Unfinished Negotiations Might Generate Treble Damages
Ellis & Winters
The North Carolina Business Court has recognized a new type of claim: a claim for failing to negotiate in good faith. Raising the stakes further, the court has held that failing to negotiate in good faith could lead to treble damages under N.C. Gen. Stat. § 75-1.1.
The Business Court’s decision came in RREF BB Acquisitions, LLC v. MAS Properties, L.L.C.
The RREF Decision
BB&T made two loans to Mark Saunders, a sophisticated real-estate developer. In 2012, Saunders was under financial pressure from other lenders, so his BB&T loans needed restructuring. BB&T and Saunders had extensive negotiations to try to restructure the loans.
BB&T’s negotiations with Saunders progressed to the point where BB&T’s outside counsel gave Saunders a proposed term sheet. BB&T, Saunders, and their lawyers met to discuss these points. They agreed on many of the proposed terms, but not all of them. Even so, at the end of the meeting, Saunders and a BB&T official “shook hands in a manner that Saunders understood to indicate that the parties had reached a deal.”
Shortly after the meeting, another BB&T official wrote internally that the meeting had been “successful in negotiating a structure for extension” of the loans. She also wrote that she would be seeking approvals within BB&T “in the next week or so.” BB&T’s outside counsel sent Saunders an updated term sheet that stated BB&T’s understanding of the terms agreed on at the meeting.
Three weeks later, though, Saunders’s in-house general counsel sent BB&T a revised term sheet. That revised version showed Saunders’s somewhat different understanding of the terms agreed on at the meeting.
One day after that exchange, BB&T told its outside counsel to stop communicating with Saunders, because the loans were up for sale. That was the end of the negotiations. BB&T sold the loans without ever telling Saunders that the loans were for sale.
RREF, the new owner of the loans, then filed suit to collect on the loans. Saunders filed counterclaims against RREF, as well as third-party claims against BB&T. (For simplicity, the rest of this post will talk only about BB&T.)
Through several claims, Saunders tried to enforce the restructuring terms that he and BB&T allegedly agreed on at their meeting. Alternatively, he tried to hold BB&T liable for ending the negotiations so abruptly—and for not telling him that it was thinking about selling the loans.
The lawsuit was assigned to the North Carolina Business Court (first Judge Jolly, and now Judge McGuire). Both sides moved for summary judgment.
In an extensive opinion, the court granted defensive summary judgment against most of Saunders’s claims, including his claim for breach of fiduciary duty. Despite Saunders’s long relationship with BB&T, the court decided that at the time of the restructuring negotiations, the parties had only an arm’s-length relationship.
Ordinarily, a decision that a lender did not owe a borrower a fiduciary duty would defeat a borrower’s extracontractual claims. In this case, though, the Business Court allowed a slightly different claim to survive: Saunders’s claim for breach of a duty to negotiate in good faith.
As the court acknowledged, no earlier decision recognizes this claim under North Carolina law. However, the court noted an emerging trend in other states to allow claims based on a binding agreement to negotiate. In fact, the court cited an opinion in which the North Carolina Business Court itself had recognized such a claim under New York law.
Applying the newly recognized theory, the court held that the parties’ words and conduct at the meeting between Saunders and BB&T—including the final handshake—could show “an agreement to continue negotiating in [an] attempt to finalize the terms of the agreement and close on a restructure agreement before the end of 2012. While it did not bind either party to the final terms of a restructure deal, such an agreement would carry with it an implied obligation that the parties to conduct any further negotiations of the terms in good faith.” The court also saw a genuine factual dispute on whether BB&T breached the newly recognized duty to continue negotiating.
The 75-1.1 Claim
Most importantly for our purposes, the court went on to hold that BB&T’s arguable breach of its duty to keep negotiating “could be sufficient to constitute conduct that is unfair or deceptive within the meaning of
G.S. § 75-1.1.”
The court did not directly explain its reasons for this conclusion. Such an explanation would have helped define the relationship between the new duty to negotiate and section 75-1.1.
Earlier in the opinion, the court had rejected two of the common predicates for a 75-1.1 claim. First, the court rejected Saunders’s claim for breach of fiduciary duty. Second, the court rejected Saunders’s claim for breach of contract. Under settled law, a 75-1.1 claim in a contractual setting requires a breach of contract and still more.
Given these points, the 75-1.1 doctrine in this area will need further development. The RREF court’s statement that a breach of the duty to negotiate “could be sufficient to constitute conduct that is unfair or deceptive” has several possible meanings. For example, that phrase might mean that the existence of a separate duty-to-negotiate claim does not, by itself, displace a 75-1.1 claim. On the other hand, the court’s phrase might denote a per se violation—a holding that every breach of the duty to negotiate automatically states a 75-1.1 claim. (Matt Sawchak has discussed these categories in a recent article.)
The RREF court itself might need to probe these issues further as the lawsuit proceeds.
The Practical Implications of RREF
Especially in view of the threat of treble damages, the new duty to negotiate raises a number of practical questions:
- What events can trigger a “binding agreement to negotiate”?
- Can parties disclaim such an agreement?
- Can a party be held liable for refusing to begin negotiations?
- Once parties start negotiating, under what circumstances can they break off negotiations?
- What is the measure of damages from a breach of the duty to negotiate?
The answers to these questions will have critical effects on North Carolina businesses. After all, the reasoning in RREF is not necessarily limited to lenders and borrowers. It might apply in any setting that involves negotiations, including settlement discussions among litigants.
In the wake of RREF, parties in negotiations should proceed with added caution. Consider documenting every step in negotiations, perhaps including your reasons for taking particular negotiating positions. Also, consider whether you need to make added disclosures—or disclaimers—to counter any expectations that people on the other side might be forming.
Making the wrong decision about what to say in negotiations could prove costly. Indeed, it could be a source of treble damages and attorney fees.
Stephen Feldman from Ellis & Winters served as a special master on discovery issues in RREF. Stephen played no role in preparing this blog post. This post is based only on publicly available information.
Author: George Sanderson