure. Rather, GRB
argues that JPMorgan failed to provide the basis for its calculation. That claim does not support
a finding that there was no meeting of the minds. Rather, that claim relies on specific contractual
provisions.
Therefore, the court concludes that there was a meeting of the minds as to all essential
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terms under the Swap Agreement, the SWAP Agreement is not ambiguous, the discretion granted
to JPMorgan is governed by reasonable parameters, and the terms of the Swap Agreement are
sufficiently definite to be enforceable. Accordingly, the court grants JPMorgan’s motion to
dismiss the declaratory judgment claim and denies GRB’s motion for partial summary judgment
on the declaratory judgment claim.
B. Breach of Contract Claim
JPMorgan also argues that this court should dismiss GRB’s breach of contract claim
because GRB cannot plead that JPMorgan’s alleged failure to provide it with an explanation of
its calculation caused it damages. GRB has not claimed that the close-out amount was
improperly calculated. Rather, GRB alleges that JPMorgan breached the contract because it did
not provide it with the underlying information necessary to determine whether the calculation
was correct. JPMorgan argues that the mere fact that GRB alleges that JPMorgan did not fully
comply with the notice provision does not state a cause of action because GRB has failed to state
how not knowing the exact calculations used to determine the close-out amount directly and
proximately caused GRB damages.
GRB argues that it has stated a valid claim for breach of contract and it is entitled to
summary judgment because there is no issue of material fact that JPMorgan breached the Swap
Agreement. The Master Agreement requires JPMorgan to provide GRB with a “statement (1)
showing, in reasonable detail, such [Close-Out Amount] calculations (including any quotations,
market data or information from internal sources used in making such calculations), (2)
specifying . . . any Early Termination Amount payable and (3) giving details of the relevant
account to which any amount payable is to be paid.”
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GRB argues that it asked JPMorgan to provide the calculations four times and that it has
never received an adequate response. GRB contends that JPMorgan’s failure to provide its
calculations and supporting information, has caused GRB to face a foreclosure action on the
dealership. Accordingly, GRB asserts that this is adequate causation and damages to support a
breach of contract claim.
JPMorgan argues that it complied with the Swap Agreement’s requirements to provide its
calculations. JPMorgan states that it provided GRB with the basic methodology it used to
calculate the close-out amount and that it offered to walk through the information on a telephone
conference call. Furthermore, JPMorgan asserts that there is nothing in the Swap Agreement that
requires it to give the information to GRB in writing and it cannot control the fact that GRB
chose not to participate in the offered conference call to explain the calculations.
The court concludes that there are too many factual disputes to rule on the breach of
contract cause of action at this stage of the litigation. Prior to discovery, there are questions as to
when GRB believes it first requested a close-out calculation and whether JPMorgan responded in
a timely, good faith manner. While JPMorgan asserts that GRB was the first to default under the
Swap Agreement by failing to pay in November and December, GRB appears to argue that it was
waiting for a close-out calculation amount from JPMorgan during that time. The court believes
that discovery should be conducted prior to this court determining who breached the agreement
and when such breach occurred. The factual disputes also preclude the court from determining
whether a failure to provide the underlying calculations and information for the close-out amount
would constitute a material breach of the Swap Agreement or if it is, as JPMorgan asserts, more
akin to a claim for an accounting. Accordingly, at this stage of the litigation, the court denies
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JPMorgan’s motion to dismiss and GRB’s motion for partial summary judgment on the breach of
contract claim.
3. Fraud & Misrepresentation Claims
JPMorgan further seeks to dismiss GRB’s fraud and misrepresentation claims, arguing
that such claims are barred by the Swap Agreement’s merger and integration clauses. Three
courts looking at language similar to the Swap Agreement’s language in this case have found
fraud in the inducement claims to be barred by the express provisions of the agreements. See
JPMorgan Chase Bank N.A. v. Controladora Commercial Mexican SAB de CV, 920 N.Y.S.2d
241, 2010 NY Misc LEXIS 5656, *17-18 (N.Y. Sup. Ct. March 16, 2010); CDO Plus Master
Fund Ltd. v. Wachovia Bank N.A., 2009 U.S. Dist. LEXIS 59540, *12-14 (S.D.N.Y. 2009);
Republic Nt’l Bank v. Hales, 75 F. Supp. 2d 300, 315-16 (S.D.N.Y. 1999).
GRB, however, that the representations made by JPMorgan employees and promotional
materials were fraudulent and misrepresented the nature of the Swap Agreement. GRB argues
that Utah law does not preclude a fraud claim arising out of a contract with an integration clause.
The Utah Supreme Court has held that “[w]here a contract by an explicit term purports to be
integrated, we will nevertheless allow extrinsic evidence in support of an argument that the
contract is not, in fact, valid. . . . We have held that extrinsic evidence is appropriately considered
even in the face of a clear integration clause, where the contract is alleged to be a forgery, a joke,
a sham, lacking in consideration, or where a contract is voidable for fraud, duress, mistake or
illegality.” Tangren Family Trust v. Tangren, 182 P.3d 326 (Utah 2008).
GRB argues that the promotional materials in this case support a fraud in the inducement
claim because they state that there is no pre-payment penalty and GRB would not have entered
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into the agreement if it knew there was a fee. However, the promotional materials refer to the
termination value that may be required when pre-payment occurs. While that termination value
was not characterized as a penalty, the materials make clear that a payment may be necessary
depending on interest rates at the time of termination. In addition, the materials expressly state
that the Swap Agreement had a different term than the underlying loan. The promotional
materials further state that they are a summary of the material provisions and that terms will be
defined in subsequent transactions. The court concludes that, under Utah or New York law, there
is no basis for a fraud or misrepresentation claim based on the pre-contract promotional materials
attached as Exhibit D to the Complaint.
To the extent that GRB’s claims are based on alleged oral misrepresentations made prior
to the contract, New York law is clear that parties are not entitled to rely on pre-contract
statements when the contract contains a full integration clause. See Primex Int’l Corp. v. WalMart Stores, 679 N.E.2d 654, 627 (N.Y. 1997). The merger and integration clauses in the Swap
Agreement are clear and unambiguous and the court has already determined that the agreement is
governed by New York law. Accordingly, JPMorgan is entitled to a dismissal of the fraud and
misrepresentation claims.
CONCLUSION
For the reasons set forth above, Defendant’s Motion to Dismiss is GRANTED IN PART
and DENIED IN PART and Plaintiff’s Motion for Partial Summary Judgment is DENIED. The
only remaining cause of action is GRB’s breach of contract claim based on an alleged failure to
provide the basis for determining the close-out amount for termination of the Swap Agreement.
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DATED this 12th day of March, 2012.
BY THE COURT:
____________________________________
DALE A. KIMBALL,
United States District Judge
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