Stephen Marshall, the bank's lawyer, said KeyBank is disappointed with the ruling and is considering an appeal to the 10th Circuit Court of Appeals in Denver.
"The bank hasn't had a chance to consider the opinion yet, so I'm not in a position to comment on the specifics of the court's ruling," said Marshall, with Durham Jones & Pinegar in Salt Lake City.
The ruling is unusual. Most contract disputes arise out of differences in interpretation of the language of the agreement. In this case, there were two contracts, one of which was hidden from Velocity, said Mary Anne Wood, the Salt Lake City attorney who represented the company.
"The bank was trying to enforce a contract other than its own documents. Most of the time, banks say, 'There it is, in the documents. You are stuck with it.' So that made [the Velocity case] unusual," Wood said.
The case dates back to 2006, when Velocity signed a contract with Sanden Machine Ltd. to buy a custom press for $1.8 million. Velocity had lined up financing with another bank when it was approached by KeyBank, which said it could offer Velocity a better loan. KeyBank approved the loan without requiring a letter of credit or a security agreement from Sanden. By then, Velocity had made a partial down payment of $80,000 to the manufacturer.
KeyBank allegedly changed its mind. Shortly before the loan closed, the bank told Sanden that it would have to secure a letter of credit before KeyBank would release a second payment to the manufacturer. In his ruling, Stewart said Velocity owner Drew Elkins was never informed of the requirement and other changes that KeyBank and Sanden negotiated.
"The reason that KeyBank did not inform Elkins of these modifications and additional requirements was so that Elkins would be more likely to enter into the loan," Stewart said in his ruling.
"If Elkins had known about these modifications and the letter of credit requirement prior to the loan closing, he would not have agreed to the loan," the judge said.
Elkins signed the loan agreement in 2007, which gave Velocity a $1.7 million line of credit. The agreement said there were no unwritten oral agreements between any of the parties and that no other agreements could supersede it. It didn't say that a letter of credit had to be in place before KeyBank would make a second payment to Sanden after the balance of the down payment was made.
By then, Sanden had received roughly $500,000 to begin construction of the press. But given that Sanden had not agreed to secure a line of credit, KeyBank withheld additional payments. Amid the confusion over terms of the loan, Sanden filed for bankruptcy, and the press was never constructed.
The bankruptcy and the contract dispute prompted Velocity to sue KeyBank in order to recoup the down payment it lost, as well as other fees the bank imposed.