A tort is born: Business court recognizes duty to negotiate in good faith

It’s not every day that North Carolina’s courts recognize a new cause of action, but a North Carolina Business Court judge did just that in a June opinion allowing a borrower to bring a claim against his bank alleging that the bank breached its duty to negotiate with him in good faith.

The case concerns two loans extended by BB&T Bank in 1997 and 2005, the first to Mark Saunders, a real estate developer, and the second to his company, MAS Properties.  Although the original terms of the loans were for one and three years, BB&T extended, modified, or renewed the loans on almost an annual basis until 2012, when Bank of America started legal proceedings against Saunders and MAS over unpaid loans. When BB&T learned of the lawsuit, they opted not to renew the loans.

The two sides brought in their lawyers to negotiate new loan terms. At an October 2012 meeting, they agreed to several key terms, and Saunders claims that he understood that they had reached a final agreement, although BB&T disputes this. BB&T sent Saunders a term sheet—a basic outline of the terms and conditions being contemplated—without telling him it represented the “last, best and final terms that BB&T would accept,” leading Saunders to conclude that he could request further revisions.

Shortly after that, BB&T put the loans up for sale and, as is its policy in such cases, stopped communicating with Saunders. BB&T ultimately sold the loans to a third party, RREF BB Acquisitions, which then filed an action against Saunders and MAS for breach of a promissory note.

Saunders filed several counterclaims against RREF and a third-party complaint bringing counterclaims against BB&T, and the case was designated to the Business Court. Judge Gregory McGuire granted summary judgment to dismiss most of Saunders’ counterclaims, but let Saunders and MAS proceed with their claim that BB&T had—and breached—a duty to negotiate with Saunders in good faith.

Keepers of the faith

North Carolina courts had never expressly recognized such a claim before, but Saunders contended that the business court should do so in his case, arguing that even if he and BB&T hadn’t reached a binding agreement, they’d at least agreed on all the terms necessary to reach one, and each side therefore had a duty to negotiate and finalize the agreement in good faith—a duty that Saunders contended BB&T had breached by selling the loans.

McGuire noted that several other states have recognized a claim for breaching a duty to negotiate, and that a clear trend had emerged among other states in favor of recognizing it. Based on “the unique facts present in this case,” McGuire found that Saunders might have a viable claim under the theory as well.

“North Carolina already implies in every contract a duty of good faith and fair dealing,” McGuire wrote. “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, McGuire wrote, might find that BB&T’s conduct at the October meeting created an agreement to continue negotiating in an attempt to finalize the terms of the deal. While such an agreement wouldn’t bind either party to the final terms of a restructure deal, it would carry with it an implied obligation that the parties conduct any further negotiations of the terms in good faith, and a jury could find that BB&T’s decision to cease communications with Saunders was not in good faith.

Chris Graebe and Mark Sigmon of Graebe Hanna & Sullivan in Raleigh represented Saunders and MAS. Graebe said that he was unsurprised that the court chose to accept the duty to negotiate and pushed back on the idea that it was an entirely new cause of action. In McGuire’s decision, he also allowed Saunders to continue with his claim against BB&T for unfair and deceptive trade practices, based upon the same conduct used to support the claim for breaching the duty to negotiate.

“I just don’t think this ruling is any sort of Pandora’s Box or opening of any kind of a floodgate,” Graebe said. “Chapter 75 [of North Carolina’s General Statutes] has for 40 years prohibited this sort of sharp, unfair business practices that this claim is getting at, so I don’t think this is any kind of an expansion of existing law, it just simply recognizes it as a discrete claim.”

Whatever they are, they aren’t this

McGuire rejected, however, Saunders’ claim that BB&T had a fiduciary relationship with him and owed him a duty to act in his best interests. The state’s Supreme Court speculated in a 2014 opinion that it was at least theoretically possible for a transaction between a bank and a customer to create a fiduciary relationship under the right circumstances. McGuire was unpersuaded that Saunders’ case fit just such a bill, however.

Although Saunders had had a relationship with BB&T for almost thirty years, by the time the sides called in their lawyers to renegotiate the loan terms, it should have been clear to a sophisticated borrower like Saunders that the relationship had turned adversarial.

“It would seem nearly antithetical to require a commercial lender to put a borrower’s interests ahead of its own in a business transaction,” McGuire wrote, adding that “it is difficult to conceive a situation in which a banking lender would owe a fiduciary duty to a sophisticated and experienced business customer.”

Since there was no fiduciary relationship, the bank had no obligation to disclose its efforts to sell the loans, so the court also granted a motion to dismiss Saunders’ counterclaim for fraudulent concealment. McGuire also granted a motion to dismiss a claim against BB&T for breach of contract based on the October meeting, citing the state’s statute of frauds.

McGuire did allow Saunders’ wife to raise a defense that the bank forced her to co-sign her husband’s loan in violation of the Equal Credit Opportunity Act, which forbids creditors from routinely requiring spousal guarantees without first ascertaining whether an applicant is creditworthy. The state’s Court of Appeals suggested in a 2013 case that a violation of the ECOA could serve as an affirmative defense in an action brought by a lender against a spouse who signed a loan as a guarantor, although the Supreme Court later reversed that decision for unrelated reasons.

Daniel Cahill, James Livermon and Richard Prosser of Poyner Spruill in Raleigh represented RREF and BB&T. Cahill could not be reached for comment on the court’s decision.

The 41-page decision is RREF BB Acquisitions, LLC v. MAS Properties, L.L.C. (Lawyers Weekly No. 15-15-0640). The full text of the opinion is available online at nclawyersweekly.com.

Follow David Donovan on Twitter @NCLWDonovan