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
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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that this opinion should not be published and is not precedent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
22
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.
24
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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K3C Inc. v. Bank of America, N.A.
Court: Court of Appeals for the Fifth Circuit
Date filed: 2006-11-07
Citations: 204 F. App'x 455
Copy CitationsCombined Opinion