Famm Steel, Inc. v. Sovereign Bank

• Citation: 571 F.3d 93
• Decision Date: 12 June 2009
• Docket Number: No. 08-1955.,08-1955.
• Parties: FAMM STEEL, INC.; Austin Realty, Ltd., Plaintiffs, Appellants, Ann Gavin; Paul Gavin, Plaintiffs, v. SOVEREIGN BANK, Defendant, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

571 F.3d 93

FAMM STEEL, INC.; Austin Realty, Ltd., Plaintiffs, Appellants Ann Gavin; Paul Gavin, Plaintiffs, v. SOVEREIGN BANK, Defendant, Appellee.

No. 08-1955.

United States Court of Appeals, First Circuit.

Heard April 7, 2009.

Decided June 12, 2009.

Susan D. Novins with whom Seegel Lipshutz & Wilchins LLP was on brief for appellants.

Richard E. Gentilli with whom Howard M. Brown, Lauren A. Solar, and Bartlett Hackett Feinberg P.C. were on brief for appellee.

Before LYNCH, Chief Judge, TORRUELLA and LIPEZ, Circuit Judges.

LYNCH, Chief Judge.

This case involves a once-profitable steel fabricating company, FAMM Steel, Inc. ("FAMM"), that fell on hard times while trying to expand its business. The company defaulted on its loans, and it was shut down and had its assets liquidated in 2004. Thereafter, it brought suit against Sovereign Bank ("Sovereign"), which provided the loans, claiming that the bank had caused its demise by forcing it to hire an incompetent financial manager who mismanaged the company's accounts and then engaging in a course of action that exacerbated the problem. The company alleged the bank was liable under a slew of theories, including an instrumentality theory, breach of the implied covenant of good faith and fair dealings, breach of fiduciary duty, fraud, duress, and interference with advantageous business relations.

The district court granted the defendant bank summary judgment in a careful and well-reasoned opinion. Gavin v. Sovereign Bank, No. 06-12314, 2008 WL 2622839 (D.Mass. June 30, 2008). We affirm. This is our first occasion to deal with the "instrumentality" theory of lender liability.

I.

We describe the facts as outlined by plaintiffs. FAMM was a family-owned steel fabricating company that operated out of Rindge, New Hampshire. It built projects such as ballparks, hotels, apartments, and office buildings throughout the Northeast. FAMM's sales revenue was $1.8 million at the end of 1995 and grew to $27 million by the end of 2000. FAMM was run by Ann Gavin, who served as the company's President and Secretary, and her father Paul Gavin, who served as its Vice President and Treasurer. Austin Realty, Ltd. ("Austin") was the record title owner of FAMM's fabrication facility in Rindge.

In 1998, as its business expanded, FAMM developed a plan to expand its facility and revamp its operations by purchasing state-of-the-art equipment. That year, it entered into a banking relationship with Fleet National Bank, the predecessor-in-interest to defendant Sovereign; for simplicity we will refer to the bank as Sovereign throughout. Between 1998 and the end of 2002, Sovereign extended approximately $6.1 million in credit to the plaintiffs, which FAMM used to expand its facility and upgrade its equipment. During that time, Edward Powers, Sovereign's Vice President, was FAMM's main point of contact with the bank; Powers was the loan officer in charge of FAMM's account until March 2003.

In the fourth quarter of 2001, FAMM suffered an operating loss due to an unexpectedly harsh winter and other external adverse economic factors, along with the continued costs of renovating its facility. FAMM informed Powers of its financial difficulties.

Around the same time, FAMM's comptroller, Charles Stearns, informed the company he would be leaving at the end of the year, and FAMM began searching for a replacement. As the process dragged on, FAMM sought to hire an accountant from the firm of Paul Seelye, who was FAMM's CPA, to oversee its finances on an interim basis. In January 2002, Ann Gavin discussed this plan with Powers. Powers stated that he was uncomfortable with this choice because he did not want someone from the company that did FAMM's auditing review also to be involved in FAMM's daily operations. He wanted Gavin to hire someone he had confidence in to oversee FAMM's accounting until the company could get a handle on its accounting department. Powers informed Gavin that person would be David Lee, an outside consultant with whom Powers and the bank had had some limited experience in the past. Gavin objected because Lee was at the time providing consulting services to a company owned by a former business partner of the Gavins with whom the Gavins were not on good terms, and because Lee did not have experience in the steel industry. Powers insisted, however, saying it was the bank's prerogative to have a consultant hired who made the bank feel secure in its financing. FAMM acquiesced and hired Lee.

FAMM continued to search for a permanent replacement for Stearns, the comptroller. It received the resume of Keith Woolford, along with those of several other prospective candidates, from Seelye; Seelye interviewed Woolford before passing on his resume to Ann Gavin. Gavin then interviewed Woolford and four other candidates. She narrowed the field to Woolford and one other candidate. The two were then interviewed by Ann Gavin, Paul Gavin, five FAMM managers, and Lee. At some point during the process, Ann Gavin sent Powers an email with Woolford's resume attached indicating that FAMM was very interested in Woolford and was probably going to make an offer to him. Ann Gavin claims that Powers wanted Lee to be involved in the interviewing process so, in essence, FAMM needed Lee's approval to make the decision, although Powers claims the bank was not involved at all in the process. Regardless, the Gavins and the group of FAMM managers who conducted the interviews concluded that they could work with either candidate, and Lee preferred Woolford, so Woolford was chosen. Woolford was hired as FAMM's permanent comptroller, and began working in March 2002. After Woolford was hired, the bank instructed FAMM to retain Lee to supervise and train Woolford and to provide general oversight to FAMM's accounting department.

In the meantime, FAMM's financial condition continued to deteriorate. As a result of its losses in 2001, FAMM became in default of certain covenants contained in the Sovereign loan documents no later than February 2002, when Ann Gavin and Lee met with Powers to discuss the company's ongoing financial problems.¹ The losses continued in the first quarter of 2002. FAMM remained in covenant default in 2002 and 2003.² Sovereign agreed to waive the 2001 covenant default in mid-2002; it did not waive the covenant defaults for 2002 and 2003, although plaintiffs claim the bank indicated such waivers would be forthcoming.

Lee's and Woolford's management did not help matters. During 2002, Lee and Woolford failed to reconcile FAMM's general ledger accounts and grossly overstated job revenues for work in progress. They had also neglected to reconcile FAMM's monthly bank statements and failed to pay monthly sales taxes. Lee and Woolford presented FAMM with inaccurate financial data that showed the company was turning a profit when in fact it was still losing money. According to Lee's and Woolford's numbers, the company expected a $300,000 profit that year; in reality, it lost $1.1 million. FAMM relied on these numbers in making business decisions over the course of the year. Plaintiffs claim that if the company had known its true financial conditions, it would have booked additional projects that were available to it, reduced overhead, withheld bonuses from employees, and avoided perks such as buying company cars and giving employees extra vacation days.

According to plaintiffs, FAMM did not become aware of these irregularities until October 31, 2002, when Lee revealed to Ann Gavin that he had not reviewed or reconciled certain accounts since he started.³ Shortly thereafter, on November 14, 2002, Lee resigned. On January 3, 2003, FAMM fired Woolford.

In January 2003, after learning the full extent of these irregularities, Ann Gavin met with Powers to discuss the situation. Powers instructed Gavin to hire a bank-approved turnaround consultant, Joe Picano; Powers stated that if FAMM did so, the company's account would remain with him and would not be moved to another department. Nonetheless, in March 2003, FAMM's account with Sovereign was transferred to John Bowen in the Managed Assets Division.

In the months that followed the revelation of Lee's and Woolford's alleged misconduct, Sovereign engaged in a series of actions that plaintiffs claim seriously exacerbated the situation; according to plaintiffs, Sovereign's "goal was to close FAMM, minimize [Sovereign's] exposure and maximize the value of its credit." This theory about Sovereign's purported motive is not further explained.

In February 2003, Sovereign terminated automatic sweeps between FAMM's checking account and its line of credit, without notifying FAMM; this caused the account to be overdrawn. After the automatic sweeps were stopped, FAMM had to manually manage its account; however, it was unable for some reason to view its account online, and thus could not determine which of its checks had cleared on a daily basis. Plaintiffs claim that Sovereign also mishandled FAMM's general disbursement account, causing at least one check to bounce, and that it failed to reproduce in a timely manner certain bank statements and checks from 2002 that FAMM had requested. Sovereign did not respond to inquiries from FAMM's suppliers, subcontractors, and other third parties. It also failed to enter into a forbearance agreement with FAMM and did not respond to various workout or refinancing proposals.

Plaintiffs claim Sovereign committed to issuing a forbearance agreement and to extending FAMM's line of credit if FAMM paid down the line. Nonetheless, no forbearance agreement was issued, and Sovereign terminated FAMM's line of credit on May 31, 2003. In March 2004, Sovereign sold FAMM's loans to a third party for $1.725 million; after the sale, FAMM's facility was shut down and its assets were liquidated. Sovereign lost over $4 million.

FAMM, Austin, Ann Gavin, and Paul Gavin brought suit against Sovereign on December 29, 2006. The complaint raised twelve...