An Atlanta lender who sued Columbus-based Synovus Bank for breach of contract amid allegations that the bank almost put it out of business by pulling its line of credit has been ordered to pay Synovus more than $16 million, including $1.6 million in attorney fees.
In a suit filed last year, DJ Mortgage LLC and its co-owner, John Smithgall, accused Synovus of breach of contract and asked the court to declare its loan agreement unenforceable, arguing that the bank arbitrarily cut off its cash flow over “non-monetary immaterial defaults,” damaging its business and subjecting it to at least two lawsuits by disgruntled clients and making it a potential target for more litigation.
The Oct. 31 order signed by Fulton County Superior Court Judge T. Jackson Bedford denied every claim.
“The bank is delighted with the court’s ruling, as it affirms the bank’s position of what happened,” said Nelson Mullins Riley & Scarborough partner S. Wade Malone, who represents Synovus along with firm partners Richard Herzog Jr. and Jeffrey Mapen and Marietta solo Rebecca Phalen.
“The bank seeks to avoid litigation with borrowers,” said Malone, “but when forced to do so it vigorously advances its position, and it did so in this case.”
On Nov. 1—one day after the order was entered—the mortgage company’s attorneys, Bondurant Mixson & Elmore partners H. Lamar “Mickey” Mixson and Jill Pryor, and associates Bret Hobson and Fredric Bold Jr. filed a notice of appeal. Mixson and Pryor did not respond to phone and email queries.
Malone declined to discuss the case in detail, but he saluted his opposing counsel.
“The Bondurant firm is the gold standard for litigators, so we are pleased to prevail in this hard-fought matter,” he said.
Malone confirmed that his team drafted the order.
According to case filings, DJ Mortgage is a “hard-money lender”—one that specializes in making short-term loans to residential or commercial real-estate investors to purchase and renovate properties for re-sale.
The company was formed in 2003 by Smithgall and David Dick, and in that year began borrowing from the Bank of North Georgia, which would later be merged into Synovus. In 2007, Synovus opened an $18 million line of credit for DJ Mortgage, which in turn secured loans to investors by taking possession of security deeds.
Synovus, according to both sides’ pleadings, agreed to hold the transfers and assignments for the underlying security deeds in escrow for DJ Mortgage, but they would remain in the name of the mortgage company. Only in the event of a default would Synovus be permitted to record the transfer.
According to a Synovus filing, Smithgall left the handling of DJ Mortgage’s day-to-day affairs to Dick. But in 2009 Smithgall—who, according to a letter among the court filings, had controlling authority over the company—expressed displeasure with Dick’s handling of the company’s affairs and removed him. Efforts to reach Dick by telephone and email were unsuccessful.
In September 2009, Synovus and DJ Mortgage began discussing a renewal of the loan agreement. Having determined that Synovus “needed to shore up its credit,” Synovus demanded that the transfer of security documents from the mortgage company to the bank must be recorded.
In October 2009, the parties inked an amended agreement for $16.5 million; Smithgall signed off as the guarantor of the loan.
According to the complaint filed by DJ Mortgage, the new agreement “continued to require the Bank to hold the Transfer Documented in escrow, unrecorded, unless and until DJ Mortgage defaulted on its obligations to the Bank.” Smithgall, it said, “agreed that if DJ Mortgage failed to punctually pay its obligations under the Amended Loan Agreement for any reason other than due to the gross negligence or willful misconduct of the bank,he would make DJ Mortgage’s payments upon demand” [italics in original].
Nonetheless, it said, Synovus stopped holding the transfer documents and recorded them the day the deal was signed, “over DJ Mortgage’s objection and contrary to the express language” of the agreement. By recording the transfer documents, it said, Synovus “took title to DJ Mortgage’s deeds to secure debt and the corresponding notes, thereby impairing DJ Mortgage’s ability to (1) collect payments due under its borrowers’ notes; (2) foreclose upon properties as necessary when its borrowers failed to pay; and (3) prosecute and defend certain litigation that was pending when the Bank recorded the Transfer Documents.”
Although the company requested that Synovus reassign specific deeds and notes to it when foreclosure was necessary, it said, the bank frequently refused to do so, and refused to foreclose on its own.
Synovus’ actions forced the company to settle at least two lawsuits unfavorably, it said, and spurred threats of additional suits for wrongful foreclosure. The company also incurred other expenses, suffered damage to its reputation and lost business, it said.
Because of the “quagmire of title issues that Bank caused,” it said, “every deal, payoff, and foreclosure has required extra time and effort to complete, thereby raising DJ Mortgage’s costs of doing business, and many brokers, title companies, closing attorneys, and other referral sources stopped conducting business with DJ Mortgage altogether.”
In May 2011, even though DJ Mortgage had made all its payments on time, Synovus declared it in default, citing, among other things, the company’s failure to deliver security deeds on properties it had foreclosed and failure to provide monthly financial reports and statements as called for in the loan agreement.
In August 2011, DJ Mortgage and Smithgall sued for breach of contract; additional counts sought a declaratory judgment that the company was excused from performing under the 2009 loan agreement, and said that Smithgall’s guaranty was unenforceable and that, “at a minimum, the outstanding loan balance has been reduced,” among others.
Synovus filed its answer and counterclaim for breach of contract in October 2011.
In last month’s order granting Synovus’ motion for summary judgment, the court agreed that there was no dispute that the 2007 agreement allowed Synovus to hold the transfer notes in escrow; that agreement, however, was superseded by the 2009 deal, it said, and had no binding authority.
The 2009 agreement requirement that the transfers be recorded was “clear and unambiguous,” it said. Other claims, including that Synovus had breached its contract by failing to provide funding after declaring the company in default, were also barred by the terms of the agreement.
Under that agreement, it said, “Synovus was entitled to exercise any of its remedies.” Since Synovus’ actions did not constitute “gross negligence or willful misconduct,” it said, Smithgall’s guaranty is enforceable.
The order granted Synovus a total of $16,269,749, including $1,477,843 in attorney fees. In a Nov. 11 filing, Malone submitted a bill of costs for an additional $134,834.
Malone declined to say whether the judgment, if left intact, is collectible. A defense filing from earlier this year, however, said Synovus first began loaning money to the company in 2003 “based on the financial strength and significant wealth of John Smithgall.”
The case is DJ Mortgage LLC v. Synovus Bank, No. 2011CV205000.
In an unrelated case, Smithgall was a named party in an Oct. 17 summary judgment order that he pay a $2 million share of nearly $7.8 million borrowed to finance a landfill project in Franklin County. In that case, Smithgall, business partner Charles Dinsmore and their company, Ear Resources of Franklin County LLC, were sued in federal court by Renasant Bank in an effort to recover funds the bank loaned to finance the project.
Judge Clay Land of Georgia’s Middle District ordered the defendants to pay the nearly $6 million in total principal, but his order reserved judgment on claims for interest, penalties and attorney fees until the parties provide supplemental briefs.
That order, too, has been appealed. Decatur attorney Thomas Fisher, who represents all the defendants, declined to comment on the case.