From The New York Times: "Foreclosures Hit A Snag For Lenders"
Potential Negligence Of An Indiana Receiver

Effectiveness Of A Release In An Indiana Forbearance Agreement

The September 20, 2007 decision by Judge Barker of the United States District Court for the Southern District of Indiana in Midwest Lumber v. Branch Banking, 2007 U.S. Dist. LEXIS 69924 (S.D. Ind. 2007) (MidwestLumberOpinion.pdf) involves the dismissal of borrowers’ lender liability claims, but it also specifically addresses a release provision in a forbearance agreement.  Even though lender liability is not the primary focus of my blog, certainly forbearance agreements are pertinent.  And the workout industry should be aware of Judge Barker’s holding.  (I’d like to thank my colleague Chris Jacobson for her contributions to this article.)      

Parties.  The plaintiff was borrower Midwest Lumber, a lumber supplier.  Mr. and Mrs. Davis, the principals of Midwest Lumber and guarantors in the subject transactions, also were plaintiffs.  The loans in question involved working capital for the business secured by accounts receivable, inventory and real estate.  The named defendant was Branch Banking and Trust Company, the lender, which refinanced Midwest Lumber’s working capital loan facility.

Defaults/forbearance agreements.  Midwest Lumber couldn’t make its payments, so it and the Davises entered into a series of loan modifications and, ultimately, forbearance agreements with Branch Banking.  As an inducement for Branch Banking to agree to the terms set out in the forbearance agreements, Midwest Lumber and the Davises gave comprehensive written releases to Branch Banking in each forbearance agreement that stated in pertinent part:

  [Midwest Lumber and the Davises] hereby release and forever
  discharge [Branch Banking], its officers, directors, attorneys,
  employees, predecessors and successors (the “Released Parties”) of
  and from any claims, demands, obligations, actions, causes of action,
  damages, costs (including without limitation court costs and attorneys’
  and paralegals’ fees and expenses), expenses and compensation of
  any nature whatsoever (collectively, “Claims”), known or unknown,
  whether based in tort, contract or any other theory of recovery, or which
  may exist or might be claimed to exist at or prior to the date of this
  Letter Agreement on account of or in any way arising out of the
  Banking relationship between [Midwest Lumber], [Branch Banking]
  and its successors . . ..

Id. at 15.

Midwest Lumber/Davises Lawsuit.  The suit giving rise to the opinion originated with the filing of a complaint by Midwest Lumber/the Davises against Branch Banking in which the plaintiffs alleged that Branch Banking should be liable for misrepresentation, breach of the covenant of good faith and fair dealing, interference with business relationships, breach of fiduciary duty, undue control, economic duress and business coercion and negligent misrepresentation.  Significantly, Midwest Lumber/the Davises initiated the lawsuit after they had executed the forbearance agreements containing the release. 

Midwest Lumber filed a motion to dismiss the claims based in part upon the releases in the forbearance agreements.  Branch Banking argued that the forbearance agreements released it of any liability toward Midwest Lumber and the Davises.  Judge Barker agreed.  Midwest Lumber and the Davises made a variety of arguments against the enforceability and effectiveness of the releases, but Judge Barker concluded on page 18:

  having determined that the releases clearly and unambiguously
  released [Branch Banking] from any claim by [Midwest Lumber
  and the Davises] arising out of their banking relationship and
  having further found that [Midwest Lumber and the Davises]
  were not under economic duress when they signed the releases
  and that [Midwest Lumber and the Davises] have not returned
  the consideration they received from [Branch Banking] in
  exchange for signing the releases, all of [Midwest Lumber and
  the Davises] claims in the Second Amended Complaint must

Message.  The Midwest Lumber case begs the question of whether lenders should demand general releases in all of their forbearance agreements.  Most workout scenarios will not involve questionable conduct on the part of the lender or allegations of lender liability.  So, such a release might not directly apply in many situations.  But there is no downside from the aspect of the lender to include such general releases in the forbearance agreements.  Indeed, there is only upside:  protection.  The time the parties forbear is the time to get a release – even if you don’t think you’ll ever need it.  Midwest Lumber generally supports the proposition that such a release should be effective to bar future lender liability claims brought by the borrowers or guarantors, so releases of liability probably should be negotiated into most if not all forbearance agreements, if possible.