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Tort/Negligence — Duty to Negotiate in Good Faith – Breach of Contract – Statute of Frauds – ECOA

RREF BB Acquisitions, LLC v. MAS Properties, L.L.C. (Lawyers Weekly No. 15-15-0640, 41 pp.) (Gregory McGuire, J.) 2015 NCBC 58

Holding: Defendants may have a claim for breach of the duty to negotiate in good faith, based on the unique circumstances of this case: The parties reached agreement on almost every material term of a contract to restructure defendants’ loans; the third-party bank’s employees indicated a successful negotiation; and the bank’s “term sheet” said it was “to facilitate discussion,” but the bank never told defendants that the bank considered the term sheet to be the final terms the bank would accept.

The court grants in part and denies in part the joint motion for summary judgment filed by the bank and by plaintiff, to whom the bank sold defendants’ loans.

After decades of doing business with defendants, the bank declined to renew loans that had matured. While negotiating a restructuring agreement with defendants, the bank was also – unbeknownst to defendants – negotiating a sale of defendants’ loans to plaintiff. Despite reaching agreement with defendants on most of the restructuring terms, the bank sold their loans to plaintiff.

Breach of Duty to Negotiate in Good Faith

North Carolina has never recognized a claim for a duty to negotiate in good faith; however, based on the unique facts of this case, defendants’ claim for breach of a duty to negotiate in good faith may be viable.

First, the trend in other jurisdictions is in favor of recognizing such claims. Second, North Carolina already implies in every contract a duty of good faith and fair dealing.

The court sees no reason that an agreement to continue negotiating in good faith would not be enforceable, provided that it met all of the requirements for contract formation under North Carolina law.

A jury could conclude that, while the parties did not reach a final agreement on all of the material terms of a restructure deal in their Oct. 29, 2012, meeting, their words and conduct established an agreement to continue negotiating in an attempt to finalize the terms of the agreement and to close on a restructure agreement. While it did not bind either party to the final terms of a restructure deal, such an agreement would carry with it an implied obligation that the parties conduct any further negotiations of the terms in good faith.

A jury also could find that the bank’s failure to notify defendants that its Nov. 1, 2012, term sheet was its best and final offer after months of negotiations, and the bank’s decision to cease communications with defendants after defendants responded to the term sheet, were not “fair dealing” or in “good faith.”

Accordingly, the court concludes that there are disputed issues of fact regarding whether the parties entered in an agreement to continue negotiating in good faith, and whether the bank breached such an agreement, and that plaintiff’s and the bank’s motion as to this claim is denied.

Other Issues

Given the sophistication of the defendant-borrower and the undisputed fact that defendants’ relationship with the bank had become adversarial by the time of the negotiations in question, the court finds no fiduciary relationship between defendants and the bank.

Since there was (1) no fiduciary relationship, (2) no evidence that the bank took affirmative steps to hide its attempt to sell defendants’ loans, and (3) no representation to defendants that the bank would not sell the loans, the bank did not have a duty to disclose that it was trying to sell defendants’ loans on the basis of “affirmative steps to conceal material facts.” Defendants were sophisticated business entities highly experienced in commercial real estate loan transactions. Defendants were fully on notice of the adversarial nature of the restructure negotiations with the bank and were represented by counsel throughout the negotiations. The bank never made any express representations to defendants that it would not sell the loans, nor could defendants reasonably have assumed the bank would not sell the loans merely because it negotiated with defendants over the course of several months. Under these facts, the bank was not under a duty to disclose to defendants that it was attempting to sell the loans.

Where the agreement being negotiated by the parties involved both the conveyance of real property and a commercial loan commitment of more than $50,000, but where no written agreement was ever signed by the parties, defendants’ breach of contract claim is barred by the statute of frauds.

On the other hand, plaintiff is entitled to judgment as a matter of law on its claim that defendants breached the terms of their loans, except as to defendant-guarantor Sibyl Saunders.

There is conflicting evidence as to whether the bank violated the Equal Credit Opportunity Act by requiring Mrs. Saunders to sign a guaranty simply because she was Mr. Saunders’ spouse. Although Mrs. Saunders signed a loan modification agreement which certified “that there [were] no defenses or offsets against said obligations,” this language is susceptible of multiple interpretations. Plaintiff is not entitled to summary judgment on its claim against Mrs. Saunders.

The evidence does not create any genuine issue of fact that the bank acted unfairly or in bad faith by not offering Mr. Saunders the opportunity to buy the loans before it sold them to plaintiff. The bank was not under any obligation to offer to sell the loans to Mr. Saunders. The bank presented uncontradicted evidence that it would not sell a defaulted loan back to the customer at a discount because this would be “a direct benefit to the guarantor who didn’t honor the obligations to begin with.” The undisputed facts establish that the bank did not breach a duty of good faith and fair dealing arising from the loans.

The same conduct upon which defendants might be able to establish that the bank breached a duty to negotiate in good faith could be sufficient to constitute conduct that is unfair or deceptive within the meaning of G.S. § 75-1.1.

Motion granted in part, denied in part.

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