C S Bio Co. v. Comerica Bank

Background

Plaintiffs CS Bio Co. and CCS Management, LLC, collectively referred to as CS, alleged that Comerica Bank did not follow through on assurances that it would provide a $6.6 million loan to fund improvements to commercial real estate in Milpitas. CS alleged that Comerica employees encouraged it to continue construction and pay its contractor because the loan would be approved and the construction costs would later be reimbursed.

Comerica issued a term sheet that CS signed and returned. The term sheet repeatedly stated that it was for discussion purposes only and was not a commitment to lend. It also made loan approval subject to credit approval, additional conditions, required documents, and a minimum fixed charge coverage ratio of 1.25. Comerica later declined to proceed, stating that CS did not meet that ratio. CS did not dispute that it failed to meet the ratio, but alleged that Comerica knew about the problem and had encouraged CS to continue funding construction.

The First Amended Complaint asserted five claims: intentional misrepresentation, negligent misrepresentation, general negligence, fraudulent concealment, and promissory estoppel.

Legal standard

The court applied Rule 12(b)(6), which tests whether a complaint alleges enough facts to state a legally valid claim. Claims based on fraud must also be pleaded with particular detail. At this stage, the court accepts material allegations as true and views them favorably to the nonmoving party, but the allegations must make liability plausible rather than merely possible.

Court’s analysis

The court held that the fraud-related claims were not adequately pleaded. The alleged statements that the loan would be approved or funded were principally promises about future conduct. Under the law discussed by the court, a broken promise generally is not fraud unless the plaintiff alleges facts supporting an inference that the defendant had no intention of performing when the promise was made. The amended complaint did not provide those facts.

CS alleged that Comerica’s reference to the fixed charge coverage ratio was a pretext and that Comerica knew its assurances were false because of concerns about CS’s major client, Intarcia. The court found those allegations insufficient to plausibly show that Comerica never intended to approve the loan despite its assurances. The signed term sheet also undermined CS’s claims because it showed that loan approval remained contingent on specified conditions and had not been finalized.

The negligent-misrepresentation claim failed because the allegations involved promises, rather than false statements about existing facts. The court stated that an honestly made but unreasonable promise to perform is different from a promise made with no intent to perform, and that negligent false promises were not actionable under the authority it applied.

The general-negligence claim was treated as duplicative of the negligent-misrepresentation claim to the extent it was based on Comerica’s statements about the loan. The court also held that CS had not alleged facts taking the case outside the ordinary rule that a financial institution generally owes no duty of care to a borrower when acting only as a conventional lender.

The promissory-estoppel claim also failed. Promissory estoppel can sometimes substitute for the consideration normally required for an enforceable promise, but the court found that this theory did not fit CS’s allegations. In any event, the court concluded that the term sheet prevented the alleged reassurances from being enforceable promises and made CS’s reliance unreasonable.

Disposition

The court granted Comerica’s motion to dismiss the First Amended Complaint. It allowed CS one final opportunity to amend in good faith, including to address an allegation that Comerica emailed CS on November 24, 2020, stating that it was waiving the fixed charge coverage ratio covenant. The court noted that even a waiver would not automatically require Comerica to approve and fund the loan. Any Second Amended Complaint was due by October 5, 2023.

The opinion contains inconsistent references to the First Amended Complaint and a “SAC,” and one passage refers to reliance after November 24, 2023, although the surrounding discussion concerns November 24, 2020.