Sun American Bank v. Fairfield Financial Services, Inc.

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

Set against the backdrop of a nationwide real estate collapse, this case presents a dispute between two banks to determine which will bear the risk of loss in a failed beachfront condominium development in north Florida. In November 2006, Defendant Fairfield Financial Services, Inc., (“Fairfield”) agreed to loan $21,840,000 (“the Construction Loan”) to fund the construction of a 14-unit luxury condominium project near Jacksonville, Florida. The Borrower was Acquilus III, LLC, a company wholly owned by Florida developer Herbert Lee Underwood. Underwood was an established customer of Fairfield and was the primary guarantor of the Construction Loan. At the time Fairfield originated the Construction Loan, its portfolio of loans to Mr. Underwood included three loans for the purchase of raw land, totaling $12,412,500.

To reduce its overall risk exposure in the Underwood relationship, Fairfield sold participation interests in the Construction Loan to several banks. One of those participant banks was a predecessor in interest to Plaintiff Sun American Bank (“Sun American”). In a Participation Agreement with Fairfield dated February 27, 2007, Sun American’s predecessor agreed to fund 16.056% of the Construction Loan, up to a maximum amount of $3,500,000. Sun American continued to fund its proportion of the monthly draws on the Construction Loan until April 9, 2008.

On April 21, 2008, Sun American learned for the first time that Fairfield had lowered the credit rating of the Construction Loan three times, between May 2007 and November 2007, because of the borrower’s declining liquidity. On May 15, 2008, Sun American notified Fairfield that it considered Fairfield’s failure to disclose the liquidity issues and the resulting credit rating changes to be a material default of the Participation Agreement and demanded that Fairfield repurchase the participation interest. Fairfield refused.

Sun American filed the present lawsuit on October 7, 2008, alleging breach of the disclosure requirements of the Participation Agreement and seeking to enforce the Agreement’s repurchase clause. In response, Fairfield has filed a counterclaim, alleging that Sun American breached the Agreement by failing to contribute to draw payments after April 2008. Both parties have filed motions for summary judgment.

Upon review of those motions, of the relevant legal authorities, and of the evidentiary materials in the record, the Court finds that there are no genuine issues of material fact and that Sun American is *1345 entitled to judgment as a matter of law. The evidence presented by the parties, as construed in the light most favorable to Fairfield, demonstrates that Fairfield failed to comply with the disclosure requirements of the Participation Agreement. Specifically, Fairfield breached Section 4 of the Participation Agreement when it failed to disclose material downgrades of its relationship with Underwood between May and November 2007. Fair-field further breached Section 10 of the Participation Agreement by failing to disclose known circumstances that could have a material, adverse effect on the Construction Loan. Upon notice of these breaches, Fairfield was obligated to cure or repurchase Sun American’s participation interest under Section 13 of the Participation Agreement. Fairfield also breached this obligation. For the reasons set forth in greater detail below, Sun American’s Motion for Summary Judgment (Doc. 25) is therefore GRANTED, and Fairfield’s Motion for Summary Judgment (Doc. 54) is DENIED. 1

I. FACTUAL BACKGROUND

The dispute in this case turns on the interpretation of the terms of the Participation Agreement, and the background facts of this case are essentially undisputed. Fairfield does not dispute that it changed its credit classification of the Construction Loan and its other Underwood loans three times in 2007. At the outset of the project, the Underwood relationship was classified as a level 4, or “acceptable” risk. Between May and November of 2007, the risk rating was changed three times, finally being rated a level 7, or “substandard” risk.

In May 2007, Fairfield reclassified the Loan from level “4” to level “5,” meaning that the Construction Loan would be placed on the bank’s watch list. In September 2007, the Construction Loan was again reclassified to level “6,” meaning that it was a “special mention loan.” In November 2007, Fairfield reclassified the Construction Loan a third time, to a level “7,” signifying a potential loss of principal and interest. Sun American did not learn of these changes in the credit rating until April 2008.

Each time Fairfield changed the classification, the change reflected increased credit risk on the credit relationship due to concerns about Underwood’s liquidity and ability to repay. Fairfield’s concerns were based largely on information obtained in its administration of its three land loans to Underwood, information that was not available to Sun American. Sun American did not learn about Underwood’s liquidity problems or the changes in the risk rating until April 2008, more than a year after these problems first became apparent to Fairfield. Fairfield contends that it had no obligation to disclose its risk rating changes or information arising from the administration of the land loans, in which Sun American was not a participant.

A. The Participation Agreement

The obligations of Fairfield and its Participating Banks were governed by a Participation Agreement provided by Fair-field. Stillman Dep. 42 (Doc. 30). A copy of the Agreement is attached to the Complaint as Exhibit A. Several provisions in the Agreement outline the responsibilities and obligations of Fairfield, as the Originating Bank, and of Sun American, as a *1346 Participating Bank. Generally, the Originating Bank is obligated to oversee and administer the loan, while the Participating Banks are responsible to make their own independent credit evaluations.

In the context of the Originating Bank’s duty to administer the Loan, the Agreement requires Fairfield to provide its Participating Banks with full disclosure of information related to the credit relationship. The Agreement’s disclosure requirements are primarily set forth in Sections 4, 10, and 11. These three provisions, read together, reflect an intent that Fairfield be completely open in communication to its participants.

In Section 4, Fairfield commits to provide written notice to the Participating Banks of any changes in the status of its credit relationship with the Borrower. In its entirety Section 4 provides:

4. Credit Condition of the Borrower(s); Access to Credit Information. It is understood and agreed that Participating Bank, and not Originating Bank, is responsible for making the ultimate credit decision through the Participating Bank’s own review of information pertaining to the Loan. Consequently, credit evaluation performed by Originating Bank must be independently verified and supplemented by Participating Bank’s review of individual Borrower(s) information with respect to each Loan, sufficient for Participating Bank to make its own credit decision with respect to its purchase of a Participation Interest in the Loan and to monitor the loan on an ongoing basis. In the event Originating Bank decides to terminate its credit relationship with a Borrower, or materially downgrades its relationship with a Borrower, Originating Bank will promptly provide written notice of such determination to Participating Bank.

Complaint, Ex. A ¶ 4 (Doc. 1) (bold in original, italics added). Much of the controversy in this case hinges on the definition of the term “downgrade,” which is not otherwise defined in the Agreement.

Section 10 of the Agreement imposes additional disclosure requirements on Fairfield. In Section 10, Fairfield agrees to notify its participants of any “default” by the Borrower. Section 10 provides, in its entirety:

10. Default by Borrower. Originating Bank shall promptly, after Originating Bank’s having knowledge thereof, inform Participating Bank of any circumstances (a “default ”) which in Originating Bank’s reasonable judgment: (a) constitute a material default under the Loan Documents and of the salient facts known to Originating Bank concerning such default; or (b) could have a material, adverse [effect] on the Loan or the value of the Collateral securing the Loan. Originating Bank shall keep Participating Bank fully informed with respect to such circumstances and any actions taken by Originating Bank in connection therewith.

Complaint, Ex. A ¶ 10. Section 10 specifically defines “default” to include not only actual default under the terms of the loan agreement, but also more broadly to include any circumstances that “could have a material, adverse effect on the Loan.” Fairfield is expected to keep its participants “fully informed” of such circumstances. The disclosure provisions of Section 10 are very broad, reflecting an intent to require complete openness by the Originating Bank.

The Agreement’s goal of complete openness and full disclosure is underscored in Section 11, which requires Fairfield to make its entire file available to the participants and to furnish participants with cop *1347 ies of all documents it receives. Section 11 provides:

11. Files and Records. Originating Bank shall keep and maintain at its offices, such files and records of matters pertaining to the Loan ... as it would were the Loan made solely by Originating Bank. All such files and records shall be available for inspection by Participating Bank or its agent during normal business hours. Originating Bank shall furnish to Participating Bank copies of the Loan Documents and all other documents and information Originating Bank shall receive from time to time, whether pursuant to the Loan Documents or otherwise relative to the Loan or the Borrower(s).

Complaint, Ex. A ¶ 11. Read as a whole, therefore, the Agreement reflects an intent to obligate the Originating Bank to keep its participants fully informed, essentially requiring Fairfield to provide the participants with as much information as Fair-field itself possesses. It does not in any way authorize Fairfield to withhold information pertinent to the Construction Loan.

The Agreement imposes duties on the Participating Banks as well. While Fair-field, as the Originating Bank, has the duty to keep its Participating Banks fully informed, the Participating Banks have a duty to exercise their own judgment and analysis of the Borrower’s creditworthiness. In the Agreement, therefore, Sun American represents and warrants “that it has done its own due diligence in identifying Borrower(s) and loan purposes, as well as underwriting the Loan made to Borrower(s) under its own lending criteria.” Agreement ¶2. The Agreement assigns the Participating Bank the responsibility to monitor the loan on an ongoing basis and to do its own independent credit evaluation in addition to the evaluation performed by Fairfield. Thus, the Agreement stipulates that “credit evaluation performed by Originating Bank must be independently verified and supplemented by Participating Bank’s review of individual Borrower(s) information.” Agreement ¶ 4. The Participating Bank “is responsible for making the ultimate credit decision through the Participating Bank’s own review of information pertaining to the Loan.” Id.

In the event of a breach by the Originating Bank, the Agreement provides a repurchase remedy to the Participating Bank. This remedy permitted Sun American to demand that Fairfield buy back its participation interest upon notice of default and opportunity to cure. With regard to breach, Section 13 of the Agreement provides:

13. Breach by Originating Bank. Participating Bank shall, in addition to all other remedies available to it at law or in equity, have the unilateral right (but not the obligation) to sell to Originating Bank, regardless of regulatory or self-imposed lending limits of Originating Bank, its Participation Interest for an amount equal to the aggregate of all principal, interest, fees and other sums due with respect to its Participation Interest, if:

a. Originating Bank shall fail to cure any default by Originating Bank under this Agreement within thirty (30) days after notice from Participating Bank specifying the default;

Participating Bank shall have the right to maintain an action for specific performance against Originating Bank to enforce Participating Bank’s rights under this Section 13.

Complaint, Ex. A ¶ 13. In the event of breach, then, the Agreement’s remedy provision allows Sun American to recover any principal it had previously advanced on the Construction Loan, along with accrued in *1348 terest on that principal and other funds advanced in connection with the Loan.

B. Fairfield’s Credit Rating System

Fairfield, like most banks, maintained a credit rating system to classify its loans according to risk. Stillman Dep. 27-28. Fairfield’s rating system used a scale of 1 to 10, with level 1 signifying zero risk and level 10 signifying a total loss. Id. at 28. At the time Fairfield approved the Loan for the Acquilus III project, the Loan was classified as a 4. Id. at 109. Fairfield’s Senior Vice President, Steven Stillman, explained that a level 4 credit “would be generally a middle market to small business, well-managed, [with an] established history, a history of profitability, but highly dependent upon bank credit.” Id. at 35-36. A level 4 credit rating reflects an “acceptable” level of risk, “nothing ... that can’t be managed.” Hunter Dep. 27 (Doc. 31). Stillman characterized the level 4 credit as “the bread and butter of the banking industry.” Stillman Dep. 36.

Each higher level of the rating system reflects a higher degree of risk to the bank. A level 5 classification, known as a “watch” rating, suggests “a slight weakness, but nothing that should result in any loss on the loan.” Hunter Dep. 27-28. A level 6 classification is known as a “special mention,” indicating a higher degree of risk due to changes in market conditions or the borrower’s status, but without an expectation of loss. Id. at 28. At level 7, a loan is considered “substandard.” A level 7 loan “has a very defined weakness that may or may not result in a loss.” Id. A loss may not be expected to any individual loan, but some losses will be expected among the bank’s entire portfolio of seven-rated credits. Stillman Dep. 39. A level 8 loan is classified as “doubtful,” with some loss expected, and a level 9 loan is considered a loss. Id. at 40. Level 10 reflects an actual charge-off of the loan. Id.

Fairfield reconsidered its risk ratings for loans on at least an annual basis. It also reconsidered risk ratings whenever warranted by circumstances such as a change in market conditions or a change in the condition of the borrower. Changes in the terms of credit, such as the extension of new loans to the same borrower, might also trigger reevaluation of the rating. In cases where Fairfield had a number of loans related to one person or entity, as in the case of its loans to Mr. Underwood’s businesses, Fairfield considered the entire group of loans to be a single credit relationship. Fairfield assigned its risk ratings to the relationship as a whole, rather than to the individual loans separately. Shearer Dep. 98 (Doc. 45).

C. Fairfield’s Relationship with Underwood

Based largely on its previous relationship with Underwood, Fairfield considered the Acquilus III project to be a good credit risk at the outset of the condominium project. Underwood was an experienced real estate developer and an established customer of Fairfield with a “proven track history of being able to build projects of this magnitude.” Id. at 104. Underwood personally guaranteed the loan, as did his development company, Eagle Development, Inc. Id. at 110. Prior to applying for the Acquilus III Construction Loan, Underwood had fully repaid three loans from Fairfield, including two construction loans in excess of four million dollars. Stillman Dep. Ex. 2 at 5. Moreover, the project itself had the promise of success, as Mr. Underwood had already obtained purchase commitments and deposits on half of the planned units in the building.

At the time Fairfield originated the Construction Loan, Underwood also had a high net worth and substantial liquidity. Fair-field’s financial statements showed that *1349 Underwood personally had liquid assets of only $30,000, consisting solely of cash. Stillman Dep. Ex. 2 p. 13. In addition to this cash, Underwood had $852,919 in a checking account with the Security Bank of Glynn County, an affiliate of Fairfield. Shearer Dep. 50-51, Ex. 42. This account was designated as an interest reserve to fund payments on Underwood’s various loans and was estimated to be sufficient to carry the debt for 1.25 years. Id. Fairfield also noted that Underwood expected to receive $1.3 million in net profits from the sale of units in the completed Acquilus II project. Hunter Dep. 51-53, Exs. 30, 31. The record does not show whether Mr. Underwood in fact realized those profits, but subsequent events suggest that he did not, or at least that the profits from the Acquilus II project were never available to apply towards Underwood’s other loans.

At the time Fairfield originated the Construction Loan, Underwood’s companies had three previous loans outstanding with Fairfield, all used for the purchase of raw land. These three loans are collectively referred to as “the land loans.” Loan number 8100240, known as the “Acquilus III land loan,” was a loan in the amount of $1,837,500 to pay for the purchase of the land on which the Acquilus III condominium project was to be built. Stillman Dep. Ex. 7. Loan number 8100243, known as the “Acquilus Waterfront Harbour loan,” was a loan in the amount of $6,075,000 to fund the purchase of a 5.62 acre site for another condominium project. Id. Loan number 8100324, known as the “Acquilus IV loan,” was a loan in the amount of $4,500,000 to pay for the purchase of yet another beachfront site. Id. All three loans were secured by the property they were used to purchase. Underwood was to pay the interest accruing on these loans from his own funds, then repay the loans at maturity by refinance into a development or construction loan. Underwood also personally guaranteed each of the loans.

The Construction Loan, loan number 8100241, was “substantially different in its structure and source of repayment from the raw land loans.” Stillman Dep. 134. Fairfield agreed to loan Acquilus III $21,840,000 to finance the construction of the condominium building on the property purchased through the Acquilus III land loan. These loan funds would be disbursed in monthly draws to cover the expenses of construction. The Construction Loan included an interest reserve, so that each monthly draw included an amount to pay interest on the Loan from loan funds. Id. at 136. The Loan was to be paid in full at maturity, upon completion of the construction, using funds obtained from sale of the condominiums or through refinance. Like the land loans, the Construction Loan was personally guaranteed by Underwood. Fairfield considered all four loans guaranteed by Underwood — the three land loans and the Construction Loan — to be a single relationship. Hunter Dep. 139. Fairfield assigned its risk ratings to the relationship as a whole, not to each loan separately. Id.

On November 16, 2006, Fairfield’s Directors Loan Committee approved the Construction Loan for the Acquilus III project. Stillman Dep. Ex. 3. At the same time, the Committee agreed to grant a six-month renewal on the Acquilus III land loan and on the Acquilus Waterfront Harbor loan. Id. The Committee also conducted its annual review of Mr. Underwood’s entire financing relationship and assigned a credit grade of “4-Acceptable.” Id.

Fairfield’s extensive relationship with Underwood required it to seek participants to provide additional funding for the Acquilus III project. Banks routinely sell participations on loans, in order to comply with legal lending limits or to avoid becoming “overly concentrated with one custom *1350 er or in one market or within one product type.” Stillman Dep. 44. Banking regulations limit exposure to any particular borrower to prevent negative impacts on a bank’s financial conditions. Hunter Dep. 35. In addition to the limits imposed by the regulation, Fairfield had its own internal hold limits, used to determine whether a loan had to be participated. Id. at 34. For the Acquilus III Construction Loan, Fairfield sold participations in the amount of $15,252,500, limiting its exposure to $6,587,500. See Stillman Dep. Ex. 7. Fair-field also sold participations in the Acquilus IV loan and the Acquilus Waterfront Harbor loan. Id.

Among the banks Fairfield solicited for participation in the Construction Loan was Sun American. 2 Fairfield’s Loan Sales Manager, Stacie Shearer, had primary responsibility for soliciting banks to purchase participation interests and for communicating with the Participating Banks. She had a connection with Reid French, a banker at Sun American whom she met while previously employed with another bank. Shearer Dep. 22. On December 4, 2006, Shearer sent an email to various potential participants, including Sun American. In her email, Shearer described the Acquilus III project and explained that the project’s principal, Underwood, “has been a customer of Fairfield Financial since 2001 and has proven to be a very experienced developer/contractor providing substantial strength with over $19MM in net worth and $882M in liquidity.” Id. Ex. 40. French responded the next day, stating that Independent was “in for $3.5mm,” and asking Shearer to “send over the financial material.” Id.

Underwood’s liquidity was an important consideration in Sun American’s decision to participate in the Construction Loan. The financial documents that Fairfield sent to Independent confirmed that Underwood had more than $882,000 in liquidity, including the designated interest reserve account. Id. 46, Ex. 41. Sun American’s Credit Approval Request shows that it considered recourse to the guarantor, Underwood, as the secondary repayment source, after the primary repayment through sale of condominium units. Garrett Dep. Ex. 4 p. 2. (Doc. 39). In its analysis of Underwood’s financial strength, Independent noted Underwood had cash in the amount of $882,919, including $852,919 at the Security Bank of Glynn County. Id. Ex. 4 p. 8. In its conclusion, the credit analysis lists the “[sjtrong liquidity and net worth of guarantor” as the first of the “[strengths relative to the credit.” Id. Ex. 4 p. 10.

Independent’s board approved the purchase of the participation interest on December 20, 2006. The Participation Agreement was not completed and closed, however, until February 27, 2007.

D. Problems in the Relationship

Despite the promising beginnings of the Acquilus III project, Fairfield began to experience problems in its relationship with the various Underwood enterprises even before Independent had closed on the Participation Agreement, as Underwood’s liquidity problems made it more and more difficult to meet his obligations on his various loans. These liquidity problems soon led Underwood to become delinquent on his payments on the three land loans. Fairfield changed the credit rating of the *1351 relationship three times between May and November 2007, first from a 4 to 5, then from a 5 to a 6, and finally from a 6 to a 7. Fairfield never informed Sun American of the early liquidity problems, the developing delinquencies on the three land loans, or the negative changes in its credit ratings.

At first, Underwood’s liquidity problems affected only the land loans, because the interest reserve on the Construction Loan made it possible for Acquilus III to pay the interest on the Construction Loan regardless of Underwood’s overall liquidity. Eventually, however, the liquidity problems became a problem for the Construction Loan as well, as Underwood was tempted to “rob Peter to pay Paul.” Still-man Dep. 156-57. Underwood began by seeking permission to use funds from the construction budget to pay the delinquent interest on his land loans. In the end, Peter was in fact robbed. In May 2008, shortly after Sun American notified Fair-field of its intent to withdraw its participation, Acquilus III took nearly $750,000 that was due to a concrete subcontractor and diverted it to unknown uses. The company submitted two forged lien releases purporting to show that the subcontractor had been paid. As of January 29, 2009, only $250,000 of that money had been recovered, and the subcontractor maintained a lien of $500,000 against the property. Stillman Dep. 233.

The first hint of trouble in the relationship occurred in February 2007, just four months after Fairfield approved the Acquilus III Construction Loan and before the parties executed the Participation Agreement. By the time Independent signed the Agreement, the $852,919 interest reserve account at the Security Bank of Glynn County had dwindled to nothing. On February 8, 2007, Tim Finney, a credit analyst at Fairfield noted in an email that Underwood had taken approximately $180,000 from the account and had used it to pay expenses and payroll related to the Acquilus III and Acquilus Waterfront Harbor projects. Stillman Dep. 124, Ex. 5. This left slightly less than $60,000 in the account, a situation Finney described as “not good.” Id. A week later, the account was empty. On February 13, 2007, Margaret Clay notified Finney in an email that Underwood had cashed another check in the amount of $60,000, and that the Glynn County account now showed a negative balance of (-$129.03). Shearer Dep. Ex. 50. Finney forwarded the email to Fair-field’s Vice Chairman, Jim DeWitt, who observed that it was “not good news.” Id. Despite the importance of the interest reserve account in the loan approval documents, Fairfield never informed Independent that the account had been cleaned out prior to the closing of the Participation Agreement. Shearer Dep. 75-76.

Underwood’s diminished liquidity led to the first reclassification of the risk rating in May 2007. On May 23, Finney sent another email to Janel Waters, who was at the time the relationship manager for the Underwood loans. Stillman Dep. 124-26, Ex. 6. In his email, Finney stated that he was sending an updated Loan Approval Form (“LAF”) for submission to Fair-field’s Directors Loan Committee, and noted that “We will downgrade Lee to a ‘5’ for the time being until his cash flow/liquidity improves.” Stillman Dep. Ex. 6.

The ensuing exchange among Finney, Waters, and fellow manager Jimmy Davis reflects concerns about the effect of this “downgrade” on Fairfield’s relationship with the participating banks. In her response to Finney, with a copy to Davis, Waters wrote, “I thought if we could show some cash we would leave him at a 4. If we take him to a 5 we might lose some participants and Jim 3 was very concerned *1352 about that.” Id. Waters and Davis then questioned whether Fairfield would be obligated to notify participants on the construction loan, given that the downgrade resulted from a renewal of a land loan. Waters concluded by stating, “I don’t know, but that was Jim’s concern when he called me after committee bitching about the fact that Lee doesn’t have any money — like he didn’t know.” Id. The relationship was downgraded to a 5 on May 30, 2007. See Hunter Dep. 60-61; Stillman Dep. Ex. 7.

As the spring of 2007 turned into summer, Underwood’s liquidity problems began to be manifest in his credit relationship with Fairfield, as he began to fall behind on interest payments on the land loans. On June 21, 2007, Finney emailed Underwood personally to notify him that the three land loans were past due. Still-man Dep. Ex. 8. On June 29, 2007, Fair-field prepared a Problem Loan Action Form (“PLAF”) to reflect that Underwood remained 24 days past due on the Acquilus IV loan and 28 days past due on the Acquilus Waterfront Harbour loan. Still-man Dep. Ex. 7.

As of July 10, Underwood still had not made the June payments for the Acquilus IV and Acquilus Waterfront Harbour loans. See Stillman Dep. Ex. 9. Janel Waters suggested that Underwood could use funds obtained as developer’s fees in a draw on the Construction Loan to pay the past-due interest on the land loans. Id. Waters further suggested that Fairfield freeze Underwood’s construction draws until the land loans were made current again, but there is no indication in the record that the Construction Loan was frozen at any time in the summer of 2007. Id. Stephen Stillman testified at his deposition that Waters was not competent to recommend freezing draws, but conceded that a loan more than thirty days past due was “a serious matter.” Stillman Dep. 145-49.

Correspondence from August 2007 indicates that Underwood was having difficulty paying his subcontractors on the Acquilus III project and was seeking to use funds from the Construction Loan to pay his interest on the land loans. On August 6, 2007, Fairfield’s draw and development manager, Bryan Barton, received an email from Patti Magnano on behalf of Acquilus III. See Stillman Dep. Ex. 11. Magnano wrote to request payment of the August draw. Barton responded that the draw was held up due to the Borrower’s failure to pay $100,000 to subcontractor EC Concrete. In response to Barton, Magnano explained, “The reason that EC Concrete has not been paid is because Janel Waters wanted us to pay the interest on the other loans that we have.” Id.

Magnano’s response touched off correspondence between Barton and Janel Waters about Underwood’s need to pay subcontractors out of the operating expenses or general conditions budget rather than out of the specific line items for subcontractors. Barton concluded the correspondence by expressing his concerns that Underwood’s problems in paying interest on his land loans would eventually impact his ability to pay the expenses of construction on the Acquilus III project:

Janel,

We are not going to get approval for this draw from our participants until we receive the lien release for the $100,000 from EC Concrete. EC Concrete is not going to give us a lien release until they get paid the $100,000 that they submitted with the previous draw, which will *1353 be coming from the general conditions on this current draw. I don’t like where Mr. Underwood is going with this. If he continues to draw from his general conditions to pay interest on other loans, eventually he will not be able to make payroll.

Id. Barton’s email is consistent with the concern expressed by Stephen Stillman, that Underwood’s declining liquidity would place him “in a position where he has to rob Peter to pay Paul.” Stillman Dep. 156— 57. Barton goes on to suggest that Fair-field fund upcoming construction draws from the deposits paid by condominium buyers, so as to “prevent us from upsetting some of our participants.” Stillman Dep. Ex. 11. Fairfield subsequently obtained permission from its escrow agent to take $818,676.14 from the deposits and apply it to the costs of the project. Id. Ex. 12. The record does not indicate that Sun American was ever notified of this transaction or of Underwood’s liquidity problems in July and August. See Stillman Dep. 157.

Despite the apparent use of Construction Loan funds to pay interest costs and the use of escrow funds to pay construction costs, Underwood again fell behind on his payments on the land loans. On August 27, 2007, Underwood was notified that his payments on the three land loans were between 22 and 27 days past due. Still-man Dep. Ex. 13. In a September 24, 2007 email to her supervisor, Janel Waters stated that the delinquencies were unlikely to be cleared by month-end. She therefore recommended taking the credit rating from a 5 to a 7. Stillman Dep. Ex. 16; Hunter Dep. 101. Jim DeWitt produced a new Problem Loan Action Form on September 27, by which time the three land loans were between 53 and 58 days past due. Stillman Dep. Ex. 15. Mr. DeWitt recommended changing the credit rating for the Underwood relationship from a 5 to a 6. Id. The Directors’ Loan Committee adopted DeWitt’s recommendation and approved the PLAF on October 4,2007. Id. Ex. 17. At that time, the Underwood loans were rated 6, or special mention. There is no indication in the record that Sun American was ever notified of this change or of the ongoing problems with the three land loans.

As Underwood’s liquidity declined and the three land loans fell further into delinquency, Fairfield proposed to remedy the situation by lending Underwood more money. As Stillman observed, Underwood was “asset rich and cash poor,” and the new loan was seen as a way to convert one of his assets into a temporary cash source. Stillman Dep. 164. The “Plan of Action” section of DeWitt’s September 27 PLAF states that Fairfield’s lending staff was “working on a new request to loan against an additional piece of collateral to provide working capital to Mr. Underwood.” Still-man Dep. Ex. 15.

This fourth land loan came to be known as the “Spoonbill Harbor” loan. Fairfield loaned Underwood $1,560,000, secured by a 3.25 acre tract appraised at $2.4 Million. The proceeds of this loan were to be used to pay off a first mortgage on the Spoonbill Harbor property itself, then to pay interest on the other three land loans. See Hunter Dep. Ex. 35, Stillman Dep. 164. In this instance, the participants were notified. On October 5, 2007, Stacie Shearer emailed the Participating Banks to inform them that a new loan had been issued:

As a participant in Acquilus III, LLC we felt it necessary to inform you that Fairfield [has] just been given committee approval to fund a new loan request to an entity known as Spoonful [sic] Harbor, LLC involving Mr. Lee Underwood. This new loan request will ultimately aid Mr. Underwood in carrying three additional credits held at Fairfield in which you are not a participant.

*1354 Hunter Dep. Ex. 35. Shearer’s email has no mention of Underwood’s ongoing liquidity issues or of the delinquencies in payment on the land loans.

The Spoonbill Harbor loan was discussed at a November 8, 2007 meeting of the Directors’ Loan Committee, at which meeting the Directors voted to move the Underwood relationship to a Grade 7. The minutes of the meeting indicate that the directors were beginning to lose patience:

Acquilus — a condition of the loan approved two weeks ago, was that Richard Collingsworth should go to Jacksonville and meet with Herbert Underwood. Richard was to firmly tell him (and make sure he understood) that we expect this loan to pay out at the maturity in six months. This is a request to amend that approval by allowing Richard to talk with him by phone, thus saving the time and expense of the trip. Aggregate Debt $14,960,000. Credit Grade 7-Substandard. Approved.

Stillman Dep. Ex. 18. Richard Collingsworth was a senior credit officer at Fair-field and “a very forceful personality.” Stillman Dep. 168. The directors’ decision to get him involved reflects a conclusion that the Underwood relationship was reaching a dangerous position.

Although the Participants were notified of the Spoonbill Harbor loan, there is no indication in the record that they were ever notified of the continuing delinquencies in the land loans, the increasing liquidity concerns, or the changes in the credit rating from a 4 in May to a 7 in November. Speaking as Fairfield’s representative, Stillman concedes in his deposition that Fairfield never told participants that Underwood was delinquent on his three land loans for several months prior to the issuance of the Spoonbill Harbor loan. Stillman Dep. 178-79.

Sun American interpreted the Spoonbill Harbor loan as a sign of trouble. On October 16, 2007, Sun American’s chief credit officer, Robert Garrett, explained his concerns about the new loan in an email to Felipe Lozano, Sun American’s relationship manager for the Construction Loan. Garrett expressed his opinion that the Spoonbill Harbor loan reflected a relationship in trouble:

They are cashing out equity in another property to provide debt service funds on their existing loans. I wouldn’t call it a workout, but it’s not a good thing either. Apparently, the momentum of their existing loans has stalled, or there is no more equity or feasibility at this time in the projects, so they’re trying to build some marketing time by coming up with an interest debt carry facility through May of next year. This is not unlike what we’ve done with a handful of our customers. However, I don’t want to be a part of this deal. I don’t want to sound the alarm, but we need to find out what’s going on with our deal. If Mr. Underwood is running into problems with four other projects, why wouldn’t ours be in distress as well?

Garrett Dep. Ex. 6. Garrett instructed Lozano to contact Fairfield and find out more about the loan. Garrett Dep. 179 (Doc. 38). Lozano contacted Stacie Shearer at Fairfield, who stated that the Underwood relationship was fine, that Underwood “was one of our best customers, there’s no problem, and this loan is in good standing.” Id. 183. Shearer does not recall any conversation with participants about the new loan. Shearer Dep. 109. She concedes, however, that she did not mention Underwood’s liquidity problems in her email to the participants.

In December, Sun America received another hint that all was not well with the Underwood relationship. On December 17, 2007, Jimmy Davis sent a memorandum to the participants to notify them that *1355 Fairfield was proposing an exchange of collateral. Garrett Dep. Ex. 7. According to the memorandum, Underwood had promised to deposit $1,500,000 from the sale of a piece of land known as the “Beaver Street property” into a controlled account to fund an interest reserve for the land loans. The purchaser backed out of the sale and Underwood was forced to release his 50% ownership in the property to his co-owner to alleviate his debt on the property. At Underwood’s request, Fair-field agreed to release its interest in the Beaver Street property and accept in exchange a pledge on his 50% interest in three other properties. Davis recommended accepting Underwood’s proposed exchange to “prevent a further deterioration in Mr. Underwood’s financial condition.” Id. Although the appraised value of the substituted properties was “considerably less” than the appraised value of the Beaver Street property, Davis noted that the exchange was acceptable because the loan-to-value ratio of the Construction Loan was only 80% even in the absence of the additional collateral. Id. Besides the allusion to “deterioration in Mr. Underwood’s financial condition,” nothing in Davis’s memorandum makes any mention of the liquidity problems Underwood had been experiencing since February or of his delinquencies on the land loans.

At one point in the summer of 2007, Fairfield almost accidentally informed Sun American of its concerns about Underwood’s liquidity, when a Problem Loan Action Form was posted on a computer network available to Participating Banks. Fairfield maintains an “extranet” imaging system designed to allow Fairfield employees and participant banks to view loan documents on-line. Hunter Dep. 73. Participants are given a user ID and password to access documents specific to the loans in which they participate. Id. at 74. Originally, it was the practice of Fairfield to scan images of PLAFs onto the extranet with other loan documents. Id. at 76. This practice was to change after a Participant took notice of a PLAF related to the Construction Loan.

On September 6, 2007, an employee of one of the Participants in the Construction Loan, Angie Ellis of Planters First Bank, noticed the June 29 PLAF posted on Fair-field’s extranet system and emailed Stacie Shearer at Fairfield to inquire about it: Hi Stacie,

I pulled the most recent inspection today and saw a Problem Loan Action Form. I know it is related to being late on 2 of the 4 loans____but I have not seen an explanation to the reason he has been late.

Anything going on with the guarantor that I need to document?

Thank you for your help,

ASE

Hunter Dep. Ex. 33. The record does not show any response to this email, and Shearer does not recall what she communicated to Ellis after receiving the email.

The record does show, however, considerable internal correspondence among Fairfield’s employees. Ellis’s email set off a lengthy debate about whether participants should be able to view PLAFs on the extranet. Shearer forwarded the Ellis email to Catherine Breitenhirt, instructing her to delete the PLAF from the extranet until further notice:

Catherine,

Could you pull up loan docs for 8100241 Acquilus III and delete the Problem Loan Action Form that is out there? I had a participant bank find this today. Please just keep this in our file and do not scan back into the imaging system until I have been able to get with Jim about what to communicate to participants prior to their discovery of this form.

*1356 Thanks so much!

Stacie

Id. Breitenhirt in turn forwarded Shearer’s email to Sandra Hunter, noting that “a participant ... saw a PLAF on the Aequilus loan and it has raised questions.” Id. Hunter in her turn forwarded the email chain to Jimmy Davis and proposed further discussion of the matter with Davis and Jim DeWitt. Id.

The Ellis email prompted “a general discussion” about whether participants should be able to view PLAFs on the extranet system. Hunter Dep. 77. The conclusion of this discussion was that participants should not be notified of PLAFs. In her deposition, Hunter offered three reasons for the decision. First, the PLAF in question contained information about the three land loans that were not a part of the Participation Agreement. Id. at 85. Second, the credit rating was internal to Fairfield and might unduly influence the participating banks’ own credit ratings. Id. Third, the PLAF was not an “end-all document,” but just a “summary for discussion.” Id.

The decision was therefore made to erase all PLAFs related to credits rated at level 5. Id. 89. At first, only five-rated credits were removed because they involved “a little subjective judgment on what ... the rating could be.” Id. at 90. PLAFs for Level 7 credits initially were not deleted because at that level the credit concerns were more “defined” and most participants would already have known about the credit problems. Id. Later, however, “the determination was ... made to remove all of them.” Id. at 92. The later PLAFs, the ones that changed the rating on the Underwood loans from a 5 to a 6 and then from a 6 to a 7, were never placed on the extranet or provided to the participants in any form.

Aside from the single email informing participants of the Spoonbill Harbor loan in October 2007 and the memo regarding the substitution of collateral in December 2007, there is nothing in the record to indicate that Sun American ever received notice of the problems Mr. Underwood was experiencing with his loan portfolio until April 2008. That April, Fairfield assigned the relationship to Stephen Still-man, a specialist in managing troubled assets. Stillman prepared a new PLAF for the five loans, in which he maintained the level 7 credit rating the Directors Loan Committee had approved in November 2007.

At his deposition, Stillman testified that he rated the loans as substandard based on the decline of the Florida condominium market. Stillman Dep. 181. His PLAF, however, does not refer to the market decline, but instead cites the borrower’s liquidity problems, noting that the “ Guarantor has been unable to keep loans without an interest reserve current” and that the borrower had to take out an additional loan to obtain cash to pay his previous loans. Stillman Dep. Ex. 29.

On April 21, 2008, Stillman organized a conference call with representatives of the participant banks. The purpose of the call was to introduce himself to the participants and tell them his thoughts about the loan. Stillman Dep. 182. During the call he informed the participants that he considered the credit to be substandard. Id. He also informed the participants that Acquilus III had failed to pay 2007 property taxes and did not have the resources to do so. Garrett Dep. 160-61, Ex. 10. Fair-field proposed using contingency funds from the construction budget to pay part of the tax bill and asked the banks to fund a “protective advance” to pay the rest. Id. The announcement that Underwood was in a perilous financial condition and that Fairfield had rated the loan substandard several months earlier caught Sun Ameri *1357 can by surprise. Regarding the April 21 conference ca