Monday, December 21, 2020
BBVA Compass v. Bagwell: Sophisticated Parties and Contractual Representation
The Dallas Court of Appeals recently reversed a trial court’s judgment that had found BBVA Compass Bank liable for fraud of more than $90 million in a residential real estate lending scenario involving David Bagwell, individual developer, and a related trust.. The Court reversed the judgment because of “red flags” that the primary plaintiff Bagwell ignored, (which should have caused him to avoid relying on the alleged fraudulent representations). See: BBVA Compass v. David Bagwell.
David Bagwell, a residential land developer with more than forty years of experience in that business, planned three luxury subdivisions in Colleyville Texas. In 2006, after selling just more than half of the lots, the three limited partnerships (on for each subdivision??) borrowed $11 million from Texas State Bank. The notes were guaranteed by Bagwell individually and the other plaintiff entities. When BBVA acquired Texas State Bank and later Compass Bank, BBVA Compass became the owner of the partnerships’ notes and guarantees.
The loans became due in February 2008; BBVA agreed to two written modifications that extended the loans until December 2009. Bagwell claimed the extensions were given because he was unable to repay the loans and needed time to find other investors to help him refinance. The parties began discussing a third modification to further extend the loans, but no written agreement or modification to the loan terms was made. At this time BBVA had begun offering to sell the loans -- which Bagwell found out after receiving calls from business colleagues. Bagwell testified that when he thought he was about to obtain an extension, he confronted a BBVA representative about the alleged sale of the loans and later determined that the representative had lied when replying that no sale was in progress and that he was working on the extension. Yet, the bank then sold the loans to another party who foreclosed on the property. Bagwell sued BBVA for fraud based on the oral representations of the representative and won at trial for $50.5 million in actual damages and $40 million in punitive damages.
Ignored Warning Signs
The Dallas Court of Appeals reversed the judgment, finding that there was insufficient evidence to support the jury finding of fraud. The Court held that justifiable reliance on the alleged misrepresentations is a required element of the fraud claim, but that Bagwell could not have justifiably relied on the misrepresentations due to “red flags” that he was aware of but ignored. Bagwell, as an experienced developer, knew that the loan documents could only be amended in writing, but claimed he relied on the oral representations of BBVA. Further, Bagwell admitted that business colleagues of his had warned him the loan was being shopped, in contradiction of BBVA telling him they were not. Finally, Bagwell knew that the contract did not require BBVA to give him notice or get his approval before a sale of the loan, so he was aware any representations about giving him notice or getting his approval would not be true.
This decision provides a warning to larger, sophisticated persons and companies that reliance on representations outside the terms of a contract is frowned upon by the courts. In situations where both parties are sophisticated, the courts are wary of looking outside the terms of the contract. Especially when those representations are inconsistent or contradict the terms of the contract.
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