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CONTRACT 21: Plaintiffs alleged defendant engaged in fraud and misrepresentation.

Plaintiff was the sole owner of Modern, and co-owner of Livingston. In 2017, plaintiff’s business partner and Livingston’s other co-owner, agreed to sell his 50% ownership interest in Livingston to plaintiff.

Bank Loan

Accordingly, in August 2017, Plaintiff engaged with defendant (bank) to fund the buyout of Livingston and refinance the debt of Modern. After a series of loan proposals, Plaintiff and defendant agreed on two loans: the Livingston loan, to buy out ownership interest, and the Modern loan, to refinance Modern’s debts.

The Livingston loan consisted of two promissory notes. The payment terms for this loan required equal monthly installments of principal and interest. The parties closed on the Livingston loan in December 2017. The Modern loan consisted of one SBA loan. The parties closed on the Modern loan in January 2019.

Change in Loan Terms

After closing the Livingston loan, Plaintiff objected to the changes in the amount of the notes and the payment terms of the Modern loan from the initial September 2017 proposal. At the closing of the Modern loan, Plaintiff also objected to the proposed distribution and cash flow terms. It is disputed whether defendant promised Plaintiff it would modify the loan documents accordingly if Plaintiff proceeded with closing the Modern loan.

After closing the Modern loan, several meetings were held to reconstruct the loans however it was impossible to accomplish. As a result, Plaintiff sought refinancing with another lender and repaid the loans to defendant in November 2018.

Negligence Claim

Plaintiffs thereafter filed a complaint against defendant, alleging defendant negligently engaged in self-dealing and unilaterally changed the terms of the loans contrary to the parties’ agreement. Plaintiffs also alleged defendant breached its fiduciary duty to plaintiffs by failing to properly distribute the Modern loan proceeds to plaintiffs, rather than itself. Further, plaintiffs alleged defendant engaged in constructive fraud and misrepresentation by waiting to disclose unilateral changes to the final loan documents until plaintiffs had no choice but to close on the loans.

To establish a negligence claim, a plaintiff must show: (1) that the defendant owed a duty to the plaintiff, (2) that the defendant breached the duty, (3) that the defendant’s breach of the duty caused the plaintiff injuries, and (4) that the plaintiff suffered damages. The record here indicates that plaintiffs alleged defendant was a negligent lending institution, failing to comply with the terms of the loans and distribute the loan proceeds accordingly.

Court Decision

Despite their speculative argument, plaintiffs fail to identify the nature of any duty that existed separately and distinctly from the contractual relationship they had with defendant. Rather, any duty owed to plaintiffs arose exclusively from the contractual relationship because no relationship, outside of the lender-borrower relationship, existed between the parties. As a result, the trial court properly found that plaintiffs failed to establish any duty arising outside of defendant’s contractual relationship with plaintiffs.

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