Carlson v. Branch Banking and Trust Co.

• Decision Date: 06 August 1996
• Docket Number: No. COA95-605,COA95-605
• Citation: 473 S.E.2d 631,123 N.C.App. 306
• Parties: Dr. Kenneth P. CARLSON and Mary Jean Carlson, Plaintiffs, v. BRANCH BANKING AND TRUST COMPANY, Defendant.
• Court: North Carolina Court of Appeals

Page 631

473 S.E.2d 631

123 N.C.App. 306

Dr. Kenneth P. CARLSON and Mary Jean Carlson, Plaintiffs, v. BRANCH BANKING AND TRUST COMPANY, Defendant.

No. COA95-605.

Court of Appeals of North Carolina.

Aug. 6, 1996.

Allman, Spry, Leggett & Crumpler, P.A. by David C. Smith and Linda L. Helms, Winston-Salem, for plaintiffs-appellees.

Moore & Van Allen, P.L.L.C. by Daniel G. Clodfelter and Mary Elizabeth Erwin, Charlotte, for defendant-appellant.

JOHN C. MARTIN, Judge.

Plaintiffs brought this action against defendant Branch Banking and Trust Company ("BB & T") alleging seven separate claims for relief, including, inter alia, claims for breach of contract, negligence, breach of warranty, fraud and deceit, and unfair and deceptive practices in violation of G.S. § 75-1.1. The claims arise in connection with a loan, secured by a letter of credit provided by plaintiffs, made by BB & T to Carolina First Holding Corporation ("Carolina First"). In its answer, defendant BB & T denied the material allegations of the complaint and moved to dismiss each of the plaintiffs' claims.

At a jury trial, the evidence tended to show the following: plaintiff Kenneth Carlson, a retired physician, and his wife, plaintiff Mary Jean Carlson, were approached by David Schamens, a local stockbroker whom plaintiffs had known since Schamens was a young child and with whom they had previously done business, regarding a potential investment opportunity. Schamens was also the sole owner and founder of Carolina First. Schamens represented to plaintiffs that in order to establish Carolina First as a full service financial company, the company had entered into a contract to purchase 80.1 percent of the Ivy Management Company, a mutual fund company in Boston that managed the Ivy Fund. The purchase price of approximately $6.2 million was to be financed in part by bank loans secured by letters of credit. Schamens wanted plaintiffs to provide a $500,000 letter of credit to help fund the transaction, in return for which plaintiffs would receive 1.8 percent, or 5,000 shares, of the common stock. After the purchase was completed, the bank loans were to be paid back by fees generated by Carolina First, and Carolina First also had an option to buy back plaintiffs' stock, giving plaintiffs approximately a 10 percent return on their investment without the letter of credit ever being drawn upon.

After the initial meeting, plaintiffs considered the proposal and investigated the mutual funds managed by Ivy. Dr. Carlson testified that he kept up with mutual funds "pretty well" by subscribing to investment publications that deal with them, and considered the Ivy Fund to be "an excellent fund." Plaintiffs ultimately decided to invest in the transaction, however, not because they felt they would get a great return on their investment, but because they were primarily interested in helping Schamens with his business. Dr. Carlson described Schamens as being "like a second son."

On or about 10 April 1990, plaintiffs executed a letter of intent with Schamens and entered a more definitive agreement on 1 May 1990 to provide the letter of credit. Plaintiffs understood that the loan was to be used solely for the acquisition of Ivy Management Company, and they had no concern that the funds would be used for anything but the Ivy acquisition. Plaintiffs would not have provided the letter of credit if they thought the funds would be used for some other purpose.

Schamens approached several banks about providing the necessary financing. The 10 April letter of intent indicated that Wachovia Bank, First Union Bank and Southern National Bank ("Southern National") had "preliminarily agreed" to provide loans to finance the Ivy acquisition. Apparently, however, all three banks subsequently decided not to make the loans, though Southern National expressed an interest in serving as the issuer of a letter of credit for the acquisition loan.

In June or early July, Schamens met with Phil Marion and Jim Lewis, commercial lenders at defendant BB & T, and requested defendant to provide a loan for the acquisition. Marion and Lewis felt the loan had a great deal of potential for defendant because Schamens would transfer $100,000 in Master Note investment to defendant upon closing, and the transaction could lead to defendant acquiring deposit accounts from both Carolina First and Ivy. Lewis made, at best, a perfunctory investigation of the transaction documents provided by Schamens, and on 25 July 1990, Lewis recommended to Ernie J. Sewell, defendant's City Executive in Winston-Salem, that defendant make a loan of $425,000 for the Ivy acquisition. Lewis' recommendation noted that Carolina First had experienced quarterly losses in its first six months of operation, and that Schamens' liabilities exceeded his outside total net worth, but also advocated that a $500,000 standby letter of credit from Southern National Bank made the loan worth the documentation risk. A $425,000 loan to fund the Ivy acquisition was approved on 27 July 1990.

During this time, plaintiffs were notified that the Ivy transaction was ready to proceed, and that Schamens had made an arrangement with Southern National regarding the letter of credit. Plaintiffs dealt with Albert Newsome, a vice-president at Southern National in the commercial banking group, who explained to them that Southern National would supply the letter of credit, and that defendant was providing the loan and would be the beneficiary of the letter of credit. For the bank to offer the letter of credit, however, Newsome first asked plaintiffs to establish a banking relationship with Southern National. Plaintiffs and Newsome also discussed that the letter of credit was to be used to secure funds for the acquisition of the Ivy Management Company, and Newsome discussed this with Lewis.

On 26 July 1990, Southern National executed the $500,000 letter of credit on behalf of the Carlsons in favor of defendant to provide Carolina First with financing for the Ivy acquisition. The letter of credit was amended on 1 August 1990 to reflect a delay in the date of the loan. The letter of credit, as amended, provided in pertinent part:

                                SOUTHERN NATIONAL BANK OF NORTH CAROLINA
                                      Southern International Corp
                              P.O. Box 34069, Charlotte, NC 28234, U.S.A
                       South College St., 2nd Floor, Charlotte, NC 28202, U.S.A
                              Telephone: (704)338"5710 Fax: (704)338"5729
                

                IRREVOCABLE STANDBY DOCUMENTARY CREDIT  Credit Number of issuing bank
                

                Dated: July 26, 1990                    S"34"71584A
                Advising Bank                           Applicant
                                                        Dr. and Mrs. Kenneth P. Carlson
                                                        3108 Buena Vista Road
                                                        Winston"Salem, NC 27106
                Beneficiary                             Amount
                Branch Banking & Trust Company          FIVE HUNDRED THOUSAND AND NO/100
                Post Office Box 2817                    U.S. DOLLARS
                Winston"Salem, North Carolina 27102     U.S.$500,000.00
                                                        Expires
                                                        Date: July 16, 1991
                                                        in Charlotte, North Carolina
                                          (Credit available by payment at our counters.)
                

WE HEREBY OPEN OUR IRREVOCABLE STANDBY DOCUMENTARY CREDIT IN YOUR FAVOR AVAILABLE BY YOUR DRAFT(S) ON U.S. AT SIGHT FOR 100 PERCENT OF DRAWING BEARING THE CLAUSE "DRAWN UNDER SOUTHERN NATIONAL BANK OF NORTH CAROLINA CREDIT NO. S-34-71584A DATED JULY 26, 1990" ACCOMPANIED BY THE FOLLOWING DOCUMENTS:

A letter purportedly signed by an authorized officer of Branch Banking & Trust Company, Winston-Salem, North Carolina, stating that payment is due under promissory note dated August 2, 1990 in the amount of four hundred twenty-five thousand and no/100 ($425,000.00) U.S. Dollars by and between Carolina First Holding Corporation and Branch Banking and Trust Company.

Special Conditions:

A) Partial drawings are prohibited.

B) The original of this credit must accompany your drawing presented to us hereunder.

Except so far as otherwise expressly stated, this documentary credit is subject to the "Uniform Customs and Practice for Documentary Credits" (1983 Revision) International Chamber of Commerce (Publication No. 400).

At the closing on 2 August 1990, after receiving the letter of credit, defendant issued a commitment letter to Carolina First for the $425,000 loan "to fund the costs and expenses related to the acquisition of Ivy Management, Inc.," and Carolina First executed its promissory note to the bank. In addition, Schamens executed a personal guarantee, and his wife, Laura, executed a limited guarantee, of the loan.

Lewis personally disbursed the loan proceeds to a newly opened Carolina First checking account at defendant BB & T as follows: $275,000 on 2 August 1990, done immediately after the closing while Schamens and his wife were still in Lewis' office, from which Lewis wrote a cashier's check for $25,000 to Mrs. Schamens in a transaction designated as a loan; $1,162.50 on 3 August 1990 for the origination fee and legal expenses; $125,000 on 6 August 1990; and $20,000 on 9 August 1990. From the Carolina First account, Lewis or another BB & T employee, at Schamens' request, authorized the transfer of loan funds to other BB & T accounts as follows: on 2 August 1990, $151,282.20 was transferred to an account for Carolina First Securities Group, a subsidiary of Carolina First, and $11,000 was transferred to Schamens' personal investment account; on 3 August, $17,666.49 was transferred to Old South Investment, another company owned by Schamens; on 6 August, another $40,000 was transferred to Schamens' personal investment account, $20,671.23 was transferred to Old South Investment, $23,000 was transferred to an account of Carolina First Asset Management Company, $8,000 was transferred to Carolina First Income...