Layne v. Bank One, Ky., N.A.

• Citation: 395 F.3d 271
• Decision Date: 10 January 2005
• Docket Number: No. 03-6062.,03-6062.
• Parties: R. Geoff LAYNE; Charles E. Johnson, Jr., Plaintiffs-Appellants, v. BANK ONE, KENTUCKY, N.A.; Banc One Securities Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

395 F.3d 271

R. Geoff LAYNE; Charles E. Johnson, Jr., Plaintiffs-Appellants, v. BANK ONE, KENTUCKY, N.A.; Banc One Securities Corporation, Defendants-Appellees.

No. 03-6062.

United States Court of Appeals, Sixth Circuit.

Argued: December 6, 2004.

Decided and Filed: January 10, 2005.

Mason L. Miller, Getty & Mayo, Lexington, Kentucky, for Appellant.

Dustin E. Meek, Tachau, Maddox, Hovious & Dickens, Louisville, Kentucky, for Appellees.

Mason L. Miller, Richard A. Getty, Getty & Mayo, Lexington, Kentucky, for Appellant.

Dustin E. Meek, Mary E. Eade, Tachau, Maddox, Hovious & Dickens, Louisville, Kentucky, Leonard A. Gail, Bank One, Chicago, Illinois, for Appellees.

Before: MARTIN and MOORE, Circuit Judges, BELL, Chief District Judge.^*

MOORE, Circuit Judge.

Plaintiff-Appellant, Charles E. Johnson, Jr. ("Johnson"), appeals the district court's grant of summary judgment in favor of Defendants-Appellees, Bank One, Kentucky, N.A. and Banc One Securities Corporation (collectively, "Bank One"). The district court found that under Kentucky law, Bank One was not liable for the depreciation in value of the shares it held as collateral for a loan to Johnson. Furthermore, the district court found that by selling the stock on a national stock exchange, Bank One acted in a commercially reasonable way in disposing of the collateral. On appeal, Johnson asserts that the district court erred in these findings, as well as by granting Bank One summary judgment on his breach of fiduciary duty and breach of contract claims. Johnson also argues that summary judgment is inappropriate with regards to Bank One's counterclaims against him. We conclude that the district court did not err on any of these issues, and thus, the grant of summary judgment to the defendants is AFFIRMED.

I. BACKGROUND

This case arises out of two loan transactions made by Bank One to plaintiffs Johnson and Geoff Layne ("Layne").¹ Johnson was the founder and CEO of PurchasePro.com, Inc. ("PurchasePro"); Layne served as the national marketing director of the company. Following a successful initial public offering, both Johnson and Layne had considerable net worth, though their PurchasePro shares were subject to securities laws restricting their sale.² To increase their liquidity, Johnson and Layne entered into separate loan agreements with Bank One for an approximately $2.8 million and $3.25 million line of credit respectively, secured by their shares of PurchasePro stock.³ The loan agreements included a Loan-to-Value ("LTV") ratio, which conditioned default on the market value of the collateral stock. The LTV ratio was calculated as the outstanding balance on the line of credit over the market value of the collateral stock. Specifically, Layne's loan agreement had a 50% LTV ratio, which meant that the market value of the collateral stock must be at least twice the outstanding balance on the line; Johnson's loan agreement had a 40% LTV ratio, which meant that the market value must remain two and a half times the outstanding balance.⁴ The credit agreements provided that if the LTV ratio exceeded those specified percentages, Johnson and Layne had five days to notify Bank One and either increase the collateral or reduce the outstanding balance such that the target LTV ratios were met. Failure to remedy the situation would be an immediate default and Bank One "may exercise any and all rights and remedies" including, "at Lender's discretion," selling the shares. Joint Appendix ("J.A.") at 353-54 (Comm. Pledge & Sec. Agmt.) (emphasis added). If Bank One intended to sell the shares, it had to give Johnson written notice ten days prior to the sale. Pursuant to these agreements, Johnson and Layne entered into trade authorization agreements that enabled Bank One to sell the shares without their consent. Though Bank One had the option of selling the collateral shares if the LTV ratios were not met, nothing in the loan agreements obligated it to do so.

In February 2001, along with the rest of the Internet sector, the stock price of PurchasePro fell considerably, such that both loans exceeded their respective LTV ratios.⁵ Rather than selling the collateral stock, Bank One entered into discussions with Johnson and Layne to pledge more collateral. The record reveals that Layne and Johnson repeatedly stated their intentions to pledge additional collateral to meet the LTV requirements. On March 6, 2001, Layne wrote that he had "been able to hold [Bank One] off from calling it in because of additional collateral that I have pledged." J.A. at 355 (Email from Layne to Lichtenberger). On March 19, 2001, Johnson sent an email to Layne inquiring about whether Bank One was "hanging in there." J.A. at 517 (Email from Johnson to Layne). On March 22, 2001, Bank One sent a letter to Layne informing him that the loan was in default. J.A. at 362 (Letter from Holton to Layne). That same day, in a conversation with Bank One, Layne stated that "[you] guys have been great ... holding on for this long," but he indicated he would like to begin selling some of the collateral stock. J.A. at 357 (Tr. of call between Layne and Thompson). After this conversation, Bank One began taking steps to liquidate the collateral stock for both loans. Later that same day, however, Johnson sent an email to Layne under the subject heading "Bank 1" which stated "they want to sell our shares and I want to stop it with additional collateral-pls call." J.A. at 364 (Email from Johnson to Layne). Later that night, Layne sent an email to Burr Holton ("Holton"), Bank One's loan officer, under the heading "[h]old off on selling" which stated that "[Johnson] is putting together a collateral package (real estate, additional shares, etc.) to secure the note at acceptable levels." J.A. at 366 (Email from Layne to Holton). Early the next morning, Layne left a voicemail for Doug Thompson, Bank One's senior trader, stating "[i]t's a possibility that... [Johnson]'s gonna put up some additional securities to secure his note and my note and maybe we don't sell right now. So I just wanna put a hold on any ... trading activity until [Johnson] talks with [the loan officer]." J.A. at 365 (Voice Message from Layne to Thompson). On April 3, 2001, Layne called Holton and stated that "he was ready to sell his [collateral] stock as soon as possible" and that "he has decided not [to work] with Mr. Johnson on combining their loans and adding additional collateral, which would have cured their default." J.A. at 367 (Memo. from Holton to File). The next day, April 4, 2001, Layne faxed a letter to Holton which stated that he would not be able to provide additional collateral to satisfy the loan agreement. J.A. at 491 (Letter from Layne to Holton); 634 (Layne Dep.). The following day, however, Layne changed his mind again and faxed Holton a letter which stated:

[Johnson] and myself are putting together a collateral package to secure our notes with Bank One. I DO NOT wish for the bank to proceed with any liquidation whatsoever of my PurchasePro stock at this time. I believe we have a strong company and that market conditions will improve, thus enabling the stock to recover to a price that allows me to pay my debt to Bank One in it's [sic] entirety. And that is certainly in everybody's best interest.

J.A. at 371 (Letter from Layne to Holton). The same day, Layne sent an email to Holton which stated "[Johnson] will be back this afternoon and we will firm the plan then. I would like to have time to discuss this [sic] him before we start liquidation." J.A. at 369 (Email from Layne to Holton). The record reveals that Johnson and Bank One were involved in discussions in the end of April and May to pay down the balance or pledge additional collateral including his house in Las Vegas. At the end of May, the proposed deal fell through and Bank One sent letters to Johnson notifying him of his continued default on the loans. Throughout the entire time from February to May 2001, Layne and Johnson continued to make principal and interest payments under the terms of the agreement, but both loans significantly exceeded their respective LTV ratios. Bank One finally sold Johnson's PurchasePro shares over four days in July, recovering $524,757.39 in net proceeds to pay down his debt, leaving approximately a $2.2 million unpaid balance.⁶

Layne and Johnson separately filed suit against Bank One in the United States District Court for the Eastern District of Kentucky on a number of counts. On January 30, 2002, the cases were consolidated. Bank One filed counterclaims against Johnson and Layne, seeking payment for the deficiencies on the loans. On November 1, 2002, Bank One filed a motion for summary judgment on all counts as well as its counterclaims. On March 26, 2003, the district court granted Bank One's motion. Johnson appeals from that ruling.

II. ANALYSIS

A. Standard of Review

We review "the grant of summary judgment de novo, viewing all evidence in the light most favorable to the nonmoving party." Boone v. Spurgess, 385 F.3d 923, 927 (6th Cir.2004). "Under Rule 56(c), summary judgment is proper `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)).

B. Duty to Preserve Collateral

We first consider Johnson's argument that Bank One violated a duty under Kentucky law to preserve the value of the collateral held in its possession. With respect to the regulation of secured transactions, Kentucky has adopted the Uniform Commercial Code ("U.C.C."), which states that "a secured party shall use reasonable care in the custody and preservation of collateral in the secured party's possession. In the case of chattel paper or an instrument,...