Borrower’s Loan Reinstatement-Related Promissory Estoppel Defense Dismissed

Note: on 5/6/22 and 5/20/22, I wrote about the 410 case cited below. Today’s post addresses more issues from the same opinion. In particular, the 5/20/22 article provides context for today’s installment, which follows up on the “loan balance statement” at issue.

Lesson. A promissory estoppel theory in the defense of a foreclosure case often fails for the simple reason that there is no evidence the lender made an actual promise to the borrower (to reinstate or forbear).

Case cite. Wilmington Tr. Nat'l Ass'n v. 410 S. Main St. LLC 2022 U.S. Dist. LEXIS 21288 (N.D. Ind. Feb. 7 2022).

Legal issue. Whether a lender’s foreclosure action could be defeated on the basis of promissory estoppel, where the lender had tendered a “loan balance statement” during workout discussions that was arguably a commitment to reinstate a loan.

Vital facts. The “balance statement” (the subject of my May 20th post) was at the center of the Defendants’ promissory estoppel theory. The Defendants essentially claimed that they were “ready, willing and able” to reinstate the loan in reliance on the figures in the balance statement. The Defendants alleged that they took steps to obtain the necessary funds, but Lender “made an about face and refused to honor the Balance Statement, damaging Defendants.”

Procedural history. Lender filed a motion for summary judgment on the promissory estoppel claim/defense.

Key rules. The Court cited to an Indiana Supreme Court case for the five elements of promissory estoppel: “1) a promise by the promissor [here, Lender]; 2) that was made with the expectation that the promisee [here, Defendants] would rely on it; 3) and induces reasonable reliance by the promisee [Defendants]; 4) of a definite and substantial nature; 5) in a way where injustice can be avoided only be enforcement of the promise.”

Holding. The Court granted Lender’s motion summary judgment. The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale.

The Court reasoned that the balance statement simply did not create a promise to reinstate the loan and waive prior defaults. “Without a promise, promissory estoppel fails from the start.” Moreover, there was no evidence that Lender sent the balance statement with the expectation that Defendants would rely on it as they did. For good measure, the Court also noted that the Defendants did not meet the payment deadline in the balance statement anyway.

Related posts.

• Email Evidence Of Alleged Loan Modification And Promissory Estoppel Defeats Auto Dealer Lender’s Summary Judgment Motion
• Alleged Oral Release Of Mortgage Rejected

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Seventh Circuit Rejects Borrower’s HAMP Contract Breach Claim: Part 2 of 2

Lesson. Statements by Lender’s employees about the status of a HAMP loan modification, coupled with Lender’s acceptance of reduced payments during the period of negotiations, should not result in a waiver of the countersignature condition precedent.

Case cite. Taylor v. JPMorgan Chase Bank, 958 F.3d 556 (7th Cir. 2020)

Legal issue. Whether lenders waive the HAMP countersignature requirement through statements made by their employees and acceptance of borrowers’ reduced payments.

Vital facts. Today follows-up last week’s post, which I recommend you read for context: Seventh Circuit Rejects Borrower’s HAMP Contract Breach Claim: Part 1 of 2.

Borrower claimed that employees of Lender told him that Borrower’s loan mod document submissions were “in receipt for processing” and that they “did not know of” Lender ever returning fully-executed copies of TPP’s to customers (despite the contract requirement). Also, Lender accepted Borrower’s reduced payments during the application period.

Procedural history. The U.S. District Court for the Northern District of Indiana granted Lender’s motion for judgment on the pleadings and dismissed Borrower’s breach of contract claim.

Key rules. As mentioned last week, the Taylor opinion has an informative introduction to HAMP. If you’re not familiar with the program, please read the case for background.

In Indiana, “a party who benefits from a condition precedent can waive it.” The waiver does not have to be in writing but “can be inferred if the waiving party shows an intent to perform its obligations under the contract regardless of whether the condition has been met.”

Holding. The Seventh Circuit affirmed the district court’s order dismissing the contract claim.

Policy/rationale. The Court found that Borrower failed to allege any action on Lender’s part from which the Court could reasonably infer that Lender intended to proceed with the trial modification without a signature by Lender. First, the alleged statements by Lender’s employees did not promise eligibility. “[Borrower’s] discussions with bank personnel cannot reasonably be viewed as binding [Lender]—with no accompanying writing of any kind—to each of the terms and conditions otherwise part of the TPP or, by extension, any agreement for a permanent mortgage modification.”

Second, as to the interim payments, the Court reasoned:

By its terms, the TPP proposal made plain that [Borrower] would need to keep paying on his mortgage. More specifically, the TPP stated that [Lender] would accept the modified and reduced payments whether or not [he] ultimately qualified for permanent loan modification. Indeed, the Frequently Asked Questions document appended to the TPP application explained that if the bank found him ineligible for HAMP, [Borrower's] first trial period payment would "be applied to [his] existing loan in accordance with the terms of [his] loan documents." So [Lender's] decision to accept [Borrower's] trial period payments was not inconsistent with its intent to rely on the countersignature condition precedent and cannot establish waiver.

Because there was no agreement for a loan modification, there was no claim for breach in Taylor. But, remain mindful that the Court dismissed the case based upon the allegations in Borrower’s complaint. It’s conceivable that a different set of facts could have caused a different result. Having said that, the language in these HAMP and TPP documents is awfully clear in terms of what needs to happen before a HAMP loan mod will occur.

In my next post, I'll discuss Borrower's promissory estoppel theory.  

Related post.  Lender’s Acceptance Of Partial Payments Did Not Waive Default

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My practice includes representing lenders, as well as their mortgage loan servicers, in connection with consumer finance litigation. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Seventh Circuit Rejects Borrower’s HAMP Contract Breach Claim: Part 1 of 2

Lesson. Under Indiana law, if a lender or its loan servicer does not sign the proposed HAMP TPP agreement, then there is no binding contract.

Case cite. Taylor v. JPMorgan Chase Bank, 958 F.3d 556 (7th Cir. 2020)

Legal issue. Whether the borrower had a viable Home Affordable Mortgage Program (HAMP) breach of contract claim against his lender.

Vital facts. Today’s post relates to the borrower’s appeal of the district court’s decision, about which I discussed in 2018: Indiana Federal Court Dismisses Borrower’s Contract Claim Against Lender Because Lender Never Executed The HAMP Trial Period Plan.

Lender informed Borrower of a HAMP-related loan mod opportunity and sent him a proposed Trial Period Plan (TPP) to be signed and returned in order to start the process. The agreement stated that the trial period would not begin until both sides signed off and until Lender returned the signed agreement to Borrower. Borrower executed, but Lender never did. The loan was never modified. The reason Lender did not execute the agreement and modify the loan was that Borrower did not qualify.

Procedural history. Borrower sued Lender alleging that Lender failed to honor the loan modification offer. As it relates to this post, Borrower sued for breach of contract. Lender filed a Rule 12(c) motion for judgment on the pleadings for failure to state a claim. The U.S. District Court for the Northern District of Indiana granted the motion, and Borrower appealed.

Key rules. The opinion in Taylor contains a very helpful introduction to HAMP. If you’re not familiar with the program or the TPP, you should read the case.

In Indiana, to have an enforceable contract, the elements of offer, acceptance, and consideration must be present. “The agreement comes into existence when one party (the offeror) extends an offer, and the other (the offeree) accepts the offer and its terms.” However, an offer can be qualified or held in abeyance until a condition is fulfilled. This is known as a condition precedent. “If an offer contains a condition precedent, a contract does not form unless and until the condition is satisfied.”

Holding. The Seventh Circuit affirmed the district court’s order dismissing the contract claim.

Policy/rationale. The Court concluded as follows:

The TPP unambiguously stated that the trial modification would "not take effect unless and until both [Borrower] and [Lender] sign it and [Lender] provides [Borrower] with a copy of this Plan with [Lender’s] signature." And if [Lender] did "not provide [Borrower] a fully executed copy of this Plan and the Modification Agreement," then "the Loan Documents will not be modified and this Plan will terminate." This language is clear and precise and created a condition precedent that required Borrower to countersign the TPP and return a copy to Borrower before the trial modification commenced.

The Court’s rationale was that, since the TPP never came into effect, no contractual obligations were imposed on Lender. One of the underlying policies behind the decision was that there “were other constraints on Lender's consideration of Borrower's loan modification request—not the least of which were imposed by the federal HAMP guidelines—but none could arise from the unsigned, ineffective TPP proposal.”

My next post will address Borrower’s waiver theory.

Related posts.

• Indiana Federal Court Dismisses Borrower’s Contract Claim Against Lender Because Lender Never Executed The HAMP Trial Period Plan
• Lender Overcomes Borrower’s Allegations Of Misconduct Surrounding Settlement Negotiations
• Indiana Upholds Dismissal Of Residential Borrower’s Tort Claims Arising Out Of Alleged HAMP Violations

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My practice includes representing lenders, as well as their mortgage loan servicers, in connection with consumer finance litigation. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Federal Court Dismisses Borrower’s Contract Claim Against Lender Because Lender Never Executed The HAMP Trial Period Plan

Lesson. Absent a fully-executed TPP, signed by a lender or its mortgage loan servicer, no enforceable contract exists, and a borrower’s claim against a lender based upon a TPP, or under HAMP, will be dismissed. In other words, an alleged loan modification agreement requires the signature of the lender.

Case cite. Taylor v. JP Morgan, 2017 WL 3754607 (N.D. Ind. 2017) (Judge Lozan's opinion); Taylor v. JP Morgan, 2017 WL 7370978 (N.D. Ind. 2017) (Magistrate Judge Martin's order)

Legal issue. The main question in Taylor was whether the Home Affordable Modification Program's Trial Period Plan constituted an enforceable contract between a lender and a borrower. A secondary issue was whether the lender was liable for breach of an implied covenant of good faith and fair dealing.

Vital facts. Borrower and his residential/consumer lender discussed a loan modification pursuant to the Home Affordable Modification Program (“HAMP”). Specifically, the lender sent the borrower a letter offering a HAMP Trial Period Plan (“TPP”). The TPP had certain terms and included certain steps for the borrower to complete before the lender would modify the mortgage loan. One of the conditions to the TPP was that the lender must provide the borrower with a fully-executed copy of the TPP; otherwise, there would be no loan modification. In Taylor, the borrower purportedly submitted the necessary paperwork, but the lender never returned an executed copy of the TPP. The borrower claimed that he qualified for a loan modification under HAMP but that the lender improperly denied the request.

Procedural history. The borrower filed a breach of contract action against the lender. The lender filed a motion for judgment on the pleadings. The U.S District Court for the Northern District of Indiana granted the lender’s motion and dismissed the borrower’s case.

Key rules.

Indiana case law involving HAMP provides that the language of the TPP is clear that it is not an offer by lenders that borrowers can accept simply by providing further documentation. Instead, the TPP is an invitation for borrowers to apply to the program, which requires the borrowers’ compliance to be considered. Cases around the country generally provide that a TPP does not take effect until the lender provides a signed copy.

There is no separate cause of action in cases like these for breach of an implied covenant of good faith and fair dealing.

Holding. Since the lender was required to execute the TPP but did not, no contract was formed and thus no viable breach of contract claim existed. Also, the Court rejected the borrower’s claim breach of good faith and fair dealing. (This case is now on appeal to the 7th Circuit.)

Policy/rationale.

TPP’s are not agreements to provide borrowers with a loan at a specified date, but rather are agreements governing obligations of both lenders and borrowers over a trial period after which lenders may extend a separate permanent loan modification should lenders determine that borrowers qualify.

The alleged contract was not for the sale of goods governed by the Uniform Commercial Code and was not the sale of insurance. Moreover, the mortgage did not give rise to any fiduciary or other special relationship. Thus the borrower’s complaint did not articulate the independent tort of breach of good faith/fair dealing.

Related post. Indiana Upholds Dismissal Of Residential Borrower’s Tort Claims Arising Out Of Alleged HAMP Violations
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I represent lenders, as well as their mortgage loan servicers, in connection with contested mortgage foreclosures and related litigation. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Borrower’s “Mutual Mistake” Defense Fails Under Indiana Law

Lesson. To set aside a loan document based upon the defense of mutual mistake, there first must be a mistake concerning a vital fact upon which the parties based the loan. Second, the mistake must be on the part of both parties.

Case cite. Williamson v. U.S. Bank, 55 N.E.3d 906 (Ind. Ct. App. 2016).

Legal issue. Whether a loan modification agreement should have been reformed or rescinded based upon an alleged mistake of fact.

Vital facts. In 2008, borrower defaulted under a promissory note and mortgage, and in 2009 lender obtained a default judgment against him. The day before the scheduled sheriff’s sale, lender notified the sheriff that the sale should be cancelled due to ongoing settlement negotiations. Nevertheless, the sheriff inadvertently held the sale, and the lender’s pre-sale written bid prevailed. The sheriff’s processed and recorded the sheriff’s deed. About three months later, lender discovered the mistake and ultimately got a court order vacating the deed. In 2010, borrower and lender executed a loan modification agreement that amended the note and mortgage, and set up a new payment plan. For three years, borrower made the payments under the loan mod. At some point, borrower discovered information leading him to believe that he was not on the deed to the property. He also had been denied his homestead exemption multiple times. About the same time, lender notified borrower that he needed to make an additional payment into escrow to cover real estate taxes. In response, borrower told lender he would not pay anything further until lender assured borrower “his name was back on the deed….” Lender then filed an affidavit with the county assessor reaffirming that the court had vacated lender’s title to the property and that the assessor’s records should reflect that title was with borrower. Despite lender’s action, borrower made no further mortgage payments.

Procedural history. Lender initiated a foreclosure lawsuit and filed a motion for summary judgment. In response, borrower filed an affidavit stating that he did not know that his name had been taken off the deed to the property when he signed the loan mod. Borrower argued that he would not have entered into the loan mod knowing his name had been taken off the deed. He essentially asserted that the loan mod was not enforceable against him. The trial court rejected borrower’s position and granted lender summary judgment.

Key rules. A contract may be reformed on grounds of mistake upon clear and convincing evidence of both the mistake and the original intent of the parties. Stated differently, “where both parties to a contract share a common assumption about a vital fact upon which they based their bargain, and that assumption is false, the transaction may be avoided if, because of the mistake, a quite different exchange of value occurs from the exchange of values contemplated by the parties.”

Ind. Code 32-30-10-3 provides that “if a mortgagor defaults in the performance of any condition contained in a mortgage, the mortgagee … may proceed in the circuit court of the county where the real estate is located to foreclose the equity of redemption….” If a lender produces evidence of a demand note and mortgage, it establishes the prima facie evidence supporting foreclosure. That shifts the burden to the borrower to prove payment of the note or any affirmative defense to foreclosure.

Holding. The Indiana Court of Appeals affirmed the trial court’s summary judgment in favor of lender.

Policy/rationale. Borrower contended that he should not have been held to the terms of the loan mod, and thus his mortgage should not have been foreclosed, because the parties mistakenly believed his name was on the deed when they executed the loan mod. But the alleged mistake of fact did not exist upon execution of the loan mod. Borrower did in fact have a valid deed at the time. Although borrower was temporarily divested of ownership through the sheriff’s sale, the trial court later set the sale aside and vacated the deed. That happened in December of 2009. The loan mod didn’t occur until December of 2010. Since borrower’s name was on the deed upon execution of the loan mod, “there was no basis to reform or rescind the agreement.”

This seemed to be a fairly straightforward decision, but I suspect there may have been more to the story. (It’s common for appellate court opinions to distill the facts to their essence.) In any event, despite borrower’s obvious frustrations arising out of the 2009 sheriff’s sale and the resulting confusion with the county’s records, the loan mod had to be enforced.

Related posts.

• Reformation:  How A Mortgage With An Erroneous Legal Description Can Be Foreclosed
• Borrowers Sue Lender Over Alleged Wrongs From Loan Modification Agreement
• Recording Deeds In Indiana:  Don't Forget The Sales Disclosure Form

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I frequently represent lenders, as well as their mortgage loan servicers, in connection with contested mortgage foreclosure actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Settlement Agreement Between Lender And Guarantors Did Not Release The Contribution Rights Of The Guarantors

Lesson. Be mindful of language in settlement agreements with lenders. Don’t unwittingly release contribution claims among guarantors unless that’s the objective.

Case cite. New v. T3 Investments, 55 N.E.3d 870 (Ind. Ct. App. 2016).

Legal issue. Whether a mutual release within a settlement agreement between a lender, on the one hand, and a borrower and several guarantors, on the other hand, resulted in a waiver of rights of contribution among the guarantors.

Vital facts. New was a commercial mortgage foreclosure matter. The heart of the case surrounded the liability of the guarantors of the loan. At issue was a “Settlement and Mutual Release Agreement” entered into by the lender, the borrower and the guarantors. The Court’s opinion sets out the relevant portions of the agreement, including the release provision. The borrower/guarantors breached the agreement by failing to pay the lender, so the lender’s claims later were reduced to a judgment. After a sheriff’s sale, an $865,315.95 deficiency remained, and one of the guarantors – T3 – paid the deficiency in full. T3 then filed an action for contribution against the other five guarantors seeking their pro-rata share of the deficiency payment. Those guarantors asserted that the prior settlement agreement had language that operated to release them from liability. T3 contended that the settlement agreement dealt only with the bank and did not demonstrate that the guarantors bargained for any benefits and detriments with respect to each other.

Procedural history. New was an appeal to the Indiana Court of Appeals following the trial court’s summary judgment in favor of T3.

Key rules.

• The doctrine of contribution “rests on the principle that, where parties stand in equal right, equality of burden becomes equity.” Contribution ensures “those who assume a common burden carry it in equal portions.” A party who pays a debt is entitled to receive contribution from any party having the same joint and several liability.
• Generally, the right of contribution only can be destroyed by an agreement between the obligated parties.
• A release is a contract and is interpreted according to contract law. Contract formation requires an offer, acceptance and consideration. Consideration generally is where there is a benefit accruing to the promisor or a detriment to the promisee. Consideration “consists of bargained-for exchange.” A release must be supported by consideration.

Holding. The Court of Appeals affirmed the trial court’s summary judgment in favor of T3. The remaining guarantors were obligated to pay T3 their pro-rata portion of the deficiency judgment.

Policy/rationale. Although the language in the “mutual release” provision in the settlement agreement was very broad and arguably cut against T3’s position, the Court found that there was no “bargained-for” exchange among the guarantors related to any release among them. The guarantors negotiated collectively with the lender. The bargained-for exchange concerned only the loan and the lawsuits filed by the lender. The settlement agreement spelled out how to resolve only those claims. The guarantors in the agreement did not settle among themselves. In short, the mutual release contained within the settlement agreement was not applicable to T3’s contribution claim.

Related posts.

• Indiana Guaranties:  Right Of Contribution Clarified
• Guarantor Contribution Claims And The Meaning Of "Joint And Several" Liability
• Claim For Contribution Against An "Accomodation Party" Fails
• Effectiveness Of A Release In An Indiana Forbearance Agreement
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I represent parties, including guarantors, in commercial mortgage foreclosure disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Wire Payment Received One Day Late Did Not Breach Forbearance Agreement

If a lender receives a loan payment one day late, is it an actionable default?  Singleton v. Fifth Third Bank, 2012 Ind. App. LEXIS 532 (Ind. Ct. App. 2012), decided in the context of a forbearance agreement, advises that the answer depends on the contract language. 

Forbearance terms.  In the forbearance agreement in Singleton, the lender agreed to forbear from its loan enforcement action from April 4, 2011 to the earlier of (i) June 30, 2011 or (ii) the occurrence of any “Termination Event.”  A “Termination event” was the occurrence of, among other things, a failure to perform any of the obligations contained in the agreement.  Upon the occurrence of a Termination Event, the lender was entitled to file an agreed judgment in its favor and against the borrower.

Payment terms.  The forbearance agreement contained an obligation that the borrower “shall make payments” to lender by certain dates set forth in a payment schedule.  The last payment, in the amount of $350,000.00, was due June 30, 2011.  The agreement did not expressly provide for a particular method of payment or whether certain methods would or would not be acceptable.  The agreement did not require the borrower to make the final payment using a wire and was silent as to the date a payment would be deemed made if made using a wire, or any other method of payment.

The payment.  On the afternoon of June 30, 2011, the borrower and his counsel contacted the lender’s representative about how to make the final payment.  The lender’s representative directed borrower’s counsel to make a wire transfer, as had been done with prior payments.  Borrower’s counsel sent a confirming email to the lender’s representative that the final payment “will be wired today,” and the lender’s representative replied by stating “thank you.”  At 3:39 p.m. the borrower initiated the final payment via a wire transfer from his bank to the lender.  The borrower obtained a wire transfer receipt stating the “effective date” and “entered date” was June 30, 2011.  The rub was that the wired funds were not received by the lender until the morning of July 1, 2011.

Paid vs. received.  The lender sought the entry of the agreed judgment, arguing that the final payment under the forbearance agreement was untimely because the lender received the funds on July 1, 2011, one day late.  The trial court agreed and entered judgment against the borrower.  On appeal, the borrower contended that the trial court improperly created terms in the forbearance agreement requiring that the June 30, 2011 payment had to be “received by” that date, when the agreement stated only that borrower “shall make payments” by that date.  In essence, the borrower’s argument was that the forbearance agreement was a payment contract and not a “received by” contract. 

Not untimely.  The Court of Appeals reversed the trial court’s decision based upon the terms, or lack thereof, in the forbearance agreement, together with the lender’s oral directive to wire the funds.  The borrower’s payment was not untimely and did not constitute a Termination Event under the agreement:

We are not at liberty to supply omitted terms while professing to construe a contract.  Accordingly, we decline to expand upon the general language in the Forbearance Agreement that [borrower] “shall make payments” . . . to include a more specific requirement that a payment, if made by a funds-transfer system as contemplated by Ind. Code §26-1-4.1, must be made by issuing a payment order at a time and with instructions calculated to ensure, taking into account any applicable statutory requirements or possible variations, that the funds would be received or otherwise deposited into [lender’s] account by the applicable due date.  The Forbearance Agreement does not include such a specific requirement. 

More than anything, Singleton is a lesson in contract drafting.  If, as a lender, you intend to strictly enforce payment defaults, then your loan documents or settlement agreements must be crystal clear.  If they are, Indiana courts typically will enforce them, likely even with a one-day breach.  If the forbearance agreement in Singleton contained language that the final payment must have been “received by” or “delivered to” the lender by June 30, 2011, then the lender may have prevailed. 

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
  be DISMISSED.

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.