Landmar, LLC v. Wells Fargo Bank, N.A., 5:11–cv–00097–MOC.

• Decision Date: 17 October 2013
• Docket Number: No. 5:11–cv–00097–MOC.,5:11–cv–00097–MOC.
• Citation: 978 F.Supp.2d 552
• Court: U.S. District Court — Western District of North Carolina
• Parties: LANDMAR, LLC, et al., Plaintiffs, v. WELLS FARGO BANK, N.A., Defendant.

978 F.Supp.2d 552

LANDMAR, LLC, et al., Plaintiffs,

v.WELLS FARGO BANK, N.A., Defendant.

No. 5:11–cv–00097–MOC.

United States District Court,

W.D. North Carolina,

Statesville Division.

Oct. 17, 2013.

S. Leigh Rodenbough, IV, Benjamin Raymond Norman, James Conrad Adams, II, Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, Greensboro, NC, David Davis Smyth, III, Brooks, Pierce, McLendon, Humphrey & Leonard LLP, Raleigh, NC, for Plaintiff.

Baxter Chad Ewing, Jim D. Cooley, Sarah Motley Stone, Womble Carlyle Sandridge & Rice, Charlotte, NC, for Defendant.

ORDER

MAX O. COGBURN JR., District Judge.

THIS MATTER is before the court on defendant's Motion for Partial Summary Judgment, plaintiffs' Response, and defendant's Reply. A hearing was held on defendant's motion on October 3, 2013. Having carefully considered the briefs, exhibits, and arguments of counsel, the court enters the following findings, conclusions, and Order granting in part and denying in part defendant's Motion for Partial Summary Judgment.

FINDINGS and CONCLUSIONS

I. Background

In this action, plaintiffs contend, among other things, that defendant defrauded them in the execution of an “interest rate swap” (hereinafter the “swap”) entered into in conjunction with a commercial loan in 2007, which funded the purchase, rehabilitation, and resale of the Country Club Apartments in Mooresville, North Carolina.

In their First Amended Complaint (“FAC”), plaintiffs contend that defendant overcharged them in the swap transaction, FAC ¶¶ 35–51, and that the swap transaction failed of its essential purpose due to the worldwide credit crisis in 2008. Id. ¶¶ 52–66. Based on such contentions, plaintiffs assert the following causes of action:

(1) Fraud in the Inducement, Duress; ¹

(2) Fraudulent Overcharges;

(3) Negligent Misrepresentation;

(4) Breach of Fiduciary Duty;

(5) Constructive Fraud;

(6) Unfair and Deceptive Trade Practices;

(7) Violation of the Bank Holding Company Act, 12 U.S.C. §§ 1972 & 1975;

(8) Rescission/Reformation of the Swap Due to Mutual Mistake;

(9) Rescission/Reformation of the Swap Due to Commercial Frustration of Purpose; and

(10) Restitution in Equity.

Defendant has moved for summary judgment on all of plaintiffs' state-law claims contending that claims one and two are time barred and that the remainder of the claims lack factual support.

II. Factual Contentions

The court has carefully considered all the evidentiary materials referenced by the parties. From such evidence, it appears that the following facts are not in dispute.

At all times relevant to this action, plaintiffs were in the business of redeveloping commercial property purposes for of resale.² Plaintiffs purchased, renovated, and later sold the Country Club Apartments (hereinafter “the apartments”) in Mooresville, North Carolina. Non-party John W. Edwards (hereinafter “Mr. Edwards”) was the managing partner of such venture, and it is undisputed that at the time of disputed transaction, he had approximately 30–years of experience in all aspects of real estate development and the financing of such ventures.

On November 15, 2006, plaintiffs executed a contract to purchase the apartments. To fund such purchase, Mr. Edwards sought financing from Branch Banking & Trust Company (“BB & T”), Wells Fargo, Prudential Huntoon Paige, and the seller of the apartments. Due to cost, Mr. Edwards rejected the proposed seller financing as well as the Prudential Huntoon Paige proposal. After declining those sources, Mr. Edwards contacted both BB & T and Wells Fargo during March or April of 2007. After each bank conducted some due diligence, both banks provided Mr. Edwards with term sheets.

Mr. Edwards received the Wells Fargo term sheet on April 24, 2007, and the BB & T term sheet on April 27, 2007. Wells Fargo offered a loan at a floating interest rate equal to the bank's one-month LIBOR rate plus 1.50% or at a fixed rate available upon request through an interest rate swap.³ On April 25, 2007, Mr. Edwards told Linda Adair, his Wells Fargo contact, that he wanted to “go with the variable rate loan.”

On May 4, 2007, he spoke with J.P. Conklin, a Wells Fargo derivatives specialist, about the possibility of entering an “interest rate swap” with Wells Fargo. After Mr. Conklin explained a swap to hi m, Mr. Edwards asked Mr. Conklin to check with Wells Fargo's credit department to see if plaintiffs could enter a swap with Wells Fargo. That same day, Mr. Edwards received a letter from Mr. Conklin that further explained a proposed swap (the “May 4 Letter”). The letter “propose[s] a hedging strategy that would allow [plaintiffs] to hedge against future interest rate increases on [plaintiffs'] floating rate loan.” It is undisputed that the letter discusses some of the risks and benefits of hedging a variable rate loan and proposed a forward starting swap, which would become effective on May 31, 2008. During his deposition, Mr. Edwards testified that after he read the letter, he knew that he needed to do his own research with respect to the swap and that he was “on [his] own with respect to the swap.”

After receiving the first set of term sheets and negotiating with BB & T and Wells Fargo, Mr. Edwards received BB & T's second term sheet on May 2, 2007, and Wells Fargo's second term sheet on May 14, 2007. Wells Fargo's second term sheet offered plaintiffs a floating rate loan at the banks' one-month LIBOR rate plus 1.50% or a fixed rate available upon request through an interest rate swap. Mr. Edwards executed the Wells Fargo term sheet and faxed it back to Wells Fargo the following day.

On May 30, 2007, Mr. Edwards received an email from Wells Fargo containing an International Swap Dealers Association (“ISDA”) Master Agreement and a Schedule to an ISDA Master Agreement as well as other documents that needed to be signed in order for plaintiffs to enter a swap. Plaintiffs executed the Master Agreement and Schedule and these documents were returned to Wells Fargo. Such documents were forwarded by the bank to Palmer Steel, a derivatives analyst who worked with Mr. Conklin. That same day, Mr. Steel emailed Mr. Edwards as follows:

Hope all is well. We received the signature pages from Mark and can lock the rate for you. Just need to hop on the phone to confirm the details and lock it in. Please feel free to give us a call whenever you have a moment this afternoon.

Edwards Depo. at Ex. 23. Mr. Edwards testified that he does not know whether he called Mr. Steel as requested in the email. The court has gathered from all the evidence presented that it is usual and customary for the bank to confirm the swap deal with a customer by way of a phone call. In any event, the Swap Agreement was entered between the plaintiffs and defendant later that day.

Entered May 30, 2007, the Swap Agreement was effective May 31, 2007, the following day, instead of May 31, 2008, as provided in the May 4 Letter. Mr. Edwards testified that he did not authorize the entry of a swap with defendant on May 30, 2007. While he does not recall making the confirming call and denies he intended to make the swap effective in 2007 rather than 2008, it is undisputed that Mr. Edwards executed a written Swap Transaction Confirmation dated May 30, 2007, and returned it to defendant on June 13, 2007.

On May 31, 2007, plaintiffs and defendant closed on the loan at the office of plaintiffs' attorney. It is undisputed that, on behalf of plaintiffs, Mr. Edwards signed: (i) a Loan Agreement; (ii) a Promissory Note in Wells Fargo's favor in the amount of $3,880,000.00; and (iii) a Promissory Note in Wells Fargo's favor in the amount of $150,000.00. Mr. Edwards testified that after the closing, Mr. Steel called him at home that same day and told him that plaintiffs had to enter a swap in order for their loan to fund. Based on such call, Mr. Edwards contends that plaintiffs were forced into the swap immediately after the May 31, 2007 closing.

On June 8, 2007, Wells Fargo's document preparation department noticed errors in the $3,880,000 Promissory Note. That Note memorialized a draw loan when the plaintiffs' loan funded at closing, and the Note's variable one-month LIBOR changed daily for one year and then once a month for the remainder of the term. Id. It appears undisputed that other portions of the Note were inconsistent with the forward starting swap proposed in the May 4 Letter and that the method of selecting one-month LIBOR with daily changes for one year and then monthly changes is generally consistent with a forward starting swap, but was inconsistent with the parties' May 30, 2007 Swap Agreement. Later in June 2007, plaintiffs were asked to execute a second $3,880,000 Promissory Note to correct these errors and Mr. Edwards complied with such request. It is also undisputed that following the closing, plaintiffs were invoiced monthly for payments due under the Swap Agreement, that these invoices totaled approximately $480,000, and plaintiffs paid all of them without comment or protest

On March 31, 2011, plaintiffs terminated the Swap Agreement with defendant. Plaintiffs paid a termination fee of $231,485.

This action was filed on June 15, 2011, in the North Carolina General Court of Justice, Iredell County, Superior Court Division, and removed to this court pursuant to 28 U.S.C. § 1332 based on diversity.

III. Summary Judgment: Applicable Standard

Defendant has moved for summary judgment on all of plaintiffs' state-law claims. Rule 56(a), Federal Rules of Civil Procedure, provides:

A party may move for summary judgment, identifying each claim or defense—or the part of each claim or defense—on which summary judgment is sought. The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The court should state on the record the reasons for granting or denying the motion.

Fed.R.Civ.P. 56(a). The rule goes on to provide procedures...