By Jerry Carter. On July 9, 2012, the Washoe County Business Court issued a significant Order dismissing a lender liability complaint. In its comprehensive opinion, the Business Court demonstrated that it was unwilling to relieve the borrower of agreements that the borrow later determined were disadvantageous. The Business Court also refused to credit the borrower’s legal conclusions, which contradicted the commercial realities of the lending transactions at issue.
The plaintiff borrowed money to fund its mining operations and gave an interest in those operations as collateral. When the borrower encountered financial difficulties, it insisted that the lender was obligated to advance additional funds. The lender did not agree and, instead, foreclosed on the collateral. The borrower sued the lender and attempted to allege several different legal theories, including: (1) breach of contract; (2) contractual breach of the covenant of good faith and fair dealing; (3) tortious breach of the covenant of good faith and fair dealing; (4) fraudulent concealment; (5) conspiracy; (6) intentional interference with contractual relations and prospective economic advantage; (7) deceptive trade practices; (8) conversion; (9) rescission based on mutual mistake and unilateral mistake; (10) unjust enrichment; and (11) violation of NRS 104.9610 (commercially unreasonable sale). The Business Court dismissed all of the borrower’s claims as follows:
Breach of Contract and Contractual Breach of the Covenant of Good Faith and Fair Dealing
The Business Court dismissed the borrower’s claims for breach of contract and contractual breach of the covenant of good faith and fair dealing because the borrower offered only general conclusions that it had performed its obligations, and failed to allege that it satisfied the specific requirements to qualify to draw down an additional advance. The Business Court observed that the credit agreement required the plaintiff to demonstrate achievement of certain operational milestones and to represent that no defaults had occurred under any material contracts that could have a material adverse effect. The Business court stated that the plaintiff did not allege “specific facts to counter Defendant’s argument that it had not achieved, nor was excused from achieving, the required operational milestones entitling it to advancement of the tranche three loan.”
Tortious Breach of the Covenant of Good Faith and Fair Dealing and Fraudulent Concealment
The Business Court dismissed the borrower’s claims for tortious breach of the covenant of good faith and fair dealing and fraudulent concealment because the borrower failed to allege facts demonstrating a fiduciary relationship with its lender. The Business Court noted that the loan documents specifically disavowed such a relationship. Moreover, the borrower failed to note any exceptional circumstances that would create a fiduciary relationship in the arms length transaction between the borrower and the lender. Because there was no fiduciary relationship, the lender had no duty to disclose facts regarding its relationship with a co-defendant for purposes of the fraudulent concealment claim.
The Business Court dismissed the borrower’s conspiracy claim because it consisted of “unsubstantiated legal conclusions couched as factual allegations.” Notably, the Business Court followed the recent United States Supreme Court decision of Ashcroft v. Iqbal, 556 U.S. 662 (2009) to reject the borrower’s conclusory allegations.
Intentional Interference with Contractual Relations and Prospective Economic Advantage
The borrower attempted to allege that the lender interfered with two of the borrower’s business transactions because the lender’s refusal to advance a third loan rendered the borrower unable to perform its contractual obligations. The Business Court took the borrower’s allegation that it failed to meet its contractual obligations to third parties as a further admission that the borrower was not in compliance with its loan obligations. And the borrower’s failure to allege compliance with its loan obligations was fatal to this claim as well.
Deceptive Trade Practices
The Business Court dismissed the borrower’s claim for deceptive trade practices because Nevada’s Deceptive Trade Practices Act applies to the sale or lease of goods and services, but does not apply to commercial loan transactions.
The borrower attempted to allege that the lender converted the borrower’s interest in a mining project “by forcing Plaintiff into default and foreclosing upon its interest.” However, the Business Court dismissed the conversion claim because the borrower failed to allege compliance with the specific loan requirements. The borrower also admitted that the loan documents gave the lender the right to foreclose.
In its rescission claim, the borrower attempted to void the lender’s option to purchase the borrower’s interest in a mining project. The borrower claimed that the option was based upon a mistake of fact because the strike price was to be determined by reference to a technical report that would be updated during the term of the option agreement. However, the Business Court rejected this theory because the parties were aware of the uncertainty at the time they signed the option agreement.
The Business Court dismissed the borrower’s unjust enrichment claim because the borrower had an express written contract and was therefore precluded from pursuing a claim based upon an implied contract.
Commercially Unreasonable Sale
In its claim for commercially unreasonable sale in violation of NRS 104.9610 (Nevada’s version of Article 9 of the Uniform Commercial Code), the borrower contended that the lender poisoned the foreclosure sale of the borrower’s interest in a mining project because the lender advertised that it possessed an option on the interest that would survive the sale. The Business Court determined that the option agreement did in fact survive the sale and therefore dismissed this claim as well.
The Business Court’s July 9, 2012 Order demonstrates that the Business Court will endeavor to enforce unambiguous agreements as written. Therefore, it is critical for Business Court litigants to articulate their compliance with the specific contract requirements at issue.