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Docket Number

49633 Record No. 931056

Attorney(S)

Robert V. Roussos (Roussos and Langhorne, on brief), for appellant. Stephen E. Noona (Paul K. Campsen; John W. Hamilton; Kaufman Canoles, on brief), for appellee.

Judges

JUSTICE COMPTON delivered the opinion of the Court.

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Smart Summary

Greenwood Associates, Inc. v. Crestar Bank, Record No. 931056 (Va. Sept. 16, 1994)

Factual and Procedural Background

Greenwood Associates, Inc. (plaintiff/appellant) obtained a $300,000 loan from Crestar Bank secured by a first deed of trust on Norfolk property that included an apartment building, and later a $45,000 second deed of trust. Crestar "called" the first deed of trust in April 1990. The parties negotiated a forbearance under which Crestar agreed to forebear foreclosure until September 1, 1990. As the forbearance period neared expiration, Greenwood obtained a sales contract with David Marshall and a loan commitment from Essex First Mortgage that, if closed, would have produced proceeds sufficient to retire Crestar's claims and yield net proceeds to Greenwood.

Crestar proceeded with a foreclosure sale on October 4, 1990 despite being advised of the Marshall contract and the commitment letter and despite Greenwood's requests to postpone the sale a few days. Crestar was the sole bidder at the foreclosure and purchased the property for $345,000. The next day Crestar sold the property to Marshall for $448,000 (the same price in Marshall's contract with Greenwood). Greenwood alleged Crestar refused to credit Greenwood with the surplus or otherwise account for proceeds and alleged Crestar had previously orally assured Greenwood it would not "double profit" and would credit any surplus to Greenwood's account. Greenwood also alleged Crestar had taken over collection of rents prior to foreclosure and had refused to account for rents collected and disbursed while Greenwood still owned the property.

Greenwood filed a three-count amended bill asserting (1) breach of contract for failure to credit proceeds of the resale, (2) a claim for an accounting of rents and disbursements while Crestar collected rents, and (3) breach of the covenant of good faith and fair dealing under the Uniform Commercial Code (U.C.C.). Crestar demurred to the amended bill. The trial court sustained the demurrer and dismissed the suit; Greenwood appealed. The Supreme Court of Virginia granted appeal and addressed whether the demurrer was properly sustained as to each count.

Legal Issues Presented

Whether Greenwood's amended bill alleged an enforceable contract (based on alleged oral assurances by Crestar not to "double profit" and to credit any surplus) such that Greenwood stated a cause of action for breach of contract.
Whether Greenwood's allegations entitle it to an accounting of rents and disbursements collected by Crestar during the period prior to foreclosure while Greenwood remained the owner.
Whether Greenwood stated a claim under the U.C.C. for breach of the obligation of good faith (Code Sec. 8.1-203) based on the foreclosure, sale, and resale transaction involving real property.

Arguments of the Parties

Appellant's (Greenwood's) Arguments

Greenwood alleged Crestar made an oral promise (an assurance) that Crestar would not "double profit" on any post-foreclosure sale and that any surplus from such a sale would be credited to Greenwood's account; Greenwood contends this constituted an enforceable promise supporting a breach of contract claim.
Greenwood contended that it reasonably relied on Crestar's assurances, which discouraged Greenwood from obtaining other bidders, seeking injunctive relief, or taking other actions to protect its interest, and that such reliance resulted in forbearance and caused Greenwood's loss.
Greenwood sought an accounting of rents collected by Crestar after Crestar took over rent collection but before foreclosure, asserting Crestar acted in a fiduciary capacity and owed Greenwood an accounting.
Greenwood alleged Crestar's course of conduct amounted to a breach of the covenant of good faith and fair dealing under the U.C.C., seeking damages for that alleged breach.

Appellee's (Crestar's) Arguments

Crestar maintained the alleged oral contract was unenforceable on multiple grounds: its terms were vague and uncertain, it lacked consideration, and it was barred by the Statute of Frauds because it was not in writing.
Crestar "disagrees strongly with and denies the allegations," i.e., it disputed the factual assertions in the amended bill.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Allen v. Aetna Casualty & Surety Co., 222 Va. 361, 281 S.E.2d 818 (1981)	A promise to forebear the exercise of a legal right is adequate consideration to support a contract.	The Court acknowledged that forbearance can constitute consideration, but evaluated whether an agreement to forebear was pled here; the Court ultimately held the amended bill failed to allege the requisite agreement to forebear as consideration for Crestar's alleged promise.
Troyer v. Troyer, 231 Va. 90, 341 S.E.2d 182 (1986)	An agreement to forebear may be implied from parties' conduct and the nature of the transaction.	The Court recognized that an implied agreement to forebear can exist but found the plaintiff's allegations did not sufficiently allege an express or implied agreement by Greenwood to forebear as consideration for Crestar's promise.
Saunders v. Bank of Mecklenburg, 112 Va. 443, 71 S.E. 714 (1911)	Mere forbearance, without an agreement to that effect, is not sufficient consideration for a promise even if the forbearance was induced by the promise; an agreement to forebear is "absolutely essential."	The Court relied on Saunders to hold that Greenwood's allegation of mere reliance and forbearance, absent an allegation of an agreement that Greenwood would forebear in exchange for Crestar's promise, failed to establish consideration and thus failed to state a breach of contract claim.

Court's Reasoning and Analysis

Standard of review and pleading assumption:

The Court noted that on demurrer it must accept as true all well-pleaded material facts in the amended bill even though Crestar denied them, and it summarized the plaintiff's allegations accordingly.

Analysis of Count One (Breach of Contract):

The Court assumed, without deciding, that the amended bill alleged the contract's terms with sufficient specificity, but proceeded to determine whether the alleged oral contract was supported by consideration.
The Court explained the legal principle that a promise to forebear the exercise of a legal right can constitute consideration (citing Allen) and that such a forbearance agreement may be implied from conduct (citing Troyer).
However, relying on Saunders, the Court emphasized that mere forbearance induced by a promise is insufficient; there must be an agreement, express or implied, that the promisee would forebear, and such an agreement is "absolutely essential."
The Court found Greenwood's amended bill did not allege that Crestar's assurances were made in exchange for Greenwood's agreement to forebear exercising legal rights. Greenwood instead alleged only that it relied on Crestar's assurances and was discouraged from taking protective actions. The "absolutely essential" element — an agreement that Greenwood would forebear in consideration for Crestar's promise — was not alleged.
Because the amended bill failed to allege consideration, the Court concluded Greenwood failed to state a cause of action for breach of contract and did not reach the separate Statute of Frauds argument.

Analysis of Count Two (Accounting):

The Court held Greenwood's allegations that Crestar had taken over collection of rents while Greenwood still owned the property were sufficient to show Crestar acted in a fiduciary capacity during that period.
Under Code Sec. 8.01-31, an accounting in equity may be had against a fiduciary who has received more than his just share; thus the amended bill alleged entitlement to an accounting of rents received and disbursements made by Crestar prior to foreclosure.
Accordingly, the Court concluded the trial court erred in sustaining the demurrer as to the second count and that Greenwood had stated a claim for an accounting.

Analysis of Count Three (U.C.C. Good Faith Claim):

The Court determined the disputed transaction concerned the foreclosure, sale, and resale of real property and thus fell squarely within matters excluded from the U.C.C.
It cited Code Sec. 8.9-104, which expressly excludes the creation or transfer of interests in real estate (including leases or rents) from that title's provisions, and referenced Code Sec. 8.1-201(19) in connection with the U.C.C. provision for good faith (Code Sec. 8.1-203).
Because the U.C.C. does not control transfers of realty, Greenwood failed to state a claim under the U.C.C. for breach of the obligation of good faith.

Holding and Implications

Holding:

Affirmed in part, reversed in part, and remanded.

The Court affirmed the trial court's dismissal of Count One (breach of contract) and Count Three (U.C.C. good faith claim), concluding Greenwood failed to plead an enforceable contract for lack of consideration and that the U.C.C. did not govern the real estate transaction alleged.
The Court reversed the trial court's dismissal of Count Two (request for an accounting) and remanded the case for further proceedings on that count, holding Greenwood sufficiently alleged Crestar acted in a fiduciary capacity with respect to rents collected prior to foreclosure and is entitled to an accounting as alleged.

Direct effect on the parties: Greenwood's breach of contract and U.C.C. claims remain dismissed; Greenwood may proceed with its claim for an accounting of rents and related disbursements for the period prior to foreclosure. The Court did not announce a new legal principle beyond application of existing Virginia precedent and statutory provisions.

Decision rendered by Justice Compton for a unanimous Court. Trial court: Circuit Court of the City of Norfolk (Hon. Alfred W. Whitehurst, presiding). Result: Reversed and remanded as to the accounting claim; affirmed as to the other counts.

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GREENWOOD ASSOCIATES, INC. v. CRESTAR BANK

In this suit between a bank and its customer arising from a foreclosure, the customer failed to state a cause of action for breach of contract or breach of the obligation of good faith; the trial court correctly sustained the bank's demurrer and dismissed two of the customer's claims. The court's dismissal of a third claim by the customer seeking an accounting is reversed and the cause remanded on that issue.

Creditors' Rights — Banks and Banking — Mortgages — Deeds of Trust — Real Property — Uniform Commercial Code — Contracts — Foreclosure — Agreements to Forebear

The plaintiff obtained loans from the defendant bank, secured by a first deed of trust and a second deed of trust on real property which included an apartment building. The landowner negotiated with the bank to forebear its right to foreclose on the loan for several months and negotiated a loan commitment from another lender which would have produced proceeds sufficient to retire all the defendant bank's claims. The bank commenced to foreclose on the property even though the sale was imminent and even though it was fully advised both of the sale contract and the commitment letter. The bank was the sole bidder and purchased the property for the amount of the loans. The next day the bank entered into a sales contract with the prospective purchaser of the property for the same price as had been negotiated between the former owner and that purchaser and refused to credit the former owner with the profit from that sale. The plaintiff alleged that an agreement concerning the application of funds of the second sale constituted a contract between the parties and that the failure to credit and account for the proceeds of sale constituted a breach of contract. In a second count, the plaintiff sought an order requiring the bank to provide it with an accounting. In the third count, the plaintiff alleged that the defendant's conduct constituted a breach of the covenant of good faith and fair dealing imposed upon it under the Uniform Commercial Code and sought damages for this alleged breach. The trial court sustained the defendant's demurrer and the plaintiff appeals the dismissal of the suit.

1. A promise to forebear the exercise of a legal right is adequate consideration to support a contract and such an agreement may be implied from the parties' conduct and the nature of the transaction.

2. Forbearance to act does not establish consideration for an undertaking, unless there was an agreement, express or implied, that the plaintiff would forebear to act. Such an agreement is absolutely essential.

3. Since allegation of such an agreement between the parties is lacking, the plaintiff has failed to state a cause of action for breach of contract to support its claim for damages.

4. The plaintiff's allegations support entitlement to the accounting that it requests for the time before foreclosure during which the defendant bank was acting in a fiduciary capacity handling rent monies for the apartments, and the trial court erred in sustaining the demurrer to the second count.

5. The transaction is not controlled by the Uniform Commercial Code, which expressly excludes the transfer of realty from its provisions and the plaintiff has failed to state a claim against the bank based upon any cause of action that may exist for breach of the obligation of good faith set forth in Code Sec. 8.1-203.

JUSTICE COMPTON delivered the opinion of the Court.

In this controversy between a bank and its customer arising from a foreclosure, we consider whether the trial court correctly sustained the bank's demurrer and dismissed the customer's suit.

In October 1991, appellant Greenwood Associates, Inc., filed suit against Crestar Bank. The trial court sustained Crestar's demurrer to the original bill of complaint and allowed the plaintiff to amend. The plaintiff filed a three-count amended bill, to which Crestar also demurred. The court sustained the second demurrer. We awarded the plaintiff this appeal from a June 1993 order dismissing the suit.

Because a demurrer admits the truth of all material facts that are well pleaded, we shall summarize the plaintiff's allegations as if they are true, although Crestar "disagrees strongly with and denies the allegations."

In July 1986, the plaintiff obtained a loan from Crestar in the amount of $300,000 secured by a first deed of trust on property in Norfolk owned by the plaintiff that included an apartment building. Crestar subsequently obtained a second deed of trust on the same property in the amount of $45,000. The first deed of trust was "called" by Crestar in April 1990.

Subsequently, the plaintiff "negotiated" with Crestar to prevent a foreclosure on the property and, in June 1990, Crestar agreed to forebear its right to commence foreclosure until September 1, 1990. When "the forbearance period approached expiration," the plaintiff obtained a contract with one David Marshall and a loan commitment from "Essex First Mortgage" to finance the sale of the real estate to Marshall. This sale would have produced proceeds sufficient to retire all Crestar's claims against the plaintiff and would have resulted "in net proceeds" to plaintiff. Crestar commenced to foreclose on the property even though the sale to Marshall was "imminent," and even though Crestar "was fully advised of both the sale contract and the commitment letter" prior to the day of the scheduled foreclosure.

At that time, a representative of Crestar "assured" the plaintiff that if Crestar subsequently sold the property after foreclosure, "Crestar would not 'double profit' if it received more than the amount bidded in," but would credit the plaintiff's "account." The plaintiff was "discouraged by Crestar in obtaining bidders for the foreclosure sale, or taking any other action to protect its interest, by oral assurances by Crestar representatives that the proceeds of any future sale . . . would be credited to the [plaintiff's] account."

In spite of the plaintiff's continued request that the foreclosure sale be postponed "a few days" so plaintiff could close with Marshall, Crestar conducted the sale on October 4, 1990. Crestar was the sole bidder and purchased the property for $345,000. On the next day, Crestar entered into a sales contract with Marshall "for $448,000, the exact same amount which had been contracted for by Mr. Marshall" with the plaintiff. That sale closed on October 31, 1990 "with net proceeds of $389,145.30, plus additional escrows which remained unaccounted for, being paid to Crestar" that Crestar refused to credit to plaintiff.

In the first count of the amended bill, the plaintiff alleges that "the agreement concerning the application of funds of the second sale constituted a contract between the parties," and that "the failure to credit and properly account for the proceeds of sale constituted a breach of contract." The plaintiff alleges that this breach of contract caused it to suffer a loss of $104,000, "minus any reasonable expenses attributable to" the October 4 sale, "said sum being the difference in the amount that was actually credited and the amount which should have been credited."

In the second count, plaintiff seeks an order requiring Crestar to provide plaintiff with an accounting. Several months prior to the foreclosure, Crestar "took over the collection of rents from the subject property." The plaintiff asserts that during this time, when it was the owner of the property, it was "entitled to an accounting of rents received and disbursements," which Crestar has refused to provide.

In the third count, the plaintiff asserts that Crestar's actions "constituted an intentionally misleading course of conduct towards" the plaintiff "insofar as it failed to properly apply the sale proceeds" of the subject property "while assuring" the plaintiff "that it would do so." The plaintiff alleges that this course of conduct constituted "a breach of its covenant of good faith and fair dealing imposed upon it under the Uniform Commercial Code," and seeks damages in the amount of $104,000 for this alleged breach.

On appeal, the plaintiff summarizes its claim under the first count as follows: "Greenwood alleged that an oral promise was made by Crestar. This promise was an assurance by Crestar that it would not double profit on any sale of the Property subsequent to foreclosure and that any surplus from such a sale would be credited to Greenwood's account." Crestar maintains that the alleged contract is unenforceable because its terms are vague and uncertain, it lacks consideration, and it is void under the Statute of Frauds because not in writing.

We will assume, but not decide, that the allegations of the amended bill set forth the terms of the contract with sufficient specificity. Nonetheless, we hold that the alleged oral contract fails for lack of consideration.

The plaintiff correctly notes that a promise to forebear the exercise of a legal right is adequate consideration to support a contract, Allen v. Aetna Casualty Surety Co., 222 Va. 361, 363, 281 S.E.2d 818, 819 (1981), and that an agreement to forebear may be implied from the parties' conduct and the nature of the transaction. Troyer v. Troyer, 231 Va. 90, 94, 341 S.E.2d 182, 185 (1986). The plaintiff argues that "Greenwood had a number of options available prior to foreclosure which would have protected its interests. Among those options were obtaining other bidders for the Property, seeking an injunction in state court or filing Chapter 11 Bankruptcy to stay the foreclosure proceedings." Further, the plaintiff contends that it is "legally sufficient that Crestar's assurance or promise should have reasonably induced forbearance and that it did, in fact, result in forbearance on the part of Greenwood, the promisee."

We do not agree with the plaintiff. Mere forbearance, without an agreement to that effect, is not sufficient consideration for a promise, even though the fact of forbearance was induced by the promise. Saunders v. Bank of Mecklenberg, 112 Va. 443, 453-54, 71 S.E. 714, 717 (1911), cited in Troyer, 231 Va. at 94, 341 S.E.2d at 185. The fact of forbearance to act does not establish consideration for the undertaking, unless there was an agreement, express or implied, that the plaintiff would forebear to act. "Such an agreement is absolutely essential." Saunders, 112 Va. at 454, 71 S.E. at 717.

In the present case, nowhere has the plaintiff alleged that Crestar made the alleged "assurances" not to "double profit" on the resale of the property in exchange for the plaintiff's promise to forebear from exercising legal rights. The plaintiff merely has alleged that Crestar made "assurances" that it foreseeably relied upon to its detriment. The "absolutely essential" agreement is lacking in the plaintiff's allegations. Thus, the plaintiff has failed to state a cause of action for breach of contract to support its claim for damages under the first count of the amended bill. Because an enforceable contract has not been pled, we do not reach the Statute of Frauds question.

Proceeding to the second count, we hold that the plaintiff's allegations support entitlement to the accounting that it requests in the amended bill, that is, an accounting of all funds Crestar received and disbursed from rents collected during the period prior to foreclosure. Based on the allegations, Crestar was acting in a fiduciary capacity during that period and was under a duty to account to the property owner. See Code Sec. 8.01-31 ("An accounting in equity may be had against any fiduciary . . . for receiving more than comes to his just share or proportion. . ."). Therefore, the trial court erred in sustaining the demurrer to the second count of the amended bill.

Turning to the third count, we conclude that this transaction is not controlled by the Uniform Commercial Code (U.C.C.). The alleged oral contract involves the foreclosure, sale, and resale of real property as a precondition to its performance. The U.C.C. expressly excludes the transfer of realty from its provisions. Code Sec. 8.9-104 specifies: "This title does not apply . . . to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder. . . ." Thus, the plaintiff has failed to state a claim against Crestar based upon any cause of action that may exist for breach of the "obligation of good faith" set forth in Code Sec. 8.1-203. See Code Sec. 8.1-201(19).

Consequently, that portion of the trial court's judgment dismissing the first and third counts of the amended bill will be affirmed. The portion dismissing the second count will be reversed and the cause will be remanded for further proceedings under that count of the amended bill of complaint.

Affirmed in part, reversed in part, and remanded.

GREENWOOD ASSOCIATES, INC. v. CRESTAR BANK

Greenwood Associates, Inc. v. Crestar Bank, Record No. 931056 (Va. Sept. 16, 1994)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Greenwood's) Arguments

Appellee's (Crestar's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

GREENWOOD ASSOCIATES, INC. v. CRESTAR BANK

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