North Carolina courts have long held that a lender does not owe a fiduciary duty to its borrowers. But what about a “Duty to Negotiate in Good Faith?” In a recent opinion (RREF BB Acquisitions, LLC v. MAS Properties, June 9, 2015), the North Carolina Business Court held that such a claim may be viable in North Carolina. While the Business Court is not an appellate court with binding precedent, its opinions are still closely followed and have been characterized as “highly persuasive” by the federal courts. Thus, its recent ruling is worth noting as it could signal the opening of a door for a brand new lender liability claim in North Carolina.

The Facts

Defendant real estate companies obtained several large, short-term commercial loans from BB&T starting in 2005. The loans were routinely extended and renewed through 2012. In February 2012, BB&T informed the defendants that it did not intend to further renew the loans. However, despite this notice, BB&T then began to negotiate with the defendants about loan renewal terms over the course of several months. In late 2012, BB&T sent the defendants several term sheets discussing proposed terms for a loan restructure. Each term sheet stated that they did “not constitute any kind of commitment or undertaking.” While the term sheets were still being discussed, BB&T sold the loans to plaintiff RREF BB, who refused any restructure and commenced collection proceedings. Defendants counterclaimed, and sued both BB&T and RREF for multiple contract and tort claims. On summary judgment, the court ruled in favor of the lenders on almost all the counterclaims, but found that Defendants’ claim against BB&T for “breach of duty to negotiate in good faith” survived.

The Law

No North Carolina court has ever recognized a duty of a lender to negotiate in good faith regarding a potential restructure of a loan. Yet other courts have held that once parties reach a certain level of negotiations which equate to a “binding preliminary agreement,” they must continue the process of negotiations in good faith.

[A binding preliminary agreement commits] the parties to negotiate the open issues in good faith in an attempt to reach the contractual objective within the agreed framework.  Under this duty to negotiate in good faith, a party is barred from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement.

The Business Court noted that the majority of jurisdictions appear to be moving towards recognition of such a tort claim. The Court specifically focused on the fact that BB&T never notified the defendants that its last term sheet was its best and final offer “leading Defendants to conclude that they could request further revisions, as they did.” Due to the facts, the Court concluded that a jury could find the parties had entered into a “binding preliminary agreement” to negotiate in good faith towards a loan restructure, and BB&T breached that agreement by ending negotiations and selling the loans to a third party.

The Moral

The moral of this case is that lenders involved in loan workouts should no longer rely solely upon standard term sheet disclaimers that the proposed terms do “not constitute any kind of commitment or undertaking.” If the Business Court’s reasoning is adopted, such disclaimers won’t bar claims for breach of duty to negotiate in good faith. Rather, lenders should take the additional step of requiring borrowers to sign a formal pre-negotiation letter which clearly lays out the rules for negotiations and specifically provides that the parties are not entering into any kind of agreement (including a “binding preliminary agreement”) until such agreement is reduced to writing and signed by both parties.

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Questions regarding this case update or financial services litigation can be addressed to Will Esser at willesser@parkerpoe.com / 704-372-9000. This legal update does not constitute the provision of legal advice or the creation of an attorney/client relationship with any party.