Mitec Partners LLC v. U.S. Bank Nat'l Ass'n

• Decision Date: 24 May 2010
• Docket Number: No. 09-1706.,09-1706.
• Citation: 605 F.3d 617
• Parties: MITEC PARTNERS, LLC, Plaintiff-Appellant,v.U.S. BANK NATIONAL ASSOCIATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

605 F.3d 617

MITEC PARTNERS, LLC, Plaintiff-Appellant,v.U.S. BANK NATIONAL ASSOCIATION, Defendant-Appellee.

No. 09-1706.

United States Court of Appeals Eighth Circuit.

Submitted: Feb. 9, 2010.

Filed: May 24, 2010.

Rehearing Denied June 28, 2010.

COPYRIGHT MATERIAL OMITTED

Dennis John Mitchell, argued, Iowa City, IA, for appellant.

Jesse Linebaugh, argued, Des Moines, IA (Charles F. Webber, Minneapolis, MN, Nicole Nicolino Nayima, Des Moines, IA, Des Moines, IA, on the brief), for appellee.

Before LOKEN, Chief Judge,^* COLLOTON and GRUENDER, Circuit Judges.

LOKEN, Chief Judge.

A group of Mitec, Inc. (Mitec), investors formed Mitec Partners, LLC (Mitec Partners), to purchase from U.S. Bank National Association (U.S.Bank) secured loans to Mitec that were in default. Their secret plan was to purchase Mitec's assets in foreclosure, wiping out Mitec's other investors. Mitec Partners purchased the loans, but the plan failed when the Small Business Administration (SBA) advised that U.S. Bank had subordinated two of its loans to SBA's secured loan to Mitec. Mitec Partners then sued U.S. Bank in Iowa state court alleging inter alia, fraud and negligent misrepresentation for failing to disclose the lienholder agreement with SBA before selling the loans to Mitec Partners. After U.S. Bank removed, the district court ¹ granted summary judgment dismissing all claims. Mitec Partners appeals the dismissal of the fraud and negligent misrepresentation claims. Summary judgment is appropriate “if viewing the record in the light most favorable to the nonmoving party, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law.” Woods v. DaimlerChrysler Corp., 409 F.3d 984, 990 (8th Cir.2005). Reviewing the grant of summary judgment de novo, we affirm. See Gregory v. Dillard's, Inc., 565 F.3d 464, 474 (8th Cir.) (en banc) (standard of review) cert. denied, --- U.S. ----, 130 S.Ct. 628, --- L.Ed.2d ---- (2009).

I. Background

Mitec owns patented technology for irradiating beef. In June 2004, U.S. Bank made four loans to Mitec, a $400,000 equipment purchase loan, a $380,000 loan to prefund SBA financing, and two revolving working capital lines of credit totaling $300,000. All four loans were secured by a properly recorded lien on nearly all of Mitec's assets, including its patents. One year later, SBA guaranteed debentures whose proceeds were used to repay U.S. Bank's $380,000 term loan, and made a $391,000 loan to Mitec under its 504 loan program.² As part of these transactions, U.S. Bank and SBA entered into a third-party lienholder agreement. The agreement subordinated U.S. Bank's revolving lines of credit, but not its $400,000 equipment loan, to SBA's 504 loan. The agreement required U.S. Bank to notify SBA of a Mitec default and gave SBA the right to purchase U.S. Bank's security interests prior to any foreclosure sale. SBA filed a UCC financing statement on its loan to Mitec. Neither SBA nor U.S. Bank recorded the third-party lienholder agreement.

In 2006, Mitec defaulted. Duane Strempke, a vice president in U.S. Bank's Special Assets Division, and Brian Dalziel, president of Mitec, failed to rehabilitate the defaulted loans. Mitec then sent shareholder and loan guarantor Tim White to negotiate with Strempke. White was a lawyer who “had a fair amount of experience from a bank's point of view dealing with unfortunate loans.” White testified that Strempke acted “like a pit bull” and described the unsuccessful negotiations as “not ... friendly.” At this point, a group of Mitec shareholders, including Tim White, formed Mitec Partners to purchase U.S. Bank's secured loans and acquire Mitec's assets at a foreclosure sale. All but one of Mitec Partners' members were investors in Mitec. Mitec Partners proceeded secretly, concerned that Dalziel would discover the plan and raise money to make the defaulted loans current, or locate a rival that could outbid Mitec Partners for Mitec's assets. James Peterson, president of Mitec Partners, testified that if its plan were successful, the other Mitec shareholders would be “wiped out” and would “lose their money.”

Attorney Robert Downer represented Mitec Partners in negotiating the loan purchase with U.S. Bank's Strempke. After hard bargaining in negotiations Downer described as “cordial,” Mitec Partners sent U.S. Bank a letter of intent (LOI) agreeing to purchase the loans for their full unpaid balance, approximately $640,000, with the exact price to be determined at closing. The LOI stated: “It is our understanding that [U.S.] Bank has forwarded all relevant documentation to Bob Downer for his review and that these documents will be received in his office today.” Strempke signed the LOI for U.S. Bank after adding an Exhibit A which provided: “This LOI is intended to set forth the general terms of the loan purchase, with final definitive terms and conditions to be set forth in an Agreement and related assignments to be prepared by Mitec Partners, LLC's legal counsel and subject to U.S. Bank's approval.” Mitec Partners signed Exhibit A.

Before closing, Strempke provided Mitec Partners with several documents related to the Mitec loans but not U.S. Bank's third-party lienholder agreement with SBA. Peterson testified that, prior to closing, when he asked Strempke how the SBA loan “plays into this,” Strempke responded, “we'll scrape them off if you want us to,” which Peterson understood to mean that U.S. Bank was the “senior lender.” Strempke acknowledged that the lienholder agreement was material to the deal and testified that he would have provided it to Mitec Partners had he been aware of the agreement before the closing.

It is undisputed that no one from Mitec Partners ever asked U.S. Bank about the relative priority of the SBA loan. Nor did Mitec Partners contact SBA or Mitec for information about the SBA loan, no doubt because Mitec Partners was concealing its plans. Prior to closing, Downer searched public records, learning that SBA recorded a security interest in Mitec's assets after U.S. Bank's security interest, which reinforced Downer's belief that all U.S. Bank security interests were prior to SBA's interest. Downer never asked Strempke whether all U.S. Bank loans were senior to any other security interest in Mitec's assets. Nor did he collect and review Mitec documents in the possession of Mitec Partners' members. Stephen Carfrae, a founding member, had an SBA document in his files stating that “[a]t or prior to 504 Loan Closing, [U.S. Bank] must execute a Third Party Lender Agreement,” and requiring that the SBA loan be secured by a lien on Mitec's equipment “[s]ubject only to the prior lien of [U.S. Bank] in the amount of $400,000.” Downer admitted that, had he seen this document before closing, he would have “ascertained exactly what the SBA's position ... would have been.”

In November 2006, Mitec Partners purchased the loans for $642,211.34. The parties signed an integrated “Assignment Agreement” providing in relevant part:

4. Disclaimer of Representations and Warranties. ... [U.S.] Bank (a) makes no warranty or representation and shall not be responsible for any statement, warranty or representation made in or in connection with the Loan Documents ... and (c) makes no warranty or representation and shall not be responsible for the ... enforceability ... or collectibility of the Loan Documents....

5. Representations by Buyer. The Buyer hereby acknowledges that it has, independently and without reliance upon [U.S.] Bank ... and instead in reliance on ... information provided by the Borrower [Mitec] and such other documents and information as the Buyer has deemed appropriate, made the Buyer's own credit analysis and decision to enter into this Assignment Agreement. The Buyer also acknowledges that it has reviewed and examined the Loan Documents and such related documents as it deemed appropriate....

7. Miscellaneous. This ... Agreement ... supersedes all oral statements and other writings with respect to the subject matter hereof.

In January 2007, when Mitec did not cure a notice of default, Mitec Partners scheduled a public auction of Mitec's assets and notified other creditors. SBA advised of its third-party lienholder agreement with U.S. Bank, and Mitec Partners did not proceed with the auction. This lawsuit followed.

II. The Fraud Claim

The elements of a claim for fraudulent misrepresentation under Iowa law are that defendant made a material misrepresentation knowing it was false and intending to deceive the plaintiff, and that plaintiff acted in justifiable reliance on the truth of the representation and suffered damages proximately caused by the representation. See Schaller Tel. Co. v. Golden Sky Sys., Inc., 298 F.3d 736, 745-46 (8th Cir.2002).

Mitec Partners alleged damages caused by U.S. Bank's non-disclosure of its prior, third-party lienholder agreement with SBA before Mitec Partners purchased the U.S. Bank loans. “Iowa law recognizes a cause of action for fraudulent misrepresentation based on nondisclosure of material facts.” Id. at 740. But to be actionable as fraud, a non-disclosure “must relate to a material matter known to the party and which it is his legal duty to communicate to the other contracting party, whether the duty arises from a relation of trust, from confidence, from inequality of condition and knowledge, or other attendant circumstances.” Wilden Clinic, Inc. v. City of Des Moines, 229 N.W.2d 286, 293 (Iowa 1975); see Sinnard v. Roach, 414 N.W.2d 100, 105-07 (Iowa 1987). Here, although Mitec Partners' appellate briefs assert such a relationship in conclusory fashion, it did not allege in the complaint or submit evidence to the district court of a relationship of trust or confidence with U.S. Bank, or that relevant material facts were peculiarly within U.S. Bank's knowledge. Thus, for its fraud claim to survive summary judgment, Mitec Partners must present sufficient evidence of one or more material,...