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Can a Written Agreement Waive Unfair and Deceptive Trade Practice Claims that Are Based on Prior Representations?

Ellis Winters

Ellis & Winters

Can entry into a fully integrated written contract waive claims for unfair or deceptive trade practices that are based on the prior representations of one of the parties? A new case from the North Carolina Court of Appeals suggests that the answer is yes.

French Broad Place, LLC v. Asheville Savings Bank, S.S.B. involves a commercial borrower that asserted breach-of-contract and related lender-liability claims against its lender.

The parties negotiate their loan.

The borrower, French Broad Place, was developing a mixed-use real estate project in Brevard. The project was to include office and retail units, restaurants, and residential condominiums.  The initial development plan contemplated that the borrower would sell, rather than lease, at least some of the commercial units, as well as the residential condominiums.

The borrower sought to obtain construction financing for the project from Asheville Savings Bank. Originally, the bank and the borrower executed a loan commitment for the bank to advance $9,950,000 in construction funding to the borrower.

The commitment contained several contingencies.  Among them, the bank indicated that it was to seek a loan participant for at least $2 million of the loan. In the subsequent litigation, the borrower claimed that it did not understand the participation requirement to be a contingency for the bank to fund the loan.

Before the loan closed, the bank informed the borrower that it was unable to find another loan participant. As a result, the bank only funded $7,750,000.00. The bank requested that the borrower find a replacement lender for the part of the loan that remained unfunded.

The borrower and the bank closed on the construction loan. The loan documents explicitly provided that the amount of the loan was $7,750,000.00.

The loan documents also included a standard integration clause. The clause recited that each party represented and agreed that the written loan agreement represented the final agreement between the parties. The integration clause also set out that there were no unwritten oral agreements between the parties, and that the written agreement could not be contradicted by prior, contemporaneous, or subsequent oral agreements between the parties. The loan documents also contained a term that expressly provided that the terms of the loan documents superseded any inconsistent terms of the loan commitment.

The loan terms change and the project fails.

After the loan closed, the borrower asked to borrow from the bank additional funds to cover a change order request in the amount of $725,801. The bank agreed and the parties entered into a written loan modification to memorialize the change in loan terms.

A second, subsequent written loan modification included a recital that the total of all funds disbursed by the lender to the borrower was $8,475,801. The recital further indicated that no construction loan funds remained to be disbursed. The modification also included a warranty that the loan agreement, as modified, was ratified and in full force and effect. The borrower further confirmed that it did not have any defenses, offsets, or other claims with respect to the modified loan.

As construction progressed, businesses started to open in the project. The borrower, or its affiliates, requested that the bank provide financing to the owners of the businesses now occupying the development. The bank refused to provide any “takeout” financing.

Eventually, the project failed and the bank took possession of the development.

The borrower sues the bank.

The borrower sued the bank in North Carolina Superior Court. The borrower claimed that the bank breached the express terms of the loan agreement in four principal ways:

–failing to provide the amount of financing promised in the original commitment letter

–underfunding the loan

–delaying the decision to fund the change-order request

–refusing to finance take-out loans, which the borrower contended the bank promised to do

The borrower also asserted claims against the bank for violating the covenant of good faith and fair dealing, breach of fiduciary duty, and committing unfair and deceptive trade practices.

The trial court granted summary judgment in favor of the bank on all of the claims. The borrower appealed and the North Carolina Court of Appeals affirmed the summary judgment decision.

The court of appeals affirms that there is no breach and no 75-1.1 liability.

On the borrower’s contract claims, the appellate court determined that there was no breach. The court determined that: (1) the integration clause contained in the loan documents superseded any contrary representation that the bank had made to the borrower; (2) that the borrower’s warranties that the loan proceeds had been disbursed in full and that the borrower did not have any present defenses to loan repayment waived any of the borrower’s claims to the contrary; and (3) with respect to the bank’s refusal to further finance the project, that no written loan term obligated the bank to extend additional loans. As to the refusal to finance, the court also pointed out that the North Carolina Statute of Frauds requires that any commitment to make a commercial loan in excess of $50,000.00 must be in writing.

Having disposed of the breach of contract claims, the court summarily dispatched the borrower’s N.C. Gen. Stat. § 75-1.1 claim. The court acknowledged that its own precedent would permit consideration of a 75-1.1 claim attendant to a breach of contract only if there were substantial aggravating circumstances attendant to the breach.

The court declined to consider whether substantial aggravating circumstances existed, however, because there was no genuine issue of material fact that the lender breached any of its agreements with the borrower. The court did not cite any cases for this proposition.

An integrated contract becomes a powerful weapon against a 75-1.1 claim.

Although it did not say so explicitly, the inference from the court’s holding is that where the relationship between two parties is governed by a contract, the rights and duties of those parties are strictly guided by the contract terms for 75-1.1 purposes.

We have discussed a recent trend in substantial aggravating circumstances cases where courts have suggested that it is difficult for a plaintiff to prove 75-1.1 liability attendant to the performance of an already existing contract. The court’s decision in French Broad appears to suggest that, where the agreement is integrated, 75-1.1 liability for violating a promise to perform that is not contained in the parties’ agreement is also extremely difficult to prove. Although fraud in the inducement to enter into a contract still appears to be a viable predicate to a 75-1.1 claim, North Carolina courts continue to pare back other 75-1.1 claims based on contracts.

Author: George Sanderson

June 19, 2018
Posted in  Substantial Aggravating Circumstances