Opinion
C.A. No. 97C-09-281-JEB.
Submitted: April 5, 1999.
Decided: February 7, 2000.
Michael K. Tighe, Esquire, Attorney for Plaintiffs.
Thomas P. Preston, Esquire, Attorney for Defendants.
OPINION
I. FACTS
This case arises out of an alleged breach of a loan agreement between Plaintiff Edge of the Woods Limited Partnership ("EWLP") and Defendant Wilmington Savings Fund Society ("WSFS"). Plaintiff EWLP was formed for the purpose of constructing a condominium development in New Castle County called "Water's Edge" (hereinafter "the project"). Plaintiffs Edge of the Woods, Inc. ("EWI"), Water's Edge Marketing Company ("WMECO"), and Pencader Development Company ("PDC") are general partners of EWLP (hereinafter "Plaintiffs").
On August 5, 1988, EWLP secured a line of credit from WSFS for approximately $11 million (the "Loan"), in order to finance the project. The loan was written by WSFS for 264 rental units that were to be sold as condominiums (an amount later reduced to 220 units and 44 lots). A permanent loan was to be extended upon completion of the 220 units for thirty years at 70% of the appraised value at 1% over the then-existing prime rate. As security for the loan, WSFS required that Hugh Martin, V, and David N. Levinson, the two presidents of EWI, WEMCO and PDC, give WSFS personal guarantees on the loan for the outstanding balance of over $6 million. The permanent loan, when issued, would not include personal guarantees.
The Complaint does not specify which person is the president of which company.
After the loan was granted, WSFS began to experience financial and regulatory problems. As a corrective measure, WSFS assigned "workout specialists" to the project, including Defendant Edward Webb, who was an employee and officer of WSFS. These specialists worked for commission based on collections taken from loans whose status was designated as "troubled". Plaintiffs allege that WSFS, mainly through its employee Webb, constantly threatened to place EWLP's loan into default, despite the fact that "EWLP was current with its interest payments and within the limit of the line of credit." However, WSFS never actually placed the loan into default status.
Plaintiff's Complaint at 15.
WSFS hired real estate appraisers to assess the completed 220 units. Plaintiffs allege that WSFS forced the appraisers to underrate the value of the units at approximately 70% of the true market value. Plaintiffs allege that this false valuation resulted in an undercapitalization of the Project, such that the funds outstanding on the loan exceeded the artificial 70% appraisals.
Plaintiffs allege that as a result WSFS wrote the loan for twenty years at 2 1/2% over the floating-prime rate, and refused to write the loan under the original terms of thirty years at 1% over the then-existing prime rate. Plaintiffs further allege that this underfunding and its concomitant higher monthly payments caused a cash-flow shortage on the project, resulting in lost profits to EWLP.
Plaintiffs allege that WSFS threatened default and foreclosure on the project in order to do the following: (1) prevent EWLP from refinancing groups of individual units for a period of six months; (2) force EWLP to agree to contracts terms on subsequent roll-overs, including penalties for early loan payoff of the loan; and (3) require EWLP to sign releases of lender liability claims as a condition of rolling over the line of credit.
Plaintiffs concede that they were able to eventually refinance all of the loan at terms superior to WSFS's terms, but that "EWLP was forced to pay 1% over floating prime . . . with an average amortization of 25 years, and with personal guarantees from Levinson, and at times from Martin, required."
Id. at 25.
In March of 1992, Plaintiffs allege that when EWLP refused to change its "marketing arm" to a broker suggested by WSFS, WSFS used "strong-arm tactics to attempt to modify previously agreed-upon terms of renewal, and to increase direct revenues gained from the Loan, including above-interest rates and shorter amortization periods on renewals." Plaintiffs further allege that when EWLP did change its marketing broker, the sales rate of the units dropped off in excess of 50%, causing WMECO to lose revenue.
Complaint at 30.
Plaintiffs allege that in October of 1992, WSFS improperly halted funding on the project, causing a six-month delay, which resulted in cost and sale overruns, lost sales, and other damages.
Plaintiffs allege that in January of 1993, WSFS froze the use of net proceeds of the unit sales, and "refused to even allow EWLP to use its own funds to pay hard costs on the project such as paving expenses . . . despite the fact that the right to use such funds for `hard costs' was specifically outlined in the lending agreements," which forced the general partners to lend out-of-pocket money in order to cover hard costs.
Id. at 34-35.
Plaintiffs allege that Webb threatened default if fifty units of the project were not kept vacant and non-revenue generating, but did foreclose on the loan when EWLP refused to do so.
Plaintiffs allege that in 1993 WSFS pressured EWLP into slowing its construction schedule, and then threatened default on the loan when EWLP did slow down.
Plaintiffs allege that "WSFS agreed to act as FNMA sponsor for Waters Edge and to process a FNMA approval application for Waters Edge," yet after six months of waiting and losing sales due to a lack of FNMA approval, EWLP discovered that WSFS was not an approved FNMA sponsor.
Plaintiffs allege that EWLP agreed to pay WSFS $50,000 as a deposit in order to reserve $5 million in end-loan funds for individual purchasers at favorable rates, and that EWLP paid $25,000 for these "`Fannie Mae' mortgages for buyers of completed units." Plaintiffs further allege that after many delays WSFS wrote few of the promised end-loans for purchasers, resulting in lost sales to EWLP, and that WSFS never refunded the $25,000 or requested the additional deposit money.
Complaint at 40-41.
Plaintiffs allege that in 1995, WSFS began refusing to amortize the loan payments over the agreed amortization period when Plaintiffs made "substantial principal balance payments," contrary to WSFS customary practice, which in turn shortened EWLP's cash flow.
Id. at 43.
Plaintiffs have asserted from the above allegations the following counts in their Complaint:
(1) breach of contract by WSFS for alleged violations of the loan agreement;
(2) breach of the implied covenants of good faith and fair dealing by WSFS under the Delaware Uniform Commercial Code, 8 Del. C. § 1- 8 Del. C. § 203;
(3) tortious interference by WSFS with the contracts between EWLP and its contractors;
(4) fraudulent conduct by WSFS and Webb, as detailed in the above allegations;
(5) breach of fiduciary duty by WSFS, Webb, and other employees and officers of WSFS;
(6) violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq., ("RICO") by WSFS and Webb's conspiracy to extort and defraud EWLP in "a pattern of racketeering activity"; and
(7) violations of 5 Del. C. § 929 ("Regulations Governing Business of Banks and Trust Companies: Tying arrangements prohibited") by WSFS in using its position as lender to improperly influence EWLP's decisions concerning the marketing and refinancing of the project.
II. STANDARD OF REVIEW
The Court may grant summary judgment if it concludes that "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to summary judgment as a matter of law." The moving party bears the initial burden of showing that no material issues of fact are present. Once such a showing is made, the burden shifts to the nonmoving party to demonstrate that there are material issues of fact in dispute. In considering a motion for summary judgment, the Court must view the record in a light most favorable to the nonmoving party. The Court's decision must be based solely on the record presented and not on all evidence "potentially possible."
Super. Ct. Civ. R. 56(c); Burkhart v. Davies, Del. Supr., 602 A.2d 56, 59 (1991).
Moore v. Sizemore, Del. Supr., 405 A.2d 679, 680 (1979).
Id. at 681.
Burkhart, 602 A.2d at 59.
Rochester v. Katalan, Del. Supr., 320 A.2d 704, 708 (1974) (citing United States v. Article Consisting of 36 Boxes, D. Del., 284 F. Supp. 107 (1968), aff'd, 415 F.2d 369 (3d Cir. 1969))
In considering a motion to dismiss, the Court must accept as true all allegations contained in the plaintiffs complaint. The test of sufficiency is whether the plaintiff may recover under any reasonably conceivable set of circumstances susceptible of proof under the complaint.
Plant v. Catalytic Constr. Co., Del. Super., 287 A.2d 682, 686 (1972), aff'd, Del.Supr., 297 A.2d 37 (1972).
Spence v. Funk, Del. Supr., 396 A.2d 967, 968, (1978).
III. DISCUSSION
Defendants have filed a motion for summary judgment and a motion to dismiss Defendant Edward Webb from the action for failure to state a claim.A. DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
In support of their motion, Defendants agree that EWLP entered into a loan agreement that was amended numerous times. Defendants assert that two of these amendments, the Third Amendment to the Building Loan Agreement and Fourth Amendment to Note, Mortgage, and Guarantys [sic], contain release language that serves to insulate the Defendants from liability in this action.
See Defendants' Motion for Summary Judgement Exhibits 1, 2 and 3.
The release in the Third Amendment to Building Loan Agreement states:
"Borrower hereby remises, releases and forever discharges Lender, its agents, officers, servants, employees, successors and assigns (collectively the "Released Parties"), of and from any and all manners of action, causes of action, suits, debts, dues, agreements, obligations, liabilities, claims, accounts, and/or demands whatsoever, whether at law or in equity, or any other claims Borrower may have or could have against the Released Parties, known or unknown, which the Borrower now has, can have, ever had, or which their successors or assigns or any of them hereafter can, shall or may have arising out of or relating to the Project, the Loan and this Agreement, including, by way of illustration and not of limitation, any of the foregoing which relates in any way to the allocation, budgeting, and disbursement of the Loan proceeds during the period from August 22, 1991 through and including the date hereof"
See Defendants' Motion for Summary Judgement Exhibit 2, p. 11, ¶ 12
The release in the Fourth Amendment to Note, Mortgage, and Guarantys [sic] states:
"Obligor and Guarantors hereby expressly release Obligee from liability for any claims, defenses, causes of action, damages, losses, whether known or unknown, now or previously existing, with respect to the loan, the Loan Documents, the Guarantors or any acts or omissions to act of Obligee related to or arising out of the loan, Loan Documents, Guarantys [sic] or this Amendment."
See Defendants' Motion for Summary Judgement Exhibit 3, p. 3, ¶ 6
In its motion for summary judgement, the Defendants argue that the Plaintiffs have failed, as a matter of law, to sufficiently plead fraud or duress to render the releases unenforceable. Defendants further argue that this Court lacks jurisdiction to hear Plaintiffs' RICO claim.
Plaintiffs argue that substantial issues of material fact exist as to the enforceability of the releases contained in the amendments to the loan documents. Plaintiffs allege that the amendments to the original note were illegally executed through threats of foreclosure and bankruptcy by WSFS. Plaintiffs argue that Defendants overlooked Count Four of the Complaint, in which Plaintiffs properly plead fraud. Plaintiffs also assert that this court has jurisdiction over its RICO claim, contrary to Defendants' contention.
General releases are valid and enforceable in Delaware. Where the release is clear and unambiguous, it only will be set aside where there is fraud, duress, coercion, or mutual mistake concerning the existence of a party's injuries. In Delaware, economic duress can render a contract voidable where there is a wrongful act which overcomes the free will of the person who has no adequate legal remedy to protect his interests.
See Sabatoro Constr. Co., Inc. v. Formosa Plastics Corp., Del. Super., C.A. No. 92L-08-030-SCD, 1996 Del. Super. LEXIS 243, Herlihy, J. (June 10, 1996) (clear and unambiguous language in the release should be given its ordinary and usual meaning); Fox v. Christiana Square Assoc., Del. Super., C.A. No. 91L-04-61-MT, 1994 Del. Super. LEXIS 141, Alford, J. (April 5, 1994) (release is final and binding where there is a meeting of the minds, consideration, and no fraud, misrepresentation, mistake, duress or undue influence); Egan and Sons Air Conditioning Co. v. General Motors Corp., Del. Super., C.A. No. 86L-MY-18, 1988 Del. Super. LEXIS 166, Gebelein, J. (April 27, 1988) (same).
Id., See also Reason v. Lewis, Del. Supr., 260 A.2d 708 (1969); Hob Tea Room v. Miller, Del. Supr., 89 A.2d 851, 856 (1952).
E.I. Du Pont Nemours and Co. v. Custom Blending International Inc., Del. Ch., C.A. No. 16295-NC, 1998 Del. Ch. LEXIS 215, Strine, V.C. (Nov. 24, 1998); Way Road Development Co. v. Snavely, Del. Super., C.A. No. 89C-DE-48, 1992 Del. Super. LEXIS 42, Toliver, J. (January 31, 1992).
In this case, plaintiffs have argued that the releases are not binding because they were procured through duress and other coercive actions.
In Way Road, supra, the court held that allegations that a release was obtained by duress through intimidation, threats of litigation and bankruptcy, and breach of the funding agreement raised sufficient issues of fact warranting further scrutiny and a denial of summary judgment.
Here, Plaintiffs have alleged numerous instances of conduct by WSFS constituting duress, both in their Original and Amended Complaints. While the facts are not sufficiently developed to allow this Court to rule as a matter of law that the releases are invalid, they are sufficient to require a denial of WSFS's motion for summary judgement on the ground that further inquiry into the facts is necessary before the Court can determine the validity of the releases.
Ebersole v. Lowengrub, Del. Supr., 180 A.2d 467, 470 (1962); Delaware Lumber and Millwork, Inc. v. Anecon Construction Co., Inc., Del. Super., C.A. No. 93L-06-011, 1993 Del. Super. LEXIS 454, Lee, J. (December 13, 1993); Way Road, 1992 Del. Super. LEXIS 42, at *14.
In addition, WSFS is incorrect in asserting that this Court lacks jurisdiction to hear RICO claims. The United States Supreme Court ruled in Tafflin v. Levittthat state courts have concurrent jurisdiction with federal courts over civil RICO claims. Thus, the Plaintiffs' RICO claim will not be dismissed for lack of jurisdiction.
493 U.S. 467 (1990).
B. DEFENDANT EDWARD WEBB'S MOTION TO DISMISS
In support of his motion, Defendant Webb argues that he is shielded from liability because he was an agent for WSFS, who was a disclosed principal. Webb argues that all mentions of him in the Complaint identify him as undertaking actions on behalf of WSFS as its employee and officer, and that there is no allegation that he had any relationship with the Plaintiffs independent of that as an employee of WSFS in administering the loan agreements of Plaintiffs and WSFS.
Plaintiffs allege in the Complaint that Defendant Webb breached a fiduciary duty owed to the Plaintiffs (Count V) and that Webb "utilized the offices and power of WSFS for his own benefit" to cause the loan between Plaintiffs and WSFS to be repaid, in violation of RICO (Count VI). Plaintiffs assert that because no factual record is present, further discovery is necessary to determine the scope of Defendant Webb's authority as a loan officer for WSFS.
Counsel for Plaintiffs mistakenly responded to Defendant Webb's motion to dismiss as a motion for summary judgement. Thus, Plaintiffs respond in accordance with the standards for summary judgment.
In Delaware, in a breach of contract action involving a disclosed principal, only the principal is liable for a breach of the contract and not the agent. An agent who seeks to avoid personal liability has the burden of proving that he or she disclosed the principal for whom he or she is contracting.
Harris, et al. v. Dependable Used Cars, Inc., et al., Del. Super., C.A. No. 96C-10-023, 1997 Del. Super. LEXIS 142, Terry, J. (March 20, 1997) (quoting American Insurance Co. v. Material Transit Inc., Del. Super., 446 A.2d 1101 (1982), citing Restatement Second Agency § 320).
Miller v. Melson, Del. Super., C.A. No. 89A-SE-3, 1990 Del. Super. LEXIS 246, *7, Herlihy, J. (June 20, 1990) ("To avoid personal liability in a transaction, it is the duty of the agent to reveal the identity of the principal and the fact of the agent's representative capacity.")
In this case, there is no dispute that WSFS was a disclosed principal. Plaintiffs refer throughout their Complaint to Webb as an employee of WSFS, the principal lending bank. For example, Plaintiffs reference Webb as such in the following allegation:
"Shortly after the initial Loan was written, WSFS began undergoing internal financial and regulatory difficulties. In an attempt to bring the bank out of its financial problems, WSFS employed a constant succession of `workout specialists,' including Webb, who were assigned to the Project. These `workout specialists' worked on a commission basis, with compensation based upon collections from loans placed in `troubled' status. This provided an economic incentive for loan officers to force the project into a `troubled' or defaulted position."
Plaintiffs' Amended Complaint at ¶ 13.
Plaintiffs' characterization of Defendant Webb as a "workout specialist" who earned commission and was employed by WSFS to deal with Plaintiffs' loan project undercuts their claim that is still "necessary to determine what the exact scope of Webb's authority was as a loan officer for WSFS." It seems clear from both parties' pleadings that Webb was acting as an agent who administered a loan between WSFS and Plaintiffs. As such, he is shielded from liability as the agent acting for a disclosed principal.
IV. CONCLUSION
For the foregoing reasons, Defendant WSFS's Motion for Summary Judgement is DENIED, and Defendant Webb's Motion to Dismiss is GRANTED.