## Facts

- Catcher Holding, Inc. (Catcher) planned a transaction in which Vivato Networks, Inc. (Vivato) would merge into Catcher, and Catcher would then seek financing through a preferred-stock offering.
- A group of lenders had previously loaned Catcher $4.8 million; an Aequitas affiliate, Aequitas Investment Management (AIM), contributed $500,000 of that amount.
- Aequitas Capital Management, Inc. (Aequitas) agreed to loan Vivato $1 million in connection with the planned transaction.
- Vivato’s principal assets—its patents—were transferred to Vivato Holdings, Inc. Aequitas obtained a security interest in the patents.
- Vivato also agreed to grant Catcher an exclusive license and an option to purchase the patents, creating potential competing interests in the patent portfolio.
- Certain Vivato shareholders formed Western Property Holdings, LLC (Western) to help finance the Vivato loan.
- Western and Aequitas entered into a loan participation agreement under which Western would fund up to 30% of Aequitas’s advances to Vivato and would receive a proportional share of (a) Vivato’s repayments and (b) proceeds from any collateral sale after default.
- The participation agreement gave Aequitas “full and complete authority” to administer and enforce the loan documents, including initiating and managing foreclosure proceedings.
- From November 2007 to February 2008, Aequitas advanced $987,750 to Vivato; Western funded $287,750 of that amount.
- Vivato defaulted, and the contemplated stock offering was unsuccessful.
- In late 2007, Vivato Holdings negotiated a potential sale of the patents to Intellectual Ventures (IV) for about $1.8 million, but the deal did not close. Western alleged the collapse was partly due to AIM’s communications raising concerns about whether patent title could be cleared without impairing Catcher’s asserted rights.
- Aequitas later filed a foreclosure action, obtained clear title to the patents at a sheriff’s sale in 2009, and ultimately sold the patents to XR Communications for $800,000.
- Western sued Aequitas for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of duties based on a “special relationship,” and negligence, claiming Aequitas mishandled enforcement and reduced Western’s expected recovery.
- After the suit was filed, Aequitas paid Western $220,481.60, representing Western’s proportional share of the XR sale proceeds plus interest.
- The trial court granted summary judgment for Aequitas on all claims, and Western appealed.

## Issues

1. Whether Aequitas breached the loan participation agreement by its conduct relating to enforcement of the loan and disposition of the patent collateral, including events connected to the proposed IV sale and the later foreclosure process.
2. Whether Aequitas breached the implied covenant of good faith and fair dealing by exercising contractual discretion in a manner Western claimed favored Aequitas or its affiliate and harmed Western’s expected returns.
3. Whether the parties’ relationship (lead lender/servicer and loan participant) created a “special relationship” imposing duties beyond the contract.
4. Whether Oregon’s economic-loss doctrine barred Western’s negligence claim seeking only financial loss arising from Aequitas’s performance under the participation agreement.

## Decision

- The Oregon Court of Appeals affirmed summary judgment for Aequitas on all claims.
- The court held Western had not shown a breach of any express contractual obligation where the agreement granted Aequitas broad, unilateral authority over loan administration, enforcement, and foreclosure decisions, and Western’s contractual entitlement was to its proportional share of actual recoveries.
- The court held the implied covenant of good faith and fair dealing could not be used to impose a duty inconsistent with the agreement’s allocation of enforcement control to Aequitas or to require Aequitas to pursue a different strategy to maximize collateral value.
- The court held no “special relationship” existed between these sophisticated parties in an arm’s-length participation arrangement, so Western could not base extra-contractual duties on that theory.
- The court held Western’s negligence claim was barred by the economic-loss doctrine because the alleged harm was purely economic and depended on duties that arose from (and were defined by) the contract, not an independent tort duty.

## Legal Principles

- A participation agreement’s express allocation of authority and risk controls the parties’ contract rights; where the lead lender is given “full and complete authority” over enforcement and foreclosure, the participant generally is limited to its pro rata share of actual repayments and collateral proceeds.
- Oregon’s implied covenant of good faith and fair dealing protects objectively reasonable contractual expectations but cannot override express terms or add substantive obligations not supported by the contract.
- A “special relationship” in Oregon requires a duty to act primarily for the other party’s benefit; negotiated, arm’s-length commercial relationships ordinarily do not qualify without a fiduciary-type undertaking.
- Under Oregon’s economic-loss doctrine, negligence claims for purely financial loss are not available absent an independent duty outside the parties’ contract (often shown through a special relationship or other noncontract source of duty).

## Conclusion

The Court of Appeals affirmed summary judgment for Aequitas because the participation agreement gave Aequitas broad authority over enforcement and foreclosure, the implied covenant could not rewrite that allocation of discretion into a duty to pursue a different collateral strategy, the relationship did not create extra-contractual fiduciary-type duties, and Western’s negligence claim sought only economic loss tied to contractual performance and was therefore barred.


Western Property Holdings, LLC v. Aequitas Capital Management, Inc., 392 P.3d 770 (2017)