1st TN Bank Nat'l Assoc. v. Barreto

• Decision Date: 09 August 1999
• Docket Number: No. 98-6020,98-6020
• Citation: 268 F.3d 319
• Parties: (6th Cir. 2001) First Tennessee Bank National Association, Plaintiff-Appellant, v. Hector V. Barreto, in his official capacity as Administrator of the Small Business Administration, <A HREF="#fr1-*" name="fn1-*">* Defendant-Appellee. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 319

268 F.3d 319 (6th Cir. 2001)

First Tennessee Bank National Association, Plaintiff-Appellant, v. Hector V. Barreto, in his official capacity as Administrator of the Small Business Administration,^* Defendant-Appellee.

No. 98-6020

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: August 9, 1999

Decided and Filed: October 9, 2001

Appeal from the United States District Court for the Middle District of Tennessee at Nashville. No. 92-01019, Todd J. Campbell, District Judge. [Copyrighted Material Omitted] John S. Hicks (argued and briefed), BAKER, DONELSON, BEARMAN & CALDWELL, Nashville, Tennessee, for Appellant.

Robert C. Watson, ASSISTANT UNITED STATES ATTORNEY (argued and briefed), Nashville, Tennessee, for Appellee.

Before: NORRIS and SUHRHEINRICH, Circuit Judges; RICE, Chief District Judge.^**

OPINION

WALTER HERBERT RICE, Chief District Judge.

This litigation stems from a loan guaranty agreement between appellant First Tennessee Bank National Association ("First Tennessee") and the Small Business Administration ("SBA"). After the SBA failed to honor the agreement, First Tennessee filed an official-capacity suit against the Administrator of the SBA. First Tennessee's lawsuit sought to compel the SBA to honor the guaranty agreement by repurchasing a defaulted loan. Following a bench trial, the district court entered final judgment in favor of the SBA on June 15, 1998. The district court concluded, inter alia, (1) that SBA regulations placed the burden upon First Tennessee to establish its substantial compliance with the terms of the guaranty agreement, and (2) that First Tennessee had materially breached the agreement. First Tennessee has filed a timely appeal from the district court's ruling, advancing two arguments. First, it asserts that the district court misallocated the burden of proof by requiring it to demonstrate substantial compliance with the terms of the guaranty agreement. Second, the bank contends that the district court erred in ruling that it had materially breached the agreement. For the reasons set forth below, we find both arguments unpersuasive, and we affirm the judgment of the district court.

I. Factual and Procedural Background

First Tennessee and the SBA entered into an agreement on September 21, 1978, under which the SBA promised to guaranty certain loans that the bank made to small businesses. The agreement covered "only loans duly approved hereafter for guaranty by [the bank] and SBA subject to SBA's Rules and Regulations as promulgated from time to time." Among other things, the agreement obligated First Tennessee to "close and disburse each loan in accordance with the terms and conditions of the approved loan authorization[.]" It also required the bank to execute documents and to "take such other actions which shall, consistent with prudent closing practices, be required in order fully to protect or preserve the interest of Lender [First Tennessee] and SBA in the loan."

On June 20, 1990, First Tennessee filed an application with the SBA, asking the agency to guaranty a revolving line of credit loan that the bank wished to extend to Telware International, Inc. ("Telware"), an export company. Deryl Bauman, Vice President and Commercial Loan Officer/Relationship Manager for First Tennessee, served as the loan officer who assisted Telware in obtaining the SBA guaranty. Specifically, Bauman helped Telware prepare a loan guaranty application, and he negotiated with Ron Reed, the Chief Credit Administrator at the SBA's Nashville office. The SBA subsequently approved First Tennessee's request and issued a loan authorization, agreeing to guaranty eighty-five percent of the bank's revolving line of credit to Telware, up to $882,350. An initial draft of the loan authorization provided that any "letter of credit" issued on behalf of a purchaser of Telware's goods would be confirmed by a United States bank or a bank acceptable to the lender, and that the goods at issue would be insured with FCIA insurance.¹ The final version of the loan authorization permitted a letter of credit either to be confirmed or to be FCIA insured. The loan authorization also was made subject to the terms of the First Tennessee-SBA guaranty agreement mentioned above.

Telware subsequently obtained the revolving line of credit loan from First Tennessee and successfully consummated several export transactions. On two occasions in particular, Telware used the line of credit to finance its sale of beans to Centrocoop, a Yugoslavian food distributor. In each instance, Telware obtained letters of credit issued by Beogradska Banka in Yugoslavia, and it prepared the various documents which were used to obtain payment from the Banka. On each occasion, First Tennessee also received notice that Beogradska Banka had acknowledged Telware's assignment of its interest in the letters of credit to First Tennessee. Such an acknowledgment was required by the loan guaranty application which had been submitted by First Tennessee on behalf of Telware.

The transaction giving rise to the present litigation occurred on December 12, 1990, when Telware agreed to sell 1,000 metric tons of navy beans and 1,000 metric tons of pinto beans to Centrocoop. Thereafter, on January 29, 1991, Beogradska Banka provided Telware with a letter of credit in the amount of $1,235,000 to secure Centrocoop's payment for the beans. Pursuant to the loan authorization, First Tennessee advanced funds to Telware, which enabled the company to purchase the beans for resale to Centrocoop. First Tennessee also received confirmation that Beogradska Banka in New York would "discount" the letter of credit.² Telware then assigned to First Tennessee its interest in the proceeds from the letter of credit. First Tennessee, however, neither received nor requested confirmation from Beogradska Banka that the Yugoslavian bank had approved the assignment of Telware's interest in the letter of credit to First Tennessee. Additionally, because the timing of its bean shipment to Centrocoop was critical, Telware lacked the time necessary to obtain FCIA insurance. Telware also was unable to have the letter of credit issued by Beogradska Banka confirmed in time to meet Centrocoop's shipping demands. As noted above, however, the loan authorization issued by the SBA required either FCIA insurance or confirmation of the letter of credit. Given its inability to meet either requirement, Telware asked the SBA for a waiver. On February 1, 1991, First Tennessee representative Bauman met with SBA representative Reed, who approved Telware's request for a waiver of the agency's requirement for FCIA insurance or a confirmed letter of credit. After receiving the waiver, Telware commenced the shipment of its beans to Yugoslavia.

With respect to financing the bean transaction, the parties anticipated that Telware would present proper documentation to Beogradska Banka, which then would honor the letter of credit that it had issued on behalf of Centrocoop. Such a payment by Beogradska Banka was necessary in order for Telware to repay the First Tennessee loan, which had enabled it to purchase the beans for resale to Centrocoop. As a result, Telware assembled the documentation required under the letter of credit and presented that documentation to Beogradska Banka. The Yugoslavian bank refused to accept Telware's documentation, however, claiming that certain bills of lading were endorsed incorrectly.³ Following Beogradska Banka's rejection of the documentation, Telware contacted Bauman at First Tennessee and informed him of the problem. Although Bauman was concerned (because no rejection had occurred in the two prior Telware-Centrocoop transactions) he took no action and instead departed on a scheduled vacation. Upon his return, Bauman learned that Telware had submitted additional documents to Beogradska Banka, which once again had rejected them. At that time, Bauman and Telware discovered that Centrocoop had alleged problems with the quality of Telware's prior bean shipments. Telware assured Bauman that it would resolve the situation.

Telware's first action was to divert the bean shipment to Malta. It then obtained an extension of the maturity date on its loan from First Tennessee. Despite the extension, Telware subsequently defaulted on the loan, and its beans were sold for significantly less than what Centrocoop would have paid for them. After First Tennessee applied the proceeds from the bean sale to Telware's debt, the outstanding principal balance on the defaulted loan was $615,442.75. On June 9, 1992, First Tennessee asked the SBA to repurchase eighty-five percent of this outstanding balance, plus interest, in accordance with the terms of the loan guaranty agreement. The SBA refused to honor the guaranty agreement, however, contending that First Tennessee had materially breached its terms by not servicing the Telware loan prudently, as required by SBA regulations and by the guaranty agreement itself. First Tennessee subsequently commenced the present litigation to enforce the loan guaranty against the SBA. The matter proceeded to a bench trial in March, 1998.

At trial, Bauman testified that his only action, upon discovering Beogradska Banka's rejection of the documents, was to speak with Fatima Telware, who assured him that she would handle the problem. Bauman did not approach First Tennessee's international department, despite his awareness that Allan Good, a manager of the department, was familiar with "important" people at Beogradska Banka, both in Belgrade and New York, and had visited them in person. Additionally, neither Bauman nor anyone else at First Tennessee notified the SBA about Beogradska Banka's rejection of the documentation. In his trial testimony, Good stated that First Tennessee's international department would have been interested in assuring that Telware's documentation was correct. He noted, however, that his department had no knowledge of First...