June 2015

I can’t remember the last time that the Business Court granted a motion opposing the designation of a case as a mandatory complex business case.  And since the Business Court Modernization Act went into effect in October 2014?  I don’t think one has been granted.

But earlier this week, Judge Gale did exactly that, in

Were you thinking that the Business Court might, one day, find that a bank owed a fiduciary duty to its customer?  That seemed like it might happen eventually, as the NC Supreme Court seemed to hold out that possibility last year, in Dallaire v. Bank of America, N.A., 367 N.C. 363, 368 (2014), in which it said that:

it is possible, at least theoretically, for a particular bank-customer transaction to give rise to a fiduciary relationship under the proper circumstances.

But on Monday of this week, in RREF BB Acquisitions, LLC v. MAS Properties, LLC, 2015 NCBC 58, Judge McGuire stuck to the long-standing case law in North Carolina that a lender does not owe any fiduciary duties to its customer.  At the same time, however, he also recognized a new cause of action which might have ramifications for claims against any type of entity (not just a lender) which decides to break off negotiations with an opposing party.

The Plaintiff RREF had purchased from BB&T two loans totaling $5.275 million which BB&T had made to the Defendants back in 2005.  It had purchased the loans from BB&T while they were in default, and shortly after BB&T stopped negotiating a forbearance agreement with the Defendants.

No Fiduciary Duty

The Defendants’ lead argument against RREF’s lawsuit to collect on the loans was that BB&T had violated a fiduciary duty it owed to them.  They said that BB&T had breached its duty by failing to disclose its attempts to sell their loans while it was in the midst of negotiating a forbearance agreement with them.

The Defendants claimed that if they had known that BB&T was selling their loans, they would have tried to buy them themselves or had a third party buy the loans on their behalf.

The basis argued by the Defendants for BB&T’s alleged fiduciary duty was that they had a thirty year relationship with a local office, and that they had worked closely with the Bank in developing various residential communities and in selling homes in those communities.  Op. ¶41.  BB&T responded that it owed no fiduciary duties to the Defendants and that it was simply pursuing the options available to it as the holder of loans that were in default.

As Judge McGuire noted, "[t]here is no reported North Carolina appellate case in which a fiduciary relationship has been found in a borrower-lender transaction."  Op. ¶38.  Given that one of the hallmarks of a fiduciary relationship is "a duty of the fiduciary to act in the best interests of the other party," Judge McGuire held that "it would seem nearly antithetical to require a commercial lender to put a borrower’s interest ahead of its own in a business transaction."  Op. ¶41.

Another reason the Court refused to find a fiduciary relationship lay in the restructuring negotiations themselves.  Both the Defendants and the Bank were at this point represented by attorneys and were "negotiating to protect their respective best interests."  (Op. ¶43).  If there ever had been a fiduciary relationship between them, "such relationship ceased once BB&T declared Defendants in default of the Loans and the positions of the parties became adverse."  Op. ¶43.

The New Cause Of Action: Breach Of A Duty To Negotiate In Good Faith

Although it did grant summary judgment on the fiduciary duty claim, the Court nevertheless allowed the Defendants to go forward on a new claim hitherto not formally recognized in North Carolina: breach of a duty to negotiate in good faith.

Continue Reading NC Business Court Says That Bank Didn’t Owe A Fiduciary Duty To Its Customer, But Recognizes New Cause Of Action: Breach Of A Duty To Negotiate In Good Faith

After a defendant succeeded on a Motion for a More Definite Statement, a plaintiff added more detail to the claims that had been dismissed.  The defendant responded to the beefed up allegations with a Motion to Strike.

Is that a proper use of a Motion to Strike?  Yes, said Judge McGuire last week in an

The Defendants in last week’s decision in DeCristoforo v. Givens, 2015 NCBC 53 were hellbent on getting out from under a settlement they had agreed to at mediation.  They offered a host of challenges to the validity of their agreement, but Judge Gale rejected all of their arguments.

The Parties And The Mediated Settlement

Plaintiff Vivian DeCristoforo was a member of Lindy’s Homemade, LLC  and was its former president and CEO.  She and her husband, also an officer of the LLC, sued the LLC, individually and derivatively.  They made claims for a breach of their employment agreements, Wage and Hour violations, tortious interference with their contracts, and violations of fiduciary duty by the individual defendants (who were officers and directors of the LLC).

The parties engaged in mediation in September 2014.  The Plaintiffs said that all parties had settled the case then, although the Defendants challenged that.  The enforceability of the settlement was the issue before the Business Court.

The settlement was reflected by the Mediation Report form cover sheet signed by all of the parties attending the mediation, and two of the attorneys, stating "that a full and final agreement of all issues was reached."  The terms of the settlement were described on an attached "Exhibit A."  Some of the attending parties put their initials on Exhibit A, but one of the individual defendants (Kaye) left the mediation before Exhibit A was finalized and he did not put his initials on it.

That One Of The Defendants Had Left The Mediation Before The Settlement Was Finalized Was Not A Barrier To Its Enforcement

His departure did not affect the enforceability of this settlement.  Judge Gale said:

[t}he Court is not persuaded by Defendants’ contention that the settlement can be avoided because Kaye left the mediation before initialing the final Exhibit A.  Kaye left, knowing that the reduction or the terms to paper on Exhibit A was in progress.  His counsel was still present.  There is no indication that he instructed that his signature, reflecting a ‘full and final agreement of all issues,’ must be withheld until he further assented to Exhibit A.  Under these circumstances, Kaye and Lindy’s should be bound to the settlement.

Op. ¶48.

We have all had our clients leave a mediation before all the final details of a settlement have been hammered out.  Planes to catch, traffic to avoid.  Maybe sheer boredom.  Still, it is probably not a good idea to have them leave before all t’s and i’s have been crossed and dotted.

The Individuals’ Signatures — Which Had No Mention Of Their Authority To Bind The Entities — Were Sufficient To Bind The LLC And Its Corporate Member

The next question that Judge Gale grappled with was whether the settlement agreement had all of the signatures necessary to bind the parties.  The LLC and its corporate member (Pittco) argued that the signatures of the attendees at the mediation were not sufficient to bind them.  The individuals signing the Mediation Report form did not distinguish whether they were signing in their personal capacities or as representatives of the LLC or its corporate member.

That is contrary to the "nearly universal practice" when transactional documents are involved, which is that "the corporate officer signs twice, once as an officer and again as an individual."  Op. ¶50 (quoting Keels v. Turner, 45 N.C. App. 213, 218, 262 S.E.2d 845, 847 (1980).

Is that the "universal practice" in mediations?  Judge Gale said it was not, writing that:

[o]ften, the time pressures of preparing documents at the end of a long and contentious mediation session require drafting a binding document that does not allow for the same formalities as a transaction completed after multiple document exchanges.  That does not mean, however, that a settlement that the attendees represent to be a full and final resolution of all issues should be easily avoided because of the form of signatures.

Op. ¶50.

So, the Judge concluded that the signatures of the individuals, bearing no reference to their corporate authority, bound both the individual and the corporations they were representing at the mediation. Op. ¶50.

The entities which were Defendants in the DeCristoforo case (the LLC and its corporate member) were hard pressed to argue that the individuals did not have the necessary authority to bind them at the mediation.  Two of the individuals were the members of the LLC’s "Special Matters Committee," which had been granted generally the "plenary power" to resolve DeCristoforo’s claims and specifically to "execute. . . for and on behalf of [Lindy’s] any and all notices, certificates, agreements . . . and other documents or instruments."  One of the Special Matters Committee members also sat on the LLC’s Board of Directors, and was Pittco’s designee to the LLC Board.

The Lack Of An Agreed Upon Release Did Not Invalidate The Settlement

The Defendants’ efforts to evade their settlement did not end here.  They said that the agreement became unenforceable when they were unable to agree on the terms of release following the mediation.  Exhibit A said that there would be "a further statement of. . . complete mutual release." 

The Defendants added terms to the post-mediation release which called for the release of federal claims which were not a part of the Business Court lawsuit and also included terms requiring the Plaintiffs to return corporate documents in their possession, also not mentioned in the terms resulting from the mediated settlement.

Judge Gale found that the language of the Mediation Report was sufficient to release all of the pending claims in the lawsuit and that the voluntary dismissal with prejudice called for by Exhibit A would have the same effect as a release.  Op. ¶57.

Continue Reading Business Court Refuses To Unwind Mediated Settlement Agreement