AMERICAN ARBITRATION ASSOCIATION Commercial Arbitration Tribunal

Re: 30 148 Y 00658 12

In the Matter of the Arbitration between

BALDWIN COUNTY SEWER SERVICE, L.L.C.

and

REGIONS BANK and MORGAN KEEGAN & COMPANY, INC.

(Claimant)

(Respondents)

OPINION AND AWARD OF ARBITRATORS

WE, THE UNDERSIGNED ARBITRATORS, having been designated in

accordance with the arbitration agreement entered into between the above-

named parties and dated June 1 , 2007, and having been duly sworn, and having

duly heard the proofs and allegations of the Parties, do hereby AWARD, as

follows:

The Arbitrators have considered the evidence presented in the hearings in

this matter held in Mobile, Alabama, from January 13, 2014 through January 17,

2014, inclusive, as well as the numerous exhibits and the extensive briefing

provided by counsel. At the outset, the Arbitrators wish to compliment counsel

on both sides of this case for the clarity of their presentations, their legal skills

and good nature, and the professionalism they demonstrated from the initial

conferences through their final submissions. It was truly a pleasure to have

worked with such competent attorneys.

FACTUAL FINDINGS

Claimant, Baldwin County Sewer Service, LLC (and certain other sewer

service entities purchased by the company, collectively called "BCSS"), instituted

this Arbitration against Respondent, Regions Bank, for the actions of the Bank

and its predecessor, AmSouth Bank (collectively "the Bank"), asserting that

BCSS had been induced to purchase interest rate swaps in three transactions in

2005 and 2007. Co-Respondent, Morgan, Keegan & Company, Inc., was

dismissed as a Respondent by consent. Although BCSS had asserted several

theories of liability, it has finally claimed entitlement to compensation solely on

the basis of fraud and misrepresentation in the inducement to purchase three

interest rate swaps. It seeks the remedy of rescission, effecting the return of all

sums paid for the swaps from their inception. For the reasons that follow, this

Panel, with a dissenting vote limited to one aspect of this decision, grants the

relief claimed by BCSS.

BCSS is a private sewer utility headquartered in Summerdale, Alabama.

BCSS's principal and President, Clarence Burke, developed a professional

relationship and later friendship with a "relationship manager" (often called a loan

officer in other banks) at AmSouth Bank, Russell Ford. BCSS's other officers or

principals were Gerald McManus, the Chief Financial Officer, and outside auditor,

William Kell, David Delaney, the manager of a related entity owning a portion of

BCSS, and Michael Delaney, the attorney for BCSS and the brother of David

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Delaney. In addition to Russell Ford, the AmSouth/Regions personnel dealing

with this matter were Richard Coad, the head of the VRDN group in the Bank's

Capital Markets Department, and interest rate swap marketer, John Robinson.

After the acquisition of AmSouth Bank by Regions, Russell Ford and Richard

Coad retained their positions, but the interest rate swap marketer became Justin

Harp.

Ford was a top-producer for AmSouth and later Regions, and both BCSS

and Burke considered Ford as an advisor and a guide in the area of interest rate

risk and management. The Bank, through its advertising, repeatedly held itself

out to the community as a "trusted advisor" in financial matters, and Ford

attempted to discharge this role to the best of his ability. The Bank asserts that it

was not a consultant or advisor to BCSS. It claims that the relationship was

merely that of a debtor-creditor and that there was no "special confidential

relationship." The Bank's advertising and the apparent reliance by BCSS on the

continued advice from Ford and other officials shed a different light on the

relationship. The Bank assumed the relationship of an advisor, as well as being

a creditor.

After 2000, the Bank determined that rather than making direct longer-

term loans to substantial borrowers, it would assist such borrowers in marketing

Variable Rate Demand Notes ("VRDNs"). Such variable rate loans (sometimes

called Bonds) were found to be more profitable to the Bank than the usual

interest-bearing direct loans. The mechanism for the issuance of a VRDN was

for the borrower to sell its notes or bonds and agree to pay a rate that varied on a

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weekly basis. Rather than the Bank taking its own money and lending it to the

borrower, it would guarantee the issuer's payments, therefore wrapping its own

credit around the borrower's credit and thus enhancing the marketability of the

borrower's notes. This was the rough equivalent of the Bank issuing a letter of

credit guaranteeing the borrower's notes. In this manner, the borrower would

pay a lower interest rate than it would have had it merely borrowed the money

from the Bank on the strength of its own credit. The purchaser of a VRDN would

be willing to accept a lower interest rate because the Bank was more credit-

worthy than the borrower. The Bank would charge the borrower a fee for

guaranteeing the borrower's note, a Trustee fee, and also an additional fee for

the remarketing of the note on a weekly basis in the general financial markets for

these products. Burke was told by Ford and others at the Bank that the VRDN

rate was tied to LIBOR and that he was paying 115 basis points over LIBOR for

the letter of credit, the remarketing fee, and the trustee fee. Ford verified that he

had told BCSS that the rate would be a LIBOR equivalent rate. Even Coad when

discussing the VRDNs internally referred to the VRDNs as "LIBOR based." (See

Claimant's Exhibit 57.)

As will be discussed later, the interest rate described in the Notes and the

Master Agreement governing the transaction described the rate merely as the

"lowest rate that would, in the opinion of the Remarketing Agent, result in the marketing value of the [VRDNs] being 100% of the principal amount thereof on the date of such termination, taking into account relevant market conditions and credit rating factors as they exist on that date; provided however, that the Weekly Rate may never exceed the Cap rate [12%]."

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VRDNs issued by companies such as BCSS and guaranteed by banks

such as Am South/Regions Bank did not exactly follow the LIBOR rate, but the

discrepancies were so small that the Bank's representatives (mistakenly)

informed customers that the VRDN rates were LIBOR rates. The LIBOR rate is

actually the London Interbank Offered Rate, namely the rate at which banks

borrow funds from other banks in the London Interbank market. Borrowers such

as BCSS were told, and historically the experience bore out the representation,

that the rate would be LIBOR-based. Ford repeatedly confirmed these

statements in his testimony.

In addition to this variable rate, the Bank charged for bank service fees,

trustee fees, and remarketing fees, which the customers readily understood were

in addition to the "LIBOR" rate, but the overall savings to the borrowers amply

justified the use of VRDNs rather than direct loans by the Bank to its customers.

The problem in this transaction, and one not explained to BCSS or other

customers of the Bank, was that the adherence to the approximate LIBOR

standard was dependent upon the Bank's own credit. LIBOR was based on the

credit of some of the world's largest and most stable banks. The VRDNs were

based on the credit worthiness of the Am South/Regions Bank guarantee. There

was some explanation that there may be a remarketing risk, but the Bank

assured Burke, and the VRDN agreement provided, that if there were problems,

the Bank would buy back the notes and BCSS would be charged no more than

the Bank prime rate from the time of the issuance of the VRDN transactions.

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Between 2002 and 2007, BCSS issued $42.575 million in these VRDN

notes. Notwithstanding the contrary language in the agreements, the Bank

consistently referred to the rates paid by BCSS as LIBOR rates.

As interest rates dropped during 2002 to 2007, the Bank, through Ford,

explained to Burke that BCSS could convert its variable rate obligations to a fixed

rate and freeze these then-current low interest rates for the balance of the life of

the various VRDN obligations. Ford explained that an interest rate swap, if

purchased by BCSS for a substantial fee, would permit the company to pay a

fixed interest rate, and that the swap partner would be obligated to pay the

variable rate on the outstanding VRDNs. This was marketed to BCSS on the

basis that the VRDNs were paying interest based on a weekly LIBOR and the

interest rate swaps so purchased would pay LIBOR to the note holders based on

a monthly revision which averaged the weekly rates.

Later, when David Delaney, BCSS's counsel, noted small variances and

questioned them, the Bank explained that there might be some small variance,

but the rates would be offset. The differences were caused by the slight variance

between weekly and monthly LIBOR rates. This explanation assuaged any

apprehension that there was any substantial variance from LIBOR. This Panel

has no question but that this is the way the swaps were marketed to BCSS, that

this was in conformity to the training the BCSS representatives had received, and

that this scenario was replicated in contemporaneous transactions with other

borrowers.

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There were, in fact, additional risks, one called a "basis risk," well

understood by the swap experts at the Bank and testified to by the Bank's expert,

who called this risk a "lottery ticket," meaning that the risk was one against which

the Bank could not protect itself and would not assume in swap transaction with a

client. Internal documents at the Bank indicated that this basis risk should be

disclosed to a customer as an inherent risk in purchasing a swap as it made the

purchase less than one which would generate a truly fixed rate.

The explanations should have informed BCSS that in the transactions in

question, this basis risk was one that the VRDNs might depart from the LIBOR

approximatfon because the Bank's own credit might be adversely affected by

unknown circumstances or market forces, and thus the notes could not be sold at

LIBOR rates. This explanation was not accomplished in the BCSS transactions,

nor in the transactions with various other customers whose swaps were the

subject of proofs at the hearing. An additional risk, that the entire market for the

VRDNs would collapse, was not even considered by the Bank. The notes would

be forced on the Bank for repurchase, thus generating a loan at the Bank's prime

rate, which would diverge considerably from the LIBOR rate offered by the

swaps. The customer therefore would be paying both the obligation it had

incurred under the swap and also would be liable for the spread between LIBOR

and the bank prime rate.

The Bank contends that these risks had in fact been disclosed to BCSS on

a number of occasions. The first was when BCSS was initially considering the

purchase of swaps in 2002. The Bank then utilized the services of Key Bank in

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Ohio to provide representatives to visit customers and explain the swap

transaction, including these inherent risks. The Key Bank records indicate that

there was such an explanation on April 16, 2002 by a Key Bank employee,

Michelle LoSchiavo, and that a PowerPoint presentation had been presented to a

BCSS employee, Drew Delaney.

The Panel notes that this was three years before the purchase of the first

swap and that the only record of this presentation was a Key Bank business

record noting that it was performed. However, Drew Delaney, the son of one of

BCSS's principals, was then a twenty-three year old low level employee, a recent

graduate, and holding a temporary job in the BCSS office supervising the

secretaries and sewer service fee charges. He had no duties relating to the

finances of BCSS. He left the company in 2003, two years before the first

interest rate swap was purchased in 2005. His testimony was that he never met

with Michelle LoSchiavo, and that no one from the Bank had made a

presentation to him concerning the swaps. Had there been such a presentation,

he would have called in Burke, his father, or another senior BCSS officer.

The Bank further contended that, during the rate-setting telephone calls

for the purchase of each swap, the risks were again explained by Bank

representatives to Burke and other senior officials at BCS$_. The Panel had the

opportunity to listen to a recording of such a call, and it was clear that no such

explanation had been given. In short, the Panel determines that the basis risk

was never explained to BCSS.

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To the contrary, the sole explanation, given repeatedly both orally and in

writing, was that BCSS was purchasing a fixed rate when it bought the swap. It

is true that if the Bank documents were carefully read, one might discern a

variance between the quoted language describing the interest rates paid on the

VRDNs and the swaps. But measuring these documentary explanations stated

in arcane language against the outright clear representations of a fixed rate

repeatedly made by the Bank, BCSS was justified in relying on the definite

statements that it was purchasing such a fixed rate. For example, when David

Delaney, BCSS's counsel, was first reviewing the VRDN documents, he noted

the language in the VRDN agreements concerning the remarketing rate and that

this language was not exactly the same as stating a "LIBOR" rate. He

determined that the best way to resolve this difference was to call the Bank's

representative and ask the question directly. He was assured that the

remarketing rate was a LIBOR rate. This makes it understandable that the

VRDN rates could be balanced against the swaps' LIBOR rates. Thus there

would be a fixed rate paid by BCSS. This process was repeated by William Kell,

BCSS's auditor, in 2005 when he reviewed the swap documents. He was also

assured that the VRDN notes and the swaps were both LIBOR rates.

Additionally, BCSS's auditor, after being assured of the LIBOR basis of both the

notes and the swap, each year described the net result as a fixed rate. The Bank

reviewed these audits and never took exception. The numerous internal Bank

documents and the representations to BCSS and other customers that refer to

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the VRDN/swap net effect as a fixed rate overshadow any contrary assertions

based on the rather obtuse quoted language of the VRDN agreements.

Even in 2008, when the financial bubble burst and the credit ratings of the

smaller banks (and even some larger banks) were adversely affected, causing

the issues raised in this case, Ford was contacted by BCSS and asked why it

had received bills for interest greatly in excess of the swap rate. Even then,

Ford's answer was that there had been some mistake; the rate still was fixed,

and this would all be adjusted.

Ford's misunderstanding was not an isolated occurrence. The Bank's

specialist, who understood the problems with the basis risk, testified that he had

received calls from numerous other bank relationship managers whose

customers were in the same position as BCSS. They had all told their customers

that they had received fixed rates and had no idea what had gone wrong. The

Bank's internal training manuals showed that the relationship managers had

been trained to consider a VRDN and rate swap as resulting in a fixed rate. This

was not a misunderstanding by BCSS, or even by Ford. It was a general and

pervasive failure of the Bank to communicate the true risks of the rate swap.

There certainly had been no warning of the basis and market risks, i.e.,

that the entire VRDN market would virtually disappear, and thus there would be

no variable rates market against which the LIBOR swaps could be balanced. For

a time the Bank attempted to remarket the VRDNs, but to no avail. There was no

market.

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The Panel determines that both the active misrepresentation of the

financial obligations under VRDNs and the failure to disclose the true risks of the

rate swap constituted a material misrepresentation sufficient to justify the remedy

of rescission. This rescission does not affect the viability of the VRDNs, which

are not here questioned, but rather the rate swaps. Therefore, as explained

later, BCSS is entitled under Alabama law to have refunded to it all sums it

expended for the rate swaps from the time of their inception.

The Bank has raised the defense of the Statute of Limitations. However,

as is later discussed, the Panel determines that this was a continuing fraud

through and including October 2008 when the normal spread that had been

explained as the difference between the weekly and monthly LIBOR rates

became significant. It then suddenly rose from 3.68% to 9%. Like others of the

Bank's customers, BCSS was told that the interest situation would be remedied

and that they were only liable for the negotiated fixed rate. The court filing

satisfied the Alabama two-year Statute of Limitations for a fraudulent inducement

claim. Therefore there factually is no limitation issue in this case.

Following the 2008 crash in the financial markets, Rick Coad met with

BCSS and was told that based upon the explanations given by the Bank officers,

they thought they had fixed their rate by entering into the swaps. Coad told

BCSS that if this was their goal they never should have been sold an interest rate

swap. Coad admitted to another Bank employee that he was disappointed with

the relationship managers because they had a perceived total lack of

understanding of interest rate swaps and were confused regarding the effect of

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webHighlight

swaps when paired with a VRDN. This did not, however, affect the damage that

had already been done.

A separate issue exists concerning a purported release signed by BCSS,

concerning which Arbitrator Beiley dissents from the majority view of Arbitrators

Platau and Dreier.

The release in question relates to a problem that occurred in April 2009.

At that time, BCSS's auditor, in the process of performing the 2008 audit,

discovered that there were four minor technical defaults under covenants in the

VRDN documents. BCSS immediately notified the Bank of these defaults and

requested waivers. The Bank immediately agreed and, without any consultation

with representatives from BCSS as to its terms, had its attorneys prepare a

waiver document dated April 30, 2009 entitled "Agreement and Waiver of Certain

Covenant Defaults." BCSS was told by the Bank that it will be happy to waive

the defaults for the nominal sum of $5,000 so that the auditor could present a

clean audit letter. The document was sent to the Bank's CFO who first checked

that each of the technical defaults were in fact waived, and he then forwarded the

document to the principals and guarantors on the VRDN obligations for their

signatures. At no time was there any mention by the Bank that it had included

waiver or general release language on the part of BCSS in the body of this four

page document, which apparently had been intended solely to be a waiver on the

part of the Bank of the four defaults and a payment of $5,000 by BCSS.

Paragraphs 5 and 13 of the agreement read in relevant part as follows:

5. Release of Defenses. The Account Party acknowledges and agrees that, as of the Effective Date, the Account Party was in

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default under the Credit Agreement, due to violation of the covenants referenced in Section 3 hereinabove ... The Account Party acknowledges and agrees (i) that there are no offsets or defenses to the Obligations owed by the Account Party to the Bank pursuant to the Financing Documents, and (ii) that there are no Events of Default existing on the date hereof other than the known defaults referenced in Section 3 hereinabove, nor are there any other facts or circumstances which will or could lead to an Event of Default under the Financing Documents. To the extent the Account Party has or could raise any claim, defense or cause of action against the Bank arising out of or related to the Financing Documents, or any of them, or this Agreement, it is hereby waived and released.

******************************

13. No Waiver. Nothing contained herein shall be construed as a waiver or acknowledgement of. or consent to any breach of or Event of Default under the Credit Agreement and the Financing Documents not specifically mentioned herein ....

[Emphasis added.]

The Panel notes that one would expect under the term of "Release of

Defenses" that BCSS would be acknowledging that it was in default in the four

particular areas and had no defenses to the Bank's claims concerning these

particular items. It was paying $5,000 for the Bank to waive these defaults.

However, at the end of this paragraph, the Bank had added a sentence: "To the

extent the Account Party has or could raise any claim, defense or cause of action

against the Bank arising out of or related to the Financing Documents, or any of

them, or this Agreement, it is hereby waived and released." [Emphasis added.]

This sentence could, as now urged by the Bank, be read as releasing BCSS's

fraud or misrepresentation claims not yet asserted or fully appreciated by BCSS

against the Bank for potentially several million dollars in losses BCSS had

suffered as a result of the swaps not covering the VRDN interest payments. The

13

initial losses had in fact been discovered six months before this document, but,

as of the time of this waiver of the reporting requirements, the relationship

between the parties had not deteriorated, and business had been proceeding

between the entities. In fact, it was not even apparent that the Bank itself

considered this language a waiver of the fraud and misrepresentation claims as

this release language was not asserted as a separate defense for some time

after BCSS's later claim.

Paragraph 5 must also be read in conjunction with the provisions of

Paragraph 13, entitled "No Waiver." This provision leads one initially to believe

that there was no waiver of any default by either party not specifically mentioned

in the agreement, i.e., that this lack of waiver applies to both sides. Therefore

the fraud claim certainly would not have been waived. A very careful reading of

the language shows that there was only no "waiver or acknowledgement of, or

consent to" breaches or defaults under the Credit Agreement and Financing

Documents. This clause may therefore arguably not apply as a "release" under a

common law, statutory, or equitable claim for fraud or misrepresentation. The

majority of the Panel determines that (1) the provisions of Paragraphs 5 and 13

read together, (2) the general purpose of the agreement as stated therein (to

waive the four technical defaults for $5,000), and (3) the parties' common

understanding of the agreement at the time, reveal no intention of BCSS to

release the bases for its rescission claim or any intention of the Bank to demand

such release in this documents. The Bank was merely waiving four minor

technical defaults for the paltry sum of $5,000. If the Bank actually intended to

14

hide a release of a potential multi-million dollar claim without calling even the

subject matter to the attention of BCSS, this well could be an additional claim of

fraud, certainly nullifying the effect of this release. If the Bank so intended this as

such .a release, it could have clearly stated this in the title, noted its intention in

contemporaneous communications, or otherwise put BCSS on notice of a

release of unrelated claims.

CONCLUSIONS OF LAW

The Panel must initially examine whether the repeated representations

concerning the interest rates on the VRDNs as being tied to LIBOR, where a

careful reading of the VRDN agreements would have shown that they were

separately negotiated variable rates governed by the ability of the remarketer to

obtain the best rates available, constituted a fraud.

As noted earlier, even though the interest rate provisions were contained

in a two hundred word esoteric definition on page 134 of the 2002 VRDN

agreement, this language was actually discovered by David Delaney, who

admitted his confusion in interpreting the language. But he was assured by Ford

and others at the Bank that this language meant that BCSS was receiving a

LIBOR rate (plus the adjustments noted earlier). The Panel determines that Ford

actually believed that the VRDNs in fact had a LIBOR-based rate with the noted

adjustments. Others at the Bank who knew that the rate was not technically a

LIBOR rate also did not intend to mislead BSCC. The history of the VRDN

marketing, dependent upon bank credit, showed slight if any variance from

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LIBOR. The difference was explained and believed by the Bank personnel to

reflect the slight variations between the monthly and weekly LIBOR rates.

The intention to deceive, however, is not a requirement for the statutory

tort of misrepresentation in Alabama. '"Legal fraud' includes misrepresentations

of material fact made 'by mistake or innocently,' as well as misrepresentations

made 'willfully to deceive, or recklessly without knowledge."' Lawson v. Harris

Culinary Enter., LLC, 83 So. 3d 483, 492 (Ala. 2011 ), quoting Young v. Serra

Volkswagen Inc., 579 So.2d 1337 (Ala. 1991 ), Alabama Code 6-5-1 01 (Fraud-

Misrepresentation of material fact). '"An innocent misrepresentation is as much a

legal fraud as an intended misrepresentation and the good faith of a party in

making what proves to be a material misrepresentation is immaterial as to the

question whether there was an actionable fraud if the other party acted on the

misrepresentation to his detriment."' Davis v. Sterne, Agee & Leach, Inc., 965

So.2d 1076, 1091 (Ala. 2007), quoting Smith v. Reynolds Metals Co., 497 So.2d

93, 95 (Ala. 1986). An innocent misstatement of a material fact which a counter-

party is intended to believe and rely upon, and does so to its damage, is a fraud

under Alabama law.

This fraud without scienter is generally recognized throughout the country

as "equitable fraud" justifying the remedy of rescission. Suppressing material

facts where there is an obligation to communicate them has similar results. Ala.

Code 6-5-102. Here, however, BCSS is not seeking to rescind the VRDN

agreements, but only to establish the fact that it had been repeatedly assured

that these agreements were based on LIBOR rates. The alleged fraud relates to

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the incorporation of these misrepresentations in the later interest rate swap

transactions of 2005 and 2007.

With regard to these interest rate swaps transactions, the earlier incorrect

characterization of the VRDN interest rates as being LIBOR- based was repeated

by the Bank and relied upon by BCSS. It was advised and counseled by the

Bank to enter into the transaction on the strength of the Bank's representation

that the LIBOR payments on the swaps would cancel the variable rates on the

bonds. The Panel wishes it to be clear that it is not relying upon single

statements which may have used the term "fixed rate" in an offhand or summary

matter. The Bank's internal documentation for the training of its personnel, the

experience with a legion of additional customers, and the testimony of the

personnel who had direct communications with the customers concerning the

nature of the swaps has demonstrated by clear and convincing evidence that the

Bank repeatedly misrepresented the fixed interest nature of the VRDN/swap

transaction.

The basis or market risks described earlier were never the basis of a

warning, caveat, or description by the Bank to BCSS. This omission constituted

a material misrepresentation in the same manner as the positive misstatements

that the VRDNs' variable rates would balance the payments made for the swaps,

and would have the net effect of giving BCSS a fixed rate. These were material

omissions and active misrepresentations of material facts causing BCSS to enter

into the swap transactions. Under the Alabama statutes and cases interpreting

them, BCSS is entitled to rescind the swap purchases.

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There has been a settled principle of Alabama law for over a hundred

years that "where one is induced by fraud to enter into a contract he may rescind

by restoring benefits and recovering payments." Southern Building & Loan Ass'n

v. Argo, 141 So.2d 545, 546 (Ala. 1932), citing earlier cases. "An alternative

would have been to retain benefits and sue in deceit for damages." /d. In this

case, BCSS has elected the remedy of rescission.

Additionally, the Panel must examine the agreements' provisions that

BCSS could not rely upon any oral representations and that it had an ample

opportunity to read the agreements and have the agreements reviewed by

accountants and attorneys. The issue is whether these contractual provisions

nullified any and all representations. This is a threshold issue which potentially

could bar BCSS's claim.

With regard to this claim that the merger and integration clauses bar this

commercial fraud claim, Alabama law rejects this argument, and permits proof of

the fraudulent representations and reasonable reliance. See Ex parte Lumpkin,

702 So.2d 462, 467-69 (Ala. 1997); Patten v. A/fa Mut. Insurance Co., 670 So.2d

854, 857 (Ala. 1995); Environmental Sys. Inc. v. Rexham Corp., 624 So. 2d

1379, 1383 (Ala. 1990). ("To hold otherwise is to encourage deliberate fraud.")

The same is true with disclaimer and non-reliance clauses, the Court stating that

if the agreement "has been induced by deliberate fraud, the written document

signed in that agreement is void." Such an agreement is "of no more binding

efficacy ... that if it had no existence, or was a piece of waste paper."

Environmental Sys. Inc. v. Rexham Corp., supra., 624 So.2d at 1385. The Court

18

continued, stating that "the existence of a general disclaimer clause in the

purchase agreement does not, as a matter of law, preclude [plaintiff] from

justifiably relying on an alleged oral representations that were not contained in

the contract." [!d. 1

The Panel therefore rejects the bar ostensibly caused by these clauses

under the facts of this case. While its intent to deceive was not a deliberate

fraud, the misstatements and omissions were intended to induce the purchase of

the swaps. The Bank may not hide behind these disclaimers and non-reliance

clauses.

BCSS had claimed punitive damages in this matter, but this claim has

been withdrawn. Had it not been withdrawn, it would have been denied, as it is

clear that the statements made by Ford and other customer representatives,

while incorrect and in situations that fully satisfy the Alabama statute, were not

made with intent to deceive or to engage "deliberately in oppression, fraud,

wantonness or malice." See Ala. Code 6-11-20 (2013). Exxon Mobile Corp. v.

Alabama Department of Conservation and Natural Resources, 986 So.2d 1093,

1113-15 (Ala. 2007). Therefore there is legally no limitation defense in this case

It is in this context that the innocence of the misstatements and omissions protect

the Bank.

The Bank has stated that the language of the several agreements

governing these transactions make it clear that BCSS could not rely upon the

representations made by Ford and the other bank officer with whom BCSS dealt.

Both sides have cited the Alabama case of Foremost Ins. Co. v. Parham, 693

19

So.2d 409 (Ala. 1997). The standards set by the Court in Foremost is one that

grants the Panel as a fact-finder, "greater flexibility in determining the issue of

reliance based on all of the circumstances surrounding a transaction, including

the mental capacity, educational background, relative sophistication and

bargaining power of the parties." /d. at 421. The standard is one of "reasonable

reliance" which bars a fraud claim as a matter of law if the Plaintiff is fully capable

of reading and understanding the document, but makes "a deliberate decision to

ignore the terms of a written contract." /d. The Panel acknowledges that, unlike

Foremost, this is not a case where, if the Plaintiff's "briefly skimmed" the

contracts, they would have discovered the fraud. The agreements in this case

contain thousands of pages, and it is true that BCSS had the agreements

reviewed by its counsel, accountant and auditor and even actually found the

language relating to the interest rate on the VRDNs. /d. at 421-22. The Panel

has noted, however, that the explanation given concerning the meaning of the

language was objectively incorrect, and throughout the entire history of the

transaction BCSS was led to believe that its rate was based on LIBOR.

The Alabama courts have found that reasonable reliance is defeated only

when the contract document "clearly contradicts the alleged misrepresentations"

and there was a "deliberate decision to ignore written contract terms." Sexton v.

Bass Comfort Control, Inc., 63 So.3d 656, 662 (Ala. Civ. App. 2010). This did not

happen in the case before this Panel. If there are contracts that are not "easily

understood," reasonable reliance will not be defeated as a matter of law.

Likewise, if the transaction requires the correlation of multiple transactional

20

documents to discover the fraud, reasonable reliance will not be decided as a

matter of law. The question is for the fact finder. Ex parte Seabol, 782 So.2d.

212, 216-217 (Ala. 2000). The Panel finds such reasonable reliance here.

The Bank contends that it had no heightened duty to disclose the nature of

the transaction to BCSS and it was a merely a creditor. There was no special

confidential relationship. The Panel determines otherwise. While a creditor, as

such, has no "special confidential relationship," in this situation such a

relationship was assumed as the Bank guided BCSS through the swap

transactions. See standards set in Flying J Fish Farm v. The People's Bank of

Greensboro, 12 So. 3d 1185, 1190-91 (Ala. 2008); Ex parte Ford Motor Credit

Co., 717 So.2d 781,786-87 (Ala. 1997). This case is also unlike CNH Am., LLC

v. Ligon Capital, LLC, _ So.3d _, 2013 WL 5966782 (Ala. 2013), cited by

BCSS. CNH Am, LLC. is also a fraudulent suppression case, but the conduct

went far beyond that attributed to the Bank by BCSS.

It is possible that independent research into the financial markets by

BCSS might have disclosed the variance between the VRDN rates and LIBOR

and the risk of the collapse of the VRDN resale markets. But this knowledge was

not readily available to BCSS, and was well known to the specialists at the Bank

who could have better trained the relationship managers or directly contacted the

borrowers with this complete explanation. The Bank has affirmatively asserted

that it did so back in 2002 and again during the rate setting telephone calls. The

Panel has determined that this was a misrepresentation. Neither of these

explanations were actually given. The fact that the Bank is relying upon these

21

explanations indicates at least some acknowledgement of its duty so to have

advised BCSS. The Bank failed in this duty.

The Bank also claims that Ford's personal relationships with Burke and

other BCSS investors should cause the Panel to discount Ford's testimony. The

Panel understands that in smaller communities there will be interrelationships

between bankers, real estate developers, builders, etc. Some shared economic

interests are not disqualifying. The Panel has assessed Ford's credibility and

determines that his testimony is believable. His later cross-examination, where

he was led through potentially contradictory testimony concerning his knowledge

of the variability of the VRDN rates vis-a-vis LIBOR, does not affect his direct and

positive testimony concerning the statements he made to Burke and others,

which were patently incorrect and were a significant basis for BCSS entering into

the rate swaps.

The Bank has raised the Statute of Limitations issue as a defense.

However, the Panel determines that there was a continuing but hidden fraud

through and including October 2008. The small variances between the VRDN

rate and the published LIBOR rate, or LIBOR rate and the VRDN rate, would not

put a reasonable borrower on notice of the fraud. They were contemporaneously

explained by the Bank and put BCSS at its ease. The fraud became apparent

only in October 2008 when the prior spread that had been explained, e.g., as the

difference between the weekly and monthly LIBOR rates, became significant

when the rate increased from 3.68% to 9%. Even then, BCSS was told that the

22

interest situation would be remedied and that they were only liable for the

negotiated fixed rate.

Soon it became apparent that these statements, like the VRDN/swap

balancing statements, were untrue. The Circuit Court filing was well within the

Alabama two-year Statute of Limitations (after discovery) for a fraudulent

inducement claim. See Ala. Code 6-2-3 (2003).

In the next section of this Opinion the Panel will discuss the damages to

be awarded, but the Bank has asserted that there were substantial benefits

conferred upon BCSS by the subject transactions. Specifically it states that

BCSS received favorable financing, and during the subject period it increased its

assets tenfold. For twelve years it has enjoyed low market interest rates and has

been protected by the swaps from interest rates which could have risen over

LIBOR. The problem with the Bank's argument is that the below-market rates

had been received initially when the VRDNs were marketed. Since 2008, BCSS

has received the Bank's prime rate on the former VRDN notes. This indeed has

been a benefit to BCSS. However, the VRDN notes are not the subject of the

damage claim, even though there was a misrepresentation that the initial rates

were linked to LIBOR. BCSS's claim is based on the cost of the swaps. Thus,

as it relates to the rescission of the interest rate swaps, this argument is

irrelevant.

It is true that Claimant has received the protection of the swaps against

interest rates which for part of 2006 and 2007 climbed above LIBOR. The

23

damages computation takes into account the sum total of all cash flows and

effectively unwinds or rescinds the swap transactions.

For the foregoing reasons, the Panel finds legal sufficiency to award

Claimant the remedy of rescission.

COMPUTATION OF DAMAGES

Had the swap transactions never occurred, Claimant would have had

neither the cash inflows nor the cash outflows associated with the swaps. The

measure of damages is then the difference between the total swap fixed cash

flow (paid by Claimant) and the total floating swap cash flow (received by

Claimant) for the period beginning June 1, 2005 through January, 2014. For

much of 2006 and 2007 the swap cash flow received by Claimant exceeded the

swap cash flow paid by Claimant. In rescinding the swap transaction, the total of

all the cash flow received by Claimant is subtracted from all cash flow paid by

Claimant as if the entire transaction had never occurred. The effect of this

calculation is to award the Claimant the net of all the cash flow paid less the cash

flow received during the life of the swaps.

AWARD

The total swap payment cash flow made by Claimant less the total

swap receipt cash flow paid to Claimant for the relevant time period totaled

to Seven Million Four Hundred Nineteen Thousand Three Hundred Fifty-

Four Dollars and Fourteen Cents ($7,419,354.14). CLAIMANT IS HEREBY

AWARDED THIS AMOUNT AS RESCISSION DAMAGES.

24

The administrative fees of the American Arbitration Association totaling

$14,200.00, shall be borne equally by BCSS and Regions Bank, and the

compensation and expenses of the Arbitrators totaling $127,540.40, shall be

borne as incurred. Therefore, Regions Bank shall reimburse BCSS the sum of

$7,1 00.00, representing that portion of said fees and expenses in excess of the

apportioned costs. previously incurred by BCSS, upon demonstration that these r

incurred costs have been paid. The above sums are to be paid on or before

sixty (60) days from the date of this Award. This Award is in full settlement of the clairns submitted to this Arbitration.

All claims not expressly granted herein are hereby denied.

I, Hon. William A Dreier, do hereby affirm upon my oath as Arbitrator that

I am the individual described in and who executed thls instrument which is my

Award.

)~ l._e9 LlJ I l.,j Date

I, Steven M. Platau, do hereby affirm upon my oath as Arbitrator that J am

the individual described in and who executed this instrument which is my Award.

/JIJ t'+ t'-.. L t ct -:z o 1 '"( Date Steven M. Platau, Arbitrator

25

Dissent

While I agree wlth almost all of the factual findings, analysis and legal

conclusions of the majority, I disagree with their ruling that the release contained

in the April 30, 2009 Agreement is inva!fd and does not bar BCSS's clairns.

The April 30, 2009 Agreernent (the "Agreement"), excluding the signature

pages, is just three C3) pages long and was signed by BCSS and the loan

guarantors,. one of whom was an experienced Alabama attorney, several rnonths

after BCSS learned that the interest rate swaps would not fix BCSS's Interest

rate as represented by the Bank.

In Paragraph 5 of the .Agreement. BCSS acknowledged and agreed that it

had no offsets or defenses to its obligations to the Bank but, if it had a claim.

defense or cause of action against the Bank arising out of or related to the

Financing Documents which included the swap agreements, it waived and

released them.

The release was not procured by fraud nor was BCSS prevented from

having its counsel review the Agreement. The Bank's agreement to waive

BCSS's defaults constituted valid consideration forth!.'; release. I do not find

ambiguity in the release language nor do l find H1at Paragraph 13 of the

Agreement conflicts with or creates an ambiguity with Paragraph 5. Even if the

two paragraphs conflict, I would not resolve the conflict by writing the release

provision out of the Agreernent.

Because l find the release is valid and bars BCSS's claims, I would rule in

26

favor of the Bank and for that reason respectfully dissent from my fellow

arbitrators.

l, Stanley A Beiley, do hereby affirm upon my oath as Arbitrator that I am

the individual described in and who executed this instrument which is my Award.

11 ~c;k It f Zf>{lf Date

~- -~~-O.J3hte L( Stanley A Be~itrator ~

27