Article

Note: Velocity Press Inc. (Buyer) agreed to purchase a custom printing press from Sanden USA (Seller) for USD 1,797,229. To finance the purchase, Buyer lined up credit with People's Bank. However, before borrowing the funds, KeyBank, N.A., Q.A.M., Inc. (Lender) approached Buyer offering more attractive terms. Lender originally approved the loan without requiring any assurances from Seller, but before closing required that Seller obtain a standby LC in favor of Buyer (to be later assigned to Lender) without informing Buyer.

During negotiations with Seller, Lender pressured Seller to obtain a standby in favor of Buyer before a second progress payment was to be made, and Lender's representatives believed that Seller agreed to obtain the LC from the Canadian Economic Development Commission (Development Authority). Lender communicated with Buyer that "[t]he actual structure is set as an open draw note for $1,728,000. As the progress payment requests come in we will wire funds out", but did not mention a standby. The trial court found that this omission was intentional.

The loan agreement did not mention the collateral agreements between Seller and Lender or the standby even though Lender did not intend to make disbursals without the standby.

When Seller was unable to obtain a standby from Development Authority, it urged Lender to issue it, which Lender did. Lender told Seller to attempt to arrange independent funding, as it would hold disbursement until the press was complete. The resulting delays required new loan documents. Although discussions indicated (falsely) that Seller required Buyer to provide an LC, the modification permitted Buyer to request LCs from Seller and did not make loan disbursements contingent on such requests. During the ensuing delays, Buyer discovered that the delays were due to the standby request.

Ultimately, Seller became insolvent and did not manufacture the press. Buyer purchased the press from another manufacturer and sued Lender for breach of contract, fraud, violation of the covenant of good faith and fair dealing, and breach of fiduciary duty. The District Court of Utah, Central Division, Stewart, J., ruled that there was no breach of contract, but granted judgment in favor of Buyer on the other causes of action.

The Judge ruled that because Buyer actually made only one disbursement request (the down-payment) to Lender (with which the Lender complied), Lender "did not manifest to [Buyer] a positive and unequivocal intent not to render performance, and therefore did not repudiate either the original or the modified Loan Agreement." Without the obligation to disburse the second payment Lender could not have violated the contract.

With regard to the claim for breach of the implied covenant of good faith and fair dealing, the Judge stated that all of the agreements were subject to the implied covenant and that "[Lender] did not have a contractual right 1) to renegotiate the . . . Contract without [Buyer]'s knowledge or 2) to tell [Seller], after the Loan Agreement was completed, that a letter of credit needed to be in place before [Lender] would make the second progress payment. By doing so, [Lender]'s actions were not consistent with the agreed common purpose of the Loan Agreement and [Buyer]'s justified expectations. [Lender's] actions injured [Buyer], as they prevented [Seller] from progressing in its construction of the press, introducing significant delays that ultimately led to the press not being completed." The Judge therefore concluded that Lender violated the covenant.

The Judge also ruled that Lender had established a fiduciary duty by exceeding the scope or the normal role as a lender and began to modify the contract without Buyer's knowledge. The Judge found that Lender "breached its fiduciary duties to [Buyer] when it placed its own interests above those of [Buyer] by leading [Seller] to believe that a letter of credit needed to be in place before the second draw could be made under the loan."

Finally the Judge ruled that Lender had committed fraud against Buyer by inducing justifiable reliance that led to Buyer's detriment (the loss of the printing press). The Judge stated:

"It was reasonable for [Buyer] to rely on [Lender]'s assertion, as [Buyer] was otherwise unaware of the letter of credit requirement and was also unaware that [Lender] was attempting to individually modify the contract through conversations with [Seller].

As [Buyer] ultimately entered into the Loan Agreement, but would not have done so if it had been aware of the letter of credit requirement, [Buyer] did in fact rely on [Lender]'s misrepresentation and was thereby induced to act."

[JEB/sb]

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