KSA Enterprises, Inc. v. BB&T, No. 17‑6132, 2019 WL 181665, 761 Fed.Appx. 456 (6th Cir. 01/14/19)
In an action regarding an appeal of a five‑count claim alleging (1) breach of contract, (2) fraudulent misrepresentation, (3) negligent misrepresentation, (4) fraudulent inducement, and (5) unjust enrichment, the 6th U.S. Circuit Court of Appeals (the “Court”) affirmed the Western District of Kentucky’s decision in favor of Branch Banking & Trust Co. (the “BB&T”) against KSA Enterprises, Inc. (the “KSA”). The Court, in unanimous fashion, reaffirmed the lower court’s decision to dismiss the first, third and fourth claims and reaffirmed the granting of summary judgment in respect of the second and fifth claims.
Over an eight‑year period starting in 2003, KSA executed eleven promissory notes (the “Notes”) with BB&T of approximately $8 million. In 2005, KSA entered into the third and fourth promissory notes which contained a new affirmative covenant that required that KSA maintain a cash flow ratio of 1.15 times the current maturities of its long‑term debt. While not discovered at the time of execution of each promissory note, a misunderstanding as to the calculation of this cash flow ratio would be an integral question for the Court. The new debt service covenants prompted KSA to seek additional debt but also to begin negotiating refinance options with BB&T. During these negotiations, BB&T uncovered troubling financial information regarding KSA and delivered to KSA three options for the relationship to continue: (1) for KSA to change its business practices, (2) for KSA add additional guarantors to each of the promissory notes, or (3) for KSA to refinance through a different lender. Faced with these options, KSA chose to refinance the loans although none of the promissory notes had been placed in default. In refinancing its debt, KSA incurred significant costs in its refinancing which were partially used to pay penalties owed to BB&T.
Based on these damages, KSA brought its claims under two separate theories of damages. First, that BB&T’s calculation of KSA’s cash flow according to Exhibit A of the promissory notes had caused damages by portraying an inaccurate and overly negative financial standing of KSA. In addition, KSA denied having reviewed Exhibit A or seeing the exhibit as an attachment to the promissory notes despite a reference within the document to such exhibit. These misrepresentations, KSA claimed, forced KSA to refinance and incur prepayment penalties. The second theory alleged that misrepresentations by BB&T to KSA over a series of months that BB&T would refinance the debt resulted in an opportunity cost whereby KSA was not only paying interest to BB&T, but also unable to refinance its debt with a different party under more beneficial economic terms.
The Court first addressed the dismissal of the breach of contract, fraudulent inducement and negligent misrepresentation claims. In respect of the breach of contract claims, KSA moved to admit parol evidence in advance of its argument that BB&T had breached the contract by changing the debt service coverage ratio. The Court denied this argument relying on not only the Kentucky Statute of Frauds that explicitly barred reliance on oral representations but also on the strong evidence that BB&T had never delivered written notice of default regarding the loans. Furthermore, the Court reasoned that “threatening” communications were simply notices of the commercial terms of the Notes. In respect of the fraudulent inducement claim, KSA alleged that BB&T fraudulently induced it to enter into additional promissory notes based on oral representations regarding the cash flow. KSA claimed its damages stemmed from legal and appraisal fees that it incurred in connection with entering into those additional agreements. The Court dismissed these claims as evidence was produced that KSA incurred these costs before the business agreement disintegrated and that KSA waited many years before voluntarily entering into refinance transactions. In respect of the negligent misrepresentation claim, KSA made three main arguments. First, KSA claimed that BB&T’s oral representations regarding the different definition of cash flow. The Court reasoned that a plaintiff must bear some burden in protecting itself and it was undisputed that the third and fourth promissory notes contained the debt service coverage ratio at issue. Second, KSA claimed that BB&T repeatedly stated that it would refinance the loans and this prompted KSA to continue their commercial relationship longer than it would have without those promises. The Court was unmoved by claims that a mere promise could induce such decisions and dismissed this portion of KSA’s claim. Third, KSA claimed that BB&T delivered several notices that the loans were in default or were to be placed in default. Evidence was produced that BB&T never placed any loans in default and the Court was satisfied by this.
The Court ended its review of the case by denying the fraudulent misrepresentation and unjust enrichment claim as KSA offered no evidence of any fraudulent misrepresentation and the Court found no evidence that KSA should not be bound to pay under a contract for which it is contractually obligated.
Article courtesy of Michael Robson of Greenberg Traurig, LLP
