Present: All the Justices
CHARLES E. BRAUER CO.,
INC., ET AL.
OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 950361 January 12, 1996
NATIONSBANK OF VIRGINIA,
N.A., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge
This appeal stems from a routine commercial banking
transaction in which a defaulting debtor's business ultimately
failed and there was an unsuccessful liquidation of assets. When
sued by a lending institution for repayment of funds advanced,
the debtor alleged by counterclaims and a separate suit that the
bank was guilty of tortious breach of a duty of good faith,
breach of contract, failure to deal with collateral in a
commercially reasonable manner, conspiracy, and tortious
interference with contract. The trial court rejected these
claims, and we confirm the trial court's action.
Contrary to the debtor's assertions on appeal, there are no
material facts genuinely in dispute. Appellant Charles E. Brauer
Co., Inc., was a Richmond wholesaler of institutional frozen and
canned foods, tobacco, candy, and paper products. This family
business was principally operated by appellant Charles P. Inman,
Jr., vice president of the company. His father, appellant
Charles P. Inman, Sr., was president of the company. For
clarity, the company and the Inmans will sometimes be
collectively referred to as the debtor.
In December 1990, the company entered into a commercial loan
agreement with appellee NationsBank of Virginia, N.A. (formerly
Sovran Bank), under which the bank agreed to provide the company
a line of credit in the amount of $850,000. These negotiations
were handled for the company by Inman, Jr., a former accountant
and college professor. Primarily, the line of credit was to be
used for the purchase of inventory, but the funds could be spent
for general operating expenses.
Inman, Jr., executed on behalf of the company a "Grid Note"
in the foregoing face amount reflecting its agreement to repay
the bank the money borrowed under the line of credit. The father
and son executed separate agreements guaranteeing the company's
obligations under the note. As security for extending the line
of credit, the bank obtained a first priority security interest
in all the company's inventory and accounts receivable pursuant
to two security agreements.
When Inman, Jr., was negotiating the line of credit, he also
had discussions with NationsBank about the financing of
construction of a new Richmond area warehouse into which the
company's operations could be moved. He planned to own the
facility and lease it to his company. The bank agreed to finance
the warehouse construction and subsequently loaned Inman, Jr.,
$1,075,000 to build the facility. In order to make the real
estate loan, however, the bank required Inman, Jr., to have about
10% to 15% equity in the real estate securing the loan; he lacked
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such resources. Ultimately, the bank agreed to allow Inman, Jr.,
to borrow funds from the company's line of credit to provide the
necessary equity, and to pay certain construction costs.
Construction of the warehouse was completed in July 1991.
Approximately $300,000 had been drawn on the line of credit for
costs related to construction, an amount carried on the company's
books as a loan from the company to Inman, Jr. About the time
the construction was completed, the company reached the limit of
withdrawals under the line of credit of $850,000.
Later in 1991, Inman, Jr., sought additional funds from the
bank because the company was not making "as much profit as
anticipated." According to Inman's testimony, he asked Jack
Robeson, the bank's commercial loan officer with whom Inman had
been dealing, to advance the debtor an additional $300,000.
Inman, Jr., testified that Robeson had orally promised him in the
summer of 1990 to make more money available to the debtor in the
future, if needed. Robeson and the bank refused to advance
additional funds during the latter part of 1991 due to the
company's poor financial condition. The company continued its
business without the additional funds from NationsBank. In
November 1992, the debtor decided to cease business operations
and to voluntarily liquidate its assets in order to pay its
creditors.
When NationsBank determined the debtor was having financial
problems, the bank retained appellee AMRESCO Institutional, Inc.,
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to "manage and collect" the loans to the debtor. This
relationship was created pursuant to a July 1992 Servicing
Agreement between the bank and AMRESCO to administer the bank's
"problem" loans.
In connection with the liquidation, the debtor interested
two companies, Smyth Food Services, Inc., and T. W. Bonner, Inc.,
in purchasing substantial portions of the debtor's inventory.
The debtor proposed to AMRESCO that the bank foreclose on the
inventory and then sell it to Smyth and Bonner. After
considering the proposal, the bank became concerned about selling
that part of the inventory which consisted of food or candy
because some of it was dated and "aged merchandise." The bank
feared that claims would be made against it by ultimate
purchasers of the goods who may become ill from consuming the
food. Smyth and Bonner declined the bank's request for
agreements indemnifying it against any losses it might suffer
from such sales. Thus, the bank refused the debtor's proposal
for such a disposition of the collateral.
Shortly thereafter, the bank and the debtor discussed the
possibility of the debtor selling the inventory by means of a
bulk sale, which would require the bank's consent to release its
lien on the inventory being sold. Various disagreements arose
about the terms of the sale and the circumstances under which the
bank would release its lien. Eventually, however, some of the
inventory was sold by the debtor with the bank's cooperation for
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approximately $269,000.
Liquidation of the inventory failed to satisfy the debt owed
the bank. Subsequently, NationsBank filed actions against the
company, Inman, Sr., and Inman, Jr., to collect the deficiency.
The debtor filed various counterclaims against the bank as well
as a separate action against AMRESCO.
These actions were consolidated by the trial court. Two of
the issues debated on appeal were disposed of pretrial.
Following a four-day jury trial, after the evidence of the
parties had been presented, the court granted the bank's motion
to strike the debtor's evidence, and entered summary judgment.
In a November 1994 order from which we awarded this appeal,
the trial court entered judgment as follows: in favor of the
bank against the company and Inman, Jr., in the principal amount
of $506,343.10 plus interest, attorney's fees, and costs; in
favor of the bank against Inman, Sr., in the principal sum of
$436,355.29 plus interest, attorney's fees, and costs; and in
favor of AMRESCO in the action against it brought by the company.
On appeal, the debtor contends, first, that the trial court
erred in sustaining the bank's demurrer to Count I of the
debtor's counterclaim. This Count set forth a purported cause of
action in tort seeking monetary damages for "NationsBank's breach
of duty and obligation to [the company] to act in good faith in
the performance of its agreement to provide line of credit
financing for [the company] to purchase inventory." In Count II
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of the counterclaim, the debtor asserted a claim for damages for
an alleged breach of contract. The debtor alleged:
"NationsBank's failure to provide line of credit financing in
accordance with the provisions of the Grid Note constituted a
breach of its loan agreement with [the company]."
The trial court's order sustaining the demurrer to Count I
does not assign a reason for the court's ruling. Nonetheless, it
is apparent from the record that the court decided Virginia law
does not recognize a separate cause of action in tort for a
party's breach of the obligation of good faith found in Code
§ 8.1-203 of the Uniform Commercial Code (U.C.C.), and that the
Count I tort claim duplicated the Count II breach of contract
claim. The trial court was correct.
Code § 8.1-203 provides: "Every contract or duty within
[the U.C.C.] imposes an obligation of good faith in its
performance." Thus, while a duty of good faith and fair dealing
exists under the U.C.C. as part of every commercial contract, we
hold that the failure to act in good faith under § 8.1-203 does
not amount to an independent tort. The breach of the implied
duty under the U.C.C. gives rise only to a cause of action for
breach of contract. Central Sav. & Loan Ass'n v. Stemmons
Northwest Bank, 848 S.W.2d 232, 239 (Tex. Ct. App. 1992).
Second, the debtor contends the trial court erred in
striking its evidence on the breach of contract claim. This
claim had two bases: (a) the bank breached the oral
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understanding Inman, Jr., had with Robeson by not advancing
additional funds, and (b) the bank breached the terms of the loan
documents by agreeing to allow the company to draw funds from the
line of credit to be used for non-inventory purposes, that is, to
be loaned to Inman, Jr., for construction of the warehouse.
Neither theory has merit.
Even if Robeson orally promised to advance an additional
$300,000, a fact the bank denies, the statute of frauds prohibits
enforcement of such a promise. Any agreement or promise to lend
money or extend credit in an aggregate amount of $25,000 or more
must be in writing to be enforceable. Code § 11-2(9).
The debtor's alternative theory is that the bank breached
the terms of the grid note by advancing to the company funds
which it knew would be loaned to Inman, Jr., for construction.
But the loan documents did not prohibit the bank from advancing
funds to the company under the line of credit for purposes other
than the purchase of inventory. Instead, the documents placed
limits on the company regarding its use of the line of credit
without the bank's permission. In addition, the bank had no
legal duty to monitor the company's use of the funds received
under the line of credit. Specifically, the bank had no legal
obligation to ensure that the loan proceeds were being used
solely for purchase of inventory. Thus, as a matter of law there
was no breach of the terms of the loan documents by the bank.
Third, the debtor contends the trial court erred in granting
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the bank's motion to strike on the claim that the bank acted in a
commercially unreasonable manner and in bad faith when it
"prevented" the company from "maximizing the proceeds" from the
sale of the inventory. We reject this contention.
The U.C.C. standard of commercial reasonableness is set
forth in Code § 8.9-504, which deals with a secured party's right
to dispose of collateral after default. The statute provides, as
pertinent, that the collateral may be disposed of by public or
private proceedings and that "every aspect of the disposition
including the method, manner, time, place and terms must be
commercially reasonable." Code § 8.9-504(3).
The commercial reasonableness standard becomes relevant only
when a secured lender "disposes" of the collateral. Diversified
Foods, Inc. v. First Nat'l Bank of Boston, 605 A.2d 609, 614 (Me.
1992). The term "disposition" is not defined in the U.C.C., but
the language of § 8.9-504(1) and (3) indicates that it means an
actual transfer of an interest in the collateral by sale, lease,
or contract. General Elec. Capital Corp. v. Vashi, 480 N.W.2d
880, 881 (Iowa 1992). Also, § 8.9-504(3) does not apply if the
seller of the collateral is the borrower rather than the secured
party. Ambase Int'l Corp. v. Bank South, 395 S.E.2d 904, 907
(Ga. Ct. App. 1990).
In the present case, the bank, relying on the loan documents
and the applicable law, justifiably elected not to have a § 8.9-
504 foreclosure sale of the collateral because it could not reach
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an agreement regarding indemnification. When a debtor is in
default under a security agreement, a secured party has the
option to foreclose, to reduce the claim to judgment, or to
"otherwise enforce the security interest by any available
judicial procedure." Code § 8.9-501(1). The bank opted to
proceed to judgment.
Therefore, because the bank did not "dispose" of the
collateral but merely chose not to release its lien on the
inventory and to proceed to judgment on its claim, the commercial
reasonableness standard was inapplicable. Moreover, the standard
could not have applied to the proposed bulk sale because the
company, not the bank, would have been the seller of the
inventory.
Elaborating on its claim of breach of the duty of good faith
regarding sale of the collateral, the debtor contends that the
facts present "a unique situation in which NationsBank, while
maintaining control over the collateral, refused to permit its
sale to purchasers whom [the company] and Inman, Jr. had found
and who were willing to purchase a substantial portion of the
existing inventory for a substantial price." Continuing, the
debtor argues that to adopt the bank's contention that no breach
occurred, "one must conclude that Virginia law permits the
secured creditor to act as unreasonably as one can imagine with
regard to its collateral and thereafter not be held accountable."
The simple answer to this contention is that the bank did
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nothing more than exercise its rights provided in the loan
documents and under the applicable law as it attempted to
cooperate with the debtor in disposing of the inventory. The
U.C.C. term "good faith" is defined as "honesty in fact in the
conduct or transaction concerned." Code § 8.1-201(19). When, as
here, parties to a contract create valid and binding rights, one
party does not breach the U.C.C.'s obligation of good faith by
exercising such rights. Mahoney v. NationsBank of Virginia, 249
Va. 216, 221, 455 S.E.2d 5, 8 (1995). Arguably, the bank's
conduct was arbitrary, but it was not dishonest.
Fourth, the debtor contends that the trial court erred in
striking its evidence on the debtor's conspiracy claim. The
debtor sought to prove that the bank and AMRESCO "combined,
agreed and mutually undertook to willfully and maliciously injure
[the company] in its reputation, trade and business," in
violation of Code § 18.2-499 (unlawful to combine to injure
others in reputation, trade, business, or profession). The trial
court did not err.
One of the requirements for recovery under the statute is a
showing that "two or more persons" combined or acted in concert.
Code § 18.2-499(a). Here, the record is clear that AMRESCO was
the bank's agent retained to service "problem" loans, and that it
acted within the scope of its agency. Under those circumstances,
a conspiracy was a legal impossibility because a principal and an
agent are not separate persons for purposes of the conspiracy
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statute. One entity existed, the bank, and a single entity
cannot conspire with itself. Fox v. Deese, 234 Va. 412, 428, 362
S.E.2d 699, 708 (1987).
Finally, the debtor contends that the trial court erred when
it granted pretrial motions for summary judgment on the company's
tortious interference with contract claim. We disagree.
The debtor sought recovery of damages arising from the
bank's and AMRESCO's alleged tortious interference with the
company's "contractual relations and business expectancies" by,
the debtor claims, intentionally disrupting the agreements with
Smyth and Bonner for sale of the inventory. As we already have
demonstrated, the bank, and its agent, merely engaged in the
lawful exercise of the bank's statutory and contractual rights
which incidentally may have interfered with the company's private
negotiations for sale of the inventory. But such conduct is not
actionable and will not support recovery for tortious
interference with contractual relations.
Consequently, we hold there is no error in the judgment
below, and it will be
Affirmed.
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