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Parties Involved:
James Abdnor
Appellee
Valley National Bank
Appellant

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

VALLEY NATIONAL BANK, ) 

a Banking Corporation, ) 

) 

Plaintiff-Appellant, ) 

) 

FILED 

Unlted States Court of Appeals 

Tenth Circuit 

NOV 6 7990 

ROBERT L, HOBC'I?-n 

Clerk .. .-~ .cR 

v. ) NO. 89-1078 

) 

JAMES ABDNOR, in his capacity as . ) 

Administrator of the SMALL BUSINESS ) 

ADMINISTRATION, an agency of the ) 

United States Government, ) 

) 

Defendant-Appellee. ) 

APPEAL FROM THE UNITED STATE$ DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. -No. 88-M-582) 

Steven R. Rider, Rider & Woulf, Aurora, Colorado, (Charles s. 

Unfug, Greeley, Colorado on the brief), for Plaintiff-Appellant. 

Gary Fox, Special Assistant United States Attorney, Washington, 

D.C., (Amy Golen, Special Assistant United States Attorney, 

Washington, D.C.; Michael J. Norton, United States Attorney, and 

J. Greg Whitehair, Assistant United States Attorney on the 

brief), for Defendant-Appellee. 

Before BRORBY and ANDERSON, Circuit Judges, and THEIS,* District 

Judge. 

THEIS, District Judge 

*The Honorable Frank G. Theis, District Judge, United states 

District Court for the District of Kansas, sitting by 

designation. 

1 

Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 1 
Plaintiff Valley National Bank ("the Bank" or "VNB") appeals 

from a judgment rendered after a bench trial. The dispute 

involves the refusal of defendant Small Business Administration 

("SBA") to purchase its guaranteed portion of a defaulted loan. 

Our jurisdiction is conferred by 28 u.s.c. § 1291. We affirm. 

I. 

The agreement between the parties was made pursuant to the 

SBA's authority under 15 u.s.c. § 636 to participate in 

guaranteed loans to small businesses that would otherwise be 

unable to secure a loan from a lending institution. Upon 

approval of a loan, the SBA will enter into a "deferred 

participation" agreement, whereby it will purchase from the 

lending bank a portion of a loan in the event of default. The 

SBA and VNB executed a blanket "Loan Guaranty Agreement" in 1983 

intended to govern future specific loans to be guaranteed by the 

SBA. The particular loan underlying this dispute was for a 

guaranty of 90% deferred participation and was final'ized on 

April 22, 1986. 

The nature of the enterprise underlying the guaranteed loan 

at issue was a cattle operation owned by Ed and Charlotte Miller 

under the name of Eagle Limousin Superior Genetics ("Eagle 

Limousin"). The Millers owned a herd of Limousin cattle, which 

are considered to be genetically superior to other commercial 

cattle. The operation for which the Millers sought financing was 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 2 
a new and innovative procedure whereby the superior offspring of 

the Limousin cattle could be produced at a much faster rate than 

normal. This procedure involved the artificial insemination of a 

donor Limousin cow and subsequent "embryo transfer." After 

artificial insemination, the resulting embryos could be flushed 

out of the "donor" cow and transferred to several non-Limousin 

"host" cows. In this way, a limited number of Limousin cows 

could be impregnated several times a year, and their genetic 

offspring could be brought to term by other cows. 

The enterprise proposed by the Millers required a large 

amount of working capital to expand the already faltering Eagle 

Limousln operation. The Millers owned only Limousin cattle and 

proposed to lease a herd of host cows from other cattle 

operations. 

equipment. 

The venture also required certain additional 

The VNB had made a previous loan to the Millers that 

was outstanding at the time the Millers proposed the embryo 

transfer enterprise. Presumably because they already faced 

default on the prior loan, the Millers did not qualify for an 

additional loan, and the Bank attempted to enlist the approval of 

the SBA for a guaranteed loan. The SBA initially rejected the 

Millers' application but after reconsideration gave its approval 

for a loan in the amount of $332,800. The Bank made 

disbursements for the total amount of the loan from April 22, 

1986 through November 22, 1986. 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 3 
Although a limited number of embryos were successfully 

transferred, no Limousin calves were brought to term in this 

manner. The loan went into default on or about January 1, 1987, 

and the Bank made a demand for payment upon the SBA on June 1, 

1987. The Bank contended that SBA was obligated to honor its 

agreement to guaranty the outstanding portion of the loan, which 

amounted to approximately $300,000. SBA defended by alleging 

that the Bank had failed to comply with the terms of the parties' 

agreement, .thus discharging the SBA guaranty. The district court 

made oral findings of fact and conclusions of law to the effect 

that the Bank had violated the guaranty agreement, and that this 

violation excused SBA of its obligation to purchase the loan. 

II. 

We review the trial court's findings of fact under the 

clearly erroneous standard. Fed. R. Civ. P. 52; United States v. 

United States Gypsum Co., 333 U.S. 364, 395 (1948). The trial 

court's finding of a material breach of contract is a question of 

fact that is controlled by this standard of review. Chaparral 

Resources, Inc. v. Monsanto Co., 849 F.2d 1286, 1289 (10th cir. 

1988); Eastern Illinois Trust & Sav. Bank v. Sanders, 826 F.2d 

615, 616 (7th Cir. 1987'). However, the appellate court is in as 

good a position as the trial court to interpret a written 

document. DeBoer Construction, Inc. v. Reliance Ins. Co., 540 

F.2d 486, 495 (10th Cir. 1976), cert. denied, 429 U.S. 1041 

(1977); see also Southwestern Stationery & Bank Supply, Inc. v. 

4 

Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 4 
Harris Corp., 624 F.2d 168, 170 (10th Cir. 1980). Thus, 

questions of interpretation are not limited by the clearly 

erroneous standard unless the trial court relied on extrinsic 

evidence for its interpretation of an ambiguous written contract. 

cavic v. Pioneer Astro Indus •• Inc., 825 F.2d 1421, 1424 (10th 

Cir. 1987). 

As with the trial court, we look first to the written 

agreement of the parties to determine the bargained-for 

objectives of the parties. The written agreement of the parties 

is reflected primarily in the 1983 blanket Loan Guaranty 

Agreement and in the April 7, 1986 Authorization and Loan 

Agreement covering this specific loan. The 1983 agreement 

provides that "[a]ll servicing actions shall be the 

responsibility of the holder who shall follow accepted standards 

of loan servicing employed by prudent lenders generally, ... 

R. Vol. I, Doc. 1, Eht. A, 1 6. The April 1986 Authorization 

agreement further states that it is subject to the provisions of 

the 1983 guaranty agreement between the Bank and the SBA. 

II 

R. Vol. I, Doc. 1, Eht. B, 1 2(a). In addition, the 1983 blanket 

agreement expressly subjects guaranteed loans by the SBA "to 

SBA's Rules and Regulations as promulgated from time to time." 

The parties agree that the critical regulation governing this 

dispute is found at 13 C.F.R. § 120.202-5: 

SBA shall be released from obligation to purchase its 

share of the guaranteed loan unless the Lender has 

substantially complied with all of the provisions of 

these regulations, the Guaranty Agreement and the Loan 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 5 
Authorization, and has not failed to disclose material 

facts, and has made no material misrepresentations to 

SBA with respect to the loan; or upon the happening of 

any one or more of the following events: 

(a) Defective Closing. Failure of the Lender to 

close and disburse the loan substantially in 

accordance with the terms and requirements of the 

loan instruments (including the loan 

authorization), or to service the loan in a 

prudent manner, either of which may result in a 

substantial loss on the loan; .... 

Accordingly, the primary issue addressed during trial was whether 

VNB had serviced the loan to the Millers in a manner employed by 

prudent lenders generally. 1 

The trial court found that the evidence was "clear and 

convincing" that the Bank had failed to follow reasonably prudent 

banking methods, citing several factors in support of this 

conclusion: the Bank took no measures to verify the number of 

successful embryo transfers and made no effort to verify that any 

of the transferred embryos, in which the Bank held a first lien 

interest, were brought to term; the Bank failed to perfect its 

security interest in the unborn cattle or to ascertain what 

interest the owners of the host cattle would have in the unborn 

embryos; after the Bank had discovered in October 19862 that the 

The trial court found no material 

the Bank at the time of SBA's approval 

excuse SBA from its guaranty obligation. 

this finding on appeal. 

omissions on the part of 

of the loan that would 

SBA does not challenge 

2 At trial the parties disputed the time at which the Bank 

discovered that the Millers had misrepresented the number of 

successful embryo transfers. The trial court expressly found that 

the Mr. Patterson, the Bank's president, learned in October 1986 

that only 50 transplants had been successful, when at least 150 to 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 6 
Millers had deceived it as to the number of actual successful 

embryo transplants, the Bank did not inform SBA and indeed 

continued to pay out additional disbursements to the Millers; the 

Bank did not know the location of the Millers' existing Limousin 

cattle, nor did it make any effort to locate, identify or inspect 

these cattle, which served to secure a second lien held by the 

SBA on this loan3; the Bank took no action after the Millers had 

failed to submit financial statements as required under the 

agreement •. Considering these various omissions, the trial court 

concluded that the Bank not only failed to follow reasonably 

prudent banking methods in servicing the Miller loan, but that it 

acted with ''gross negligence" and "almost reckless indifference." 

We do not find the trial court's conclusions on this issue 

to be clearly erroneous. Indeed, a review of the record 

submitted on appeal reveals substantial evidence to support the 

finding that the Bank did not act reasonably with respect to the 

loan. See also Citizens Marine Nat'l Bank v. United States Dep't 

of Commerce, 854 F.2d 223, 228 (7th Cir. 1988) (cumulative effect 

of various imprudent acts by bank excused SBA from honoring 

guaranty agreement), cert. denied sub nom., Bank One. Stevens 

Point. NA v. United States Dep't of Commerce, 109 s. Ct. 1312 

180 were necessary for the venture to succeed. Plaintiff does not 

challenge this finding on appeal. 

3 The Limousin cattle herd serving as collateral for this 

loan was lost and had not been accounted for as of the time of 

trial. 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 7 
(1989); Pittsburgh Nat'l Bank v. Abdnor, 898 F.2d 334 (3d Cir. 

1990) (bank failed to service loan prudently by delaying the 

cashing of a check). The Bank calls attention to the fact that 

there were no specific provisions in the Loan Authorization 

Agreement that required the measures not taken by the Bank. This 

argument assumes that all actions defining the prudent lender 

must be specifically set forth in the agreement before they may 

be expected of the Bank. Although the 1986 Loan Authorization 

Agreement did impose some specific servicing actions upon the 

Bank, this does not preclude the possibility that other 

unspecified actions might also be required of the prudent lender. 

A contrary interpretation would require us to ignore as mere 

surplusage the contractual requirement of prudent servicing. The 

Bank also argues that it serviced the Miller loan with the same 

level of attention and professionalism as it uses in servicing 

other non-SBA loans. This argument ignores that the Loan 

Agreement establishes the standard governing the Bank's conduct 

with respect to SBA loans to be that of "prudent lenders 

generally." This contractual standard is also consistent with 

the SBA's Standard Operating Procedure ("S.O.P. 11 ) 50-50-3 162{b), 

which states that "each lender is expected to administer the SBA 

guaranteed loans in its portfolio with at least the same level of 

case control, attention and professionalism that it applies to 

its direct (non-SBA) loan portfolio." (emphasis added). Thus, 

even assuming the validity of the Bank's assertion, it is no 

defense that the Bank may normally service its non-SBA loans in 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 8 
an imprudent manner. 

The Bank alleges that the trial court's interpretation of 

the parties' agreement violated the parol evidence rule by 

relying on evidence extrinsic to the written documents forming 

the contract. Specifically, the trial court referred to a letter 

introduced over plaintiff's objections from Mr. Patterson, the 

president of VNB, to Mr. Muller of the SBA. In this letter, 

which predated the April 7, 1986 Authorization Agreement, 

Mr. Patterson assured Mr. Muller that the Bank would consult with 

the owners of any host cows and obtain a written understanding 

from these prospective commercial cow operators regarding the 

Bank's security interest in the embryos. Mr. Patterson also 

stated that the Bank would search the county records for any 

liens on the host cows and, if liens were found, would obtain "a 

written acknowledgment" of the Millers' ownership of the embryos 

and the Bank's security interest in the embryos. The Bank took 

none of these actions. 

Plaintiff's argument has no merit. Although the trial court 

referred to the letter written by the Bank's president to the 

SBA, it did not do so to alter or contradict the terms of the 

parties' written agreement. Rather, the letter was merely one 

piece of evidence considered by the trial court to aid in its 

factual inquiry into the specific actions required of the prudent 

lender. If a contractual term is ambiguous, resort may be had to 

extrinsic evidence to determine the meaning of that term. Devine 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 9 
v. Ladd Petroleum Corp., 805 F.2d 348, 349 (10th Cir. 1986); 

Amoco Prod. Co. v. Western Slope Gas Co., 754 F.2d 303, 309 (10th 

Cir. 1985). The trial court did no violence to the parol 

evidence rule by considering this letter for the purpose of 

ascertaining the appropriate conduct of "prudent lenders 

generally." 

We next consider the trial court's conclusion that the 

Bank's various forms of inaction excused the SBA from buying its 

guaranteed portion of the loan. The Bank argues that the SBA may 

refuse to honor its guaranty agreement only when the specific 

acts or inaction on the part of the Bank resulted in an 

identifiable and substantial -loss. The trial court interpreted 

the agreement so as not to require that a specific loss on the 

loan be traceable to the Bank's negligent servicing. In support 

of its position, the Bank relies on language contained in the 

governing regulation and ori the SBA's own written procedure. 

Among the events excusing the SBA from its guaranty obligation is 

the lender's failure "to close and disburse the loan 

substantially in accordance with the terms and requirements of 

the loan instruments •.• or to service the loan in a prudent 

manner, either of which may result in a substantial loss on the 

loan." 13 C.F.R. § 120.202-5(a) (emphasis added). This language 

is repeated in S.O.P. 50-50-3 1 76(a), which states that the SBA 

may deny liability if the lender fails "to close/disburse 

substantially in compliance with the Authorization or servicing 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 10 
in a substantially negligent manner, either of which may result 

in a substantial loss on the loan." The Bank contends that the 

loss on the loan would have resulted even if it had serviced the 

loan in the manner found wanting by the trial court. According 

to plaintiff, the Bank could not have prevented the ultimate loss 

on the loan by performing the various acts cited by the trial 

court, because the only reasons for the failure of Eagle Limousin 

were Miller's dishonesty and the inherent risk in this 

experimental venture. 

This defense must fail for several reasons. First, the 

language relied upon by the Bank states that the SBA will be 

excused of liability if the negligent conduct "may result in a 

substantial loss on the loan." 13 C.F.R. § 120.202-5(a) (emphasis 

added). In addition, s.o.P. 50-50-3 1 76(a) emphasizes that an 

actual loss is not necessary, stating that "[t]he combination of 

a substantial failure by participant which results, or may 

result, in a substantial loss" is a predicate to an SBA denial of 

liability. Thus, the trial court's interpretation of the terms 

of the agreement on this issue is supported by the regulations 

forming a part of the agreement. Under the SBA regulations and 

policy statements relied upon by the parties, 4 it is sufficient 

4 We are aware that a contrary interpretation of SBA standard 

operating procedure was upheld by the Seventh Circuit in Eastern 

Illinois Trust & Savings Bank v. Sanders, 826 F.2d 615, 617 (7th 

cir. 1987) (a resulting substantial loss on the loan is a 

prerequisite to repudiating an SBA guaranty). In Eastern Illinois 

the court referred to s.o.P. 50-53-3 1 56, which is neither cited 

by the parties nor provided for our review. In addition, the 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 11 
if the lender's actions are of such a nature that they may be 

expected to result in a substantial loss on the loan. 

Even assuming the validity of the Bank's interpretation, the 

trial court found that the Bank's failure to service this loan in 

a prudent manner did result in a substantial loss. The trial 

court stated: 

The loss here resulted from the failure completely of 

Miller to carry out the venture that was outlined in 

great detail in the submission to the SBA, to the bank 

and to the SBA. All of this was contingent on-- even 

the creation of the collateral that was really to 

support this loan was contingent on good management by 

him· of the existing herd and of the efforts to increase 

the herd through the embryo transplant system. So what 

happened here is a total failure of that venture 

through gross mismanagement by the borrower without 

adequate control and monitoring by the lender bank, and 

that's a loss. And it is the loss which excuses the 

SBA from its obligation to repurchase. 

R. Vol. III, at 482. (emphasis added). It is clear that the trial 

court found that the failure of the venture was due at least in 

part to the negligent servicing of the Miller loan. The Bank 

concedes that the business failed because Miller did not perform 

as promised. Reply brief at 15. And the trial court found a 

casual connection between the failure of Miller to perform and 

the Bank's numerous instances of inadequate monitoring of the 

loan. The Bank also discovered in October 1986 that the Millers 

Eastern Illinois court appears to have endorsed this interpretation 

as a finding of fact by the trial court that was not clearly 

erroneous. Necessarily, we are unable to express a view on the 

correctness of this interpretation of S.O.P. 50-53-3 1 56, and our 

review is restricted to the documents and findings of fact before 

us. 

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Appellate Case: 89-1078 Document: 01019945186 Date Filed: 11/06/1990 Page: 12 
had performed only 50 embryo transfers, contrary to their earlier 

representations to the president of VNB, yet the Bank continued 

to make disbursements of approximately $57,000 after it had 

discovered the misrepresentations of the Millers. Finally, the 

Bank's failure to inform itself of the location of the Limousin 

herd and the failure to perfect the second lien security interest 

in this herd resulted in the loss of this valuable collateral. 

Given these considerations, we cannot say that the trial court 

clearly erred in finding that the Bank materially breached its 

agreement with SBA, thereby excusing SBA of its guaranty 

obligation. 

The judgment of the district court is AFFIRMED. 

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