286 F.3d 878 (6th Cir. 2002), 00-5484, In re Sallee

Docket Nº:00-5484
Citation:286 F.3d 878
Party Name:In re Sallee
Case Date:April 15, 2002
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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286 F.3d 878 (6th Cir. 2002)

In re Worth A. SALLEE and Sandra M. Sallee, Debtors.

Worth A. Sallee, Sandra M. Sallee, and John Wilson, Trustee, Plaintiffs-Appellees/Cross-Appellants,

v.

Fort Knox National Bank, N.A. and Dickinson Financial Corporation, Defendants-Appellants/Cross-Appellees.

Nos. 00-5484, 00-5652.

United States Court of Appeals, Sixth Circuit

April 15, 2002

Argued: Sept. 19, 2001.

Rehearing Denied: May 10, 2002.

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John T. McGarvey (briefed), Douglas G. Sharp (argued and briefed), Morgan & Pottinger, Louisville, KY, for Plaintiffs-Appellees/Cross-Appellants.

Philip W. Bledsoe (argued and briefed), Richard M. Paul, III (briefed), Shughart, Thomson & Kilroy, Kansas City, MO, Cathy S. Pike (briefed), Russell H. Saunders (briefed), Weber & Rose, for Defendants-Appellants/Cross-Appellees.

Before: BATCHELDER and COLE, Circuit Judges; GWIN, District Judge. [*]

GWIN, D. J., delivered the opinion of the court, in which COLE, J., joined. BATCHELDER, J. (pp. 904-906), delivered a separate opinion concurring in part and concurring in the judgment.

OPINION

GWIN, District Judge.

With these appeals, we review the judgment of the U.S. Bankruptcy Court for the Western District of Kentucky. That court gave judgment of $3,009,998.25 against Appellant Fort Knox National Bank ("Fort Knox Bank") on Plaintiff Worth and Sandra Sallee's breach of a fiduciary relationship and fraud claims. This case arises from a complicated series of loans that the Sallees used to purchase and operate a

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convenience store and laundromat in the Fort Knox, Kentucky area. The case presents the unhappy collision between Fort Knox Bank's bad banking practices and the Sallees' business naivete and incompetence.

In wading through the morass created by Fort Knox Bank and the Sallees, we first describe the factual background upon which the Sallees base their claim of a fiduciary relationship with Fort Knox Bank. After considering this background, we find that Fort Knox Bank's relationship with the Sallees did not create a duty in Fort Knox Bank to act primarily in the Sallees' interest. The relationship between a bank and a borrower does not ordinarily impose a fiduciary duty upon the bank. While the Sallees may have been childlike in trusting Fort Knox Bank's representatives, we find no reasonable person in their position would believe Fort Knox Bank acted on the Sallees' behalf in lending monies to the Sallees.

After discussing the Sallees' claim that Fort Knox Bank owed them a fiduciary duty, we examine the bankruptcy court's finding that the Sallees established their fraud claim. Regarding the fraud claim, Fort Knox Bank argues that the Sallees cannot show reasonable reliance unless they can establish their fiduciary claim. However, under Kentucky law, a duty to disclose may arise from a partial disclosure of information or from circumstances in which one party to a contract has superior knowledge and is expected to reveal it. We find that although Fort Knox Bank could refuse to give the Sallees the laundromat appraisals in its possession, it could not reveal one appraisal while keeping secret other appraisals that would show the appraiser had no idea of the laundromat's value.

Finding sufficient evidence to support the Sallees' fraud claim, we next examine Fort Knox Bank's argument that the Sallees released all claims against Fort Knox Bank by signing two Extension/Waiver Agreements ("extension agreement") in August and December 1989. The bankruptcy court found the extension agreement's release language insufficiently broad to prevent the Sallees' claims. Upon appeal, the district court found the release language broad enough to prevent the Sallees' claims. Nonetheless, the district court found Fort Knox Bank fraudulently procured the Sallees' assent to the extension agreement. Because we hold the evidence supports the district court's finding that Fort Knox Bank fraudulently induced the Sallees' execution of the release, we deny Fort Knox Bank's argument that the release prevents the Sallees' claims.

After finding that the Sallees have established their fraud claim, we turn to the bankruptcy court's determination of damages. In its judgment, the bankruptcy court awarded the Sallees damages for fraudulent misrepresentation and fraudulent inducement. We find that Kentucky law required the Sallees to elect between a claim for fraudulent misrepresentation or one for fraudulent inducement. Because the Sallees elected to obtain damages for fraudulent misrepresentation, they could not obtain damages for fraudulent inducement. As a result, the bankruptcy court erred in awarding much of the damages found.

The bankruptcy and district courts found support for an award of punitive damages. We find sufficient evidence to support this finding. The bankruptcy and district courts calculated the punitive damage award as 75% of the compensatory damages. Because we find that the district and bankruptcy courts significantly overstate the compensatory damages, we affirm the district court's order to remand

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this case to the bankruptcy court to recalculate the punitive damage award.

I.

A. Procedural Background

Appellant Fort Knox Bank sued Appellees Worth and Sandra Sallee in the Circuit Court of Hardin County, Kentucky. In its complaint, Fort Knox Bank alleged the Sallees had defaulted on a $575,000 promissory note secured by a mortgage. Fort Knox Bank asked for judgment on the note with accrued interest. It also asked that the property securing the note be sold and the proceeds be applied against the loan.

The Sallees counterclaimed and then filed a petition for bankruptcy in the U.S. Bankruptcy Court for the Western District of Kentucky. The Sallees removed this lawsuit to bankruptcy court as an adversary proceeding related to a case under Title 11. See 28 U.S.C. § 1452 (2001). The Sallees then added a claim against third-party defendant/appellant Dickinson Financial Corporation ("Dickinson Financial"). Dickinson Financial was the corporate parent of Fort Knox Bank. The bankruptcy court had jurisdiction over this case under 28 U.S.C. §§ 157(b) and 1334(b) (2001).

After the bankruptcy court entered judgment against Fort Knox Bank, the appellants appealed to the district court, which reviewed the decision of the bankruptcy court under 28 U.S.C. § 158(a) (2001). The district court reversed in part and affirmed in part the bankruptcy court's judgment. Appellants Fort Knox Bank and Dickinson Financial then appealed to this Court and the Sallees cross-appealed.

B. Factual Background

Because this factually complex case comes upon appeal from the record made at the bankruptcy court, we rely upon the bankruptcy court's factual findings. 1

Appellant Fort Knox Bank was a small banking institution on and near the military post at Fort Knox, Kentucky. It offered unsophisticated banking services to military personnel and businesses in the surrounding community. At times relevant to this case, Dickinson Financial, a holding company, owned Fort Knox Bank. 2

Fort Knox Bank primarily provided consumer banking services, with only a modest amount of commercial lending. This practice changed in the mid- to late 1980s. Like many other misguided lending institutions then, Fort Knox Bank decided to increase its commercial lending, which ultimately grew to approximately 40% of Fort Knox Bank's total loan portfolio.

Fort Knox Bank gave responsibility for commercial lending to Senior Loan Officer Ken Logsdon ("Logsdon") and Assistant Loan Officer Victoria Cooney ("Cooney"). Each possessed a dangerous combination of inexperience and incompetence.

Displaying the "go-go" mentality that infected banking in the mid 1980s, Fort Knox Bank made a series of loans to Fred W. Bramblett ("Bramblett") and his family to finance a variety of real estate projects. Logsdon and Cooney authorized and supervised these loans.

The Bramblett family included Fred, Sr. and his wife Pearl, and their two sons, Fred W. and James Bramblett. They worked in the construction field and began borrowing large amounts from Fort Knox

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Bank in the mid 1970s. The Brambletts helped each other in their endeavors and routinely transferred property and loans between themselves.

Reflecting Logsdon and Cooney's incompetence, Fort Knox Bank poorly documented the loans made to Bramblett in the mid-1980's, loosely collateralized the loans, and made the loans with little financial information. Moreover, Fort Knox Bank continued this series of loans even though Bramblett's endeavors consistently lost money.

By the fall 1987, Fort Knox Bank's easy lending policy and Bramblett's incompetence resulted in Fort Knox Bank having several hundred thousand dollars of bad loans. Rather than face the consequences of his questionable lending practices, Senior Loan Officer Logsdon agreed to a generalized workout strategy with Bramblett. Under this workout strategy, Fort Knox Bank would give Bramblett, his businesses, and various family members and associates additional loans. Bramblett would use the new loans to keep his obligations to Fort Knox Bank afloat until Bramblett could divest the properties. Logsdon overstated the value of the collateral securing the original loans to allow him to lend Bramblett enough money to keep his old debts current.

Bramblett used the additional loans to keep past loans from going bad until he could turn his investments around or sell them. If necessary, Logsdon indicated that Fort Knox Bank would consider financing the purchase of one or more of Bramblett's properties, especially if the purchase could be secured with better collateral than the security offered by the Brambletts.

Throughout 1989, Bramblett looked for...

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