Hovell v. Origin Bank
| Decision Date | 23 September 2020 |
| Docket Number | No. 53,527-CA,53,527-CA |
| Citation | 303 So.3d 1087 |
| Parties | Barbara McNorton HOVELL Plaintiff-Appellant v. ORIGIN BANK f/k/a Community Trust Bank Defendant-Appellee |
| Court | Court of Appeal of Louisiana — District of US |
OFFICE OF DONALD L. KNEIPP, By: Donald L. Kneipp, Counsel for Appellant, Robert H. Holladay
WOOD LAW FIRM, By: R. Douglas Wood, Jr., HAYES, HARKEY, SMITH, & CASCIO, By: Thomas M. Hayes, III, Counsel for Appellee
Before WILLIAMS, GARRETT, and THOMPSON, JJ.
This appeal arises from the trial court's granting of an exception of no cause of action against a seller of a broadcast radio station by the bank who provided financing for the buyer. The relatively low threshold consideration for overcoming an exception of no cause of action is if the petition states a cause of action on any ground or portion of the demand. Plaintiff has set forth a potential cause of action in his pleadings, and we therefore reverse and remand the matter for further proceedings.
The applicable parties in this matter are the owner/seller of a broadcast radio station, the buyer, and the bank funding the purchase. The absence of various security interests inuring to the benefit of a subrogee of the bank's position is at the crux of the dispute. When the buyer stopped making installment payments on the loan, the bank seized a guarantor's certificate of deposit ("CD"), which had been pledged as security for the loan. The seller was ultimately revealed to be the source of the funds for the CD.
A seller may owner-finance the sale of a radio broadcast station, but Federal Communication Commission ("FCC") rules prohibit a seller from retaining a reversionary interest in the FCC broadcast license.1 A broadcast license can have significant value and was one of the assets being conveyed in the present sale. The parties elected for the buyer to obtain a commercial loan. When the buyer was apparently unable to obtain independent financing, the seller, using a third party to disguise the actual source of the funds, deposited the funds in a CD with the lending bank. The CD was in an amount equivalent to one hundred percent (100%) of the amount sought to be borrowed by purchaser. With that collateral, the bank provided the buyer with financing, the sale concluded, and the buyer began making regular monthly installments on the loan.
A few years later, the buyer stopped paying the monthly installments on the loan, and with the loan in arrears, the bank began deducting the payment amounts from the pledged CD. After subsequent delinquent payments, the bank seized the entire remaining loan balance due and returned the balance of the funds in the CD to seller.
The seller, now subrogated to the position of the bank, sought recovery from the borrower, who was the buyer, of its seized funds and filed suit against that buyer. During that process, the seller discovered the bank had not secured a personal guaranty from the buyer, an interest in the FCC broadcast license, or an interest in the furniture, fixtures, and equipment that comprised a part of the sale. The seller has alleged that when the bank was discussing the pledge of the CD with seller's undisclosed representative, the bank made verbal promises to obtain additional security, including a personal guaranty from the buyer and the seller and to file liens against the assets of the radio station being conveyed. The bank denies those allegations.
The seller asserts that the bank owed a duty of good faith and fair dealing in connection with obtaining the additional security, despite there being no written document to support seller's claims. The bank asserts that there is no writing memorializing any agreement to obtain additional security on the loan and that it had no duty to obtain any of the security the seller alleges was promised to his undisclosed agent. The bank undertook its usual and customary underwriting in order to determine whether to offer a loan to the buyer and then obtained the security it deemed appropriate to support its lending decision.
The seller then filed suit against the bank for the alleged breach of the duty of good faith and fair dealing, which he asserts resulted in damages. The bank filed an exception of no cause of action against the seller, and the trial court granted the exception. The seller now appeals that judgment.
On March 4, 2011, Holladay Broadcasting of Louisiana, LLC, owned and operated by Robert H. Holladay ("Holladay"), sold a radio station to KP Music Group, LLC ("KP Music"), for $700,000. KP Music financed the purchase of the radio station through Origin Bank F/K/A Community Trust Bank ("Origin") and executed two promissory notes dated March 2, 2011, to Origin, one for $50,000 in operating capital and the other for the $700,000 purchase price.
Origin required collateral for the notes in favor of KP Music. Original plaintiff in this action, Barbara McNorton Hovell ("Hovell"), pledged a certificate of deposit in the amount of $750,000, after replacing another woman who originally pledged the funds necessary to secure the loan. Hovell is Holladay's former mother-in-law. Hovell executed two assignments of deposit account in favor of Origin dated April 11, 2011, wherein she assigned a CD worth $750,000 to secure the promissory notes in favor of KP Music. Holladay alleges that Origin verbally agreed to secure additional collateral for KP Music's loan, specifically including: 1) a UCC financing statement on the furniture, fixtures, and equipment belonging to the radio station owned by KP music, 2) a lien on KP Music's FCC License, 3) a personal guaranty from Holladay, and 4) a personal guaranty from Calvin H. Murry (the owner/operator of KP Music). The record contains no writing that reflects any such assertion by Origin Bank, and neither party has referred to any such writing.
Approximately four years after the purchase of the radio station and systematically paying the monthly installments as they came due, KP Music stopped making monthly payments in 2015. Origin sent Hovell written notification via certified mail that KP Music had missed a monthly payment and informed her that the monthly payment had been deducted from her CD, in accordance with the security agreement. In July 2015, after additional monthly payments were not made by KP Music, Hovell was notified that Origin had seized and liquidated the CD to satisfy the balance of KP Music's loan. The balance of the CD in excess of the loan balance was returned to Hovell.
On June 30, 2016, after alleged unsuccessful efforts to recover funds from KP Music in a separate lawsuit, Hovell, acting through her agent and attorney in fact, Holladay, filed a petition for damages against Origin. Hovell argued in her petition that because Origin liquidated her CD, she was subrogated to the rights of Origin against KP Music, and because Origin breached its commitment to acquire additional collateral to secure the loan, she suffered damages. The petition included copies of the bill of sale from Holladay Broadcasting to KP Music, the two promissory notes from KP Music to Origin, the assignments of deposit account from Hovell to Origin to secure the promissory notes, and the certificate of deposit from Hovell. There was no reference to any independent due diligence by Hovell or Holladay regarding the creditworthiness of KP Music or its members. Further, there is no proof of any other security agreements or personal guaranties Hovell required from KP Music or its members that would inure in her favor should her funds be seized to pay the loan from Origin. Apparently, Hovell was satisfied to rely on any security interests and rights to which she may be subrogated, should Origin utilize her funds to pay the loan of KP Music. There is no indication Hovell required, prior to pledging the CD, any proof of the completion of any of the additional security measures that she claims Origin agreed to collect.
On December 17, 2018, in response to the action initiated by Hovell, Origin filed peremptory exceptions of no right of action, no cause of action, and, in the alternative, prescription. It asserted that Holladay had supplied the funding for the CD in Hovell's name and had used Hovell as a "straw man" to circumvent FCC regulations, which, as noted above, prohibit a seller from retaining a reversionary interest in the FCC license in which he has an ownership interest.2
Origin argued that the Louisiana Credit Agreement Statute ("LCAS") barred Hovell's action because there was no written agreement to obtain additional collateral. Any added security would have been in excess of 100% of the loan amount secured by the CD held by Origin, and would then likely only inure to the benefit of a subrogated party, as Origin was completely secured with a certificate of deposit equal to its loan amount.
Hovell and Holladay then filed a motion to substitute Holladay as the plaintiff. The motion was granted, and Hovell was dismissed as a party in any capacity. Holladay filed a supplemental and amended petition for damages, claiming that "at the time these proceedings were originally filed, Hovell was acting as an agent for an undisclosed principal, who was Holladay, and the monies represented by that certain Certificate of Deposit dated March 28, 2011, ... belonged to Holladay." Hovell states that she had previously filed suit against KP Music in another proceeding but asserts that because Origin did not acquire the other collateral, she (and now Holladay) was damaged because there was no additional collateral to recover in satisfaction of the debt.
On March 22, 2019, Origin filed a reconventional demand against Hovell, which made additional allegations about the nature of the loans and collateral involved between the parties, including that a former employee of Holladay Broadcasting, Kathy Landrum, originally pledged a CD as collateral for the KP Music loan. According to...
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