Flags v. Boston Five Bank CV-90-340-B 10/30/93 P
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
Flags I, Inc., et al.
v. Civil No. 90-340-B
The Boston Five Cents Savinas Bank, et al.
O R D E R
This case concerns a failed effort by a lender and its
borrowers to restructure their debt and equity interests in two
related real estate development projects. Financial problems
with both projects prompted the parties to enter into complex
negotiations that resulted in the lender's agreement to advance
additional funds to several of the plaintiffs in exchange for
plaintiffs' agreement to surrender ownership and control over one
of the projects and to release certain potential claims against
the lender and its affiliate. When this agreement failed to
stabilize relations among the parties, plaintiffs commenced this
action alleging that the lender violated the bank anti-tying
laws. The lender and its affiliate argue that they are entitled to
summary judgment with respect to plaintiffs' anti-tying claims
because they claim that their conduct is protected by the
"traditional banking practice" exemption from the bank anti-tying
laws. For the reasons that follow, I accept defendants'
arguments and grant their motion for summary judgment.
I. FACTS
The real estate development projects that give rise to the
present case are known as The Villages at Granite Hill I
("Granite Hill I") and The Villages at Granite Hill II ("Granite
Hill II"). Both projects were intended to make substantial
profits for the plaintiffs and their lender. However, like many
such projects conceived during the 1980s, the projects have yet
to be successful. The projects and the parties' unsuccessful
restructuring effort are described below.
A. Granite Hill I
Granite Hill I is a large complex of condominiums and single
family homes in Hooksett, New Hampshire. The project was
conceived in 1985 when several of the individual plaintiffs and
their former partners agreed with the Boston Five Cents Savings
2 Bank, FSB ("Boston Five") to develop the first phase of Granite
Hill I as a joint venture. Pursuant to this agreement, Boston
Five incorporated Province Street Corporation ("Province Street")
as a wholly owned service corporation, and several of the
individual plaintiffs incorporated Flags I, Inc. ("Flags") to
serve as egual partners in the project.
Shortly thereafter. Province Street and Flags executed a
joint venture agreement ("Joint Venture Agreement") forming
Granite Hill Associates ("GHA") to develop Granite Hill I. Flags
contributed land valued at approximately $2 million and Province
Street agreed to contribute an eguivalent amount in cash as their
initial capital contributions to GHA. Except for certain costs
identified as "Hard Costs Overruns," the Agreement specified that
additional capital contributions would be shared egually by Flags
and Province Street. The Agreement also provided that the
partners would receive periodic distributions from the project's
net cash flow. Under the Agreement, Province Street was allowed
to recover its initial capital contribution on a preferred basis
and thereafter distributions would be shared egually. Finally,
the Agreement provided that GHA would be overseen by a two-member
management committee composed of one person selected by Flags and
one person selected by Province Street.
3 Washington Development Company ("WDC")a a partnership
comprised of several of the individual plaintiffs, was selected
to manage Granite Hill I . After construction was well underway,
the Villages at Granite Hill Realty, Inc. ("Granite Hill Realty")
replaced the project's original real estate broker and Granite
Hill Contractors-Hooksett, New Hampshire, Inc. ("Granite Hill
Contractors") replaced the project's first general contractor.
Both Granite Hill Realty and Granite Hill Contractors are owned
by several of the individual plaintiffs.
Boston Five provided financing for Granite Hill I. As of
March 1990, the outstanding balance on GHA's loans to Boston Five
was $10,849,201.
B. Granite Hill II
Granite Hill II was intended to be a large development of
condominiums and single family homes adjacent to Granite Hill I.
The land for the project was purchased in 1986 and title is held
in a trust ("the Granite Hill Trust"). Washington Development
Company, Inc. ("WDI"), a corporation owned by several of the
individual plaintiffs, and Province Street, were named as both
trustees and egual beneficiaries in the Trust. Although
substantial on-site and off-site improvements subseguently were
completed, only two model homes were under construction by the
4 beginning of 1990.
Boston Five made several loans to the Granite Hill Trust to
finance the purchase of the property, the completion of
infrastructure improvements, and the construction of the model
homes. As of March 1990, the Trust owed Boston Five $11,766,608
on these loans.
C. The Decline in the Real Estate Market
Granite Hill I initially appeared to be highly successful.
It won construction and marketing awards and many units were
built and sold. As a result. Province Street recovered its
initial capital contribution and additional distributions
totalling $2,734,761. Province Street also received $100,000 in
cash and a note of $262,500 ("the Shops Note") from the sale of
land by GHA to WDI for a commercial development known as the
Shops at Granite Hill. Flags also recovered approximately
$1,000,000 of its capital contribution to GHA. Finally, WDI
earned management fees. Granite Hill Realty earned brokerage
commissions, and Granite Hill Contractors earned income on its
construction contracts with GHA.
When the New Hampshire Real Estate market experienced a
sharp decline in 1988, both Granite Hill I and Granite Hill II
began to experience financial difficulties. By 1989, sales at
5 Granite Hill I had slowed to the point that GHA needed additional
capital contributions from Province Street to cover debt service
and the cost of on-going operations. By the end of 1989, GHA
owed approximately $335,000 to its contractors and its loans from
Boston Five were in arrears. Granite Hill II was also
experiencing similar difficulties. Although substantial
infrastructure improvements had been completed and sales
agreements for four units had been signed, only two model homes
had been built. By the end of 1989, Boston Five's loans to the
Granite Hill Trust were also in arrears.
D. Restructuring Agreement
In March 1990, the parties executed a complex agreement
("the Restructuring Agreement") substantially altering the
parties' debt and eguity interests in both projects. Several
significant aspects of the Agreement are discussed below.
1. Restructuring of GHA
The Restructuring Agreement provided that GHA would be
converted from a general partnership to a limited partnership.
Whereas Flags and Province Street had each held a 50% general
partnership interest in GHA under the Joint Venture Agreement,
The Restructuring Agreement provided that Flags' interest in GHA
was converted into a 49% limited partnership interest.
6 Similarly, Province Street's interest in GHA was to be converted
into a 50% limited partnership interest and a 1% general
partnership interest. The Restructuring Agreement also reguired
Flags to release any claims against Boston Five or Province
Street arising from a breach of any trust or fiduciary duty that
Province Street might owe to Flags in the future because of
Flags' new status as a limited partner in GHA. Thus, the
Agreement vested Province Street with the power to act as if it
were the sole owner of GHA, notwithstanding Flags' 49% limited
partnership interest. The Restructuring Agreement further
specified that Flags ultimately would share egually in any
distributions or profits earned by GHA. However, the Agreement
provided that the payment of any such profits or distributions
would be deferred until the projected completion date for Granite
Hill I.
2. Restructuring of Granite Hill Trust
The Restructuring Agreement specified that the egual
beneficial interests held by Province Street and WDI in the
Granite Hill Trust were to be converted into a limited
partnership in which WDI would become the sole general partner
with combined general and limited partnership interests of 99%.
Province Street would retain only a 1% limited partnership
7 interest in the Trust. The Agreement also required Province
Street to release any claim for breach of trust or fiduciary duty
it might have against WDI so as to permit WDI to control the
Trust as if it were the sole owner of the Trust assets.
3. Releases of Claims Against Boston Five and Province Street
An essential aspect of the Restructuring Agreement is its
requirement that the parties release past and future claims
against Boston Five and Province Street. In addition to the
previously described releases purportedly negating any fiduciary
duty Province Street might owe to Flags arising from Province
Street's new role as the sole general partner in GHA, the
Agreement also required Flags, WDI, WDC, Granite Hill
Contractors, and Granite Hill Realty to release: (i) any claim
"by or against Boston Five relating to Granite Hill I, Granite
Hill II, or their course of dealing with respect thereto, whether
or not arising as aforesaid"; and (11) any claim "now existing or
hereafter arising [against Province Street and Boston Five] based
on any fiduciary or trust relationship . . . ." Thus, any claim
that plaintiffs may have had to compel defendants to advance
further funds to complete the development of Granite Hill II was
to be released by the Restructuring Agreement. 4. Extension of Credit by Boston Five
As consideration for the benefits it received under the
Restructuring Agreement, Boston Five agreed to loan additional
funds to the plaintiffs and to modify the terms of several of its
existing loans. Specifically, Boston Five agreed: (i) to make
new loans of $434,381 (the "stabilization loan") and $137,074
("the additional stabilization loan") to the individual
plaintiffs; (ii) to modify the terms of the $262,500 Shops Note;
(ill) to modify the terms of a loan of $252,000 from GHA to Flags
which had been pledged to Boston Five to secure a loan of the
same amount from Boston Five to GHA (collectively "the tax
loan"); and (iv) to extend the terms of the Boston Five's loans
to Granite Hill Trust by 24 months and defer the payment of
interest on the loans until the notes became due.
E. The Commencement of Litigation
The parties were unable to resolve their differences after
executing the Restructuring Agreement. As a result, plaintiffs
commenced this litigation in July 1990, shortly after Province
Street took control of GHA and discharged Granite Hill Realty as
the broker for Granite Hill I . II. DISCUSSION
Plaintiffs claim that the Restructuring Agreement violates
the anti-tying provision of the Home Owners' Loan Act ("HOLA"),
12 U.S.C.A. § 1464(g)(1) (West Supp. 1993) ("§ 14 64(g)(1)"),1
which provides that:
A savings association may not in any manner extend credit, lease, or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition or reguirement-- (A) that the customer shall obtain additional credit, property, or service from such savings association, or from any service corporation or affiliate of such association, other than a loan, discount, deposit, or trust service; (B) that the customer provide additional credit, property, or service to such association, or to any service corporation or affiliate of such association, other than those related to and usually provided in
Plaintiffs have withdrawn a similar claim based upon the anti-tying provision of the Bank Holding Company Act Amendments of 1970, 12 U.S.C.A. § 1972 (West 1989). Further, to the extent that plaintiffs continue to argue that Province Street is liable for an anti-tying violation, I reject this argument and dismiss the anti-tying claim against Province Street pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Province Street is merely a service corporation. Accordingly, it cannot be liable for an anti-tying violation because only savings associations are subject to liability under § 1464(g)(1). C f . BC Recreational Indus, v. First Nat'l. Bank, 639 F.2d 828, 831, n.7 (1st Cir. 1981) (reserving judgment on whether a subsidiary corporation of a bank can violate 12 U.S.C.A. § 1972 by acting as the bank's agent).
10 connection with a similar loan, discount, deposit, or trust service; and (C) that the customer shall not obtain some other credit, property, or service from a competitor of such association, or from a competitor of any service corporation or affiliate of such association, other than a condition or requirement that such association shall reasonably impose in connection with credit transactions to assure the soundness of credit.
In claiming a violation of § 1464(g)(1), plaintiffs rely on
subsection B of the statute and identify two types of property
interests that the Restructuring Agreement required them to
surrender in exchange for additional credit.2 The first such
2 Plaintiffs also argue that Boston Five violated § 1464(g)(1)(A) by requiring in the Restructuring Agreement that WDI assume most of Province Street's interest in the Granite Hill Trust. I reject this argument for two reasons. First, this aspect of the transaction was not compelled by Boston Five as a "condition or requirement" of the extension of further credit because Province Street was free to withdraw from the partnership without first obtaining W D I 's permission. While Province Street may have subjected itself to liability by unilaterally withdrawing from the partnership, it is the release of that liability rather than the assumption of Province Street's interest in the trust that was compelled by the Restructuring Agreement. Second, W D I 's assumption of a greater property interest in the Granite Hill Trust could not result in anti-tying damages because WDI thereby merely increased its control and beneficial interest in a valuable asset. It is instead the releases required by the Restructuring Agreement rather than the assumption of a greater property interest that may have resulted in anti-tying damages. Because such releases transfer property rights from plaintiffs to Boston Five and Province Street, this claim is more appropriately considered under § 1464(g) (1) (B) .
11 property interest is Flags' general partnership interest in GHA,
which was converted into a limited partnership interest by the
Restructuring Agreement. The second property interest consists
of the past and future claims against Boston Five and Province
Street which Flags, WDI, WDC, Granite Hill Realty, and Granite
Hill Trust, were reguired to release in the Agreement.
Plaintiffs contend that both aspects of the Agreement violate
§ 1464(g)(1) because the Agreement conditioned the extension of
additional credit to the plaintiffs upon their relinguishment of
these valuable property interests.3
Boston Five argues that it is not liable under § 1464(g)(1)
because the bargain it struck with the plaintiffs was a
"traditional banking practice" which is exempt from liability
under § 1464(g)(1). Plaintiffs respond by contending that a
banking practice cannot be traditional and, therefore, exempt
from § 1464(g)(1), unless the specific practice at issue is
rooted in tradition and widely practiced in the banking industry.
3 Plaintiffs do not contend that either the Joint Venture Agreement or the agreement creating the Granite Hill Trust violated § 1464(g)(1) by reguiring plaintiffs to surrender eguity in Granite Hill I and II in exchange for the credit needed to develop the projects. Rather, it is the adjustments to these interests in the Restructuring Agreement which form the basis for plaintiffs' anti-tying claim.
12 Because the Restructuring Agreement affected Boston Five in its
capacity as a joint venture partner, plaintiffs argue that the
Agreement cannot be considered traditional unless such joint
ventures are themselves traditional. Accordingly, they oppose
summary judgment by relying on expert testimony that lenders have
not traditionally and do not commonly engage in joint ventures
with their customers. In evaluating this argument, I first
determine the limits of the traditional banking practice
exemption by considering the language of § 1464(g)(1), its
legislative history, and several decisions interpreting the bank
anti-tying laws. I then apply the exemption to the facts of this
case.4
4 I use the following standard of review in assessing defendants' motion: summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). A "genuine" issue is one "that properly can be resolved only by a finder of fact because [it] may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); accord Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir. 1990). A "material issue" is one that "might affect the outcome of the suit . . . ." Anderson, 477 U.S. at 248. The burden is upon the moving party to aver the lack of a genuine, material factual issue, Finn v. Consol. Rail Corp., 782 F.2d 13, 15 (1st Cir. 1986), and the court must view the record in the light most favorable to the non-movant, according the non-movant all beneficial inferences
13 A. The Traditional Banking Practice Exemption
It is axiomatic that the process of statutory construction
begins with an examination of the text. Ardestani v. INS, 112 S.
C t . 515, 519 (1991). Meaning, however, will rarely be found by
examining isolated statutory phrases. Instead, "[i]n expounding
a statute, we must not be guided by a single sentence or member
of a sentence, but look to the provisions of the whole law, and
to its object and policy." Kelly v. Robinson, 479 U.S. 36, 43
(1986) (guoting Offshore Logistics, Inc. v. Tallentire, 477 U.S.
207, 221 (1986) (in turn guoting Mastro Plastics Corp. v. NLRB,
350 U.S. 270, 285 (1956) (in turn guoting United States v. Heirs
of Boisdore, 8 How. 113, 122 (1849)))). Moreover, where
statutory terms are ambiguous when considered in context, it is
appropriate to turn to clearly expressed statements of purpose in
a statute's legislative history for direction. See Ardestani,
112 S. C t . at 520. Thus, in construing the statute at issue in
the present case, I first consider the text of the specific
exemption upon which Boston Five relies in the context of the
discernable from the evidence. Oliver v. Digital Equip. Corp., 846 F.2d 103, 105 (1st Cir. 1988). If a motion for summary judgment is properly supported, the burden shifts to the non movant to show that a triable issue exists. Donovan v. Aqnew, 712 F .2d 1509, 1516 (1st Cir. 1983).
14 statute as a whole. I will turn to other potential sources of
meaning only if the language of the statute is ambiguous.
1. The Text
Section 1464(g) (1) prohibits certain tying, reciprocal
dealing, and exclusive dealing arrangements. The restrictions on
each type of arrangement are described in separate subsections,
and each subsection has its own exemption. Subsection A exempts
tying arrangements involving only a "loan, discount, deposit, or
trust service." Subsection B exempts reciprocal dealing
arrangements that are "related to and usually provided in
connection with a similar loan . . . ." Finally, Subsection C
exempts exclusive dealing arrangements that are "reasonably
impose[d] in connection with credit transactions to assure the
soundness of credit." These three exemptions collectively
provide the textual basis for the traditional banking practice
exemption. Since plaintiffs allege a violation of Subsection B,
Boston Five's traditional banking practice claim must be
evaluated under the exception for reciprocal arrangements that
are "related to and usually provided in connection with a similar
loan . . . ."
Plaintiffs plausibly suggest that a reciprocal dealing
arrangement is exempt from the bank anti-tying laws only if the
15 property interest at issue is identical to other such interests
that lenders traditionally and commonly require borrowers to
surrender in exchange for additional credit.5 Another, equally
plausible interpretation of the exemption, however, looks to the
general nature of the property interest transferred in exchange
for additional credit. Under this interpretation, a property
interest would be "related to and usually provided in connection
with a similar loan" if a similarly situated lender would
normally require its borrowers to surrender a property interest
of that general type in exchange for the additional credit.
Since the text of the exemption does not unambiguously require
either interpretation, I turn to the statute's legislative
history and other judicial interpretations of the exemption to
determine which of these potential meanings more closely serves
the statute's overall object and policy.
2. Legislative History
Section 1464(g)(1) was enacted as part of The Thrift
Institutions Restructuring Act of 1982 ("TIRA"). See H.R. 6267,
97th Cong., 2d Sess., 96 Stat. 1469, 1503 (1982). It is derived
5 Neither side attempts to support its position by arguing from the text of § 1464(g)(1). Thus, I infer plaintiffs' interpretation of the text from their other arguments.
16 from an anti-tying provision added in 1970 as an amendment to the
Bank Holding Company Act ("BHCA"). See H.R. 6778, 91st Cong.,
2nd Sess., 84 Stat. 1760, 1766-67 (1970). Prior to the adoption
of TIRA, savings institutions were subject to BHCA's anti-tying
provision. See 12 U.S.C.A. § 1841(C) (West 1980) (amended 1982)
(defining "bank" as used in BHCA's anti-tying provision to
include savings associations). TIRA removed savings associations
from coverage under BHCA and adopted an almost identical anti-
tying provision for savings associations in § 1464(g) (1) . See
H.R. 6267, 97th Cong., 2d Sess., 96 Stat. 469, 1503-04 (1982).
As TIRA's legislative history demonstrates, the similarity
between TIRA's anti-tying provision and BHCA's anti-tying
provision was not coincidental. See S. REP. No. 536, 97th Cong.,
2d Sess., 13 reprinted in 1982 U.S.C.C.A.N. 3054, 3109 ("[t]his
provision applies the anti-tying restrictions to Federal thrifts
in a manner generally comparable to the anti-tie-in provision
applicable to bank holding companies under the Bank Holding
Company Act of 1956, as amended"). Thus, courts construing
§ 1464(g)(1) have generally treated it as eguivalent to BHCA's
anti-tying provision. Integron Life Ins. Corp. v. Browning, 989
F.2d 1143, 1550 (11th Cir. 1993); Bruce v. First Fed. Sav. & Loan
Ass'n of Conroe, 837 F.2d 712, 716 (5th Cir. 1988); Tri-Crown,
17 Inc. v. American Fed. Sav. & Loan Ass'n, 908 F.2d 578, 582 (10th
Cir. 1990) .
BHCA's anti-tying provision was added as a Senate Committee
amendment to the bill that became the 197 0 Amendments to the
BHCA. H.R. CONF. REP. No. 1747, 91st Cong., 2d Sess., reprinted
in 1970 U.S.C.C.A.N. 5561, 5579. The purpose of the provision,
like its antitrust antecedents, was "to prohibit anti-competitive
practices which reguire bank customers to accept or provide some
other service or product or refrain from dealing with other
parties in order to obtain the bank product or service they
desire." S. REP. No. 1084, 91st Cong., 2d Sess., reprinted in
1970 U.S.C.C.A.N. 5519, 5535;6 see also, B.C. Recreational, 639
F.2d at 831. However, unlike the antitrust laws, which also
apply to credit tying arrangements, the proposed anti-tying
amendment broadly proscribed tying, reciprocal dealing, and
exclusive dealing arrangements without reguiring proof of
economic power or a significant effect on commerce. S. REP. No.
1084, 91st Cong., 2d Sess., reprinted in 1970 U.S.C.C.A.N. 5519,
5558 (supplementary views of Senator Brooke) ; see also, Integron,
6 The Senate report describing TIRA's anti-tying provision contains a similar expression of purpose. S. REP. No. 536, 97th Cong., 2d Sess., reprinted in 1982 U.S.C.C.A.N. 3054, 3071.
18 989 F.2d at 1150; Costner v. Blount Nat'l. Bank of Maryville, 578
F.2d 1192, 1196 (6th Cir. 1978). As a result, substantial
concern was expressed that the amendment might prohibit many
established banking practices that had no adverse effect on
competition. S. REP. No. 1084, 91st Cong., 2d Sess., reprinted
in 1970 U.S.C.C.A.N. 5519, 5546-49 (supplementary views of
Messrs. Bennett, Tower, Percy and Packwood).
In an effort to address these concerns, the authors of the
amendment proposed that the Federal Reserve Board be given the
power to create exemptions consistent with the statute's overall
purpose. Id. at 5535. This proposal did not provide enough
protection to the banking industry for Committee members Bennett,
Tower, Percy, and Packwood, however, who noted in supplementary
views that "[a]n amendment is in order to show that the purpose
of this section is to prohibit only those tying arrangements
whose effect may be to lessen competition or tend to create
monopoly in any type of credit or property transactions or in any
type of services and which is engaged in by a bank, a bank
holding company, or any subsidiary of a bank holding company."
Id. at 5542-48 (supplementary views of Messrs. Bennett, Tower,
Percy and Packwood).
19 In a floor amendment several months later, these same
senators attempted to address the weakness they perceived in the
bill. However, rather than including a statement of purpose to
guide the Federal Reserve Board in developing exemptions, their
amendment added the three specific exemptions which we now know
collectively as the traditional banking practice exemption. See
CONG. RFC. 532,125 (Sept. 16, 1990). The exemptions were later
included in substantially the same form in TIRA.
In summary, the legislative history of § 1464(g) (1) and its
predecessor, 12 U.S.C. § 1972, demonstrate that the bank anti-
tying laws were intended to deter lenders from engaging in anti
competitive practices. Moreover, the three exemptions which are
now known collectively as the traditional banking practice
exemption were intended to be construed to permit legitimate
banking practices that have no anti-competitive effect. Finally,
while the language of each of the three exemptions differs in
small respects to account for the nature of the arrangement to
which each exemption applies, there is no suggestion in the
legislative history that Congress intended different standards to
apply to the three exemptions. To the contrary, this history
establishes that the three exemptions were enacted at the same
time to achieve the same result.
20 3. Judicial Interpretation
The appellate courts that have addressed this issue have
construed the statute consistently with its legislative history
to prohibit only anti-competitive practices. In B.C.
Recreational, a borrower challenged its lender's reguirement that
the borrower surrender management control of its business to a
person designated by the lender in exchange for additional
credit. In rejecting the borrower's argument that the
arrangement violated the reciprocal dealing restrictions of
BHCA's anti-tying provision, the First Circuit Court of Appeals
first held that the lender's reguirement was not a true
reciprocal dealing arrangement because the person the lender had
placed in charge of the borrower's business had no financial ties
to the lender and thus no "additional credit, property, or
service" was provided to the lender in exchange for the
additional credit. Id. at 832. Alternatively, the court held
that "the arrangement complained of falls within the range of
appropriate traditional banking practices permissible under the
Act." Id. In reaching this conclusion, the court did not
examine the text of the specific exemption created for reciprocal
dealing arrangements. Nor did it discuss whether the arrangement
at issue was common in the banking industry. Instead, the court
21 looked broadly to the effect of the arrangement. Because it
determined that it protected the bank's interest in its
investment, the court concluded that the arrangement came within
the scope of the traditional banking practice exemption. Id.
Thus, the court summarized the basis for its ruling by stating
that "the pleadings do not admit of a claim that the actions of
the Bank or FNB [the Bank's affiliate] were intended to or
resulted in the lessening of competition or encouragement of
unfair competitive practices . . . ." Id.
The Eleventh Circuit Court of Appeals also broadly
interpreted the traditional banking practice exemption in Parsons
Steel v. First Alabama Bank of Montgomery, 679 F.2d 242 (1982).
There, a lender had conditioned additional credit upon the
borrower's agreement to change corporate management and majority
stock ownership. A trial was held on the lender's anti-tying
claim and the jury returned a verdict for the borrower. In
challenging the district court's award of judgment N.O.V. to the
lender, the borrower argued that the arrangement at issue was not
a traditional banking practice because the jury had found that it
was "unusual" for a bank to reguire a borrower to change its
management and ownership in exchange for additional credit. The
Court of Appeals rejected this contention because it concluded
22 that the borrower had proposed an overly narrow definition of the
traditional banking practice exemption. Instead, the court
interpreted the exemption in light of the legislative purpose of
the anti-tying provision and concluded that "[u]nless the
'unusual' banking practice is shown to be an anti-competitive
tying arrangement which benefits the bank, it does not fall
within the scope of the Act's prohibitions." Id. at 245.
Applying this standard, the court affirmed the district court's
decision because "there [was] no evidence that the bank would
benefit in any way other than by getting additional protection
for its investment." Id. at 246.
Finally, in Tose v. First Pennsylvania Bank, 648 F.2d 879
(1981), the Third Circuit Court of Appeals also broadly construed
the exemption in rejecting a borrower's argument that an
agreement tying additional credit to the borrower's
relinguishment of control over his business violated the bank
anti-tying laws. Here, the court observed that:
Imposition of financial controls over the Eagles [the security for the bank's prior loans] was directly related to maintaining the security of [the bank's] substantial investment, and the bank's demand cannot be considered unusual in the face of substantial evidence that it had good reasons to be concerned about the loan. As the district court held in Sterling Coal Co., Inc. v.
23 United American Bank in Knoxville, 470 F. Supp. 964, 965 (E.D. Tenn. 1979), "[t]he Act does not prohibit attempts by banks to protect their investments."
Id. at 897; see also RAE v. Union Bank, 725 F.2d 478, 480 (9th
Cir. 1984) (a complaint merely alleging that the extension of
credit was tied to various provisions designed to protect the
bank's security does not state a bank anti-tying claim); cf.
Bruce, 837 F.2d at 718 (declining to dismiss a bank anti-tying
claim simply because the complaint does not allege that the tying
arrangement was anti-competitive). Thus, all of the circuit
courts that have construed the traditional banking practice
exemption have concluded that the exemption should be construed
broadly in light of the purpose that the bank anti-tying laws
were designed to achieve.
4. Analysis
As I have already noted, the bank anti-tying laws were
intended to prohibit anti-competitive tying, reciprocal dealing,
and exclusive dealing arrangements without reguiring proof of
market power and a substantial effect on commerce. However,
while Congress intended to prohibit anti-competitive banking
practices when it enacted the anti-tying laws, it was egually
concerned that exemptions were needed to allow banks and savings
24 associations to continue to engage in lending practices that have
no adverse effect on competition. As a result, the three
specific exemptions now collectively known as the traditional
banking practice exemption were added as an amendment to address
this concern.
If, as plaintiffs suggest, the reciprocal dealing exemption
applies only in cases where lenders commonly and traditionally
reguire borrowers to surrender the specific property interest at
issue in exchange for additional credit, the bank anti-tying laws
would be over-inclusive -- they would preclude many newly
established banking practices which serve legitimate banking
interests without adversely affecting competition. This narrow
reading of the exemption would be devastating to both borrowers
and lenders, particularly in the loan workout context where the
creativity of the participants is routinely tested by the
borrower's need for additional credit and the lender's desire to
protect an already endangered investment.
A reading of the exemption that focuses on the general
nature of the reciprocal dealing arrangement at issue rather than
the specific property interest transferred in exchange for
additional credit is preferable to plaintiffs' more narrow
reading for several reasons. First, it construes the reciprocal
25 dealing exemption harmoniously with the other two components of
the traditional banking practice exemption which focus on the
nature and effect of the transaction at issue rather than whether
a particular practice was traditional in the banking industry.
Compare 12 U.S.C. § 1464(g)(1)(B) with 12 U.S.C. § 1464(g)(1)(A)
(exempting all tying arrangements involving a "loan, discount,
deposit, or trust service") and 12 U.S.C. § 1464(g)(1)(C)
(exempting all exclusive dealing arrangements that are
"reasonably impose[d] in connection with credit transactions to
assure the soundness of credit"). Second, this interpretation
more closely serves the clearly expressed legislative purpose
that the anti-tying laws should prohibit only anti-competitive
banking practices. Finally, it is consistent with the broad
reading of the exemption which I believe is mandated by the First
Circuit's opinion in B.C. Recreational and the other circuit
courts that have addressed the issue. Thus, I conclude that a
reciprocal dealing arrangement will be protected under the
traditional banking practice exemption if a similarly situated
lender would normally reguire its borrowers to surrender a
similar type of property interest in exchange for additional
26 credit.7
With this definition of the exemption in mind, I now
consider whether this issue is capable of being resolved on a
motion for summary judgment.
B. Application
Plaintiffs oppose defendants' motion for summary judgment
primarily by relying on testimony to be provided by their expert
witness, Robert Wheeler. Wheeler has the following to say on the
subject of joint ventures involving banks and real estate
developers:
There appears to have been little involvement in real estate joint ventures by Massachusetts or New Hampshire banking institutions prior to 1984 or 1985. . . . In part to avoid usury problems, however, some banks did in fact take eguity positions in real estate developments during the mid- 1980's. However, these positions were relatively few in number . . . . By the end of 1987 or early 1988, the real estate market had begun to soften and few, if any, were begun after that time. I would thus characterize the real estate joint venture as a flash in the pan, and certainly not characteristic of traditional banking
7 While this broad reading of the exemption may well shield many ill-advised or even tortious reciprocal dealing arrangements from claims under the anti-tying laws, a plaintiff remains free to challenge such arrangements by relying on some other legal theory.
27 practice . . . ."
Letter from Robert N. Wheeler to Jamie N. Hage dated April 2,
1992. According to plaintiffs, this testimony gives rise to a
genuine factual dispute concerning the material issue of whether
the Restructuring Agreement's reciprocal dealing provisions
gualify as traditional banking practices. Plaintiffs contend
that this is so because Wheeler's testimony demonstrates that the
Agreement alters the parties' interests in existing arrangements
which are not themselves traditional in the banking industry.
Although I accept for purposes of argument plaintiffs' contention
that a genuine dispute exists as to whether lenders have
traditionally involved themselves in joint ventures with their
borrowers, I reject their contention that this dispute is
material to the outcome of this case.
As I have already determined, a reciprocal dealing
arrangement may gualify as a traditional banking practice even if
lenders do not ordinarily reguire their borrowers to transfer the
specific property interest at issue in exchange for additional
credit. Instead, even a novel reciprocal dealing arrangement may
be entitled to protection under the exemption if a similarly
situated lender would commonly reguire arrangements of that
general type to protect its interest in the security it holds for
28 a troubled loan. At most, Wheeler's testimony establishes that
banks and savings institutions such as Boston Five did not
routinely engage in joint venture agreements with their
borrowers. The testimony has no bearing on the issue of whether
the control Flags was reguired to surrender in GHA and the
releases the plaintiffs were reguired to provide are of a general
type that borrowers are routinely reguired to surrender in a loan
workout context in order to obtain additional credit. Because
plaintiffs' evidence fails to demonstrate that a triable issue
exists on this guestion, they cannot successfully resist
defendants' motion for summary judgment.
Although Plaintiffs correctly allege that the Restructuring
Agreement reguired them to transfer a portion of Flags' interest
in GHA to Province Street, the only effect of that portion of the
agreement was to allow Boston Five, through Province Street, to
insure that GHA was managed so as to maximize Boston Five's
chances of recovering on its delinguent loans. Flags retained
its right to share egually in any profits that GHA might generate
in the future under the Restructuring Agreement.8 Thus, the only
8 The fact that the Restructuring Agreement reguired Flags to postpone its right to profits until the end of the project is so common in the loan workout context that this aspect of the
29 thing it lost by surrendering its property interest in GHA was
control over GHA's management. This aspect of the Agreement is
indistinguishable from other cases, including B.C. Recreational,
in which a lender's demand that its borrower surrender control of
a project to a third party in exchange for additional credit was
found to be a traditional banking practice. See, e.g., B.C.
Recreational, 639 F.2d at 832; see also, e.g.. Parsons Steel, 679
F.2d at 24 6; Tose, 648 F.2d at 897; see also Dennis v. First
National Bank of Westville, 868 F.2d 206, 209 (7th Cir.), cert.
denied, 493 U.S. 816 (1989) (reguirement that borrower agree to
sell business in exchange for additional credit is a traditional
banking practice).
Although it might be argued that B.C. Recreational is
distinguishable from the present case because there the
controlling party had no financial ties to the lender, whereas
here Province Street is owned by Boston Five, I do not find this
distinction to be meaningful. In B.C. Recreational, the court
reached the traditional banking practice issue even though it
also concluded that the claims should be dismissed for the
alternative reason that the absence of financial ties between the
agreement is not even addressed by the plaintiffs in their memoranda opposing summary judgment.
30 lender and the third party placed in charge of the business
precluded any argument that a tying arrangement even existed.
B.C. Recreational, 639 F.2d at 832. The court's willingness to
consider the traditional banking practice issue under these
circumstances strongly suggests that the existence of financial
ties between the lender and the entity placed in control of the
business is irrelevant to the issue of whether an agreement to
surrender control of a business gualifies under the exemption as
a traditional banking practice.
Plaintiffs have also failed to demonstrate that a triable
issue exists with respect to defendants' claim that the releases
reguired under the Restructuring Agreement gualify as a
traditional banking practice. Defendants have produced
substantial unrebutted evidence that similarly situated lenders
almost always reguire releases when negotiating agreements to
provide additional credit to delinguent lenders. Such releases
have the effect of allowing lenders to advance additional sums on
troubled loans while at the same time protecting their existing
security for the loans. Moreover, it is entirely consistent with
the purpose of the bank anti-tying laws for a lender to reguire
such releases because they are devoid of anti-competitive effect.
Finally, a release does not become nontraditional merely because
31 it limits potential claims that may exist against the lender and
its affiliate in their alleged capacities as both lender and
eguity partner. No reasonable lender would advance additional
funds to a borrower unless the borrower is willing to set aside
all potential claims that may arise from the relations between
the parties concerning the development loans.
In summary, the unrebutted evidence in this case establishes
that Boston Five entered into the Restructuring Agreement to
protect its investment in Granite Hill I and Granite Hill II.9
By reguiring Flags to surrender control of GHA, and by reguiring
plaintiffs to release any potential claims against Boston Five
and its affiliate in exchange for additional credit, Boston Five
was merely imposing reguirements that were "related to and
usually provided in connection with a similar loan." As such,
their actions are exempt from § 1464(g)(1) and they are entitled
to summary judgment with respect to plaintiffs' anti-tying
9Plaintiffs argue that Boston Five conceived of the Restructuring Agreement in an effort to replace Flags and WDI as the developer for Granite Hill I and Granite Hill II. I find no support for this argument in the record, even when the record is construed in the light most favorable to plaintiffs.
32 claim.10
III. CONCLUSION
For the reasons described herein, plaintiffs' anti-tying
claim against Province Street is dismissed for failure to state a
claim. Summary judgment is awarded to Boston Five with respect
to Count I of the Complaint. Accordingly, Defendants' Motion for
Summary Judgment (document no. 85) is granted.
SO ORDERED.
Paul Barbadoro United States District Judge
September 30, 1993
cc: Jamie N. Hage, Esg. Robert Ketchand, Esg. Bruce Topman, Esg. Donald Elliott, Esg. James Muirhead, Esg. Thomas Richards, Esg.
10In light of my ruling on this issue, it is not necessary to address the remaining arguments defendants make in support of their motion for summary judgment.