Best Medical International, Inc. et al. v. Wells Fargo Inc. NA

Lorraine Nordlund

DENNIS J. SMITH. CHIEF JUDGE
MARCUS D. WILLIAMS
JANE MARUM ROUSH
LESLIE M. ALDEN
JONATHAN C.THACHER
R. TERRENCE NEY
RANDY I. BELLOWS
CHARLES J. MAXFIELD
BRUCE DWHITE
ROBERT J. SMITH
DAVID S. SCHELL
JAN L BRCDIE
LORRAINE NORDLUND
BRETT A KASSASIAN
MICHAEL F. DEVINE

JUDGES BARNARD F. JENNINGS
THOMAS J. MIDDLETON
THOMAS A. FORTKDRT
RICHARD J, JAMBORSKY
JACK B. STEVENS
J. HOWE BROWN
F BRUCE BACH
M. LANGHORNE KEITH
ARTHUR B. VIEREGG
KATHLEEN H. MACKAY
ROBERT W. WOOLDRIDGE, JR.
MICHAEL P. McWEENY
GAYLORD L FINCH. JR
STANLEY P. KLEIN
RETIRED JUDGES

Dear Counsel:

This matter came before the Court on the Defendants' Demurrer to Plaintiffs' Third Amended Complaint. The Court heard argument on Thursday, May 5, 2011, and made multiple substantive rulings, incorporated into an order entered on May 24, 2011. The Court took three specific matters under advisement and requested supplemental briefs from the parties. For the following reasons, the Court declines to rule on Wells Fargo's liability for intentional torts proven against Wachovia, and sustains the demurrer as to rescission as a remedy under the UCC, and as to the minority business certification providing standing for corporate plaintiffs under the Virginia Equal Credit Opportunity Act ("VA ECOA").

As this case has been before the Court now on multiple occasions, the Court will dispense with an extensive factual overview and focus only on the facts relevant to the legal issues in this opinion. Consistent with its April 27, 2011, opinion letter, the Court devoted significant time during the May 5, 2011 hearing to issues discussed in that letter. When discussing the ability of the corporate plaintiffs to bring a claim under the VA ECOA, the Court asked counsel for Wells Fargo whether the certification of some of the corporate plaintiffs as minority-owned businesses had any effect on their ability to bring such a claim. Counsel for Wells Fargo responded that she did not believe that the certification had any effect on standing but had not looked into the issue. The Court requested and received supplemental briefs from both parties on this issue.

During the same dialogue about claims under the VA ECOA, the Court also asked counsel for Wells Fargo whether Wells Fargo would be liable for the intentional torts of Wachovia as Wachovia's successor. Counsel for Wells Fargo responded that she thought Wells Fargo might be liable but wanted to look back at the agreements memorializing the merger between the two corporations before giving the Court a definite answer. The Court asked counsel to address that issue as well in supplemental brief. Wells Fargo's supplemental brief reserves its position that neither it nor Wachovia committed any intentional torts against the Plaintiffs, and asserts that were the Court to find that any were committed, Wells Fargo did not intend to raise the merger as a defense.

Lastly, Wells Fargo's demurrer raised multiple issues about the Plaintiffs' requested remedies. During the hearing, the Court asked the parties whether rescission was an appropriate remedy under Virginia's version of the Uniform Commercial Code ("UCC") for a breach of the covenant of good faith and fair dealing. As the parties' briefs had not focused specifically on this issue, the Court requested written argument on that and limited the parties to a total of ten pages for these three issues.

In their Third Amended Complaint, the Plaintiffs request rescission of the Waiver and Amendment Agreement as a remedy for their claim that Wells Fargo breached the covenant of good faith and fair dealing incorporated into the Financing and Security Agreement ("FSA") with Plaintiff Huestis Machine Corp.

In its supplemental brief, Wells Fargo contends that although rescission is available in limited circumstances under the UCC, those circumstances are not present in this case; therefore rescission is not available to the Plaintiffs. Wells Fargo emphasizes that courts have repeatedly held that rescission is not an appropriate remedy for a breach of contract claim because it is so extreme as compared to other available remedies for contract disputes, i.e. money damages, or even reformation. Additionally, Wells Fargo points out that the Plaintiffs' particular request goes a step further beyond the cases in which courts have granted rescission - the Plaintiffs ask the Court to rescind the Waiver and Amendment Agreement as a remedy for Wells Fargo's alleged breach of the Financing and Security Agreement.

In their supplemental brief, the Plaintiffs urge the Court to follow a Fourth Circuit decision which granted rescission for a defendant's violation of a contract's duty of good faith and fair dealing. Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4^th Cir. 1999). And looking to Virginia's version of the UCC, the Plaintiffs argue that Va. Code § 8.1A-103(b) gives courts the discretion to apply common law remedies where the UCC is silent and application of that remedy would achieve the ends of justice. That section states: "Unless displaced by the particular provisions of the UCC, the principles of law and equity.... supplement its provisions." Id.

Wells Fargo is correct that the UCC specifically allows for rescission in certain instances not relevant to this case, such as a buyer's right to cancel a contract for the sale of goods, and rescission of a lease contract. The Plaintiffs are also correct that the Virginia Code allows the Court to use its discretion in supplementing the UCC's specific provisions with the principles of law and equity. Turning to the case law for these principles, the Court finds that in the absence of mutual mistake, illegality, disability, fraud by concealment or in the inducement, and without undue influence resulting from confidence or friendship, or any inadequacy of consideration sufficient to suggest fraud, equity does not require rescission, but leaves a plaintiff to his legal remedies. See Rison v. Newberry, 90 Va. 513, 521--22 (1894). Moreover, "[o]rdinarily, rescission will not be granted for breach of a contract which is not of such substantial character as to defeat the object of the parties in making the contract." Neale v. Jones, 232 Va. 203, (1986).

Assuming arguendo that the Plaintiffs were requesting rescission of the FSA as a remedy for its alleged breach by Wells Fargo, the one supportive case that the Plaintiffs cite involves South Carolina law, not Virginia law. The Supreme Court of Virginia has consistently held that only certain grounds such as mutual mistake, fraud, and duress are appropriate for rescission. See Ayers v. Mosby, 256 Va. 228, 234 (1998); Runion u. Helvestine, 256 Va. 1, 10 (1998); Metro Realty of Tidewater, Inc. v. Woolard, 223 Va. 92, 99 (1982); Ashby v. Dumouchelle, 185 Va. 724, 733 (1946). The Plaintiffs have failed to allege anything but the breach of the covenant of good faith and fair dealing, and Virginia law does not recognize that as a proper ground for rescission.

Most importantly, however, the Plaintiffs are requesting that the Court allow them to proceed on a theory that the breach of the covenant of good faith and fair dealing encompassed in one agreement serves as grounds for rescission of another. The Court cannot find any supporting case law for this theory and because rescission is such an extreme remedy in any case, the Court declines to embrace the Plaintiffs' theory as alleged in the Third Amended Complaint. Accordingly, the Court sustains Wells Fargo's demurrer to the requested rescission of the Waiver and Amendment Agreement based on a breach of the covenant of good faith and fair dealing implied in the Financing and Security Agreement. This decision requires the Plaintiffs to strike Section G. of Count VII's prayer for relief.

In their supplemental brief, the Plaintiffs claim that neither the relevant statutes nor any case law precludes a corporate plaintiff from bringing an ECOA claim on its own behalf. The Plaintiffs analogize to cases brought by corporations under federal civil rights law and urge the Court to adopt a similar theory for ECOA claims.

In its supplemental brief, Wells Fargo argues that former Governor Timothy Kaine established the minority-owned business certification through an Executive Order in 2006, with the asserted purpose of "maxinriz[ing] the participation of its citizens in the vast array of commercial opportunities in state procurement ... to promote economic justice and eliminate impediments to a more equitable procurement process." Exec. Order No. 33, Aug. 10, 2006. Wells Fargo also cites to the Virginia Administrative Code implementing this Executive Order and emphasizes that this certification designates a business as "minority-owned" as opposed to the business itself being a minority; and that the purpose of the certification is to even the playing field in state government contracting as opposed to creating a new opportunity for the Plaintiffs under the ECOA.

What is today known as the Department of Minority Business Enterprise (DMBE) was originally enacted in 1975 by Chapter 509 of the Acts of the Virginia General Assembly, and is now codified at Va. Code § 2.2-1400 et. seq. The terrminology used in this title of the code has changed multiple times since 1975 by formal amendment and executive order, but the intent behind the creation of the DBME and the certification has always been the same - to "[c]oordinate . . . the plans, programs and operations of the state government that affect or may contribute to the establishment, preservation, and strengthening of small, women-owned, and minority-owned businesses." Va. Code § 2.2-1402(1). Wells Fargo is correct that former Governor Kaine's Executive Order makes clear that the narrow purpose of the certification is to increase opportunities for minority-owned businesses in the Commonwealths procurement processes. Nothing in the multiple amendments or executive orders regarding this certification indicates any intent by the General Assembly to affect the borrower-lender relationship between parties like the ones in this case. Therefore, the Court finds that the minority-owned business certification two of the corporate Plaintiffs hold does not create standing for them under the VA ECOA.

Counsel for Wells Fargo will please prepare the order and submit it to chambers no later than June 17, 2011.

Regards, Judge, Fairfax County Circuit Court