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First Merit Bank v. J&B Products, LTD.

United States District Court, E.D. Michigan, Northern Division

October 27, 2016

FIRST MERIT BANK, Plaintiff, x
v.
J&B PRODUCTS, LTD., et al., Defendants.

          ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT ON COUNTS II, III, AND IV, DISMISSING COUNT I OF PLAINTIFF'S COMPLAINT AS MOOT, AND DIRECTING PARTIES TO CONFER IN GOOD FAITH AND SUBMIT SUPPLEMENTAL BRIEFS REGARDING ATTORNEYS' FEES

          THOMAS L. LUDINGTON United States District Judge.

         Plaintiff First Merit Bank initiated the present action by filing its complaint against Defendant J&B Products, Ltd. (“J&B”), and Defendant Joseph Bommarito on October 8, 2015. See Compl., ECF No. 1. Plaintiff alleges that, by defaulting on three loan agreements, Defendants are in breach of various guarantees and promissory notes. Id. Plaintiff therefore seeks repayment of all outstanding loan obligations ($415, 526.46 at the time the complaint was filed) and attorneys' fees. After the close of discovery, on July 27, 2016 Plaintiff moved for summary judgment on Counts II, III, and IV of Plaintiff's complaint. See ECF No. 16. For the reasons stated below, Plaintiff's motion will be granted, and summary judgment will be granted in favor of Plaintiff on Counts II, III, and IV. Because there is no dispute that Loan No. 1 has been paid, Count 1 of Plaintiff's complaint will be dismissed as moot.

         I.

         Plaintiff First Merit Bank is a National Banking Association with a principal place of business in Ohio. See Compl., ¶ 3, ECF No. 1. Plaintiff First Merit acquired Citizens Bank, N.A. during the relevant time period, and is Citizens Bank's successor in interest. Id. Defendant J&B is a Michigan Corporation with a principal place of business at 2201 South Michigan Avenue in Saginaw, Michigan. Id. at ¶ 4. Defendant Joseph Bommarito, a resident of Saginaw, Michigan, is the registered agent, principal, and manager for J&B. Id. at ¶¶ 5-6. He is also the registered agent, principal, and manager of nonparty Bommarito Realty, LLC, a Michigan limited liability company located in Saginaw. Id. at ¶ 7.

         A.

         On December 9, 2011 Bommarito Realty, LLC entered into a loan agreement with Citizens Bank for the principal amount of $37, 448.13 (“Loan No. 1”). See Loan No. 1, ECF No. 16 Ex. 1. Pursuant to the agreement, an event of default would occur if Bommarito Realty failed to make any payment when due, and, in the event of default, the lender had the option to declare the entire unpaid principal balance and all uncured interest due. Id. The loan was secured by real estate located at 2201 South Michigan Avenue in Saginaw, Michigan. See ECF No. 16 Ex. 2. The loan was guaranteed by both Defendant Bommarito and Defendant J&B Products. See Loan No. 1; See also ECF No. 16 Exs. 3-4. It is undisputed that Loan No. 1 has been paid in full. See Def.'s Mot. Summ. J. 2, ECF No. 16.

         Defendant J&B entered into a business loan agreement with Citizens Bank on August 14, 2012 through which Citizens Bank agreed to make loan advances to Defendant J&B (“Loan No. 3”). See Loan No. 3, ECF No. 16 Ex. 6. Through Loan No. 3 Defendant J&B agreed to maintain a minimum combined debt service coverage ratio of 1:2 to 1, to be evaluated at the end of each fiscal year. Id.[1] An event of default would occur if J&B failed to make any payment when due, failed to comply with any loan covenant, or the lender in good faith believed itself to be insecure. Id. In the event of default First Merit had the option to declare all indebtedness due. Id. Pursuant to Loan No. 3, on September 11, 2013 Defendant J&B Products and Plaintiff First Merit Bank (the successor in interest of Citizens Bank) entered into a promissory note whereby Plaintiff advanced Defendant J&B $300, 000.00. See ECF No. 16 Ex. 7. Loan No. 3 was secured by substantially all of the assets of J&B, and was personally guaranteed by Defendant Bommarito. See ECF No. 16. Exs. 8-10.

         Defendant J&B entered into a second business loan agreement with Plaintiff First Merit on September 11, 2013 through which First Merit agreed to make loan advances to Defendant J&B (“Loan No. 5”). See Loan No. 5, ECF No. 16 Ex. 11. That same day J&B executed a promissory note payable to Defendant J&B in the amount of $300, 000.00. See ECF No. 16 Ex. 12. Under Loan No. 5 Defendant J&B agreed to maintain a minimum combined debt service coverage ratio of 1:2 to 1, to be evaluated at the end of each fiscal year.[2] Id. An event of default would occur if J&B failed to make any payment when due, failed to comply with any loan covenant, or the lender in good faith believed itself to be insecure. Id. In the event of default First Merit had the option to declare all indebtedness due. Id. As with Loan No. 3, Loan No. 5 is secured by substantially all of the assets of J&B, and is personally guaranteed by Defendant Bommarito. See ECF No. 16. Exs. 8-10.

         Also on September 11, 2013, Defendant J&B and Defendant Bommarito entered into a subordination agreement with Plaintiff First Merit. See Subordination Agreement, ECF No. 16 Ex. 13. Pursuant to that agreement, Defendant J&B agreed to subordinate all amounts owed to and for the benefit of Defendant Bommarito to the debts owed to First Merit under the Loan Agreements. Id. While Defendant Bommarito signed the agreement on behalf of J&B on September 11, 2013, he did not sign the agreement on his own behalf until December of 2013 due to an oversight. See Ehrlinger Dep. 107, ECF No. 16 Ex. 17.

         B.

         In addition to obtaining loans from Plaintiff First Merit, Defendants also obtained a series of loans from the John W. Wolf Revocable Trust (the “Trust”) totaling $600, 000.00. See Wolf Aff. ¶ 3, ECF No. 16 Ex. 16. On August 12, 2012 Defendant J&B obtained a loan in the amount of $200, 000.00 from the Trust. Id. at ¶ 6. Then, from September 27, 2012 to November 19, 2012 Defendant Bommarito obtained four loans totaling $400, 000.00 from the Trust. Id. Concerning the loans made to him personally, Defendant Bommarito represented to John W. Wolf that he intended to loan the proceeds to Defendant J&B. Id. at ¶ 9. Defendant J&B repaid the loans through seven installment payments to the Trust. Id. at ¶ 10. The first six installments were paid on December 5, 2012, December 21, 2012, July 12, 2013, July 22, 2013, July 26, 2013, and August 15, 2013, respectively. Id. The final $200, 000.00 installment was paid by Defendant J&B to the Trust on October 3, 2013. Id. Plaintiff alleges that this final payment was in violation of the parties' Subordination Agreement. Defendants contend that they did not violate the Subordination Agreement because the agreement was not executed until December when Defendant Bommarito signed the agreement.

         2013 was ultimately a difficult year for Defendants, and J&B lost over $250, 000.00. See Flint Aff. ¶ 11. As a result, it is undisputed that Defendant J&B was unable to meet the minimum debt service ratio of 1.20 to 1.0 as required by the Loan Agreements. Plaintiff thus became concerned with the performance of J&B, and noticed numerous issues with Defendants' 2013 financial reporting. See Ehrlinger Dep. 17, 20, 42-43, 48-50, ECF No. 21. Plaintiff alleges that Defendants' 2013 financial statements did not comply with GAAP and overstated J&B's accounts receivable, thereby misrepresenting a negative balance in violation of the Loan Agreements.

         C.

         Plaintiff did not immediately take any action related to these defaults. In July of 2014, Plaintiff downgraded the loan to 11, meaning it was substandard and/or needed to be watched. See Ehrlinger Dep. 49-50. Then, at some point in the second half of 2014 the Loan Administrator Charles Flint referred the loans to First Merit's Managed Assets Department. See Flint Aff. ¶ 4. Mr. Flint concluded that the company needed additional capital in the form of equity or subordinated debt to replace J&B's operating losses and to compensate for large distributions made to Defendant Bommarito and Bommarito Realty. Id. at ΒΆΒΆ 5-6. Mr. Flint contends that he determined that it was in First Merit's interest to end ...


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