Topics: Contract to provide LC; Good Faith; Fraudulent Inducement of a Bank

Note: Compass Bank and Vectra Bank (Banks) entered into a Settlement Agreement and Mutual Release (Agreement) with Eager Road Associates, LLC, Alan R. Skop, Don C. Musick III, and Adolphus A. Busch IV (Developers) to end litigation that arose from an alleged promise to finance a real estate development project. The Agreement embodied a bond refinancing plan to be set in motion once certain conditions precedent were satisfied, two of which were the basis of this dispute.

The Agreement required Developers to tender a USD 4.15 million "Developer Settlement Plan" to Banks and to obtain issuance of a standby letter of credit in the amount of USD 1.35 million in Banks' favor. After Developers allegedly failed to satisfy the two conditions precedent, Banks sued Developers, asserting four claims: (1) specific performance of the Agreement; (2) damages for breach of the Agreement; (3) breach of the covenant of good faith and fair dealing; and (4) intentional misrepresentation and fraudulent inducement of the Agreement. Developers moved to dismiss all claims. The United States District Court for the Eastern District of Missouri, Hamilton, J., granted in part and denied in part the motion to dismiss Banks' fraudulent inducement claim, and denied dismissal of the remaining claims.

In regards to Banks' claim that Developers breached the covenant of good faith and fair dealing, the Judge recognized that Missouri courts have adopted the implied duty to deal in good faith which "requires parties to cooperate with one another to enable performance of expected contractual benefits." In the present case, the Agreement did not specify a time or "date certain" triggering Developers' obligation to tender the Developer Settlement Plan and cause the issuance of the LC. The Judge ruled that this omission was significant because "under Missouri law, the covenant applies squarely in circumstances where 'by unilateral action' one party 'improperly den[ies] the other party from expected benefits flowing from the contract.'" Banks alleged that Developers unilaterally exercised discretion acting in bad faith to delay performance of the Agreement which frustrated Banks' expected benefits. The Judge ruled that this behavior "is a textbook allegation of breach of the implied covenant of good faith and fair dealing."

Finally, the Judge dismissed Banks' claim that Developers fraudulently induced Banks to enter into the Agreement by misrepresenting that Developers had the funds required under the Developer Settlement Plan and could obtain an LC. The Judge dismissed this claim because "[t]he economic loss doctrine bars 'recovery of purely pecuniary losses in tort where the injury results from a breach of a contractual duty.'" In other words, in order to recover on a fraud claim, that claim must be independent of the contract claim. The Judge ruled that Banks failed adequately to plead a claim for fraudulent inducement because the alleged misrepresentations were incorporated into the Agreement and the Banks failed to plead damages outside of those recoverable from a breach of contract claim.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.