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Bank of America, N.A. v. JB Hanna, LLC

United States Court of Appeals, Eighth Circuit

September 8, 2014

Bank of America, N.A., Plaintiff - Appellant,
v.
JB Hanna, LLC; Kerzen Properties, LLC; Burt Hanna; Hanna's Candle Company, Defendants - Appellees. Bank of America, N.A., Plaintiff - Appellee,
v.
JB Hanna, LLC; Kerzen Properties, LLC; Burt Hanna; Hanna's Candle Company, Defendants - Appellants

Submitted February 11, 2014.

Page 842

[Copyrighted Material Omitted]

Page 843

Appeal from United States District Court for the Western District of Arkansas - Fayetteville.

For Bank of America, N.A., Plaintiff - Appellant (12-3239): Theresa L. Davis, Melissa A. Mickey, Michael L. Molinaro, Reed & Smith, Chicago, IL; Lance R. Miller, Mitchell & Williams, Little Rock, AR; Stanley D. Smith, Mitchell & Williams, Rogers, AR; Thomas Walsh, Bryan & Cave, Saint Louis, MO.

For JB Hanna, LLC, Kerzen Properties, LLC, Burt Hanna, Hanna's Candle Company, Defendants - Appellees (12-3239): Steven L. Brooks, Friday & Eldredge, Rogers, AR; Robert Jeffrey Mitchell, William B. Putman, Taylor Law Partners, Fayetteville, AR.

For Bank of America, N.A., Plaintiff - Appellee (12-3352): John Keeling Baker, Mitchell & Williams Law Firm, Little Rock, AR; Theresa L. Davis, Melissa A. Mickey, Michael L. Molinaro, Reed & Smith, Chicago, IL; Lance R. Miller, Mitchell & Williams, Little Rock, AR; Stanley D. Smith, Mitchell & Williams, Rogers, AR; Thomas Walsh, Bryan & Cave, Saint Louis, MO.

For JB Hanna, LLC, Kerzen Properties, LLC, Burt Hanna, Hanna's Candle Company, Defendants - Appellants (12-3352): Steven L. Brooks, Friday & Eldredge, Rogers, AR; Robert Jeffrey Mitchell, William B. Putman, Taylor Law Partners, Fayetteville, AR.

Before LOKEN, BYE, and COLLOTON, Circuit Judges.

OPINION

Page 844

COLLOTON, Circuit Judge.

Burt Hanna, JB Hanna, LLC (" JB Hanna" ), Kerzen Properties, LLC (" Kerzen" ), and Hanna's Candle Company, LLC (" Hanna's Candle" ) (collectively, " the Hanna Parties" ) borrowed several million dollars, in the form of floating-interest-rate loans, from Bank of America, N.A. (" the Bank" ). The Hanna Parties failed to pay the balance due on one of the loans when it matured. The Bank sued the Hanna Parties for breach of contract. The Hanna Parties counterclaimed, alleging fraud, breach of fiduciary duty, negligence, deceptive trade practices, and breach of contract by the Bank, and demanding reformation or rescission.

The district court granted summary judgment in favor of the Bank as to the Hanna Parties' counterclaims. The Bank's claims proceeded to trial, and a jury concluded that the Hanna Parties did not breach the contract. The district court denied the Bank's post-verdict motions for judgment as a matter of law and for a new trial. The Bank appeals, and the Hanna Parties cross-appeal. We conclude that the case was properly submitted to a jury, and the Bank is precluded by the rules of procedure from seeking a judgment as a matter of law, but that the jury's verdict was against the great weight of the evidence, so we reverse and remand for a new trial on the Bank's breach-of-contract claims. We agree with the district court that the Hanna Parties' counterclaims fail as a matter of law, and we therefore affirm

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the court's grant of summary judgment for the Bank as to those claims.

I.

Burt Hanna is a businessman from Arkansas. Hanna owns and manages JB Hanna, Kerzen, and Hanna's Candle, all of which are Arkansas limited liability companies. The Bank is a national banking association with its main offices located in North Carolina.

In 1998 and 1999, JB Hanna borrowed $6.5 million at a floating interest rate from the Bank's predecessor-in-interest, NationsBank, N.A.; the loan matured in 2010. To fix artificially the loan's interest rate, in 1998 JB Hanna and NationsBank entered into an interest rate swap, on a notional principal amount of $6.5 million, terminating in 2010. The 1998 swap, and all of the later swaps between JB Hanna and the Bank, were governed by an International Swap Dealers Association (" ISDA" ) Master Agreement dated September 10, 1998.

An interest rate swap allows a borrower to hedge his exposure to changes in the interest rate on a floating-rate loan. In the simplest case, the borrower makes fixed-rate interest payments to a counterparty, who in turn makes floating-rate interest payments to the borrower. Both payment streams are based on a notional principal amount that often decreases during the term of the swap and matches the declining balance of a corresponding loan. By paying a fixed rate of interest to a counterparty in exchange for the counterparty making payments based on the floating rate, a borrower can artificially " fix" the rate of interest he must pay on any associated loan.

In May 2001, JB Hanna borrowed $4.2 million at a floating interest rate from the Bank; the loan matured in 2010. JB Hanna and the Bank also entered into an interest rate swap, on a notional principal amount of $4.2 million, terminating in 2008.

In October 2001, JB Hanna borrowed another $2.4 million at a floating interest rate from the Bank; the loan matured in 2005. The loan was secured by a mortgage on JB Hanna's real property, an assignment of rents, and an interest in JB Hanna's personal property. Mr. Hanna personally guaranteed the loan. JB Hanna and the Bank also entered into an interest rate swap, on a notional principal amount of $2.4 million, terminating in 2005. In 2007, the October 2001 JB Hanna loan was extended for five years, with a new maturity date in 2012. JB Hanna and the Bank also entered into a corresponding interest rate swap.

In 2005, JB Hanna sought to borrow an additional $4 million from the Bank, to fund a divorce settlement of Mr. Hanna's. Initially, JB Hanna and the Bank discussed entering into a five-year, $4 million loan and an interest rate swap on a notional principal amount of $4 million. At the time, however, JB Hanna still owed the Bank approximately $7.2 million on the 1998-99 and May 2001 loans, so the parties discussed the possibility that the Bank would refinance JB Hanna's existing indebtedness in conjunction with the proposed $4 million loan, thus executing one new $11.2 million loan agreement.

On June 29, 2005, several Bank employees discussed an alternative proposal, namely, that all of JB Hanna's existing swaps be terminated, too, such that the parties would execute one new $11.2 million loan and one new $11.2 million swap. The Hanna Parties assert that if JB Hanna agreed to the restructured swap, the Bank would make more money, and the Bank's individual employees stood to improve their quarterly performance. The Bank allegedly recommended this revised

Page 846

structure to JB Hanna, representing that it would allow JB Hanna to pay a lower effective rate of interest. According to the Hanna Parties, the representation that the revised structure was a better deal for JB Hanna was false because, in reality, that structure was projected to result in JB Hanna's paying more interest overall.

On June 29, 2005, JB Hanna and the Bank entered into an interest rate swap, on a notional principal amount of $11.2 million, that on its face terminates on August 1, 2015. In September 2005, JB Hanna and the Bank entered into a floating rate loan of $11.2 million with a stated maturity date of September 20, 2010. The 2005 JB Hanna loan was secured by a mortgage on JB Hanna's real property, an assignment of rents, and an interest in JB Hanna's personal property. Mr. Hanna personally guaranteed the loan.

According to Mr. Hanna, although JB Hanna's attorneys reviewed the 2005 JB Hanna loan documents, JB Hanna was not represented by counsel with respect to the 2005 JB Hanna swap, and JB Hanna relied on the Bank to recommend an appropriate transaction. Notwithstanding the plain terms of the agreements, the Hanna Parties allegedly did not realize that the 2005 JB Hanna loan was actually a five-year agreement, with a term that did not match the ten-year term of the 2005 JB Hanna swap. Mr. Hanna alleges that he first learned in May 2008 that the 2005 JB Hanna swap extended until 2015, whereas the 2005 JB Hanna loan matured in 2010. In October 2008, he also became aware that unless JB Hanna could pay the amount due or refinance the loan upon its maturity in 2010, the Bank could accelerate all of JB Hanna's obligations under the 2005 swap agreement.

In 2006, Kerzen borrowed $2.4 million at a floating interest rate from the Bank; the loan matures in 2015. The 2006 Kerzen loan agreement mandated that Hanna's Candle comply with several financial-condition covenants--namely, maintenance of a certain debt service coverage ratio, tangible net worth, and fixed charge coverage ratio--breach of which would constitute default by Kerzen. The loan was secured by a mortgage on Kerzen's real property, an assignment of rents, and an interest in Kerzen's personal property. Hanna's Candle guaranteed the loan. Kerzen and the Bank also entered into an interest rate swap, on a notional principal amount of $2.4 million, terminating in 2015. The 2006 swap was governed by the " 2002 ISDA Master Agreement," entered into by Kerzen and the Bank on December 6, 2005.[1]

In the various swaps, guaranties, security agreements, the 1998-99 and May 2001 JB Hanna loans, and the 2006 Kerzen loan, the parties agreed to waive a jury trial in the event of a dispute arising from those transactions. The October 2001 and ...


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