Note: AGEM Management Services, LLC and Tangi East, LLC (Bond Issuers) sold variable rate demand notes (VRDNs) to investors to finance corporate real estate development. Bond Issuers were responsible for making variable rate payments of interest and principal to the VRDN purchasers. Whitney National Bank (Issuing Bank) issued an irrevocable standby letter of credit as security for the repayment of the VRDNs. After the bonds were issued, Issuing Bank encouraged Bond Issuers to enter into Interest Rate Swap Agreements (Swap Agreements) with First Tennessee Bank National Association (Creditor). Bond Issuers agreed to pay Creditor a fixed interest rate on the debt in exchange for Creditor's payment on the variable interest of the debt in an attempt to safeguard against rising interest rates.

Bond Issuers subsequently sued Creditor for breach of contract, fraudulent suppression, breach of fiduciary duty, misrepresentation, and civil conspiracy. On Creditor's motion, the United States District Court for the Eastern District of Louisiana, Milazzo, J. dismissed the action for failure to state a claim upon which relief can be granted.

Bond Issuers alleged that Issuing Bank and Creditor operated under a fee sharing agreement under which Creditor would pay a one-time referral fee to Issuing Bank. Bond Issuers alleged that Issuing Bank acted as Creditor's agent and knowingly made false representations to induce the Swap Agreements. Bond Issuers also alleged that Creditor withheld material information at the time of the Swap Agreements. Bond Issuers asserted that their injury was related to two misrepresentations:

(1) Issuing Bank's "representation that the interest rate swaps would have the effect of converting the variable rates that [Issuing Bank and Creditor] owed on their VRDN bonds into fixed interest rates, thereby eliminating the interest rate risk associated with their VRDNs" and

(2) Creditor "failure to disclose that an impairment on [Issuing Bank's] Letter of Credit underlying each of the VRDN issuances would likely increase the interest rates [Bond Issuers] had to pay on the VRDN bonds, thus resulting in higher borrowing costs". Bond Issuers argued that absent these misrepresentations, they would not have entered into the Swap Agreements with Creditor.

The Judge found that the statute of limitations for the fraud and civil conspiracy actions under Louisiana law was one year from the date that the party claiming the fraud or civil conspiracy should have known of the fraudulent act that harmed them. The Judge noted that Bond Issuers did not bring suit until 2012 even though they sustained damage from Issuing Bank and Creditor as early as 2008. Therefore the Judge dismissed the fraud claims with prejudice.

Bond Issuers also argued that Creditor owed owed them a fiduciary duty. Bond Issuers "contend[ed] that in this capacity [Creditor] had a duty to set the interest rates at the lowest possible rate and had a duty to maintain the Swap and VRDN ratesetting so that the represented 'fixed rate' would be achieved." Creditor responded by stating that the Louisiana Credit Agreement Statute (LCAS) applied because they "extended a financial accommodation to [Bond Issuers]... in the form of an interest rate swap which [Bond Issuers] used to hedge against the risk of interest rate fluctuations on their VRDNs" and that under the LCAS there could be no implied fiduciary relationship. Creditor also argued that the agreement between the parties expressly disavowed any fiduciary relationship.

The Judge agreed with Creditors, finding that pursuant to the LCAS and the agreement between the parties there was no fiduciary duty and, even if there were such a duty present, Bond Issuers' claim would still be invalid on account of the expiration of the statute of limitations. The Judge declined to extend the doctrine of contra non valentum* to extend the statute of limitations because Bond Issuers had been on notice of the perceived harm since 2008.


* The principle that the limitations statute does not begin to run against a plaintiff who was unable to act because of a culpable act of the Defendant, e.g., concealing material information.


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.