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Sweely Holdings, LLC v. SunTrust Bank

Supreme Court of Virginia

November 21, 2018



          PRESENT: Lemons, C.J., Mims, McClanahan, Powell, Kelsey, and McCullough, JJ., and Russell, S.J.



         SunTrust Bank ("SunTrust") made secured loans totaling $18.3 million to Sweely Holdings, LLC ("Sweely") and later sought to recover collateral when Sweely defaulted and threatened bankruptcy. The parties negotiated a Master Loan Modification and Forbearance Agreement ("Workout Agreement") that provided Sweely with another opportunity to pay its debt. When Sweely failed to do so, SunTrust took action against Sweely's collateral.

         In response, Sweely filed this suit against SunTrust, alleging, among other things, breach of contract, fraud in the inducement, and constructive fraud. The circuit court dismissed the case on demurrer, finding that the Workout Agreement defeated Sweely's breach of contract claim and that Sweely had failed to state a claim for any fraud. We agree and affirm.



         "Because this appeal arises from the grant of a demurrer, we accept as true all factual allegations expressly pleaded in the complaint and interpret those allegations in the light most favorable to the plaintiff." Coward v. Wellmont Health Sys., 295 Va. 351, 358 (2018). Though we "accept as true unstated inferences to the extent that they are reasonable, we give them no weight to the extent that they are unreasonable. The difference between the two turns on whether 'the inferences are strained, forced, or contrary to reason,' and thus properly disregarded as 'arbitrary inferences.'" Id. at 358-59 (emphases in original) (citations omitted). We also "distinguish allegations of historical fact from conclusions of law. We assume the former to be true arguendo, but we assume nothing about the correctness of the latter because 'we do not accept the veracity of conclusions of law camouflaged as factual allegations or inferences.'" Id. at 359 (emphasis in original) (citation omitted).


         1. The Failed Loan Transaction

         The Amended Complaint[1] alleges that, in 2008, Sweely and SunTrust engaged in an $18.3 million commercial-lending relationship to provide capital for the Sweely Holdings Estate Winery in Madison County, Virginia ("the Winery"). In addition to personal property at the Winery estimated to have a value of $2.5 million, Sweely offered four parcels of real property as collateral for the loans: (i) a horse farm in Florida appraised at $10 million; (ii) a mixed-use farm property in Madison County with a tax-assessed value of $1.5 million; (iii) the Winery in Madison County appraised at $16 million; and (iv) the Sweely family farm in Madison County appraised at $6.2 million.

         Sweely defaulted on these loans in May 2010. Pursuant to the loan documents, SunTrust seized $1.8 million of Sweely's cash assets from Sweely's Interest Reserve Account. After Sweely had declared its intention to seek bankruptcy protection, the parties entered into "discussions and negotiations regarding a workout of the loans." J.A. at 7. Sweely alleges that during one of those discussions in 2010, a SunTrust employee falsely stated that SunTrust had obtained appraisals of the four parcels that showed a collective fair market value of $10.5 to $13.5 million. Sweely asked for copies of these appraisals but did not receive them during the negotiations.

         At the time of this alleged misrepresentation, Sweely claims, SunTrust possessed appraisals estimating the collective worth of the parcels to be $22.8 million and had filed regulatory documents repeating this valuation. According to Sweely, SunTrust intended the misrepresentation as a subterfuge to deter Sweely from declaring bankruptcy because SunTrust would be able to seek relief from the automatic stay of collections imposed by bankruptcy law if the low appraisals were accurate and if SunTrust were an under-secured lender.

         The Amended Complaint concedes that "Sweely initially expressed doubt as to the accuracy of the appraisals"[2] but nevertheless alleges that Sweely "believed and relied on the misrepresentation that SunTrust possessed appraisals showing" a value of $10.5 to $13.5 million for the collateral and "further believed and relied on the misrepresentation that SunTrust could demonstrate to a court that there was a negative equity position on the loans." Id. at 9. The possibility that SunTrust could make that under-secured showing, Sweely alleges, caused it "not to file for bankruptcy, not to negotiate for more favorable workout terms . . ., and to enter into the Workout Agreement instead." Id.

         Pursuant to SunTrust's motion craving oyer, the circuit court admitted into the record four appraisals that SunTrust had obtained in 2010 and 2011. See supra note 2. The 2010 appraisals of the Winery, the family farm, and the Florida horse farm offered two alternative valuations: a "Market Value As Is," which assumed, for each separate property, a one- to four-year period of marketing and exposure, and a "Disposition Value," which assumed a one-year period of marketing and exposure. See J.A. at 124, 272, 383-84 (altering capitalization). The 2011 appraisal of the mixed-use property offered a single "Market Value 'As Is'" figure of $975, 000 and assumed a 12- to 18-month marketing and exposure period. Id. at 494, 498. Collectively, these alternative valuations ranged between $13, 550, 000 in "Disposition Value" for three of the four properties to $18, 715, 000 in "Market Value As Is" for all four properties. The appraisal reports also contained an assumption that there were no liens on the properties. See id. at 218, 358, 461, 500.

         2. The Workout Agreement

         The parties subsequently entered into the Workout Agreement, which stated that the obligors, including Sweely, had "requested that SunTrust Bank forbear from exercising its rights and remedies . . . to allow the Obligors time to either refinance the Loans and/or obtain equity investments in their businesses." Id. at 103. SunTrust made clear, however, that its agreement to forbear was conditional: "Without waiving any rights or remedies available to SunTrust Bank on account of the defaults recited above, SunTrust Bank is willing to grant the Obligors' request, provided that all of the Obligors comply with each of the terms, conditions and understandings contained in this Agreement." Id.

          The principal condition was Sweely's agreement to a "disposition schedule and incentive plan" that established "turnover" dates for each of the four properties by which Sweely would either make a specific cash payment to SunTrust or voluntarily convey the collateralized property to SunTrust. See id. at 110-12. Each property had a different turnover date: (i) November 5, 2010, for the Florida property; (ii) January 31, 2011, for the mixed-use property; (iii) March 31, 2011, for the Winery; and (iv) June 30, 2011, for the family farm. See id. at 110-11. The Workout Agreement also required SunTrust to prepare and deliver the deeds to the properties to Sweely for Sweely to execute if it could not make the required payments by each property's corresponding turnover date. See id. at 112. If Sweely did not make the required cash payments, but instead delivered the deeds, Sweely would receive a credit from each deed toward its overall debt, culminating in its release from all future liability. See id. at 110-11.

         For each of the properties, the disposition schedule provided that "SunTrust Bank may, immediately after such turnover date, schedule and conduct a foreclosure sale . . . which all of the Obligors agree shall be subject to the 'Friendly Foreclosure' provisions of Section 8.12 hereof." Id. at 110-12 (emphasis omitted). Titled "'Friendly Foreclosure' of Real Property Collateral Upon Expiration of Property-Specific Deadlines or Forbearance Default," Section 8.12 provided that the obligors would give "full cooperation with the commencement and continuation of any foreclosure action" against the collateralized properties. Id. at 116. The provision added:

In the event a Foreclosure Action is commenced (but only after a Forbearance Default under this Agreement), such cooperation shall include the present agreement of each Obligor that no Obligor will contest, object to, file injunctive relief with respect to, or otherwise hinder or delay any Foreclosure Action in any way, shape or form, and will not request, induce or influence other third parties to do so.

Id. Finally, Sweely represented in the Workout Agreement that it had not granted any liens on the properties that it had not "previously disclosed" to SunTrust. Id. at 106.

         When Sweely was unable to make the required payment by the turnover date applicable to the Florida property, it voluntarily conveyed that property to SunTrust pursuant to the Workout Agreement. As the January 31, 2011 turnover date for the mixed-use property approached, Sweely found itself unable to make the required payment. Sweely claims that it failed to convey the property by the turnover date because SunTrust refused to accept the property pursuant to a deed in lieu of foreclosure.

         Sweely alleges that SunTrust contacted a title-service company to review a deed in lieu of foreclosure for the mixed-use property. The title-service company, the Amended Complaint asserts, advised SunTrust that "it would be 'much safer' for SunTrust to foreclose on the Mixed-Use Property due to the existence of liens on the property" because "[u]nder Virginia law, certain liens would have been extinguished if the property was foreclosed on but not if it was transferred by deed." Id. at 15. SunTrust "immediately confirmed" to the title-service company that it "would not record a deed-in-lieu and would instead foreclose on the Mixed-Use Property." Id. at 16. For this reason, Sweely asserts, SunTrust elected to foreclose on the mixed-use property rather than accept a deed in lieu of foreclosure.

         As the March 31, 2011 turnover date for the Winery approached, Sweely again found itself unable to make the required payment. SunTrust stated that it would "forsake the Deed delivery requirement" and simply foreclose on the Winery instead. Id. at 19. SunTrust agreed to accept the deed in lieu of foreclosure for purposes of triggering Sweely's right to a credit and to relief from any deficiency obligations but would not record the deed. See id. at 19. Prior to the date of foreclosure, Revolution, LLC, a real-estate-investment firm, bought all of the Sweely promissory notes from SunTrust for an aggregate price of $7.5 million.[3] Sweely alleges that its debt balance at this time was "just in excess of" $9 million and that the value of the remaining collateral "was at least twice that amount." Id. at 22. Sweely later negotiated a final ...

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