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LASALLE BANK v. BANK OF AMERICA

December 31, 2003.

LASALLE BANK NATIONAL ASSOCIATION, Plaintiff;
v.
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.

FACTS

  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 security agreement.

  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 Agreement.

  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.

  DISCUSSION

  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 ...


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