While North Carolina has never recognized a fiduciary relationship between lenders and borrowers, in June the North Carolina Business Court did recognized a new cause of action: breach of a duty to negotiate in good faith.[1] The Court confined its decision to the particular facts present in the case, leaving many questions unanswered regarding this type of claim.
BB&T gave two loans totaling $5.275 million to an experienced real-estate developer. BB&T and the client had a long (30 year) borrower-lender relationship, which the Court characterized as “multifaceted and unique.”[2] The loans needed restructuring, so BB&T and the borrower spent over eight (8) months extensively negotiating their terms. The negotiations progressed to the point where BB&T provided the borrower with a term sheet and forbearance agreement. At this meeting, the parities shook hands and a BB&T official wrote internally that they had been “successful in negotiating a structure for extension” of the loans. Then BB&T “went dark,” ceasing communication with the borrower, and selling the loans to Plaintiff RREF BB, who commenced collection proceedings.
The Defendant’s lead argument against collection was that BB&T violated a fiduciary duty owed to them by failing to disclose its attempts to sell their loan while negotiating a forbearance agreement. Additionally, Defendant argued BB&T breached its duty to continue negotiations in good faith.
As the Court acknowledged, there are “no reported North Carolina appellate cases in which a fiduciary duty has been found in a borrower-lender transaction.”[3] However a 2014 North Carolina Supreme Court case held open the idea, opining “it is possible, at least theoretically, for a particular bank-customer transaction to give rise to a fiduciary relationship under the proper circumstances.”[4] Still, the Court refused to find a fiduciary relationship in this instance, stating that if there was any such relationship it ceased upon negotiations when both parties were represented by attorneys and “negotiating to protect their respective best interests.”[5]
The Court nevertheless allowed the Defendant to move forward on a new claim: breach of a duty to negotiate in good faith. The Court held the parties’ words and conduct at the final meeting could show “an agreement to continue negotiating in [an] attempt to finalize the terms of the agreement … [w]hile it did not bind either party to the final terms … such an agreement would carry with it an implied obligation that the parties conduct any further negotiations of the terms in good faith.”[6] The Court also acknowledged a trend in other jurisdictions in favor of recognizing such claims.[7] Finally, as North Carolina already implies in every contract a duty of good faith and fair dealing, the Court determined an agreement to continue negotiating in good faith would be enforceable, “provided it met all of the requirements for contract formation under North Carolina law.”[8]
While significant, this decision leaves many important questions unanswered. For example, what establishes an agreement to negotiate in good faith? Under what circumstances can a party break off negotiations? What are the elements for proving a party did or did not act in good faith? What are the measure of damages for a breach of duty to negotiate in good faith?
It will be interesting to see how the North Carolina Court of Appeals addresses this claim. Until then, how this decision will practically affect future business transactions between lenders and borrowers remains to be seen.
[1] RREF BB Acquisitions, LLC v. MAS Properties, LLC, 2015 NCBC 58.
[2] Id.
[3] Id.
[4] Dallaire v. Bank of Am., N.A., 367 N.C. 363, 368 (2014).
[5] RREF BB Acquisitions, LLC.
[6] Id.
[7] Id. See, Teachers Ins. & Annuity Assoc. of Am. V. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987).
[8] Id.
