Tort/Negligence – Constructive Fraud – Waiver – Duress – Contract – Partnership/Loan Conversion – Attorneys

Outer Banks Ventures, Inc. v. Tinkham (Lawyers Weekly No. 005-001-16, 14 pp.) (Stephani Humrickhouse, J.) E.B.N.C.

Holding: Any alleged breach of fiduciary duty by the defendant-attorney would have occurred in connection with the parties’ 2011 promissory note, prior to the execution of their 2013 note; thus, any such breach was waived by the 2013 note’s waiver provision.

The court grants defendants’ motion to dismiss.

Background

The defendant-attorney gave legal advice to the two plaintiff-developers (one of whom was his brother-in-law). In 2009, the attorney agreed to invest up to $500,000 in exchange for a one-third interest in the debtor/plaintiff-development company, with an option to convert his capital contribution into a loan.

In 2011, the parties executed a credit line deed of trust (the 2011 note), which consolidated the attorney’s previous investments and established a $1,000,000 line of credit for the plaintiff-developers. The 2011 note was secured by a deed of trust on certain real property.

In 2013, plaintiffs sought a release of collateral to facilitate a property sale. Plaintiffs allege that the attorney advised them to go forward with the sale but later changed his mind and refused to cooperate, causing suit to be threatened against the development company.

The parties resolved the dispute through a 2013 promissory note. The note restructured the indebtedness owed to the attorney, including an extension of the maturity date, an accommodation of the sale, and a waiver of claims against the attorney.

The development company filed a Chapter 11 bankruptcy petition. Plaintiffs initiated this adversary proceeding, alleging constructive fraud and duress.

Discussion

The Fourth Circuit has held that a waiver provision will be enforced unless it (1) was obtained through intentional misconduct, (2) was not knowing and voluntary or (3) would thwart the legislative policy behind the statute in question. Similarly, the North Carolina Supreme Court has recognized the enforceability of such provisions in accordance with general principles of contract interpretation.

Waiver provisions have specifically been found enforceable in the context of loan modification and restructuring agreements. A waiver provision obtained in exchange for a loan restructuring provides a benefit for both parties: a means of escaping default for the borrower, and protection against future claims for the lender.

Plaintiffs assert duress as a defense to waiver. The attorney allegedly advised the developers to proceed with the 2013 sale and then refused to cooperate. Plaintiffs claim this caused them economic duress and enabled the attorney to force the execution of the 2013 note.

Duress exists where one’s unlawful acts induce another to enter a contract or perform or forego to perform some act under circumstances which deprive him of his free will. A threat to do what one has a legal right to do cannot constitute duress.

Plaintiffs’ allegation that the attorney advised his brother-in-law to go forward with the 2013 sale, but then refused to cooperate by releasing his security interest, does not by itself indicate any wrongdoing or breach of duty by the attorney. Absent from the complaint is any allegation that the attorney agreed to release his security interest or that he had an obligation to do so. The attorney was entitled to stand on his legal rights.

The court also does not give merit to the allegation that the attorney acted wrongfully and to the detriment of plaintiffs by taking advantage of his superior bargaining power. The documents establish that the attorney merely acted in accordance with his contractual rights.

One of the alleged sources of the attorney’s superior bargaining power was his legal representation of the plaintiffs, but this was economic power legitimately granted to him pursuant to the parties’ voluntary dealings. Additionally, the 2011 note provides that each party had an opportunity to secure independent legal counsel, and the 2013 note indicates that plaintiffs were represented by independent counsel.

Further, any superior bargaining power stemming from the attorney’s ability to cash out of the alleged partnership was a creature of contract, as it was expressly bargained for and agreed to by the parties. Conversion of the attorney’s status to that of a creditor was always a possibility. Accordingly, any coercive power of the attorney was derived from economic power legitimately granted to him.

Also, plaintiffs have not plausibly alleged that they were deprived of their free will or that they faced irreparable injury to their business. Plaintiffs actually benefitted from the 2013 note, which extended the maturity date on the previous advances despite the occurrence of defaults and released and substituted collateral. Considerable free-will bargaining among the parties, which was ultimately resolved by the 2013 note, eliminates any validity to plaintiffs’ argument that they entered into the 2013 note only because they were faced with circumstances amounting to duress.

Finally, the 2013 note could not have been procured as a result of a breach of the attorney’s alleged fiduciary duties because at that time he had already disclaimed his partner status, which he was contractually permitted to do. Any alleged breach of fiduciary duty occurred in connection with the 2011 note, prior to the execution of the 2013 note, and thus was waived.

Dismissed.