Wells Fargo Bank v. Arizona Laborers

• Citation: 38 P.3d 12,201 Ariz. 474
• Decision Date: 18 January 2002
• Docket Number: No. CV-00-0062-PR.,CV-00-0062-PR.
• Parties: WELLS FARGO BANK, a National Banking Association, Plaintiff-Counterdefendant-Appellee, v. ARIZONA LABORERS, TEAMSTERS AND CEMENT MASONS LOCAL NO. 395 PENSION TRUST FUND; Arizona Laborers, Teamsters and Cement Masons Local No. 395 Defined Contribution Pension Trust Fund; Arizona Operating Engineers Defined Benefit Pension Trust Fund; Arizona Operating Engineers Defined Contribution Pension Trust Fund; Arizona State Carpenters Pension Trust Fund; Arizona State Carpenters Defined Contribution Pension Trust Fund; McMorgan & Company, a California corporation, as Managing Agent of the Funds, Defendants-Counterclaimants-Appellants.
• Court: Supreme Court of Arizona

38 P.3d 12

201 Ariz. 474

WELLS FARGO BANK, a National Banking Association, Plaintiff-Counterdefendant-Appellee, v. ARIZONA LABORERS, TEAMSTERS AND CEMENT MASONS LOCAL NO. 395 PENSION TRUST FUND; Arizona Laborers, Teamsters and Cement Masons Local No. 395 Defined Contribution Pension Trust Fund; Arizona Operating Engineers Defined Benefit Pension Trust Fund; Arizona Operating Engineers Defined Contribution Pension Trust Fund; Arizona State Carpenters Pension Trust Fund; Arizona State Carpenters Defined Contribution Pension Trust Fund; McMorgan & Company, a California corporation, as Managing Agent of the Funds, Defendants-Counterclaimants-Appellants.

No. CV-00-0062-PR.

Supreme Court of Arizona, En Banc.

January 18, 2002.

As Corrected April 9, 2002.

Lewis and Roca LLP, by John P. Frank, Peter Baird, Randy Papetti, Barry Willits, Phoenix, Attorneys for Plaintiff-Counterdefendant-Appellee.

Morrison & Hecker L.L.P., by Michael C. Manning, James W. Howard, Monty L. Greek, Phoenix, Attorneys for Defendants-Counterclaimants-Appellants.

OPINION

JONES, Chief Justice.

I. Facts and Procedural History

¶ 1 This controversy arises under a triparty agreement between First Interstate Bank ("the Bank"),¹ various union pension funds ("the Funds"), and Mercado Developers, a partnership headed by J. Fife Symington, III ("Symington"). In 1987, the Bank funded a $2.3 million loan to a separate Symington partnership for a strip mall development named Alta Mesa Village. The Funds were not involved in the Alta Mesa transaction. Later the same year, Symington approached the Bank to request financing for a construction project in downtown Phoenix called the Mercado Project ("the Mercado").² The Bank determined not to provide permanent financing for the Mercado but offered Symington interim construction financing if he were able to secure permanent financing from another lender. The Funds agreed to be that lender.

¶ 2 The Bank's obligation to fund the construction loan arose the moment Symington secured a commitment from the Funds (the "Permanent Commitment").³ At the Bank's request, in May 1988, the Bank, the Funds, and Symington executed a Triparty Agreement setting forth the rights and obligations of each party. Among other things, the Agreement provided that the Bank would fund $10 million for construction of the Mercado, but that no later than June 30, 1990, the Funds would "take-out" the Bank's interim loan with permanent financing.⁴ After the take-out, Symington would be obligated to the Funds under the Permanent Commitment. The Funds' obligation was conditioned on review and approval of Symington's financial status.⁵ The Funds could refuse the loan if contract conditions were not met or if the Funds were dissatisfied with Symington's financial condition. For example, the Funds could terminate the Permanent Commitment if Symington were to become insolvent, make an assignment for the benefit of creditors, or fail to pay debts as they matured.⁶ In addition, pursuant to the terms of the Triparty Agreement, the Funds were entitled, on request, to receive financial information from the Bank on the status of the Mercado construction loan.⁷ The Bank was not required to volunteer information to the Funds;⁸ Symington, however, was expressly obligated to provide specific financial information to the Funds.

¶ 3 By early 1989, the Phoenix real estate market began to experience a catastrophic decline, and Symington's real estate endeavors were not immune from the trauma. The loan balance on Symington's Alta Mesa development came due in March 1989, and because of the project's lackluster performance, Symington was unable to satisfy the obligation. The loan appeared on the Bank's "Watch Report" for the first time in March 1989. The Watch Report is an internal bank document that monitors problem loans. In exchange for a fee, the Bank extended the loan until September 1, 1989. The loan was subsequently twice extended: on September 1 and December 1, 1989.⁹ When the obligation ultimately matured on March 15, 1990, Symington was still unable to pay, and the loan defaulted at the conclusion of business that day.

¶ 4 The events that occurred between late 1989 and July 1990, and the effect of those events on the Funds' ultimate decision to fund the Mercado permanent loan are at the core of this lawsuit. The Funds claim that, during these months, actions were carried out by Symington and the Bank that were intended to cloak Symington with a false appearance of financial vigor and to deprive the Funds of any reason to refuse to fund the Permanent Commitment. The Bank, of course, was concerned and anxious to obtain repayment of the $10 million Mercado construction loan. The Bank contends what it did to ensure the permanent loan was lawful, that by securing the take-out, it was merely protecting its own interests, that it was unaware of any fraudulent behavior by Symington, and that in any event, it had no legal duty to the Funds to inform them of anything.

¶ 5 Prior to March 1990, the Bank explored the option of foreclosing the defaulted Alta Mesa loan, selling the property, and issuing a deficiency notice to Symington. The Bank discussed this proposal with Symington and asked him to submit a Business Plan with recommendations for handling the troubled loan. In response, on March 16, 1990, one day after the latest Alta Mesa loan extension expired, Symington aide James Cockerham sent a letter to the Bank suggesting that the Bank should take a cooperative approach to stabilize the Alta Mesa loan because "[f]oreclosure by FIB [First Interstate Bank] and/or an assignment for the benefit of creditors could have a detrimental impact to both the Partners and FIB." In his deposition, Cockerham acknowledged that one potential detrimental impact would be to give the Funds a basis on which to refuse to fund the permanent Mercado loan.

¶ 6 While Symington was attempting to salvage Alta Mesa, the June 30, 1990, date on which the Funds were required to retire the Mercado construction loan drew nearer. On or about May 4, 1990, as part of his obligation under the Permanent Commitment, Symington provided a certified financial statement to the Funds, current through December 31, 1989. According to the Funds, they later learned that the financial statement was false and included exaggerated values and omissions, giving Symington a specious appearance of solvency. Among other things, the financial statement did not mention the financial troubles afflicting Alta Mesa, nor did it mention the three extensions on that loan. In fact, Symington asserted the same personal equity in the Alta Mesa project that he reported on the statement given the Funds in 1987 to secure the permanent commitment.

¶ 7 On May 21, 1990, Doug Hawes, the Bank's Alta Mesa loan officer, requested approval once again to extend the Alta Mesa loan, this time through July 1, 1990—one day after the Funds were required to take-out the Bank's interim loan on Mercado. One reason given by Hawes for the requested forbearance was to "[a]llow time for finalization of the Mercado loan pay-off...." On May 25, the Bank consented to Hawes' request and executed, in Symington's favor, a forbearance agreement on the Alta Mesa loan until July 1, 1990.

¶ 8 Less than two weeks later, on June 7, 1990, Jeff White, the Bank's Mercado loan officer, submitted a memo to the Bank's Senior Loan Committee detailing Symington's deteriorated financial condition and requesting authority to charge off $1.2 million of the Mercado construction loan that would not be paid by the Funds.¹⁰ White's memo indicated that property values listed on Symington's most current financial statements "do not accurately reflect the current market" and that "[c]ontingent debt also appears not to have been fully accounted for on his recent statement." Ward Wilson, a member of the Senior Loan Committee, testified that the Bank was concerned about intentional misstatements by Symington. Before agreeing to accept less than the full $10 million, the Bank requested an updated financial statement from Symington. In fact, in an attempt to avoid the $1.2 million shortfall, the Bank convened a meeting the next day, June 8, 1990, attended by, among others, Sam Coppersmith, counsel for the Funds. Discussion of the shortfall was had but the meeting appears to have been unsuccessful from the Bank's standpoint.

¶ 9 At the Bank's request, Symington resubmitted his financial statement on June 26, 1990. With minor revisions, this statement contained the same numbers that appeared on the May 4, 1990 statement. Ward Wilson testified the Bank's concern was "heightened" at this point, and when asked whether the Bank knew Symington had provided the same financial numbers to the Funds, Jeff White testified that he "would hope so."

¶ 10 Evidence also disclosed significant banking irregularities, allegedly in violation of federal banking regulations and the established internal procedure within the Bank. The Funds' banking expert, Jeffrey Gaia, provided a declaration that the Bank's forbearance from enforcement of the Alta Mesa loan was contrary to prudent banking practice for purposes of securing the Mercado take-out. Robert Lee Creed, the Bank's own employee, testified that a forbearance not accompanied by a credit authorization request is unusual if, as here, it extends the maturity of the loan. The Alta Mesa forbearance was not accompanied by a credit authorization request. In addition, the Bank failed to report Symington's false representations to federal banking officials as required by federal regulations, where the Bank was admittedly knowledgeable of the false financial statement. See 12 C.F.R. § 21.11 (1989).

¶ 11 Finally, on June 29, 1990, against the background of a real estate market suffocating from defaulted loans and foreclosures and with Symington's financial condition in grave difficulty, the Funds complied with the terms of the Permanent...