The Allegations of the Complaint
The elaborate complaint consists of 165 paragraphs extending over fifty pages, as well as almost thirty exhibits. In reviewing a motion to dismiss, the well-pleaded allegations of the complaint are to be taken as true and viewed in a light most favorable to the non-moving party, and all reasonable inferences that can be drawn from the facts are to be drawn in favor of the non-moving party. Sturm v. Clark, 835 F.2d 1009, 1011 (3d Cir. 1987); Wisniewski v. Johns Manville Corp., 759 F.2d 271, 273 (3d Cir. 1985). In accordance with that standard, the following factual account is taken from the complaint.
The story begins in 1986, when Seal obtained an option to purchase approximately seventy-two acres of vacant land in Warwick Township, Bucks County, Pennsylvania. On that property, Seal hoped to develop and build a number of residential units, later known as Victoria Place. In search of funds to finance the project, Seal contacted Michael Hogan, then Vice-President of New Jersey National Bank, and informed him of the type and amount of development loans he would require. Thereafter, Hogan advised Seal that New Jersey National Bank would not finance the project, and, with Seal's purchasing option approaching its expiration, Seal resolved to sell his option.
Subsequently, Hogan left his employ at New Jersey National Bank and went to work for defendant Riverside Federal Savings Bank ("Riverside"), which is owned by defendants Vahak Hovnanian and Shant Hovnanian (Vahak Hovnanian's son). Interested in the Victoria Place development project, the Hovnanians instructed Hogan to contact Seal and persuade him to participate in a joint venture partnership with Riverside. To that end, Hogan promised Seal that they would meet a number of financial requirements spelled out by Seal.
On January 17, 1986 Riverside executed a commitment letter under which Riverside agreed to be a joint venture partner with Jamison Development Corporation ("Jamison"), a real-estate development company controlled by Mr. Seal, and to provide $ 1,500,000 in equity capital as well as to provide or obtain some $ 40,000,000 in loans for the project. Riverside agreed to provide those loans on a non-recourse basis, meaning that neither Seal nor the Hovnanians would need personally to guarantee the loans. Relying upon the terms of this letter, Seal ceased all efforts to sell his option or obtain alternative funding.
In April of 1986, Riverside issued a second commitment letter with similar terms to the first. (Riverside, however, was now to provide $ 2,250,000, rather than the original $ 1,500,000, in equity capital). Then, in a meeting on April 16, 1986, Riverside executed a Memorandum of Agreement summarizing the terms of the first two letters. Finally, on or about August 4, 1986, a limited partnership agreement was executed between Victoria Woods, Ltd., the managing partner and assignee of Seal Development Company, and Riverside Hovnanian Bucks County No. 1, Inc. ("RBC"),
forming Sovereign Estates, Ltd. ("Sovereign").
Four days before the Victoria Place property was to be purchased, and five days before Seal's option was to expire, Hogan told Seal that (1) Riverside could not, consistent with state and local regulatory requirements, provide the $ 2,250,000 in equity, and (2) it could not provide or obtain the $ 40,000,000 loan without Seal's personal guarantees. Seal alleges that defendants were aware of these facts all along, and, by presenting Seal with this information only as his option to purchase was about to expire, they left Seal with no alternative but to accede to various unfavorable conditions in order to receive funds needed to purchase the property. Specifically, on October 7, 1986, the following transactions occurred: (1) in return for a loan of approximately $ 2,000,000 from Riverside for the purchase of the property, Sovereign executed a note and mortgage with Riverside, which Seal personally guaranteed for up to $ 1,000,000; (2) Sovereign executed a second note and mortgage for a $ 1,600,000 million loan from Riverside to start the development of the property; and (3) RBC obtained an option to purchase a thirty percent stock interest in Sovereign, which it later exercised. By these transactions, Seal alleges that Riverside breached its initial contractual obligations and managed to place all the partnership risk on Seal and Sovereign.
By the beginning of 1987, Sovereign was running out of construction funds. At a February 1, 1987 meeting, Shant Hovnanian, in addition to refusing to provide additional capital or loans at that time, convinced Seal to provide supplementary collateral and sign an agreement purportedly relieving Riverside, RSL and RBC of any obligation to provide the $ 40,000,000 in non-recourse construction financing. Seal claims that he agreed to these terms "otherwise Sovereign would be forced into bankruptcy as it was without funds." Complaint at P 45. Subsequently, at a meeting sometime in March, 1987, and then at a settlement of April 27, 1987, Seal was, as he sees it, forced to restructure the $ 2,000,000 and $ 1,600,000 loans, resulting in an increase in his personal liability. Most notably, in return for Riverside's agreement to lend Sovereign $ 1,700,000 as a replacement for the $ 1,600,000 loan of October 7, 1986, which would soon come due, Seal agreed to provide a personal guarantee of $ 1,700,000 as well as additional mortgages to Riverside through two companies under his control.
Despite the agreement allegedly waiving their obligation to do so, defendants continued to represent to Seal that they would obtain the funding as originally agreed to and would not let the project die. Trusting these representations, Seal personally obtained or guaranteed loans from other sources to finance the continuation of the project. Despite these efforts, funds were still insufficient, and Seal decided to sell the Warwick property, as well as the unfinished Victoria Place, to the LinPro Company ("LinPro") for approximately $ 10,000,000. However, Shant Hovnanian agreed to purchase Seal's interest in Victoria Place and the Warwick property if Sovereign would call off the sale to LinPro. Seal terminated Sovereign's agreement of sale to LinPro, but defendants delayed the completion of their purchase. LinPro offered again to purchase the properties, but Seal, once more at Shant Hovnanian's request, turned down the offer.
Ultimately, Riverside decided not to purchase Seal's interests in the properties, citing newly-discovered problems with the development project. On October 13, 1988, a group of creditors filed an involuntary Chapter 7 Petition in Bankruptcy against Sovereign. That petition, which was converted into a Chapter 11 proceeding in April 7, 1989, is still pending before the bankruptcy court.
The instant complaint consists of eight counts. Four of those counts-- comprising all of the claims asserted against one or both of the Hovnanians-- are at issue today: Count II (Breach of Contract for Third-Party Beneficiary); Count III (Breach of Implied Covenant of Good Faith and Fair Dealing); Count VII (Civil Conspiracy); and Count VIII (Aiding and Abetting).
The Procedural History
The complaint was filed on March 28, 1991. The Hovnanians, although they had not yet filed an answer,
served discovery requests on Seal on June 7, 1991. Shortly thereafter, at a July 10, 1991 status conference held in my chambers, Seal's attorney, P. Stephen Lerario, Esq., expressed his desire to withdraw from the case due to a heart attack he had recently suffered, and the case was placed in civil suspense for three months. Seal was unable to find substitute counsel, and Lerario moved, on October 3, 1991, to withdraw from the case. In an October 13, 1991 letter to the court, Seal voiced various objections to Lerario's being allowed to withdraw from the case; most prominently, Seal reported a financial inability to obtain a replacement attorney. Still, in December of 1991, Lerario was granted permission to withdraw.
Seal subsequently filed a motion to reconsider that order, which was denied.
At a February 12, 1992 status conference, in response to the Hovnanians' request that the action be dismissed due to Seal's inability to retain replacement counsel, Seal was asked to report to the court within a month on his efforts to retain replacement counsel. Seal did not do so. On October 21, 1992, a scheduling order was filed, directing that all discovery be completed by the end of November, 1992. On November 12, 1992, the Hovnanians filed the instant motion to dismiss for failure to prosecute or failure to state a claim.
Approximately one week later, John Randolph Prince, Esq., entered his appearance on behalf of Seal.
Claims Directed to Plaintiff's Dilatory Conduct
1. Delinquent Prosecution
Defendants argue that the complaint should be dismissed for lack of prosecution pursuant to Fed. R. Civ. P. 41(b) due to Seal's delinquence in complying with their discovery requests of June 7, 1991 and in obtaining replacement counsel. Rule 41(b) authorizes the court to dismiss an action because of the plaintiff's failure to prosecute. However, dismissal of a complaint with prejudice is "an extremely harsh penalty" for delay, GLO Co. v. Murchison & Co., 397 F.2d 928, 929 (3d Cir. 1967) (per curiam), reh'g granted, 397 F.2d at 929 (vacating the district court's dismissal), cert. denied, 393 U.S. 939, 21 L. Ed. 2d 276, 89 S. Ct. 290 (1968), and is reserved for extreme situations in which there is a "clear record of contumacious conduct," Palmer v. City of Decatur, 814 F.2d 426, 429 (7th Cir. 1987), or "a serious showing of willful default," Gill v. Stolow, 240 F.2d 669, 670 (2d Cir. 1957). See generally 9 Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 2369, at 193-98 (1971). Plaintiff's delay in this case does not present one of those exceptional circumstances in which it is appropriate to dismiss his complaint for failure to prosecute.
Seal, in my view, does not bear a large measure of responsibility for much of the delay in this case. See Poulis v. State Farm Fire & Casualty Co., 747 F.2d 863, 868 (3d Cir. 1984) (citing this as one of the important factors for the district court to consider when addressing a Rule 41(b) motion for involuntary dismissal). The serious illness of his attorney accounts for a substantial period of delay. While it is true that Seal failed to notify the court of his efforts to obtain replacement counsel by March 12, 1992, as he was ordered, it was well known to this court that Seal-- who opposed his counsel's withdrawal-- was having trouble obtaining replacement counsel and was busy defending on his own a related case before this court.
Now that Seal has been able to obtain counsel who is ready to prosecute this action, I am most reluctant to deny him the opportunity to proceed, especially in the absence of any compelling showing by defendants that they have actually been prejudiced by the delay in this case.
Accordingly, defendants' request for involuntary dismissal pursuant to Rule 41(b) will be denied.
2. Untimely Service of Process
The complaint was filed in March of 1991; however, defendant Vahak Hovnanian was apparently not served with the complaint until December 8, 1992. (The docket reflects that Shant Hovnanian acknowledged receipt of service on May 3, 1991, well within the time provided by the Federal Rules). Rule 4(j) of the Federal Rules of Civil Procedure provides:
If a service of the summons and complaint is not made upon a defendant within 120 days after the filing of the complaint and the party on whose behalf such service was required cannot show good cause why such service was not made within that period, the action shall be dismissed as to that defendant without prejudice upon the court's own initiative with notice to such party or upon motion.
Fed. R. Civ. P. 4(j). The Third Circuit has stressed that Rule 4(j)'s 120-day limit to effect service of process is to be "strictly applied." Lovelace v. Acme Markets, Inc., 820 F.2d 81, 84 (3d Cir. 1987). "If service of the summons and the complaint is not made in time and the plaintiff fails to demonstrate good cause for the delay 'the court must dismiss the action as to the unserved defendant.'" Id. (emphasis in original) (quoting from the legislative history of Rule 4(j)). Although Seal filed a separate "Memorandum of Law in Opposition to Defendant Vahak Hovnanian's Motion to Dismiss," he made no effort to demonstrate good cause for the untimely service or to show why the claim of untimely service may have been waived; accordingly, I see no alternative but to dismiss the complaint as to Vahak Hovnanian without prejudice.
This dismissal without prejudice means simply that the dismissal itself does not bar Seal from bringing a subsequent action on the same claims. See Santos v. State Farm Fire and Casualty Co., 902 F.2d 1092, 1094-95 (2d Cir. 1990). I express no view as to whether some or all of the claims against Vahak Hovnanian may be barred by the applicable statute of limitations or whether Seal may be entitled to a tolling of the limitations period from the time of proper service or from sometime sooner.
The Viability of the Complaint
Shant Hovnanian *fn11"
] argues that, with respect to each of the four counts in which he is named, plaintiff has failed to state a claim.
I address each of these allegedly deficient counts in turn.
No question is raised but that this case is governed by Pennsylvania law.
1. Breach of Contract for a Third-Party Beneficiary (Count II)
Plaintiff alleges that (1) the two commitment letters, the April 16, 1986 Memorandum of Agreement, and the August 4, 1986 Limited Partnership Agreement together constituted a contract between Seal's corporations and Riverside, and (2) Riverside, RSL, RBC, and the Hovnanians breached this contract by forcing modifications decidedly more unfavorable to Seal. According to Seal, the defendants reneged on the agreements that Seal would not have to issue personal guaranties on any of the funding transactions and would not have to borrow additional funds. As relief, Seal seeks, among other things, to be freed from his personal guarantees totalling $ 2,700,000 as well as his obligations to repay an additional loan from Riverside and loans from several other creditors. Hovnanian offers three reasons why Count II must be dismissed for failure to state a claim: (1) Seal is neither a party to any of these agreement nor a third-party beneficiary of those agreements, (2) Seal, in any event, modified his rights under those contracts by agreeing to restructure those deals on October 7, 1986 and in early 1987; and (3) even if Riverside, RSL and RBC committed a breach of contract, the corporate veil cannot be pierced to reach Hovnanian (a controlling shareholder and officer of Riverside).
Assuming, arguendo, that Seal is a third-party beneficiary to the various agreements and that Hovnanian can be held personally liable,
Seal would still not be entitled to recover on the express terms of the contract culminating in the August 1986 Limited Partnership Agreement unless he can show that the agreements entered into on October 7, 1986 and in early 1987-- creating the terms of which Seal complains-- did not legally modify or supersede the earlier agreements to which he hopes to return. See Miller v. Travelers Ins. Co., 143 Pa. Super. 270, 17 A.2d 907, 908 (Pa. 1941) ("A third party beneficiary in an ordinary contract is subject to the limitation of its terms as he has no greater rights under it than are provided in the contract itself."); Restatement of Contracts § 140 (1932). Seal's position apparently is that defendants-- through a series of misrepresentations about their ability and willingness to provide the original funding promised-- maneuvered the financially-strapped Seal and Sovereign into an economic crisis and caused Seal to execute the later agreements against his will.
Once the parties have entered into an integrated contract, a court must give effect to the contract "absent illegality, unconscionableness, fraud, duress, or mistake . . . ." Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1009 (3d Cir. 1980). A party asserting economic duress must show a wrongful act or threat by the other party that left the victim no reasonable alternative. Restatement (Second) of Contracts § 175(1) (1981); see Plechner v. Widener College, Inc, 418 F. Supp. 1282, 1294 (E.D. Pa. 1976) (noting that a previous Restatement formulation-- similar to the present rule-- is the law of most jurisdictions), aff'd 569 F.2d 1250 (3d Cir. 1977). The complaint alleges that because defendants threatened not to advance the funds originally promised if Seal did not provide additional collateral, and because Seal badly needed the funds first to exercise his purchasing option and, later, to save the project and his business, he acceded to those terms against his will. "It is well settled that merely because one enters into an agreement which he would not enter if he did not need the money there is not such duress as will void the contract." Lawlor v. Nat'l Screen Serv. Corp., 211 F.2d 934, 937 (3d Cir. 1954), rev'd on other grounds, 349 U.S. 322, 99 L. Ed. 1122, 75 S. Ct. 865 (1955); see also Harrison v. Fred S. James, P.A., Inc., 558 F. Supp. 438, 443 (E.D. Pa. 1983). Still, business compulsion is a species of duress, and may be established by proof of such a "'threat [of serious financial loss] that, in conjunction with other circumstances and business necessity, the party so coerced fears a loss of business unless he does so enter in the contract as demanded.'" National Auto Brokers Corp v. Aleeda Dev. Corp., 243 Pa. Super. 101, 364 A.2d 470, 474 (Pa. Super. 1976) (citation omitted). Highly relevant is whether the party exerting pressure has contributed to the other's financial difficulty. See 364 A.2d at 475; accord Continental Bank of Pa. v. Barclay Riding Academy, 93 N.J. 153, 459 A.2d 1163, 1176 (N.J.), cert. denied, 464 U.S. 994, 78 L. Ed. 2d 683, 104 S. Ct. 488 (1983).
The complaint alleges that defendants contributed to Seal's financial distress by misrepresenting their interest in, and ability to fund, the project. Fraud in the inducement of a contract may be shown to avoid an alleged contract. See In re Allegheny Int'l, Inc., 954 F.2d 167, 178 (3d Cir. 1992) (applying Pennsylvania law). The party seeking to avoid the contract must show that the other party knowingly made an affirmative misrepresentation or concealed a fact. Id. Further, the party seeking avoidance must show that he reasonably relied on the misrepresentation in entering the contract. Id.
Regardless of whether plaintiff has stated a colorable claim that the subsequent agreements were induced by economic coercion or by fraud, the allegations of the complaint indicate that plaintiff ratified those agreements and, hence, waived his power to avoid the contract modifications on these grounds.
A. Ratification of a Contract Induced Under Duress
Economic duress ordinarily makes a contract voidable, not void. See Agathos v. Starlite Motel, 977 F.2d 1500, 1506 (3d Cir. 1992) (citing Restatement (Second) of Contracts § 175 cmt d. (1981)); National Auto Brokers, 364 A.2d at 473. This distinction is important because a victim of duress may be held to have ratified the contract if it is merely voidable. Restatement (Second) of Contract § 174 cmt. b (1981).
The Pennsylvania Superior Court's decision in National Auto Brokers is highly instructive on the question of when an injured party ratifies an agreement that may have been economically coerced. That case involved two writings, the first of which, drafted on July 4, 1972, described plaintiff's option to purchase 520 acres of land from defendant, collateralized by 50,000 shares of plaintiff's stock. Subsequent to the drafting of the purchasing option, defendant learned that plaintiff's stock was worth less then it expected and informed plaintiff that the original option agreement was unacceptable and additional security was required. On August 3, 1972, the parties entered into a second agreement substantially modifying the terms of the July 4 option agreement in defendant's favor and providing for a formalized agreement of sale (with monthly payments from plaintiff to defendant). Plaintiff then proceeded to begin developing the property. However, plaintiff defaulted on its October 1972 payment to defendant. Plaintiff attempted to renegotiate the August 3 agreement, but defendant rejected the proposal. On October 20, 1972, plaintiff sued for specific performance of the original July 4 agreement, arguing that it was forced to enter the second agreement of August 3 by economic duress and business compulsion. The trial court found for the plaintiff, holding that business compulsion voided the August 3 agreement.
The Superior Court reversed. The Superior Court found, first, that the facts did not support a finding that the August 3 agreement was induced by economic duress. According to the Superior Court, although plaintiff had been in financial distress, it (1) had immediate legal remedies at the time, including bringing its suit for specific performance as soon as defendant demanded additional collateral, and (2) had created its own financial troubles. Second-- and this is what is directly relevant to the case at bar-- the Superior Court found that even if the contract had been economically coerced, plaintiff's actions had ratified the contract:
A party who possesses a power of avoidance for business coercion loses it by electing to affirm the transaction. Ratification results if a party who executed a contract under duress accepts the benefits flowing from it, or remains silent, or acquiesces in the contract for any considerable length of time after the party has the opportunity to annul or avoid the contract.
364 A.2d at 476 (citations omitted). The Superior Court noted that following the August 3 agreement, plaintiff proceeded pursuant to that agreement, making various payments thereunder. Further, rather than seeking to rescind the contract, plaintiff sought instead to modify it; only after that attempt failed did plaintiff bring the suit. Accordingly, the Superior Court held that plaintiff was bound by the terms of the second agreement.
Following the legal guidelines articulated in National Auto Brokers, and accepting the allegations of the complaint as true, it is clear that no relief on Count II could be granted under any set of set of facts that plaintiff could prove consistent with those allegations; Seal, as a matter of law, ratified the contract modifications. According to the complaint, after the October 7, 1986 settlement, Seal and Sovereign purchased the Victoria place property with the loan proceeds that flowed from the transactions that Seal now calls into question. After signing an agreement relieving defendants of their obligation to provide the original financing, Seal and Sovereign, on April 27, 1987, accepted a $ 1,700,000 loan that was used to develop the property. See Complaint Exh. P (including copy of the April 1987 check made out for $ 1,700,000 to Sovereign by Riverside). By the summer of 1987, and faced with serious insufficiency of funds, Seal-- rather than seeking to rescind the modified agreements with defendants or to obtain specific performance of the original terms of the Memorandum of Agreement-- instead looked to sell the property. Thereafter, Seal attempted to have defendants purchase the property and clear him of all debts and personal guarantees. It was not until approximately two-and-one half years after this deal fell through, and after forfeiture and bankruptcy proceedings had commenced, that Plaintiff filed the instant action seeking to return to the terms of the original contract. Having accepted the benefits flowing from the modified agreements and having failed to erect a legal challenge to those modified terms until a significant period of time had passed-- much longer even than in National Auto Brokers -- plaintiff cannot now be heard to claim that those agreements were induced by economic coercion.
B. Ratification of a Contract Fraudulently Induced
Insofar as the allegations permit the inference of a colorable claim that plaintiff entered into and acquiesced in the subsequent agreements because of a pattern of fraudulent misrepresentations by defendants-- a theory which plaintiff does not pursue in his submissions-- it is clear from the face of the complaint that plaintiff similarly cannot avoid the contract modifications on this ground. Fraudulent inducement, like duress, ordinarily makes a contract voidable, not void. In Re Allegheny, 954 F.2d at 178; Culbreth v. Simone, 511 F. Supp. 906, 915 (E.D. Pa. 1981); Restatement (Second) of Contracts § 164(1) (1981) ("If a party's manifestation of assent is induced by either a fraudulent or a material representation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient."). A party seeking to rescind a contract for fraud "must act promptly to rescind once the fraud is discovered." Mellon Bank Corp. v. First Union Real Estate Equity and Mortgage Invs., 951 F.2d 1399, 1408 (3d Cir. 1991);
see generally Restatement (Second) of Contracts § 380 (1981). Seal alleges that he was induced to modify the agreements because defendants falsely assured him that they would be able to get the desired financing originally promised and would follow through with their original commitments despite the terms of the subsequent loan documents. See Complaint at P 41. These misrepresentations and false promises allegedly continued through December of 1987. See id. By the summer of 1987, Sovereign had insufficient funds to continue with construction of Victoria Place and, retreating from the idea that Riverside would "comply with its commitments," Complaint at P 57, Seal began to look for a purchaser for the property. By February 1988, when Sovereign stopped all work on Victoria Place due to "Defendants' failure to provide or obtain sufficient loans or equity capital to fund the project," Complaint at P 66, Seal might have recognized the hollowness of defendants' assurances that they would able to put together the lending package and honor their original commitments. Still, accepting the allegations of the complaint as true, only by August 29, 1988-- when foreclosure proceedings were commenced against Sovereign at Shant Hovananian's insistence-- did Seal, "for the first time" "realize that [he, Sovereign and its related entities] had been the victims of all of the Defendants' manipulations, and schemes for over two and one half years . . . ." Complaint at P 75. Upon discovery of defendants' subterfuges, plaintiff, rather than seeking to rescind the modified agreements or otherwise enforce the terms of the original agreements, attempted instead to sell the property or find alternative financing. Seal filed the instant action seeking to avoid the later loan agreements on March 28, 1991-- approximately two-and-one-half years after he acknowledges discovering defendants' machinations. Given this considerable delay and pattern of behavior inconsistent with disaffirmance, plaintiff has simply failed to state a claim for fraudulent inducement on which he is entitled to relief under any conceivable set of facts consistent with the allegations of the complaint. See Sixsmith v. Martsolf, 413 Pa. 150, 196 A.2d 662, 663 (Pa. 1964) (action designed to rescind a contract secured by fraud properly dismissed for failure to state a claim because that action-- instituted more than twenty-five months after completion of the transaction described in the contract-- was "legally too late for this purpose").
Accordingly, Count II will be dismissed for failure to state a claim.
2. Breach of Implied Covenant of Good Faith and Fair Dealing (Count III)
Seal alleges that defendants breached an implied obligation of good faith and fair dealing by, among other things, failing to disclose certain funding difficulties, requiring Seal and the entities controlled by him to assume an unfair risk burden, and misrepresenting their interest in entering a joint venture partnership with Sovereign. Shant Hovnanian argues that, under Pennsylvania law, no implied covenant of good faith and fair dealing exists in an agreement between a borrower and a lending institution.
In an effort to demonstrate the general applicability of the covenant of good faith and fair dealing, plaintiff refers to section 205 of the Restatement (Second) of Contracts: "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." Restatement (Second) of Contracts § 205 (1981). The Superior Court of Pennsylvania recently noted that
the general duty of good faith and fair dealing in the performance of a contract as found in . . . § 205, has been adopted in this Commonwealth in Creeger Brick and Building Supply Inc. v. Mid-State Bank & Trust Co., 385 Pa. Super. 30, 35, 560 A.2d 151, 153 (1989), and Baker v. Lafayette College, 350 Pa. Super. 68, 84, 504 A.2d 247, 255 (1986), aff'd 516 Pa. 291, 532 A.2d 399 (1987).
Somers v. Somers, 418 Pa. Super. 131, 613 A.2d 1211, 1213 (Pa. Super. 1992);
see also Fluid Power, Inc. v. Vickers, Inc., No. Civ. A. 92-0302, 1993 U.S. Dist. LEXIS 2012 1993 WL 23854 * 5 (E.D. Pa. Jan. 28, 1993) (recognizing a duty of good faith and fair dealing in a distributorship arrangement based on Somers). The pronouncement of the Somers court requires further attention because one of the opinions cited as adopting the general duty of good faith-- Creeger -- appears, at first blush, to deny it full force. In fact, Creeger is prominently cited by defendant Hovnanian for the proposition that no duty of good faith pertains in the instant action.
In Creeger, plaintiff, a brick and building supply company, had secured a Small Business Administration loan from the defendant bank in order to repair a brick manufacturing plant that it had purchased. To obtain the loan, plaintiff had mortgaged the plant and several properties owned by its president. When plaintiff encountered a cash shortage, it applied for an additional line of credit from the bank. The bank refused, and later also refused to release the lien on one of the mortgaged properties to allow its sale. Further, the bank would not assign its interest in the loan to a new lender. Subsequently, plaintiff went out of business.
Plaintiff filed suit against the defendant bank, alleging that the bank had failed to deal with it in good faith by-- to recite a few of the claims-- refusing to extend a line of credit or promptly release the mortgage, failing to assist plaintiff in obtaining supplemental funding, and overcollateralizing the loan. The court-- while noting that § 205 suggested a general duty of good faith and fair dealing
-- observed that the Pennsylvania Supreme Court and other courts have "refused to apply a duty of good faith to alter or defeat the rights of a creditor which have been granted by law or contract." 560 A.2d at 154. The court concluded:
It seems reasonably clear from the decided cases that a lending institution does not violate a separate duty of good faith by adhering to its agreement with the borrower or by enforcing its legal and contractual rights as a creditor. The duty of good faith imposed upon a contracting party does not compel a lender to surrender rights which it has been given by statute or by the terms of its contract. Similarly, it cannot be said that a lender has violated a duty of good faith merely because it has negotiated terms of a loan which are favorable to itself. As such, a lender generally is not liable for harm caused to a borrower by refusing to advance additional funds, release collateral, or assist in obtaining additional loans from third persons.