Southland Bank v. A & a Drywall Supply

• Decision Date: 12 December 2008
• Docket Number: 1060204.
• Citation: 21 So.3d 1196
• Parties: SOUTHLAND BANK and Jimmy Adkinson v. A & A DRYWALL SUPPLY COMPANY, INC., and Chadwick E. Anderson.
• Court: Alabama Supreme Court

21 So.3d 1196

SOUTHLAND BANK and Jimmy Adkinson v. A & A DRYWALL SUPPLY COMPANY, INC., and Chadwick E. Anderson.

1060204.

Supreme Court of Alabama.

December 12, 2008.

Opinion Overruling Rehearing April 24, 2009.

William P. Gray, Jr., and Douglas N. Robertson of Gray & Associates, L.L.C., Birmingham, for appellants.

Ted Taylor, Leah O. Taylor, and Rhonda Pitts Chambers of Taylor & Taylor, Birmingham; and William L. Lee IV and William L. Lee III of Lee & McInish, P.C., Dothan, for appellees.

Forrest S. Latta and Leronne Riddick-Seals of Bowron, Latta & Wasden, P.C., Mobile; and R. Bruce Barze, Jr., of Balch & Bingham, LLP, Birmingham, for amicus curiae Alabama Defense Lawyers Association, in support of the appellants.

H. Hampton Boles, Gregory C. Cook, and John D. Pickering of Balch & Bingham, LLP, Birmingham, for amicus curiae Alabama Bankers Association, in support of the appellants.

James Jerry Wood, gen. counsel, Home Builders Association of Alabama, Montgomery, for amicus curiae Home Builders Association of Alabama, in support of the appellees.

Leila H. Watson of Cory, Watson, Crowder & DeGaris, P.C., Birmingham, for amicus curiae Alabama Association for Justice, in support of the appellees.

Joe C. Cassady of Cassady & Cassady, LLP, Enterprise, for amicus curiae AMAROK, Inc., Drywall Distributor Cooperative, in support of the appellees.

SMITH, Justice.

Southland Bank and Jimmy Adkinson, defendants below, appeal the trial court's judgment on a jury verdict in favor of the plaintiffs, A & A Drywall Supply Company, Inc. ("A & A"), and Chadwick E. Anderson. We reverse the trial court's judgment and render a judgment for Southland Bank and Adkinson.

Facts and Procedural History

Anderson was the president and sole shareholder of A & A. The company sold drywall and roofing and ceiling products to contractors and the general public. Anderson started the company in 1996 after having worked for his father, Glenn Anderson, who had also owned a drywall business. Although business increased in 1999 and 2000, A & A struggled financially at times. In its best year, 2000, A & A made a profit of $52,000, which represented 1.64% of A & A's total sales. It started 2001 with $480,000 in accounts receivable and $500,000 in accounts payable.

From time to time A & A contracted to supply projects with the United States Department of Housing & Urban Development ("HUD"). Certain payment procedures with these projects often created cash-flow problems for A & A. In 2001, A & A was presented with the opportunity to bid on larger HUD projects. These projects required more than twice the volume of materials A & A normally kept in inventory and thus required more capital.

Anderson considered opening new supply facilities for A & A in various locations to support the anticipated increase in business from the HUD projects. Anderson decided to seek a $500,000 line of credit to pay off a portion of A & A's existing debt and to increase the company's working capital for the purchase of more inventory.

Anderson first met with Waylon Fulford, a loan officer with SouthTrust Bank, regarding a line of credit. Fulford had previously worked with A & A in financing certain equipment purchases. Anderson submitted to SouthTrust a request for a loan along with other documentation. Fulford asked Anderson to submit certain financial information about A & A and a letter requesting a line of credit.

At this time, Anderson also learned of a loan-guarantee program offered by the United States Small Business Administration ("SBA"). The SBA offered a program referred to as the "7(a) Loan Guaranty Program," which guaranteed certain loans extended by lenders to qualified small businesses. To obtain such a guarantee, an application was made with the SBA. After considering the application, which could be complex and include numerous documents, the SBA could guarantee as much as 75 to 85 percent of a loan issued by a lender to a small business.

While waiting on SouthTrust to approve his request for a line of credit, Anderson went to see Jimmy Adkinson at Southland Bank. Adkinson was a senior vice president of Southland Bank and a "long time friend" of Anderson. Both Anderson and his father, Glenn, had banked with banks at which Adkinson had worked for many years. In fact, Adkinson had worked for various different banks over the years, and Anderson would transfer his accounts to follow Adkinson when Adkinson changed employers.

Anderson said that he wanted to discuss "the SBA" with Adkinson because he "trusted [Adkinson's] judgment." Additionally, Anderson wanted to ask Adkinson if he believed that SouthTrust Bank was taking an inordinately long time to approve the line of credit. Anderson asked Adkinson to look at the materials he had submitted to SouthTrust. Anderson testified regarding this conversation as follows:

"I think, basically, I just asked him, `Jimmy, is this loan something y'all are interested in.' And he said, `Yeah.' And I said, `Well, now if the SBA approves it, are you going to write the loan.' And he said, `I can't see any reason why we wouldn't.'"

According to Anderson, Adkinson stated that he had the necessary application forms for the SBA loan guarantee program but recommended that Anderson have Cindy Watt¹ professionally prepare the necessary application and supporting paperwork. A & A hired Watt and paid her $1,000 for the work on an application for an SBA guarantee; Anderson and Watt worked together to complete the application. Anderson also forwarded Adkinson a letter requesting a loan, as well as certain financial information. Anderson testified that later Adkinson indicated to him that "Southland Bank would do a loan if the SBA guaranteed it." Adkinson, on the other hand, denied telling Anderson that the loan would be approved by Southland Bank if the SBA guaranteed it.

On March 13, 2001, Adkinson executed several documents to be submitted to the SBA with Anderson's application, including a form entitled "Lender's Application for Guaranty or Participation" ("the SBA application"). This document states that Southland Bank and A & A "propose" to enter into a guaranteed loan. Additionally, a "credit analysis" prepared by Watt was included with the application; it stated that "Southland Bank has agreed to lend $500,000" to A & A. The SBA's Birmingham field office received the SBA application on April 2, 2001. The SBA application requested approval of a guarantee of a $500,000 loan to A & A.

Testimony at trial revealed that the normal practice or procedure at Southland Bank was to have the loan approved by the bank before the SBA application was sent to the SBA. Adkinson, however, had not taken A & A's loan request to his supervisor, Jon Sonmor, Southland Bank's senior credit officer, for approval. Adkinson testified that he felt that the "best chance" of getting the loan approved by Sonmor was to get the SBA guarantee first because A & A had a poor relationship with Southland Bank; A & A had missed numerous payments on equipment loans, and its checking account had been closed because of an excessive number of overdrafts.

SouthTrust Bank later telephoned Anderson for more information about the line of credit he had requested at the bank; at that time, Anderson indicated that he had taken care of the financing through another bank.

On April 17, 2001, the SBA application was approved and the SBA guaranteed 75% of a loan in the amount of $500,000. The guarantee contained numerous restrictions on the use of the loan proceeds and also required that certain properties put forth by A & A and Anderson as collateral be appraised and that the appraisal result in certain minimum fair-market values.

After Anderson learned from the SBA that the guarantee had been approved, he telephoned Adkinson. Anderson testified that Adkinson stated that "as soon as he got the paperwork, we would close the loan." Anderson testified that Adkinson indicated that Anderson "could go ahead and start doing whatever [he] needed to do to get the jobs and the operations going." A & A subsequently began placing bids and purchasing new inventory. Additionally, A & A committed to purchase and lease equipment and to lease new business locations in Georgia and Florida.

After the SBA application was approved, Adkinson took A & A's loan request to Sonmor. Sonmor was familiar with A & A because A & A's checking account had been closed as a result of overdrafts and because he was updated every other week on past-due loans and A & A was "usually" past due for over 30 days on its loan payments. Sonmor noted that, according to the financial statements submitted in support of the loan request, in A & A's best year, 2000, it was overdrawn by $139,000 at another bank. Furthermore, even with the SBA guarantee, Southland Bank's exposure was 25% of the loan, which would be secured only by second mortgages on several pieces of property, "accounts receivable inventory, and just a little bit of equipment." Sonmor testified that, based on his knowledge of A & A, "it just didn't make any sense to do the loan."

On May 10, 2001, Adkinson advised Anderson that Southland Bank was not going to write the loan. In early June, Southland Bank attempted to repossess equipment it had previously financed for A & A. Additionally, suppliers began to deny A & A purchases on credit because of late payments. Ultimately, A & A declared losses in 2001, 2002, and 2003.

In November 2002, A & A and Anderson (hereinafter collectively "the plaintiffs") sued Southland Bank and Adkinson (hereinafter collectively "the defendants"), seeking damages on claims of fraud against both Southland Bank and Adkinson, and breach of an implied contract, estoppel,² and negligent or wanton failure to train or supervise Adkinson against Southland Bank.³ The complaint was later amended to seek damages for negligent or wanton failure to provide a loan against both Southland Bank and Adkinson. In July 2003, over...