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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.

From The New York Times: "Foreclosures Hit A Snag For Lenders"

If you deal with mortgage security pools, and in particular the foreclosure of mortgages within such a pool, you should read today's interesting article from The New York Times:  "Foreclosures Hit a Snag For Lenders".  The article addresses federal court foreclosure litigation in Ohio and specifically an opinion by Judge Boyko dismissing fourteen cases because the plaintiff (foreclosing entity) failed to prove it had standing to pursue the cases.  I located the Judge's October 1 order referenced in the article: .pdf.  My colleague Chris Jacobson helped find the October 31 opinion: BoykoOpinion.pdf.

The moral of the story is that the institution filing the foreclosure suit, if pressed by the Court or the defendant borrower, must have proof that it owned the note and held the mortgage on the date of the filing of the foreclosure complaint.  As demonstrated by the Ohio ruling, with respect to mortgage security pools this seemingly simple requirement may be burdensome or perhaps even impossible under certain structuring. 

Corrective action probably can be taken during the proceedings in most cases to ensure that the named plaintiff actually holds the mortgage and owns the note.  For example, depending upon the circumstances, the pleadings can be amended to name the proper party or, on the other hand, assignments can be executed to place the note/mortgage into the hands of the plaintiff.  Lenders/investors and their counsel should be advised of the Ohio ruling and prepare themselves accordingly.  I will post updates to this story as the situation warrants.   

Residential/Subprime Mortgage Crisis Does Not Appear To Be Materially Affecting Commercial Loans - At Least Not Yet

From time to time over the past several months, people have asked me how the sub-prime mortgage crisis and the record number of residential mortgage foreclosures have affected my practice and the industry that I target - commercial, secured lending.  For some context, here's an article from today from MSNBC - "Want A Second Mortgage?  Good Luck!".

People outside of the industry are surprised to learn that commercial loans continue to be in pretty good shape.  The clients and prospects I've spoken to over the past year have conveyed that their default rates remain very low.  As I understand it, there's really no comparison between the rates of residential/consumer mortgage defaults and those of commercial/secured loan defaults.  Although I gather that commercial credit may me tightening, the sub-prime mortgage crisis simply hasn't translated to a commercial loan problem, at least not to this point.  Here's a story today from the Cincinnati Enquirer entitled "Commercial Building Booms" that supports what I've been hearing. 

This is not to say that an increase in commerical defaults, workouts, foreclosures or bankruptcies may not be on the horizon.  I'm no economist, but there certainly are signs for the potential of an up tick in such matters.  Here are links to a couple stories from today's New York Times that speak to these issues:  Fed Chief Warns of Worse Times in the Economy and Wachovia Sets $1.1 Billion in October Losses.  If your impressions are different than mine, I would appreciate learning more about what you're experiencing and invite you to call or email me.         

Memo To Self: Happy Anniversary

On November 1, 2006, I launched this blog.  One year, 68 posts and thousands of hits later, my site is going strong, and its visitors are steadily growing each week.  If you're new to Indiana Commercial Foreclosure Law, welcome.  If you've been here before, thank you and welcome back. 

First post.  I thought it might be useful to re-publish my very first post: 

I designed this blog to provide a resource for individuals in the banking and commercial lending industry who deal with Indiana-related commercial foreclosure issues.  Today, November 1, 2006, my blog debuts with the goal of publishing posts at least weekly in one of four categories:  Court Commentary, Notable News, Practical Pointers and Statutes Say.

Court Commentary will have content analyzing recent Indiana state and federal court opinions on the substantive law and procedural rules that govern this field.

Notable News will provide Indiana-related news, from various media outlets, impacting commercial lenders generally and the work-out/foreclosure side of their businesses specifically.

Practical Pointers will include articles designed to assist secured lender representatives who are, or are about to be, involved in a commercial foreclosure lawsuit. 

Statutes Say will publish posts about Indiana statutory law applicable to commercial foreclosures and secured collections.

I’m excited about developing a resource for commercial lending institutions faced with under-performing or non-performing loans.

  Because this is a new blog, I hope to receive feedback on how I can make it more useful.  I welcome suggestions, which you can e-mail to me by clicking on the “E-Mail Me” link.  My contact information in its entirety can be found by clicking on the “About” link. 

Features.  In addition to the fresh content offered at least weekly, over the course of the past year I've enhanced some of the permanent features of this blog that appear along the left side of the home page.  These include: 

  • The "About" link, which takes you to my bio
  • The self-explanatory "Email Me" link
  • Links to the four categories described that allow you to review all posts on that subject
  • The ability to conduct a Google search of this blog - to research all issues I've addressed
  • A link to subscribe to this site's RSS feed - a great way to have new posts automatically delivered
  • The opportunity to sign up to receive emails of new posts - this is secure and will never result in contact from me
  • Links to the relevant Indiana statutes
  • Links to the pertinent Indiana procedural rules
  • Links to the major Indiana state and federal court websites
  • Links to local media websites
  • Links to the predominate trade/professional organizations for secured lenders
  • Links to posts, archived by month

Finally, each post can be emailed by clicking on "Email this" at the end of each post.

I would like to thank my collegue Matthew Adolay for reviewing my articles before I formally post them.  Having his pair of eyes has been a great help and has ensured that my work is readable and understandable.  Thank you, Matt.

Again, this blog is dedicated to commercial lenders and banks needing to foreclose on loan collateral, enforce liens and collect commercial, secured debts.  If you work in this area or routinely deal with these issues, please stop by from time to time.  And, always remain mindful that my objective is to be a resource for you, so email or call if you think I can improve this blog in any way.  Thanks.