Financing: Lender Liability for Improper Disclosure
In a decision that affects all types of financing, a federal district court in Massachusetts ruled that a lender's disclosure to a competitor of the reasons for the lender's decision not to finance a prospective borrower's investment could constitute a tortious interference with a prospective business relationship if such action constitutes a violation of established standards in the banking industry.
ARY Jewelers LLC is part of a billion-dollar enterprise headquartered in the United Arab Emirates. The parent company is in a variety of businesses, including real estate. ARY had an opportunity to purchase the stock of Krigel's Inc., a privately-owned chain of retain jewelry stores that had fallen on hard times. ARY and Krigel's entered into a stock purchase agreement. ARY sought financing for the deal from various lenders, including IBJ Business Credit Corp., the defendant in this case. An agreement between the two was negotiated, but IBJ then rescinded its offer. The reason was that IBJ learned from newspaper articles that ARY's chairman had been charged with bribery in connection with a large contract in Pakistan.
Foothill Capital Corp., a competitor of IBJ in seeking to finance ARY's acquisition of the Krigel firm, was informed by IBJ of its decision to refuse financing and the reasons for doing so. When ARY sought to restart its negotiations with Foothill, Foothill withdrew its tentative financing proposal and substituted a less favorable one that included a condition requiring disclosure of any litigation involving ARY. ARY declined to do so and ended its efforts to acquire Krigel's.
ARY then began this lawsuit, alleging that if not for the disclosure by IBJ, Foothill's earlier offer would have remained on the table and ARY would have been able to proceed with the acquisition of Krigel's stock. IBJ moved for summary judgment on the count alleging breach of confidential or fiduciary relationship.
Elements of ARY's Claim
Under Massachusetts law, the elements of a tortious interference with an existing or prospective business relationship are: (1) a business relationship or contemplated contract of economic benefit; (2) defendant's knowledge of the relationship; (3) defendant's interference with it through improper motive or improper means and (4) plaintiff's loss of advantage directly resulting from defendant's conduct. The court said that ARY presented competent evidence on all four elements but that the third and fourth deserve further attention.
Improper Motive or Means
The court said no facts suggested that IBJ acted through an improper motive, i.e., out of enmity or with the purpose of hurting ARY. With regard to improper means, however, ARY maintains that IBJ improperly shared confidential information with Foothill, since this violated banking industry confidentiality standards. Said the federal district court, "The very narrow question…is whether a violation of established standards in a trade or profession rises to the level of improper means for the purposes of tortious interference." The federal district court also held that a genuine issue exists with respect to whether ARY's damages were directly caused by IBJ. The basis for this is a deposition by an officer of IBJ that he had changed the terms of the agreement because the information from IBJ "made us nervous." Thus the case must go to trial.
Reference: ARY Jewelers LLC v. IBJTC Business Credit Corp., 414 F. Supp. 2d 90 (D.C. Mass. 2007).
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This article was written by and published herein with the permission from professionals of BDO Seidman, LLP. Alvin Arnold is the editor of the Monitor. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.
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