Banking Expert Discusses Letter Of Credit Transactions In Loan Servicing Case


Banking Expert

Court: 6th Circuit Court of Appeals
Jurisdiction: Federal
Case Name: First Tenn. Bank Nat’l Ass’n V. Barreto
Citation: 268 F.3d 319

Facts

The Small Business Administration (SBA) ran a program that guaranteed certain loans made by First Tennessee Bank to small businesses. Among other requirements, the agreement obligated First Tennessee to “close and disburse each loan in accordance with the terms and conditions of the approved loan authorization.” It also required the bank to execute documents, and “take such other actions which shall, consistent with prudent closing practices, be required in order fully to protect or preserve the interest of Lender [First Tennessee] and SBA in the loan.”

As a part of this arrangement, First Tennessee got the SBA to guarantee a revolving line of credit loan for Telware International, Inc., an export company. After consummating several successful transactions under this Agreement, Telware wished to enter into a transaction to sell 1,000 metric tons of navy beans and 1,000 metric tons of pinto beans to another company, Centrocoop. Since Centrocoop was based in Yugoslavia, Telware obtained a letter of credit from a local bank, Beogradska Banka, to secure Centrocoop’s payment for the beans.

In order to finance the bean transaction, Telware assembled and submitted the documentation required under the letter of credit. However, the Beogradska Banka refused to accept Telware’s documentation claiming that certain bills of lading were endorsed incorrectly. Eventually, Telware defaulted on this loan. In response, First Tennessee asked the SBA to repurchase 85% of the outstanding balance, plus interest, in accordance with the terms of the loan guaranty agreement. The SBA refused and alleged that First Tennessee had materially breached its terms by not servicing the Telware loan prudently, as required by SBA regulations and by the guaranty agreement itself. First Tennessee sued.

The Banking Expert

At trial, a banking expert witness testified on behalf of the SBA. The banking expert had worked in the international departments of various banks and his responsibilities included letter-of-credit supervision, loan servicing, document review and collection, and overseeing import-export transactions. The expert testified that a document presenter is notified of an alleged discrepancy 70-75% of the time when documents are first presented in a letter-of-credit transactions. He also explained that a lending bank such as First Tennessee has a financial interest in such documents. Therefore, according to the expert, such a bank should personally handle the presentation of documents to a foreign bank. Consequently, he opined that First Tennessee had acted imprudently by failing to take any of the foregoing steps and by allowing Telware to interact with Beogradska Banka. The district court found for the SBA and First Tennessee appealed.

Court Discussion

On appeal, First Tennessee argued that the expert lacked the qualifications to offer valid expert testimony and that his testimony was not based on technically valid reasoning. First Tennessee pointed out that the expert had no experience in lender-borrower relationships and, therefore, was unqualified to offer an opinion about whether First Tennessee had followed prudent banking practices with respect to servicing the Telware loan.

The 6th Circuit noted that the expert’s opinion at trial that First Tennessee imprudently took itself “out of the loop” by allowing Telware to handle the dispute with Beogradska Banka, fell under the “technical or other specialized knowledge” component of Rule 702. The court also noted that not only did the expert identify problems with First Tennessee’s approach, he also identified several steps that First Tennessee could have taken in an attempt to persuade Beogradska Banka to honor the letter of credit.

First Tennessee also argued, relying on Daubert, that the expert’s testimony was not based upon technically valid reasoning or methodology, even if he was qualified to offer such testimony. The 6th Circuit disagreed and noted that although Daubert specifically dealt with scientific evidence, it was well recognized that the gatekeeper analogy was applicable to all expert testimony offered under Rule 702. The mere fact that the expert’s opinions may not have been subjected to the crucible of peer review, or that their validity had not been confirmed through empirical analysis, did not render them unreliable and inadmissible.

Held

The court relied on the Supreme Court’s decision in Kumho Tire v. Carmichael to hold that the Daubert reliability factors were unhelpful in the present case. Since the case involved expert testimony derived largely from the banking expert’s own practical experiences gained from 40 years in the banking industry. The court noted that opinions formed in such a manner do not easily lend themselves to scholarly review or to traditional scientific evaluation.

It was held that the fundamental objective when considering the admissibility of expert testimony is to ensure the reliability and relevance of that testimony. In this case, the banking expert’s testimony fulfilled that objective. The district court’s decision to admit the banking expert witness testimony was affirmed.

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