United States District Court, N.D. Illinois
December 31, 2003.
LASALLE BANK NATIONAL ASSOCIATION, Plaintiff;
BANK OF AMERICA NATIONAL ASSOCIATION, Defendant
The opinion of the court was delivered by: ROBERT GETTLEMAN, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff LaSalle Bank National Association has brought a four count
complaint against defendant Bank of America National Association alleging
breach of contract (Counts I and III), breach of fiduciary duty (Count
II), and gross negligence and misrepresentation (Count IV). Defendant has
moved to dismiss portions of Count II, all of Count III, and a portion of
Count IV. For the reasons set forth below, the motion is granted in part
and denied in part.
Plaintiff claims that defendant breached various duties owed to it in
connection with a "Participation Agreement" under which plaintiff
participated in some, but not all of defendant's loans to Trendmasters,
Inc., a toy manufacturer and distributor. Defendant was Trendmasters'
lender under three separate lines of credit: (1) a $32 million line of
credit consisting of a Revolving Loan, a Sub facility Letter of Credit
Commitment and Term Loan (the "General Line of Credit); (2) a $10 million
Interest Hedge Agreement; and (3) a $10 million line of credit designed
to support Trendmasters' Hong Kong operations (the "Trade Line of
Credit"). The General Line of Credit was created pursuant to a Loan Agreement
("Loan Agreement") executed between defendant's predecessor, Nations
Bank, and Trendmasters. In conjunction with the Loan Agreement, the
parties executed a general security agreement which identifies
Trendmasters' assets serving as collateral for the General Line of Credit
to include essentially all personal property of Trendmasters, including
all present and future accounts, general intangibles, notes, drafts,
acceptances, documents, instruments, bank deposits, inventory, goods, and
all proceeds of the foregoing.
Shortly after entering into the Loan Agreement, the parties executed a
Trade Finance Agreement which created the Trade Line of Credit. The Trade
Line of Credit was designed to provide Trendmasters with funds necessary
to purchase toys from Chinese and other foreign manufacturers for later
distribution to retailers in the United States. The Trade Finance
Agreement authorized defendant to extend credit to Trendmasters under six
different loan and credit line facilities, one of which was known as the
"Packing Loans." The Trade Finance Agreement authorized defendant to
extend up to $2.5 million in Packing Loans to Trendmasters to enable the
company to make required payments to the Chinese and other foreign
manufacturers. Up to that $2.5 million cap, the amount of Packing Loans
defendant could extend to Trendmasters was limited to 45% of the value of
valid and acceptable original export letters of credit from Trendmasters'
toy retailers that were lodged with defendant (the "advanced rate"). The
collateral for the Trade Line of Credit, including the Packing Loans, was
included in the collateral described in the general security agreement
that secures all the loans under the Loan Agreement, specifically the
General Line of Credit. The Trade Line of Credit Agreement specifically
provides that the credit facilities established under that agreement "at all times will remain
cross-collateralized and cross-guaranteed with the Loan Agreement."
On June 18, 1999, plaintiff and defendant executed a "Participation
Agreement" through which plaintiff purchased a 40% participation share in
the loans under the Loan Agreement (the General Line of Credit).
Plaintiff did not purchase any interest in the Interest Hedge Agreement
or the Trade Line of Credit Agreements, including the Packing Loans.
Under the Participation Agreement plaintiffs interest in the General Line
of Credit loans was secured by the Trendmasters assets that comprised the
collateral securing the loans under the Loan Agreement and general
Beginning sometime in April 2001, defendant increased the Packing Loans
beyond the $2.5 million cap and in excess of the "advance rate" stated in
the Packing Loan documentation. Defendant did this without plaintiffs
consent and, apparently, without a written amendment to the Trade Finance
The Revolving Loan under the General Line of Credit was not paid when
due on August 15, 2002. An event a default was not declared, however,
until October 17, 2002. After the event of default was declared defendant
set-off amounts in Trendmasters' Hong Kong bank account, but did not
share the proceeds with plaintiff. During the two month period between
the maturation of the revolving note on August 15, 2002, and the
declaration of an event of default on October 17, 2002, Trendmasters paid
down an accumulated total of over $6 million in Packing Loans and other
obligations under the Trade Line of Credit.
After the declared default, Trendmasters' loan obligations were
accelerated and defendant set-off additional monies held in Trendmasters'
bank account. Thereafter, much of Trendmasters' remaining assets were sold pursuant to a consensual foreclosure
sale. After recovering its costs for collection of the collateral,
defendant paid itself the entire amount of proceeds set-off from
Trendmasters' Hong Kong bank accounts to satisfy a portion of
Trendmasters' obligations to defendant under the Trade Line of Credit.
Defendant did not distribute the collateral in accordance with the
provisions of the Participation Agreement.
Although the complaint was brought in four counts, some counts have
multiple claims. As defendant correctly notes, plaintiffs asserted claims
allege three forms of wrongdoing: (1) defendant's failure to share the
proceeds of the set-off from Trendmasters' Hong Kong bank account (the
"set-off claims"); (2) defendant's alleged improper handling of the
Packing Loans ("Packing Loan claims"); and (3) defendant's allegedly
wrongful delay in declaring an event of default on the General Line of
Credit (the "default declaration claims"). Defendant's motion attacks the
Packing Loan claims and the default declaration claims only.
1. Packing Loan Claims
The Packing Loan claims are set forth in part of Count II, all of Count
III, and part of Count IV. In those counts, plaintiff alleges that
defendant, without plaintiffs consent and without written amendment,
increased the amount of the Packing Loans beyond the $2.5 million cap, in
excess of the original 45% advance rate. In Count II, plaintiff alleges
that defendant's actions breached a fiduciary duty owed to plaintiff
created by the Participation Agreement. Specifically, plaintiff alleges
that prior to Trendmasters' default on the General Line of Credit,
defendant increased the Packing Loans, thereby increasing the risk of
default of those loans, and increasing the risk that Trendmasters'
collateral would be paid to defendant only, without any sharing with
plaintiff. Plaintiff also claims that defendant increased the advance rate
without consulting plaintiff or obtaining plaintiffs consent.
In Count III, plaintiff alleges that defendant's actions breached §
3.1 of the Participation Agreement, which provides that subject to two
inapplicable exceptions, "any amendment to the Loan Agreement or any of
the other Loan Documents shall require the affirmative vote of both Lead
Bank [defendant] and Participant [plaintiff]." The parties appear to
agree that the term "Loan Documents" as defined in the Loan Agreement
include the Trade Finance Agreement and thus the Packing Loans.
Count IV alleges that by expanding the Packing Loans and the allowing
Trendmasters to pay off the expanded Packing Loans with collateral that
was pledged under the Loan Agreement, defendant committed gross
Defendant's attack on these claims stems from the plain wording of
three provisions of the Participation Agreement. First, Recital E of the
Participation Agreement provides:
The . . . trade letters of credit exposure
[including the Packing Loans] are specifically
excluded from this Agreement and the participation
purchased by Participant hereunder."
The Recitals, however, are not incorporated into the agreement and,
under Missouri law*fn1
, can be used to find the intent of the parties
only when the operative language of the contract is ambiguous, uncertain
or indefinite. Missouri Highway and Transportation Commission v.
Maryville Land Partnership, 62 S.W.3d 485
, 492 (Ml, Ct. App. 2001).
That language is none of these things.
Two operative provisions of the Participation Agreement make clear, as
defendant argues, that plaintiff had no right to participate in the
Packing Loans and defendant had no obligation to plaintiff with respect to defendant's handling of those loans.
Section 5 of the Participation Agreement provides that:
Trade Letters of Credit: Interest Hedge
Obligations. Participant is not purchasing
an interest in the Trade Letters of Credit or the
Interest Hedge Obligations, and the Trade Letters
of Credit and the Interest Hedge Obligations are
not a part of the Loans. Any collateral securing
solely the Trade Letters of Credit and/or Interest
Hedge Obligations does not secure both Loans.
Nothing contained here shall grant Participant any
right, and Participant has no right, to make any
decisions, vote on any actions, or take any
actions, with respect to the Trade Letters of
Credit or the Interest Hedge Obligations, and
Participant acknowledges and agrees that all such
actions and decisions shall be made solely by Lead
Bank in Lead Bank's sole and absolute discretion
without any duty or obligations owed to
Participant. Participant has no right to share in
any set-off rights Lead Bank may have against
Borrower or its assets which are held by Lead Bank
solely to secure the Trade Letters of Credit or
Interest Hedge Obligations, pledged to Lead Bank
solely to secure the Trade Letters of Credit or
Interest Hedge Obligations, or in which Lead Bank
has a Security Interest solely to secure the Trade
Letters of Credit or Interest Hedge Obligations.
Participant waives any rights to cause Lead Bank
to marshal assets with respect to any collateral
securing solely the Trade Letters of Credit and/or
the Interest Hedge Obligations.
Additionally, § 2.3 of Amendment No. 1 to the Loan Agreement,
dated the same day as the Participation Agreement provides:
Notwithstanding the foregoing, Participant has no
right to make any decisions, vote on any actions,
or take any actions, with respect to the Trade
Letters of Credit or Interest Hedge Obligations.
Participant has not purchased any interest in the
Trade Letters of Credit or the Interest Hedge
According to defendant, these provisions demonstrate that it had the
sole and exclusive right to alter the terms of the Packing Loans, and
thus plaintiff can have no claim based on defendant's actions with
respect to those loans. Defendant argues that the specific provisions of
§ 5 and 2.3 "trump" the general provisions in § 3.1, requiring
plaintiffs affirmative vote on any amendment to the Loan Agreement. In
particular, defendant argues that each of these specific provisions
contains language that elevates it over the general provisions of §
3.1. Both specific provisions contain language indicating "notwithstanding" anything contained herein,
thus acknowledging that the two provisions might be inconsistent with
other provisions of the agreement. Read together, according to defendant,
§ 3.1 requires plaintiffs vote on any amendments dealing with the
General Line of Credit (the loans in which plaintiff purchased a
participation), while §§ 5 and 2.3 make clear that no vote is
necessary with respect to the Trade Line of Credit including the Packing
Loans or the Interest Hedge Agreements, the loans in which plaintiff did
not purchase a participation share. Additionally, defendant correctly
notes that under Missouri law, if there is an inconsistency between a
specific and general provision in a contract, the specific provision
controls. See Robins v. McDonnell Douglas Corp.,
27 S.W.3d 491
, 497 (Ml. App. Ct. 2000).
In response, plaintiff raises the incredulous argument that § 5 of
the Participation Agreement admittedly limits plaintiffs right to
participate in decisions or vote on or take actions with respect to the
Packing Loans, but not with respect to what plaintiff unilaterally terms
the "Excess Packing Loans." In essence, plaintiff argues that § 5
specifically provides that plaintiff has no rights with respect to any
decisions made by defendant regarding the Packing Loans unless defendant
increases the loans beyond what which was set out in the Trade Finance
Agreement. This argument is nonsensical and rejected by the court.
Section 5 is clear an unambiguous. It provides that plaintiff has no
rights with respect to the Trade Line of Credit under which the Packing
Loans were created. The contract could not be any clearer and the express
provisions of § 5 and 2.3 negate any claim by plaintiff that under
§ 3.1 it had a right to vote on any amendment to the Packing Loans.
Accordingly, plaintiffs breach of contract claim (Count III) and any
breach of fiduciary duty claims arising out of defendant's unilateral
increase in the Packing Loans (Count II breach of fiduciary duty and
Count IV gross negligence) fail to state a claim and are dismissed. 2. Default Declaration Claim
The default declaration claim is set forth in the second part of Count
II, alleging that defendant wrongfully delayed in declaring an event of
default on the General Line of Credit, allowing Trendmasters to use the
collateral securing the General Line of Credit to reduce the balance of
the Packing Loan. Defendant raises two challenges to this claim. First,
defendant argues that § 3.1 of the Packing Agreement requires the
affirmative vote of both plaintiff and defendant to declare an event of
default and that plaintiff never voted on or demanded that an event be
declared. Second, defendant argues that the Participation Agreement
expressly disclaims any fiduciary duty owed by defendant to plaintiff
with respect to defendant's handling of Packing Loans.
Section 2.40 of the Participation Agreement provides that any money
paid to defendant pursuant to the Loan Agreement at any time after the
occurrence of a default or an event of default shall be applied according
to the set-off procedures. Plaintiff alleges that default occurred, but
that defendant failed to declare an event of default for the sole purpose
of avoiding application of § 2.4. If plaintiff is correct, any money
received by defendant on the Packing Loans from the sale of collateral
that was cross-collateralized with the General Line of Credit could be
subject to the provisions of § 2.4. Therefore plaintiff has stated a
claim under § 2.4 of the Agreement.
Plaintiff cannot, however, state a separate claim for breach of
fiduciary duty, because § 4.2 of the Packing Agreement expressly
provides that "[defendant] shall not have any duties or responsibilities
except those expressly set forth in this Agreement and except as set
forth in § 2.4 and 4.3, shall not be a trustee or fiduciary for
Participants. Defendant therefore owed no duty to plaintiff except as
defined in the Agreement. See First City Federal Savings and Loan
Association v. Worthren Bank and Trust Co., 919 F.2d 510, 514 (9th
Cir. 1990) (Fiduciary relationship should not be inferred from a Participation Agreement absent unequivocal
contractual language. Banks and savings institutions engaged in
commercial transactions normally deal with one another at arm's length
and not as fiduciaries.) Accordingly, defendant's motion to dismiss the
default declaration claims in Count II, based on defendant's failure to
set-off payments received from Trendmasters on the Packing Loans made
from the sale of collateral securing the General Line of Credit after
default on the General Line of Credit is denied.
For the reasons set forth above, defendant's motion to dismiss is
granted in part and denied in part. The motion is granted with respect to
the first part of Count II, all of Count III and the first part of Count
IV. The motion is denied in all other respects. Because the breach of
contract claim in Count I is not addressed in this opinion, and because
plaintiff's other viable claims overlap in the remaining counts,
plaintiff is directed to file an amended complaint conforming to this
opinion on or before January 19, 2004. Defendant is to file an answer
thereto on or before February 9, 2004. This matter is set for a report on
status February 17, 2004, at 9:00 a.m., at which time the parties are to
present a final discover plan.