Article

Note: Velocity Press, Inc., a Utah corporation (Buyer), agreed to pay USD 1,797,229 to Sanden Machines, Ltd. (Seller) for a new custom printing press. To finance the transaction, Buyer entered into a loan agreement with Key Bank, NA (Lender).

The contract between Buyer and Seller did not require a LC. However prior to entering into the initial loan agreement and without Buyer's knowledge, Lender informed Seller that Seller would have to obtain a standby LC in favor of Lender before Lender would advance further payment for the press. A month later, Seller notified Lender that it believed Lender would be issuing the LC and that funding a LC in time to maintain production would be impossible.

Lender sought to resolve the issue by entering into a new agreement with Buyer, who was given the impression that Seller had required Buyer to apply for a LC in favor of Seller. Lender additionally informed Buyer that additional financing of the press would not be provided unless Buyer agreed to sign an LC application. Under the new agreement, Lender issued a LC in favor of Seller, requiring Seller to secure outside funding using the LC as collateral. As a result, Seller experienced funding issues and rearranged its production schedule, using the new material for Buyer's press for the benefit of another customer. Subsequently, Seller went bankrupt before resuming work on Buyer's press.

Buyer sued Lender for breach of the covenant of good faith and fair dealing, breach of fiduciary duty, that Lender had fraudulently induced Buyer into the Loan Agreement, and that Lender's actions were the proximate cause of Buyer's damages. The trial court found in Buyer's favor with respect to those claims. On appeal, Lender contested the rulings and additionally argued that it was released from liability when Buyer signed the LC agreement. The United States Court of Appeals, Tenth Circuit, Lucero, J., Holloway, J., and Gorsuch, J., affirmed in respect to the issues of the covenant of good faith and fair dealing, fraud, proximate cause, and the rejection of the liability release claim. However, the appellate court reversed in respect to the issues of fiduciary duty and remanded the case for further proceedings.

The appellate court noted that it had no reason to reverse the district court's finding that Lender breached the covenant of good faith and fair dealing by renegotiating the contract between Buyer and Seller without Buyer's knowledge and adding the LC requirement, which were "inconsistent with the agreed purpose of the loan agreements". Additionally, because Lender's actions were designed to "induce [Buyer] to enter into the [Loan Agreement]", the appellate court affirmed the trial court's ruling on the claim of fraud. The appellate court affirmed that Lender's actions were the proximate cause of Buyer's damages, ruling that "it was reasonably foreseeable that requiring [Seller] to find independent financing could lead to financial difficulties and delaying construction of the press" and that seller would have had the ability to complete the Buyer's press barring the requirement of the LC.

The appellate court rejected the contention that the LC agreement released Lender from liability because Utah law "does not permit a covenant of immunity which will protect a person against his own fraud". However, the appellate the court reversed the district judge's ruling that Lender breached a fiduciary duty to Buyer, noting that, while Lender acted "as if [Buyer] placed 'particular confidence' in [Lender]", evidence did not support the finding of a fiduciary relationship under Utah law.

[ABS/mjb]

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