US BANK NAT. ASS'N v. ABLES & HALL BUILDERS

696 F. Supp.2d 428

U.S. BANK NATIONAL ASSOCIATION, Plaintiff, v. ABLES & HALL BUILDERS, a Kentucky General Partnership, Ronnie Ables, Dennis Wade Ables, and James A. Hall, its General Partners, Defendants.

No. 08 Civ. 2540(DC).

United States District Court, S.D. New York.

March 19, 2010.

Michael Best & Friedrich LLP, by Jacob E. Miota, Esq., Milwaukee, WI, and Sasson & Blaivas LLP by Moshe Sasson, Esq., New York, NY, for Plaintiff.

Traflet & Fabian by Stephen G. Traflet, Esq., New York, NY, and Fultz Maddox Hovious & Dickens PLC by John David Dyche, Esq., Louisville, KY, for Defendants.

OPINION

CHIN, District Judge.

In this breach of contract case, plaintiff U.S. Bank National Association (the "Bank") sues defendants Abies & Hall Builders (the "Partnership"), Ronnie Abies ("Ronnie"), Dennis Wade Abies ("Wade"), and James Hall to enforce the terms of an interest rate swap transaction. Defendants assert several defenses as well as counter-claims for declaratory relief, misrepresentation, breach of fiduciary duty, and breach of the covenant of good faith and fair dealing. Both parties move for summary judgment. For the reasons set forth below, the Bank's motion is granted and defendants' motion is denied.

BACKGROUND

The basic terms and structure of the swap transaction are not disputed. The parties disagree about certain facts relating to whether the terms of the transaction are enforceable. The facts set forth below are drawn from the parties' Rule 56.1 statements (where the facts are undisputed), as well as from deposition transcripts, declarations, and exhibits. Whenever conflicts in the evidence are material, they have been resolved in favor of defendants.

A. Undisputed Facts

1. Background

The Partnership is a general partnership among Ronnie, Wade, and Hall. (Defendants' Rule 56.1 Statement ("Def. Stmt.") ¶ 2; Plaintiff's Response to Defendants' Rule 56.1 Statement ("Pl. Resp.") ¶ 2). Abies & Hall Builders, Inc. (the "Corporation") is a corporation owned by Ronnie, Wade, and Hall. (Def. Stmt. ¶ 4; Pl. Resp. ¶ 4). The two businesses are separate entities. (Id.). Along with a third entity, Airport Storage, LLC,¹ the Partnership and the Corporation had seven mortgage loans with the Bank, totaling about $7.5 million in May 2004. (Id.). Together, I refer to the Partnership, the Corporation, and Airport Storage, LLC as the "entities."

Darlene Abies ("Darlene") is Wade's wife and the bookkeeper for both the Partnership and the Corporation. (Def. Stmt. ¶ 5; Pl. Resp. ¶ 5). In mid-May 2004, Darlene contacted the Bank to inquire about obtaining a lower interest rate on the entities' seven mortgage loans. (Id.). A representative of the Bank, Paul Gelhausen, recommended a "blend and extend" transaction through an interest rate swap transaction. (Id.).²

2. The Proposed Transaction

The "interest rate swap transaction" that Gelhausen proposed would be reflected in separate agreements between the Partnership and the Bank, and it would be used to achieve a lower net interest rate on the entities' seven mortgages.

The first step would be to convert the interest rate on the mortgage loans from a fixed-rate of about 7.70% to a floating rate equal to the monthly LIBOR (London Interbank Offered Rate) plus 2.25%. (Plaintiff's Proposed Findings of Fact³ ("Pl. Stmt.") ¶ 24; Defendants' Response to Plaintiff's Proposed Findings of Fact ("Def. Resp.") ¶ 24; Miota 8/28/09 Decl. Ex. 9, ISDA Master Agreement ("Master Agreement"); Miota 8/28/09 Decl. Ex. 11, Confirmation ("Confirmation")).

Next, the Partnership and the Bank would execute a separate contract where the Bank and the Partnership would agree to exchange monthly interest payments based on a "notional" figure equal to the mortgage principal. (Id.).⁴ The Bank would pay a monthly interest rate equal to the LIBOR, and the Partnership would pay a monthly interest rate equal to 5.07%. (Id.).

The final result across the three payment streams would be that the entities would pay a net interest rate of 7.32% on their mortgages—a savings of 38 basis points. (Pl. Stmt. ¶ 24; Def. Resp. ¶ 24). The Partnership's position would be hedged—as the LIBOR went up, the interest rate on the entities' mortgages became less favorable, but the monthly payments on the swap transaction became more favorable. The Bank also hedged its position by going onto the market and entering into an opposite interest rate swap transaction with a third party. (Def. Stmt. ¶ 53; Pl. Resp. ¶ 53). Neither side was exposed to any risk, whether the LIBOR increased or decreased over time.

3. The Terms of the Swap Transaction

The terms of the swap transaction were memorialized in three documents. The Master Agreement and Schedule are standard forms issued by the International Swap Dealers Association, and they establish the general terms governing the transaction. (Def. Stmt. ¶ 17; Pl. Resp. ¶ 17; Pl. Stmt. ¶ 26; Def. Resp. ¶ 26). The Confirmation describes the specific financial terms of the transaction, and sets a termination date of July 1, 2014. (Pl. Stmt. ¶¶ 28, 35; Def. Resp. ¶¶ 28, 35; Confirmation at 2).

The Master Agreement and Schedule provide for "Events of Default" and "Termination Events." (Master Agreement §§ 5(b), 6(e); Schedule Part I(g)). The Schedule states that an "Additional Termination Event" will occur "upon termination of any agreements between the Bank and the Partnership." (Schedule Part I(g)). Upon occurrence of an "Additional Termination Event," the Master Agreement requires a "payment upon early termination." (Master Agreement §§ 6(e), 12; Confirmation Part I(f)). This payment is calculated by seeking three quotations for the current market value of the interest rate swap. (Id.). Depending on the state of the LIBOR at the time of termination, either the Bank or the Partnership would be liable for the "payment upon early termination."

4. Darlene Signs the Master Agreement and Schedule

Gelhausen and another Bank representative, Greg Buckhout, met with Ronnie and Hall in June 2004 to discuss the proposed swap transaction. (Pl. Stmt. ¶¶ 18-19; Def. Resp. ¶¶ 18-19). On June 30, 2004, Gelhausen faxed some documents to the Partnership's office, to Darlene's attention. (Pl. Stmt. ¶ 23; Def. Resp. ¶ 23; Def. Stmt. ¶ 15; Pl. Resp. ¶ 15). The documents were: the Master Agreement, the Schedule, and a "Resolution" form. (Id.).

The Resolution was designed to designate the individuals who were authorized to enter into the swap transaction on behalf of the Partnership. (Def. Stmt ¶ 20; Pl. Resp. ¶ 20; Miota 8/28/09 Decl. Ex. 8, Resolution ("Resolution")). Wade Abies, Ronnie Abies, James Hall, and Tom Solley signed the Resolution document on June 30, 2004. (Def. Stmt. ¶ 21; Pl. Resp. ¶ 21; Resolution).

Although she was not authorized by the Resolution document, Darlene Abies nevertheless signed the Master Agreement and Schedule on July 1, 2004—purportedly on behalf of the Partnership. (Def. Stmt. ¶¶ 21, 23; Pl. Resp. ¶¶ 21, 23; Master Agreement; Schedule).

In early July, Gelhausen spoke to Ronnie to lock in the combined interest rate of 7.32% on the entities' seven mortgages. (Pl. Stmt. ¶ 24; Def. Resp. ¶ 24). The Confirmation document, setting forth the monthly interest rates payable by the Bank and by the Partnership on the swap transaction, was faxed to the Partnership's office on July 2, 2004, but no one signed the document at that time. (Pl. Stmt. ¶ 35, 36; Def. Resp. ¶¶ 35, 36; Confirmation).

5. Ronnie Signs the Confirmation

Gelhausen "discovered" in August 2004 that Darlene was not authorized by the Resolution to have signed the Master Agreement and Schedule on behalf of the Partnership. (Def. Stmt. ¶ 42; Pl. Resp. ¶ 42). Gelhausen was concerned that the Partnership had not yet signed the Confirmation. (Def. Stmt. ¶ 43; Pl. Resp. ¶ 43). He began calling Ronnie repeatedly. (Miota 8/28/09 Decl. Ex. 4, Deposition of Ronnie Abies ("Ronnie Depo.") at 29). Ronnie spoke to Gelhausen "every day," and Gelhausen was "threatening" to "sue" the Partnership. (Id. at 29, 38).

Ronnie refused to sign the Confirmation, purportedly, because "he didn't understand it," and because the Bank was requiring the Partnership to do a lot of "expensive" things, such as procure "floodplain certificates" for the mortgaged properties. (Id. at 29-30). He also states that he does not "read well," although he never mentioned this fact to Gelhausen. (Id. at 39). In this time frame, Ronnie met with an attorney, Bruce Neikirk, to consult about the swap transaction. (Def. Stmt. ¶ 45; Pl. Resp. ¶ 45; Pl. Stmt. ¶ 43; Def. Resp. ¶ 43; Ronnie Depo. at 28-29). Neikirk telephoned Gelhausen. (Pl. Stmt. ¶ 44; Def. Resp. ¶ 44). In September 2004, Gelhausen sent five letters to Neikirk about the swap transaction. (Pl. Stmt. ¶ 45-50; Def. Resp. ¶¶ 45-50; Miota 8/28/09 Decl. Ex. 13-18, Letters from Paul Gelhausen to Bruce Neikirk).

In the letters to Neikirk, Gelhausen summarized the terms of the transaction, described the way in which it operated to lower the entities' overall mortgage interest rate, attached copies of the Master Agreement and Schedule (both signed by Darlene), listed all of the entities' affected loans, provided estimates of the costs if the mortgage loans were to be paid-off early and if the Master Agreement's "payment upon early termination" clause were to be triggered. (Id.).⁵

On October 1, 2004, Gelhausen faxed a copy of the Confirmation to Neikirk seeking execution by the Partnership. (Pl. Stmt. ¶ 50; Def. Resp. ¶ 50). Ronnie signed the Confirmation sometime in October 2004. (Pl. Stmt. ¶ 36; Def. Resp. ¶ 36). On November 5, 2004, Darlene signed an amended Confirmation that changed only the due date for monthly settlement payments—from the first day of every month to the eighth day of every month. (Pl. Stmt. ¶¶ 53-54; Def. Resp. ¶¶ 53-54; Miota 8/28/09 Decl. Ex. 12., Amended Confirmation).

6. Performance Under the Agreement

The Partnership performed its obligations under the swap transaction...