K3C Inc. v. Bank of America, N.A.

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS November 6, 2006
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
)))))))))))))))))))))))))) Clerk

No. 06-50343
Summary Calendar
))))))))))))))))))))))))))

K3C Inc., Sierra Industries, Inc.;

Plaintiffs–Counter Defendants-Appellants,

v.

Bank of America, N.A.

Defendant–Counter Claimant-Appellee
v.

Mark Huffstutler

Counter Defendant-Appellant

Appeal from the United States District Court
for the Western District of Texas
(5:03-CV-557)

Before DeMOSS, STEWART and PRADO, Circuit Judges.

Per Curiam:*

This dispute arose from a January 2000 interest rate swap

agreement between Defendant-Appellee Bank of America (“BOA”)and

Plaintiffs-Appellants K3C Inc., Sierra Industries, Inc.,

*
Pursuant to 5TH CIRCUIT RULE 47.5, the Court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIRCUIT
RULE 47.5.4.

1
(“Companies”), and Mark Huffstutler (“Huffstutler”), the

Companies’ sole shareholder (collectively, “Appellants”). After

losing money under the agreement throughout 2001 and 2002, the

Companies brought suit against BOA seeking damages for (1) fraud,

(2) gross negligence, (3) negligent misrepresentation, (4) breach

of fiduciary duty, (5) breach of duty to disclose, (6) breach of

duty to deal fairly and in good faith, (7) rescission due to

misrepresentation, (8) violation of the Texas Deceptive Trade

Practices Act, (9) violation of the Texas Business Opportunity

Act, (10) violation of the Texas Securities Act, and (11)

violation of the Bank Holding Company Act. Defendant BOA brought

counterclaims for breach of contract against the Companies and

against Huffstutler as Guarantor. Following a bench trial from

August 12, 2004, until August 26, 2004, the district court denied

all claims asserted by the Companies and held in BOA’s favor on

its contractual counterclaim. The court awarded BOA $186,641.67

plus interest for the termination payment found to be owed by the

Companies under the agreement and an additional $225,000 in legal

fees. The Companies and Huffstutler now appeal from this

decision.1 For the reasons that follow, we affirm the judgment of

1
While Huffstutler is named as an appellant, all of the
issues raised on appeal relate to the Companies’ affirmative
claims against BOA and BOA’s contractual counterclaims against
the Companies. At trial, Huffstutler made no affirmative claims
against BOA, instead asserting only personal defenses to his
personal liability as Guarantor. Huffstutler does not raise these
personal defenses again in this appeal.

2
the district court.

I. FACTUAL BACKGROUND

A. The Parties and Their Relationship

The Companies, located in Uvalde, Texas, are engaged in the

business of aircraft service, maintenance, and modification. As

of December 31, 1999, the Companies had combined assets of

approximately $19.1 million. The Companies had a more than

twenty-year business relationship with BOA, having relied upon

BOA for numerous loans and financing arrangements. At the time of

the interest rate swap agreement at issue in this case, BOA’s

outstanding loans to the Companies equaled more than $7.7

million.

B. Interest rate swaps

An interest rate swap is a transaction by which a borrower

can hedge against the risk of interest rate fluctuations. The

borrower and another party agree to exchange cash flows over a

period of time. Most commonly, one party exchanges fixed rate

payments for floating rate payments based on an underlying index

such as LIBOR (London Inter Bank Offer Rate). This effectively

converts the party’s floating rate loan to a fixed rate loan.

Thus, if the interest rate on a borrower’s adjustable or floating

rate loan rises, the increase in interest owed is offset by

payments received through the interest rate swap.

The basic interest rate swap, known as a “plain vanilla”

3
swap, involves one party paying a fixed rate of interest, while

the other party assumes a floating rate of interest based on the

amount of the principal of the underlying debt, known as the

“notional” amount of the swap. A “knockout” swap is an interest

rate swap containing an additional feature–-when the floating

interest rate rises above a certain level, the obligation of the

parties is knocked out, and no payment is required for that

period. A knockout provision thus benefits the party making the

floating rate payments, and this party correspondingly pays for

the provision by offering a lower fixed rate to the other party.

C. Prior Swap Agreements Between the Parties

On September 28, 1998, BOA representatives visited the

Companies in Uvalde, Texas, and delivered a Powerpoint

presentation marketing the use of swap agreements as hedges

against rises in interest rates. The presentation, made to

Huffstutler, then the Companies’ President, and Chief Financial

Officer Reggie Ewoldt (“Ewoldt”), provided a general overview of

interest rate swaps as well as brief discussions of accounting,

tax issues, and the method of terminating an interest rate swap.

On October 23, 1998, the Companies and BOA executed a

customized ISDA form “Master Agreement” for swap transactions.

ISDA is a trade body of swap dealers and other participants in

the derivatives market. The ISDA form Master Agreements, widely

used in the derivatives market at the time, provide a statement

of conditions controlling all swap contracts between the parties

4
to the agreement. The Master Agreement executed by BOA and the

Companies contained the terms that governed the succeeding swap

transactions between them. In the event of early termination of a

swap agreement, the Master Agreement provided that either BOA or

the Companies would be required to pay a termination payment. The

Master Agreement also included certain disclaimers and

representations concerning the relationship of the parties and

the non-reliance of each party upon each other’s communications.

The Companies did not seek or receive advice from independent

advisors or other professionals concerning the Master Agreement

or subsequent swap transactions.

On November 10, 1998, BOA and the Companies entered into the

First Swap Transaction. This was memorialized on November 12,

1998, by the First Confirmation, which stated that the

transaction would be governed by the terms of the Master

Agreement. The transaction had a three-year term with a fixed

rate of 5.33% and a $2 million notional amount. The termination

date of the First Swap Transaction was November 13, 2001. Both

BOA and the Companies fully performed under the First Swap

Transaction.

While this agreement was in effect, Huffstutler and BOA

executed a Guaranty. By the terms of the Guaranty, dated August

31, 1999, Huffstutler guaranteed to BOA the full and prompt

payment when due of any and all liabilities, overdrafts,

indebtedness and obligations of the Companies.

5
D. The Knockout Swap Transaction

After the execution of the First Swap Transaction, BOA began

to market to the Companies a new interest rate swap including a

knockout provision. Conversations took place between Ewoldt and

BOA representatives about the differences between plain vanilla

and knockout swaps. On December 8, 1999, the Companies received a

second Powerpoint presentation from BOA explaining certain

attributes of the knockout swap. On January 31, 2000, BOA and the

Companies entered into the Knockout Swap Transaction,

memorialized by the Second Confirmation, in which the parties

agreed that the transaction would be governed by the terms of the

Master Agreement.

The Knockout Swap Transaction had a five-year term, a fixed

interest rate of 6.5%, and a knockout provision if LIBOR exceeded

7.5%. Under the terms of the swap, therefore, if interest rates

were between 6.5% and 7.25%, BOA made payments to the Companies.

If interest rates rose above 7.25%, the swap would be knocked out

for the period, and neither party would make payments under the

agreement. If interest rates fell below 6.5%, however, the

Companies would make payments to BOA. The notional amount of the

swap was $2 million, and the effective date was February 1, 2000.

During 2000, both parties made payments under the Knockout

Swap. In early 2001, however, interest rates began a steady fall,

with the result that the Companies began to pay increasing

6
monthly amounts to BOA. Interest rates continued to drop

throughout 2001 and fell below 2% in early 2002. Monthly payments

by the Companies to BOA under the Knockout Swap were between

$7000 and $9000 throughout 2002. The Companies’ payments under

the Knockout Swap totaled $179,901.12 by April 30, 2003.

In January 2003, the Companies requested that BOA provide

them with a statement reflecting the amount necessary to pay off

the Companies’ underlying loans. BOA did so, and the Companies

sold assets and used the proceeds to pay the amount due for

outstanding loans from BOA. The Companies’ payoff of the loans

constituted a “Termination Event” under the Master Agreement,

which allowed BOA to designate an “Early Termination Date.” Under

the provisions of the Master Agreement, upon termination the

Companies were required to pay a termination fee equaling “the

Non-defaulting Party’s Loss in respect of this Agreement.” In a

letter to BOA dated June 2, 2003, the Companies refused to pay

the termination fee and demanded that BOA return to the Companies

the amount that the Companies had lost under the Knockout Swap.

Subsequently, this suit was filed.

II. ANALYSIS

On appeal, the Companies and Huffstutler raise eleven points

of error. This court reviews the district court's findings of

fact for clear error and conclusions of law de novo. Payne v.

United States, 289 F.3d 377, 381 (5th Cir. 2002). For mixed

7
questions of law and fact, we review the district court's fact

findings for clear error, and its legal conclusions and

application of law to fact de novo. Id. In reviewing factual

findings for clear error, we defer to the findings of the

district court “unless we are left with a definite and firm

conviction that a mistake has been committed.” Id.

Federal jurisdiction in this case is based on the diversity

of the parties. The parties are in agreement that the Companies’

tort claims are governed by Texas law and both parties’

contractual claims are governed by New York law.

A. Fiduciary Relationship

Appellants first argue that the district court erred in not

finding a fiduciary relationship between BOA and the Companies

and a breach of that relationship. Under Texas law,

[t]here are two types of fiduciary relationships. The
first is a formal fiduciary relationship, which arises as
a matter of law, and includes the relationships between
attorney and client, principal and agent, partners, and
joint venturers. The second is an informal fiduciary
relationship, which may arise from a moral social,
domestic or purely personal relationship of trust and
confidence, generally called a confidential relationship.

Swinehart v. Stubbeman, McRae, Sealy, Laughlin & Browder, Inc.,

28 S.W.3d 865, 878-79 (Tex. App.-–Houston [14th Dist.] 2001, pet.

denied) (internal quotation marks and citations omitted).

The relationship between a borrower and lender is not one

that gives rise to a formal fiduciary relationship. Whether there

might be a confidential relationship between the Companies and

8
BOA is a more difficult question. However, the Texas courts “do

not recognize such a relationship lightly.” Exxon Corp. v.

Breezevale Ltd., 82 S.W.3d 429, 443 (Tex. App.–-Dallas 2002, pet.

denied). BOA’s longstanding business relationship with the

Companies is not enough to establish a confidential relationship;

Texas courts have held that “[t]he fact that a business

relationship has been cordial and of extended duration is not by

itself evidence of a confidential relationship.” Swinehart, 28

S.W.3d at 880. Nor does the Companies’ trust in BOA suffice, as

“subjective trust is not enough to transform an arms-length

transaction between debtor and creditor into a fiduciary

relationship.” Bank One, Texas, N.A. v. Stewart, 967 S.W.2d 419,

442 (Tex. App.–-Houston [14th Dist.] 1998, pet. denied).

Appellants have not shown that the district court erred in

finding that no fiduciary relationship existed between the

parties.

Moreover, the district court’s conclusion is consistent

with the parties’ own depiction of their relationship in the

Master Agreement. Part 5(h)(3) of the Master Agreement,

incorporated by the Second Confirmation into the Knockout Swap

Transaction, states as follows: “Status of the Parties. The other

party is not acting as an agent, fiduciary or advisor for it in

respect of that Transaction.” The explicit language of the

parties thus supports the district court’s finding of no

9
fiduciary relationship between the Companies and BOA.

It remains possible that a so-called “special relationship”

between the parties could exist under Texas law. A special

relationship is an “extracontractual” relationship that “exists

where there is an unequal bargaining position between parties to

a contract.” Bank One, 967 S.W.2d at 442. While a “fiduciary duty

requires the fiduciary to place the interest of the other party

before his own,” the special relationship entails only the

“common law duty of duty of good faith and fair dealing.” Id.

However, “[a] special relationship does not usually exist between

a borrower and lender,” id., and Texas courts have been reluctant

to find a special relationship in that context. See, e.g., Farah

v. Mafridge & Kormanik, P.C., 927 S.W.2d 663, 675-76 (Tex. App.–-

Houston [1st Dist.] 1996, no writ). Where a special relationship

between a borrower and lender has been found, it has rested on

factors such as “excessive lender control over, or influence in,

the borrower’s business activities.” Id. at 675. In this case,

the district court found that there was no imbalance of power

between the parties such that would give rise to a special

relationship. After reviewing the record, we hold that the

district court did not err in making this determination.

B. Negligent Misrepresentation

Appellants argue that the district court erred in finding

that the statute of limitations barred Appellants’ claims for

10
negligent misrepresentation and gross negligence. Appellants

further maintain that the district court erred in not finding

sufficient evidence to support Appellants’ claim for negligent

misrepresentation. Appellants do not address argument to the

district court’s rejection of the merits of their gross

negligence claim; this claim is therefore waived. Comty. Workers

of Am. v. Ector County Hosp. Dist., 392 F.3d 733, 748 (5th Cir.

2004).

It is undisputed that the cause of action for negligent

misrepresentation carries a two-year statute of limitations. TEX.

CIV. PRAC. & REM. CODE ANN. § 16.003 (a) (Vernon 2005). The

Companies’ claim accrued for negligent misrepresentation on the

date that the contract between BOA and the Companies was made.

Tex. Am. Corp. v. Woodbridge Joint Venture, 809 S.W.2d 299, 303

(Tex. App.-–Fort Worth 1991, writ denied). Thus, the Companies’

claim accrued on January 31, 2000, the date of the Second

Confirmation, and their suit was not filed until June 13, 2003,

well outside of the two-year statute of limitations.

Appellants argue that the statute of limitations for their

negligent misrepresentation claim should be tolled by the

“discovery rule.” The discovery rule provides that the statute of

limitations will run “not from the date of the [defendant’s]

wrongful act or omission, but from the date that the nature of

the injury was or should have been discovered by the plaintiff.”

11
Weaver v. Witt, 561 S.W.2d 792, 793-94 (Tex. 1977). Texas courts

will toll the statute of limitations if the injury is both

inherently undiscoverable and objectively verifiable. HECI

Exploration Co. v. Neel, 982 S.W.2d 881, 886 (Tex. 1998). An

injury is inherently undiscoverable where it is “by nature

unlikely to be discovered within the prescribed limitations

period despite due diligence” by the plaintiff. Ellert v. Lutz,

930 S.W.2d 152, 156 (Tex. App.–-Dallas 1996, no writ).

In the instant case, the district court found that the

discovery rule did not apply because the nature of the injury was

not inherently undiscoverable. Appellants have not demonstrated

that the district court erred in this conclusion. There has been

no showing that the Companies could not have obtained predictions

about interest movements or outside advice regarding their legal

and financial obligations under the Knockout Swap had they

exercised due diligence. The district court correctly held that

the statute of limitations bars Appellants’ negligent

misrepresentation claim.

Even if the discovery rule were applicable, Appellants could

not have prevailed on the merits of their negligent

misrepresentation claim. The elements of negligent

misrepresentation are: (1) the representation is made by the

defendant in the course of his business, or in a transaction in

which he has a pecuniary interest; (2) the defendant supplies

12
“false information” for the guidance of others in their business;

(3) the defendant did not exercise reasonable care or competence

in obtaining or communicating the information; and (4) the

plaintiff suffers pecuniary loss by justifiably relying on the

representation. Fed. Land Bank Ass’n v. Sloane, 825 S.W.2d 439,

442 (Tex. 1991). In the instant case, the district court found

that “none of the information BOA provided to the companies can

be characterized as ‘false information’ sufficient to sustain a

negligent misrepresentation cause of action.” On appeal, the

Companies have not identified any statements of fact by BOA that

were actually false. Nor have Appellants pointed to any

statements of fact by BOA that were so incomplete as to be

misleading. Nor, where BOA representatives made statements of

opinion, have Appellants shown that the BOA representatives did

not genuinely possess those opinions.

Moreover, had Appellants proved false statements by BOA,

Appellants could not have satisfied the justifiable reliance

prong of the negligent misrepresentation cause of action. In Part

5(h)(1) of the Master Agreement, incorporated by the Second

Confirmation into the Knockout Swap Transaction, each party

pledged that “[i]t is not relying on any communication (written

or oral) of the other party as investment advice or as a

recommendation to enter into that Transaction.” Whether such a

disclaimer of reliance is binding is determined by the language

13
of the contract and the circumstances surrounding its formation.

Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex.

1997); see also Fair Isaac Corp. v. Tex. Mut. Ins. Co., No. H-05-

3007, 2006 U.S. Dist. LEXIS 48426 at *6 (S.D. Tex. July 17,

2006).

In this case, the language of the disclaimer is clear and

unambiguous, and the circumstances favor giving effect to the

disclaimer. Though the Companies lacked the level of financial

knowledge possessed by BOA, the district court found that “[t]he

Companies routinely enter sophisticated transactions and use

contracts in conducting their business” and that “[t]he Companies

have entered contracts on numerous occasions that limit or

disclaim warranties and remedies, clarify the status of the

relationship between the parties, and ensure that agreements are

limited to terms specified in written contracts.” The Companies

were capable of understanding the nature and effect of the

disclaimer provisions in the Master Agreement. As a consequence,

the Companies cannot claim to have justifiably relied on BOA’s

representations.

C. Fraud

Appellants contend that the district court erred in not

finding sufficient evidence to support the Companies’ claim for

fraud. To prevail on their fraud claim, the Companies must prove

that: (1) BOA made a material representation that was false; (2)

14
BOA knew the representation was false or made it recklessly as a

positive assertion without any knowledge of its truth; (3) BOA

intended to induce the Companies to act upon the

misrepresentation; and (4) the Companies actually and justifiably

relied upon the representation and thereby suffered injury. Ernst

& Young, L.L.P. v. Pac. Mut. Life, 51 S.W.3d 573, 577 (Tex.

2001).

For the same reasons that the Companies’ claim for negligent

misrepresentation lacks substantive merit, the Companies’ fraud

claim must too fail. The district court found that “BOA did not

materially misrepresent characteristics of knockout swaps,” and

Appellants have not shown that this finding was in error. BOA may

have communicated greater enthusiasm for the knockout swap than

was warranted by the circumstances, but this conduct alone does

not rise to the level of actionable misrepresentation. Moreover,

even if the Companies proved that BOA made a false material

representation, the Companies’ reliance on that representation

would not have been justifiable in light of the explicit

disclaimer of reliance in the Master Agreement. (See supra,

section II B.) We conclude that there was no error in the

district court’s rejection of the Companies’ fraud claim.

D. Deceptive Trade Practices Act (DTPA)2

2
TEX. BUS. & COM. CODE ANN. § 17.50 (Vernon 2002 & Supp.
2006).
15
 Appellants contend that the district court “erred in not

applying the Deceptive Trade Practices Act and in not finding a

violation thereof.” The district court held that “the evidence

does not support a finding of false, misleading, or deceptive

acts sufficient to support [the Companies’] DTPA claim.” The

court found that “BOA’s representations and disclosures

concerning the Knockout Swap Transaction were not false,

misleading, or deceptive.” On appeal, the Companies argue that

they qualify as “consumers” under the DTPA because the interest

rate swap counts as a “service” within the meaning of the DTPA.

Yet, while BOA maintained at trial that the Companies were not

“consumers” under the DTPA, the district court did not reject the

Companies’ DTPA claims on this basis. Because Appellants have not

addressed their argument to the district court’s conclusion that

BOA’s representations did not violate the DTPA, the district

court’s holding must stand.

E. Implied Duty of Good Faith and Fair Dealing/Duty to Disclose

Appellants argue that the district court erred in “failing

to recognize Bank of America’s ‘Implied Duty of Good Faith and

Fair Dealing’ or its Duty to Disclose in regard to Appellants.”

Every contract governed by New York law contains an implied duty

of good faith and fair dealing. N.Y. Univ. v. Cont’l Ins. Co., 87

N.Y.2d 308, 318 (N.Y. 1995); see also 1-10 Indus. Assocs., LLC v.

Trim Corp. of Am., 297 A.D.2d 630, 631 (N.Y. App. Div. 2002).

16
This duty requires that “neither contracting party engage in

conduct that will have the effect of destroying or injuring the

rights of the other party to receive the benefit of the

contract.” Agency Dev., Inc. v. MedAmerica Ins. Co., 327 F. Supp.

2d 199, 203 (W.D.N.Y. 2004). The duty is breached when “one party

to the contract affirmatively seeks to prevent the other party’s

performance or to withhold the benefits of the contract from the

other party.” Phlo Corp. v. Stevens, No. 00-3619, 2001 U.S. Dist

LEXIS 7350, at *21-22 (S.D.N.Y. June 7, 2001).

As these New York cases indicate, the duty of good faith and

fair dealing “relates only to the performance of obligations

under an extant contract, and not to any pre-contract conduct.”

Indep. Order of Foresters v. Donaldson, Lufkin & Jenrette, Sec.

Corp., 157 F.3d 933, 941 (2d Cir. 1998). See also Phoenix Racing,

Ltd. v. Lebanon Valley Auto Racing Corp., 53 F. Supp. 2d 199, 216

(N.D.N.Y. 1999). Yet, in the portion of their appeal addressed to

the duty of good faith and faith dealing, Appellants again rely

on BOA’s alleged misrepresentations prior to the signing of the

Knockout Swap Agreement. Appellants do not point to any conduct

by BOA in performance of the Knockout Swap Agreement that would

violate BOA’s duty of good faith and fair dealing. We therefore

uphold the district court’s determination that BOA did not breach

its implied duty of good faith and fair dealing.

Under New York law, a duty to disclose during business

negotiations may arise where there is a fiduciary or confidential

17
relationship between the parties, as well as where (1) one party

has superior knowledge of certain information; (2) that

information is not readily available to the other party; and (3)

the first party knows that the second party is acting on the

basis of mistaken knowledge. Banque Arabe et Internationale

D’Investissement v. Md. Nat. Bank, 57 F.3d 146, 155 (2d Cir.

1995). The district court held that there was no fiduciary or

confidential relationship between BOA and the Companies, and, as

discussed supra, section II. A., we decline to overturn that

conclusion. While BOA possessed greater knowledge of interest

rate swaps than did the Companies, the Companies have not shown

that they could not have readily obtained more information about

prospective interest rate movements and about their legal and

financial obligations under the Knockout Swap Agreement had they

sought outside advice. We hold that BOA did not have an

affirmative duty to disclose during contract negotiations with

the Companies.

F. Texas Securities Act

Appellants charge that the district court erred in

concluding that the Texas Securities Act did not apply to the

Knockout Swap Transaction. There are no cases that directly

address whether interest rate swaps qualify as securities under

the Texas Securities Act.3 Looking to the federal securities laws

for guidance, as did the district court in this case, is

3
TEX. REV. CIV. STAT. ART. 581-33 (Vernon 1964 & Supp. 2006).
18
therefore appropriate. See Beebe v. Compaq Computer Corp., 940

S.W.2d 304, 306-07 (Tex. App.–-Houston [14th Dist.] 1997, no

writ) (“While cases dealing with the federal securities laws are

not dispositive concerning our interpretation of the Texas

Securities Act, they may provide persuasive guidance.”); see also

In re Westcap Enters., 230 F.3d 717, 726 (5th Cir. 2000)

(“[B]ecause the Texas Securities Act is so similar to the federal

Securities Exchange Act, Texas courts look to the decisions of

the federal courts to aid in the interpretation of the Texas

Act.”).

More than one federal court has held that interest rate

swaps are not securities for the purposes of federal securities

laws. See Proctor & Gamble Co. v. Bankers Trust Co., 925 F. Supp.

1270, 1277-83 (S.D. Ohio 1996); see also Lehman Bros. Commercial

Co. v. Minmetals Int’l Non-Ferrous Metals Trading Co., 179 F.

Supp. 2d 159, 164, 167 (S.D.N.Y. 2001). No court has held to the

contrary. The case cited by Appellants, Caiola v. Citibank, N.A.,

295 F.3d 312 (2d Cir. 2002), is not on point, for there the court

addressed a very different type of financial instrument–-a type

of stock option known as a “cash-settled over-the-counter

option.” Caiola, 295 F.3d at 324-27. While the trial court in

Caiola had relied on Proctor & Gamble, the Second Circuit

concluded that Proctor & Gamble involved “a very different type

of transaction.” Id. at 326. We therefore uphold the district

court’s conclusion that the “non-securities based, interest rate

19
Knockout Swap at issue here is not a security under the Texas

Securities Act.”

G. Bank Holding Company Act

Appellants argue that the district court erred in finding

that BOA’s actions did not violate the Bank Holding Company Act.

The 1970 amendments to the Bank Holding Company Act, 12 U.S.C.

§ 1972, were directed at tying arrangements by banks that require

bank customers to accept or provide some other service or product

or to refrain from dealing with other parties in order to obtain

the bank product or service they desire. Swerdloff v. Miami Nat’l

Bank, 584 F.2d 54, 57-58 (5th Cir. 1978). To state a claim under

§ 1972, a plaintiff must show that (1) the banking practice in

question was unusual in the banking industry, (2) an anti-

competitive tying arrangement existed, and (3) the practice

benefits the bank. Bieber v. State Bank of Terry, 928 F.2d 328,

330 (9th Cir. 1991).

The record supports the district court’s conclusion that BOA

committed no violation of the Bank Holding Company Act.

Appellants point to no evidence that BOA conditioned the

extension of credit or another service on the Companies’ agreeing

to an interest rate swap. The Companies’ alleged inability to

obtain an interest rate swap from another bank was not the result

of anti-competitive or unusual business practices by BOA. Rather,

it is the natural result of the Companies’ decision to borrow

substantial sums from BOA, requiring that a significant portion

20
of the Companies’ assets be pledged as collateral.

H. Breach of Contract Counterclaim

Appellants argue that the district court erred in finding

that the Companies breached their contract with BOA. Appellants

first claim that their contract with BOA was unenforceable

because of a lack of consideration, contending that “the Knockout

Swap provided no benefit whatsoever to the Companies.” Appellants

argue that because the Companies’ loans went into default, “BOA

had a unilateral right to terminate the Knockout Swap from its

inception,” and as a result “there were no benefits to the

Companies.”

Under New York law, a promise unsupported by consideration

is generally invalid. Granite Partners, L.P. v. Bear, Stearns &

Co., 58 F. Supp. 2d 228, 252 (S.D.N.Y. 1999). Sufficient

consideration may be provided either by a benefit to a promisor

or a detriment to the promisee. Id. But even if a contract lacked

consideration as written, performance by the parties can render

the contract enforceable. “As a general rule, even a contract

unenforceable at its inception because of lack of consideration

or mutuality may nevertheless become valid and binding to the

extent that it has been performed.” Id. at 256 (internal

quotation marks omitted); see also Flemington Nat'l Bank & Trust

Co. v. Domler Leasing Corp., 65 A.D.2d 29, 36-37 (N.Y. App. Div.

1978) (“Even when the obligation of a unilateral promise is

suspended for want of mutuality at its inception, still, upon

21
performance by the promisee a consideration arises which relates

back to the making of the promise, and it becomes obligatory.”)

(internal quotation marks omitted); Pozament Corp. v. AES

Westover, LLC, 27 A.D.3d 1000, 1001 (N.Y. App. Div. 2006). In

this case, it is undisputed that BOA performed under the Knockout

Swap Transaction by making payments to the Companies for several

months, and that the Companies accepted those payments. We hold

that the district court did not err in rejecting the Companies’

lack of consideration defense.

Appellants also claim that the Knockout Swap Transaction was

unenforceable due to fraud by BOA. Under New York law, “a party

induced to enter a contract by fraud or misrepresentations must

make a choice; the party may either elect to accept the situation

created by the fraud and seek to recover his damages or he may

elect to repudiate the transaction and seek to be placed in the

status quo.” Ballow Brasted O’Brien & Rusin P.C. v. Logan, 435

F.3d 235, 238 (2d Cir. 2006) (internal quotation marks omitted).

Here, the Companies have attempted to do both. Regardless, as

discussed supra, section II. C., the district court concluded

that there was no evidence of fraud by BOA, as BOA made no

actionable misrepresentations. Appellants have not identified

facts or law that would require us overturn the district court’s

conclusion, and therefore the Companies’ fraud defense must fail.

I. Attorney’s fees

Appellants object to the district court’s award of $225,000

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in attorney’s fees to BOA. A district court’s award of attorney’s

fees is reviewed for an abuse of discretion, though factual

determinations for the relevant factors are reviewed for clear

error. Mathis v. Exxon Corp., 302 F.3d 448, 461-62 (5th Cir.

2002). Appellants first argue that BOA submitted insufficient

evidence to allow the district court to “assess the legitimacy

and reasonableness of BOA’s requested fees.” Appellants allege

that BOA submitted as evidence only a two-page spreadsheet with a

monthly breakdown of hours. This allegation is incorrect: On

January 20, 2006, BOA filed a supplemental appendix of evidence

containing copies of all its legal fee invoices for this matter.

These submissions provided sufficient evidence for the district

court to make its determination.

Appellants also argue that the amount awarded to BOA was

unreasonable “in light of the amount involved and the results

obtained.” In diversity cases, state law governs both the award

of and reasonableness of attorney’s fees. Mathis, 302 F.3d at

461. In this case, this district court found that the BOA was

entitled to attorney’s fees for both its counterclaim and its

defenses due to provisions in the contract between the Companies

and BOA. Appellants do not challenge this conclusion.

Accordingly, we look to New York law, which governs the Knockout

Swap Transaction, to assess the reasonableness of the district

court’s attorney’s fees award. New York cases provide that “the

award of an attorney’s fee, whether pursuant to agreement or

23
statute, must be reasonable and not excessive.” Rad Ventures

Corp. v. Artukmak, 818 N.Y.S.2d 527, 530 (2006). “Before ordering

one party to pay another party’s attorney’s fees, the court

always has the authority and responsibility to determine that the

claim for fees is reasonable.” Solow Management Corp. v. Tanger,

797 N.Y.S.2d 456, 457 (2005). In determining reasonableness, the

following factors should be considered: “the difficulty of the

questions involved; the skill required to handle the problem; the

time and labor required; the lawyer’s experience, ability and

reputation; the customary fee charged by the bar for other

services; and the amount involved.” In re: Ury, 485 N.Y.S.2d 329,

330 (1985).4

Appellants argue that the $225,000 award to BOA was

excessive because BOA recovered only $186,641.67 in this

litigation. But BOA also had to defend against numerous claims by

the Companies, including a request for punitive damages.

Moreover, the amount recovered in the lawsuit is only one of

numerous factors to be assessed in determining attorney’s fees;

the time and labor required is another significant factor. See

id. BOA produced evidence that its lawyers spent approximately

1,544 hours in connection with this litigation. Appellants have

not shown that the amount of time or hourly rates were

4
Both parties rely on Texas law in their arguments about attorney fee reasonableness and
cite the eight-factor test from Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812,
818 (Tex. 1997). The Andersen factors are the very similar to the factors cited above in In re:
Ury; thus the same result would be reached under Texas law.
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unreasonable for the issues involved. We hold that the district

court did not abuse its discretion in making the attorney’s fees

award that it did.

III. CONCLUSION

For the reasons above, we AFFIRM the district court’s

judgment in this matter on all claims, counterclaims, and awards.

AFFIRMED

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