31014 Union City Blvd LLC, et al. v. Live Oak Banking Company

Background

The plaintiffs, 31014 Union City Boulevard LLC and Union City Veterinary Corporation, entered into a loan agreement with Live Oak Banking Company to purchase property and construct a veterinary hospital in Albany, California. The agreement governed the loan relationship, including construction-draw requests and the disbursement process. The plaintiffs and their contractor were required to submit disbursement requests and supporting documents.

The agreement gave Live Oak discretion to decide whether the conditions for a disbursement were satisfied. It also stated that the borrower and other project participants could not rely on Live Oak’s determination that a disbursement was appropriate, and that making a disbursement did not approve or accept the work performed or represent that the work complied with the parties’ contracts.

Live Oak construction specialist Charlie Lehmann allegedly made assurances on or about December 22, 2022, that Live Oak would check the accuracy of requests and issue payments only for completed work or ordered materials supported by adequate documentation. The contractor later submitted a payment application seeking $385,031.25, including $220,189 for mobilization costs. In a January 23, 2023 email, Lehmann asked the plaintiffs to approve the payment and specifically warned that the mobilization charge was higher than usual and had relatively little supporting documentation. The plaintiffs approved the application, and Live Oak disbursed the funds.

The plaintiffs later requested documentation about the payment application. Live Oak refused, stating that the information was confidential. Live Oak also sent a proposed modification agreement connected to the property’s sale. The plaintiffs rejected it because it contained broad release language and because Live Oak allegedly asked them to backdate it.

The plaintiffs asserted five claims: breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, and violation of North Carolina’s Unfair and Deceptive Trade Practices Act. Live Oak moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

Contract Interpretation

The court applied North Carolina law and held that the agreement was unambiguous on the issues relevant to the motion. It determined that Live Oak had discretion to decide how much documentation was sufficient before approving a disbursement. The court also held that the agreement barred the plaintiffs from relying on Live Oak’s approval as an indication that the underlying payment application or work was legitimate or adequately supported.

The court rejected the plaintiffs’ interpretation that Live Oak had an independent duty to ensure that the requested payment was only for work actually completed. At the same time, the court did not accept Live Oak’s broader argument that all duties concerning documentation rested solely with the plaintiffs. The agreement required Live Oak to review the submitted documentation and make a disbursement when the documentation was satisfactory, but the agreement left the sufficiency determination to Live Oak’s discretion and barred reliance on that determination.

The court also held that the Small Business Administration loan authorization did not create separate duties owed to the plaintiffs because it stated that it created no third-party rights or benefits for the borrower.

Claims

Breach of contract. The court dismissed this claim with prejudice. The plaintiffs argued that Live Oak breached the agreement by approving a payment supported by insufficient documentation and by presenting the contractor’s application to the plaintiffs for after-the-fact approval. The court held that the agreement did not impose the specific duties the plaintiffs claimed. Because the plaintiffs ultimately approved the payment application in a form satisfactory to Live Oak, the court concluded that Live Oak did not breach an identified contractual provision. The court found amendment would be futile.

Implied covenant of good faith and fair dealing. The court dismissed this claim with prejudice to the extent it was based only on the agreement’s terms. Under North Carolina law, the implied covenant generally prevents conduct that injures a party’s right to receive the benefits of a contract. Here, however, the claim rested on the same conduct as the unsuccessful contract claim, and the court found no breach of a contractual duty. The court stated that amendment might not be futile if the plaintiffs could allege conduct outside the agreement that plausibly frustrated the agreement’s purpose.

Fraud. The court dismissed the fraud claim because the plaintiffs did not adequately allege reasonable or justifiable reliance. The agreement barred reliance on Live Oak’s disbursement determination. In addition, the January 23 email expressly warned about the unusually high mobilization charge and limited supporting documentation. The court held that this warning gave the plaintiffs an opportunity to investigate and undermined their assertion that they reasonably relied on Live Oak’s earlier statements. The opinion did not expressly state that this claim was dismissed with prejudice.

Negligent misrepresentation. The court dismissed this claim with prejudice. It held that the plaintiffs could not show justifiable reliance for the reasons given in the fraud analysis. The court also held that North Carolina’s economic-loss rule barred the claim because the alleged misrepresentations concerned the contractual disbursement process and the alleged injury arose from the subject matter of the contract. The court found amendment would be futile.

Unfair and Deceptive Trade Practices Act. The court dismissed this claim. It held that the plaintiffs could not base the claim on alleged misrepresentations about the payment application because they could not show reliance and resulting injury. The court further held that Live Oak had no duty to disclose its internal documentation because the agreement created no fiduciary or special relationship and the borrower-lender relationship was ordinarily conducted at arm’s length. The court also found that the proposed modification could not have caused injury associated with the earlier disbursement because the plaintiffs rejected it after the disbursement had already been approved and issued.

The court stated that amendment would be futile for the portion of the Unfair and Deceptive Trade Practices Act claim based on misrepresentations about the appropriateness of the disbursement. It nevertheless granted leave to amend other potentially viable theories involving the disbursement process or another unfair or deceptive practice that proximately caused injury.

Disposition

Judge Arles R. Breyer granted Live Oak’s motion to dismiss. The order states that the plaintiffs’ claims were dismissed with prejudice where specified above and that the plaintiffs could file an amended complaint within 30 days. The opinion does not state a separate prejudice designation for the fraud claim.