Gillette of Kingston, Inc. v. Bank Rhode Island, No. WC 05-0616 (RI 5/5/2006)

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GILLETTE OF KINGSTON, INC., and IMOTHY J. GILLETTE v. BANK RHODE ISLAND

No. WC 05-0616.

Superior Court of Rhode Island.

Washington, S.C.

Filed: May 5, 2006.

DECISION

RUBINE, J.

This matter is before the Court on Bank Rhode Island's (hereinafter "Bank RI") motion for summary judgment as to Counts III, IV, and V of the Verified Complaint filed by Gillette of Kingston, Inc. (hereinafter "GKI") and Timothy J. Gillette (hereinafter "Gillette") (collectively "Borrowers").¹ The claims in issue are: (a) Count III, violation of the Equal Credit Opportunities Act (ECOA or Act), 15 U.S.C. § 1691 (2006) et seq., and Federal Reserve Regulation B, 12 C.F.R. § 202 (2006); (b) Count IV, illegal retaliation in violation of the ECOA; and (c) Count V, breach of the implied covenant of good faith and fair dealing.

Facts and Travel²

On April 22, 2003, a Master Loan Agreement (hereinafter "Agreement") was entered into by and between Timothy J. Gillette and GKI, the Borrowers, and Bank RI, the Lender. In connection with this transaction, the Borrowers dealt directly with James P. Tiernan (hereinafter "Tiernan"), a Senior Vice President at Bank RI. The Agreement provided for a term loan in the amount of $800,000 and a line of credit in the amount of $100,000. The purpose of the loan was to refinance existing indebtedness and to expand GKI's available line of credit to better withstand seasonal fluctuations in sales. The loans were secured, in part, by security interests in GKI's assets, and with mortgage deeds on property located in Exeter and South Kingstown. On or about September 10, 2003, Gillette borrowed an additional $75,000 from Bank RI in connection with the construction of a residence on the Exeter property.

The Borrowers allege that Tiernan exercised substantial control over the disbursements of loan proceeds. Tiernan instructed the Borrowers to use some of the loan proceeds to make payments on a subordinated loan with Ocean State Business Development Authority, as well as to use $50,000 of the line of credit towards Gillette's divorce settlement. Gillette alleges that the pressures of the divorce and Tiernan's control over the funds left him with no other option than to do what Tiernan demanded. The Borrowers contend that as a result of applying the loan proceeds in the manner required by Bank RI, cash-flow was impaired. In response, Gillette approached Tiernan in November 2004 to request additional business financing in the amount of $150,000. Tiernan instructed Gillette that he would work on it, but he did not know if he would be able to obtain the entire request. As a result, GKI faced continuing problems with vendors, and Gillette repeatedly contacted Tiernan to inquire as to the status of the credit request. Tiernan reiterated that he was working on it and over a period of time requested various interim financials from GKI. In February 2005, Tiernan informed the Borrowers that Bank RI was unable to extend any additional credit.

On July 25, 2005, the Borrowers, through counsel, sent a letter to Bank RI giving notice of their claims that Bank RI had violated the ECOA, 15 U.S.C. § 1691 et seq., and Federal Reserve Regulation B, 12 C.F.R. § 202.³ The Borrowers allege that on August 2, 2005, Bank RI retaliated by: demanding payment in full of the unpaid balance and all accrued interest on the line of credit; declaring defaults under the $800,000 and the $75,000 loans; accelerating and demanding payment in full of the unpaid balance and accrued interest on said loans; and threatening to commence foreclosure proceedings against the Exeter and South Kingstown properties if Plaintiffs' indebtedness was not repaid in full by September 6, 2005. After acceleration, demand and the scheduling of mortgage foreclosure, it is further alleged that Bank RI refused the Borrowers' reasonable request for forbearance to permit them to complete arrangements for take-out financing. As of August 2, 2005, the Borrowers were current on monthly payments of principal and interest on all loans. Bank RI defends its actions as justified and reasonable in light of GKI's financial statements as of year end 2004 evidencing breaches of the Minimum Debt Service Coverage and Tangible Net Worth covenants in the Agreement. Said breaches, Bank RI contends, constitute events of default under the Agreement, justifying acceleration and demand of all indebtedness due from the Borrowers.⁴

Standard of Review

"As a prerequisite to an order for summary judgment, the lower court must review the pleadings, affidavits, admissions, answers to interrogatories, and other appropriate evidence from a perspective most favorable to the party opposing the motion." Gliottone v. Ethier, 870 A.2d 1022, 1027 (R.I. 2005) (citing Steinberg v. State, 427 A.2d 338, 340 (R.I.1981)). After viewing the facts in the light most favorable to the nonmoving party, if the moving party can show, as a matter of law, that the plaintiff is unable to support its claims, only then can the Court grant the defendant's motion for summary judgment. Ludwig v. Kowal, 419 A.2d 297, 301 (R.I. 1980) (quoting Belanger v. Silva, 114 R.I. 266, 267, 331 A.2d 403, 404 (R.I. 1975)) (in denying a motion for summary judgment, "it is the province of the trial justice to determine, by an examination of the pleadings, depositions, answers to interrogatories, admissions on file, and the affidavits of the parties," whether there exists a genuine issue of material fact, and if not, whether the moving party is entitled to judgment as a matter of law). Super. R. Civ. P. 56.

The nonmoving party bears the burden of demonstrating by competent evidence the existence of a disputed issue of material fact and cannot rest on allegations or denials in the pleadings, mere conclusions, or legal opinions. DeSantis v. Prelle, 891 A.2d 873 (R.I. 2006) (quoting Lucier v. Impact Recreation, Ltd., 864 A.2d 635, 638 (R.I. 2005)). The United States Supreme Court has noted that, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Hord Corp. v. Polymer Research Corp. of Am., 275 F. Supp.2d 229, 234 (D.R.I. 2003) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2510 (1936)).

Analysis

Violation of the Equal Credit Opportunities Act and Regulation B.

Count III of the Verified Complaint claims that Bank RI failed to provide "timely notice of adverse action" in connection with the Plaintiffs' November 2004 request for additional business financing or "timely notice of the specific reasons for any such adverse action," alleging such failure to constitute a violation of the ECOA and Regulation B. Under both the statute and the regulations, a creditor must notify an applicant of action taken after receiving a completed application.⁵ See 15 U.S.C. §1691(d)(1) and 12 C.F.R. § 202.9(a)(i). According to Gillette's deposition, the application process was on-going and included telephone conversations and multiple requests for interim financials for the months preceding and following the November 2004 request. Such financial information was used in assessing the additional financing request. Therefore, while the date of a completed application has not been agreed to, for purposes of this motion it appears undisputed that an application was not "complete," as defined by the regulations, prior to January 2005.⁶

The statutory language of 15 U.S.C § 1691(d)(1) expressly provides that "[w]ithin thirty days (or such longer reasonable time as specified in regulations of the Board for any class of credit transaction) after receipt of a completed application for credit, a creditor shall notify the applicant of its action on the application." However, the statute further provides that the term "adverse action" does not include a refusal to extend additional credit under an existing credit arrangement where the applicant is delinquent or otherwise in default, or where such additional credit would exceed a previously established credit limit. See 15 U.S.C. § 1691(d)(6). Additionally, the definition of "adverse action" under 12 C.F.R. § 202.2 excludes, "any action or forbearance relating to an account taken in connection with inactivity, default or delinquency as to that account." See 12 C.F.R. § 202.2(c)(2)(ii).

The statutory language grants authority to the Board to specify a longer notification period under the regulations for any class of credit transaction. Accordingly, 12 C.F.R. § 202.9(a)(3)(ii) specifically governs the notification procedure for business credit applicants⁷ in businesses with gross revenues in excess of $1 million.⁸ Under this section, a creditor shall:

(A) Notify the applicant, within a reasonable time, orally or in writing, of the action taken; and

(B) Provide a written statement of the reasons for the adverse action and the ECOA notice specified in paragraph (b)(1) of this section if the applicant makes a written request for the reasons within 60 days of the creditor's notification.⁹ (Emphasis added.)

This Court finds as a matter of law that Bank RI did not violate the ECOA thirty day notice requirement for adverse action taken with regard to the Borrowers' request for additional financing. The statute expressly provides that the term "adverse action" does not include refusals to extend credit under an existing credit arrangement where the applicant is in default, or where such additional credit would exceed a previously established credit limit. See 15 U.S.C. § 1691(d)(6) and 12 C.F.R. § 202.2(c)(2)(ii).

Under the facts of this case, an existing credit relationship and arrangement existed between the parties as is evidenced from the loan agreements, the line of credit, the Borrowers' oral request for additional financing, the ongoing dialogue between the parties regarding the additional financing, and the continued filing...