While many brokers assert equitable defenses to a promissory note action brought by his or her former broker-dealer; potential legal contract defenses should also be considered.
As a part of many recruitment and sign-on transactions, several contracts are executed contemporaneously, such as: 1) a License Agreement; 2) Promissory Note; and 3) Deferred Compensation Plan Agreement. Let’s assume that one or all of these contracts contained a Virginia choice of law provision. Under Virginia law, these documents -- taken together -- form the agreement between the parties. Indeed, “where a business transaction is based on more than one document executed by the parties, the documents will be construed together to determine with intent of the parties[.]” Parr v. Alderwoods Group, Inc., 604 S.E.2d 431, 434 (Va. 2004) (citing Countryside Orthopedics, P.C. v. Peyton, 541 S.E.2d 279, 284 (Va. 2001)). “Where two papers are executed at the same time or contemporaneously between the same parties in reference to the same subject matter, they must be regarded as parts of one transaction, and receive the same construction as if their several provisions were in one and the same instrument.” Id. At 434-35 (citing Countryside, 541 S.E.2d at 284).
When such contracts are construed as if the provisions were in a single instrument, the first party to materially breach the contract cannot enforce the provisions of the integrated contract. Id. At 435. A breach is material if it is “a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract.” Id. (Countryside, 541 S.E.2d at 285). As such, the broker-dealer’s initial breach of one of the non-promissory note agreements may legally excuse a subsequent breach of the repayment provision of the promissory note contract. At a minimum, the recoverable damages from the initial peremptory breach may set off or even exceed the balance of the note or notes.
Beyond a potential breach of contract counterclaim or peremptory-breach affirmative defense, the broker may possess causes of action for fraudulent or negligent representation, conversion or tortious interference “[W]hen one represents as true that which is not true, and another relies thereon to his damage, the latter may recover for the false representation whether it was knowingly or innocently made.” B.W. Acceptance Corp. v. Benjamin T. Crump Co., Inc., 99 S.E.2d 606, 608 (Va. 1957). “The intent of the party making the representation is immaterial. The point is whether the other party was misled. Whether the representation is made innocently or knowingly, if acted on, the effect is the same.” Id. “In the one case the fraud is constructive; in the other it is actual.” Id.; see also Hansen v. Stanley Martin Companies, Inc., 585 S.E.2d 567, 573 n. 4 (Va. 2003) (“Negligent misrepresentation is the essence of a claim for constructive fraud in Virginia.)” An action for conversion can be maintained by one who has a property interest in and is entitled to the immediate possession of the thing alleged to have been wrongfully converted. United Leasing Corp. v. Thrift Ins. Corp., 440 S.E.2d 902, 905 (Va. 1994). Finally, tortious interference with business relations claim requires: (1) the existence of a valid contractual relationship or business expectancy; (2) knowledge of the contract or expectancy by the alleged interferor; (3) intentional interference inducing or causing a breach of the relationship or expectancy; and (4) resultant damages. Williams v. Dominion Technology Partners, LLC, 576 S.E.2d 752, 757 (Va. 2003).
In light of the generally poor reception broker’s and representative’s promissory note defenses receive in FINRA arbitrations, it is important to explore solid legally supportable theories in lieu of more general complaints rooted in equity. Complaints about the broker-dealer’s alleged failure to live-up to its recruitment promises will likely get more traction if narrowed, specified, and planted firmly in a legally cognizable contract theory.