Case Title: Charles E. Brauer Co. v. NationsBank

Citation: 

Docket Number: 

State: virginia

Court: Virginia Supreme Court

Date: 1996-01-12T00:00:00Z

Document:
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. 
 
 
 
 
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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.