Foreclosing on commercial loans can be a dicey proposition these days, with banks often being greeted by lender-liability counterclaims alleging that borrowers and guarantors were fraudulently induced into executing loan documents and otherwise treated unfairly along the way by their lenders.
A recent, exhaustive ruling by the U.S. District Court in Louisville shows a potential way out of such quagmires. In a 58-page opinion issued this past July, Senior District Judge Charles R. Simpson III in PNC v. Seminary Woods, LLC, et al., Case No. 3:13-cv-297, dismissed all but one of the borrower’s and guarantors’ numerous claims. In many respects, this result was made possible by the bank’s inclusion of comprehensive release language in each of several amendments to the original loan documents.
Releases executed by sophisticated business entities and individuals in subsequent loan modification documents have the very real potential of blocking claims based on matters as simple as alleged breaches of contract and/or breaches of the duty of good faith and fair dealing, as well as more problematic claims based upon alleged fraudulent inducement, fraudulent omission, negligent misrepresentation, and ECOA violations.
In the case before Judge Simpson, the original loan was documented in April 2006, and as subsequent amendments/modifications to the original terms were agreed upon, the bank included boldfaced release language (drafted by Morgan & Pottinger) in the documentation. As pointed out by Judge Simpson early in his opinion, “[t]he contracting parties…clearly acknowledged and affirmed for the third time in July of 2010 their respective obligations under the note and guaranties, and fully released any and all claims…in connection with the financial transactions relating to the project [up to that point].”
Importantly, Judge Simpson also concluded that comprehensive release language in loan amendments was sufficient to find that several guarantors had waived claims under the Equal Credit Opportunity Act and Regulation B. In those instances, the bank was alleged to have required spouses of guarantors to sign separate guaranties in 2006 without determining if the husbands’ assets “alone sufficed to support their limited guaranty obligations.” The Court also emphasized that the bank’s waiver of loan defaults when it negotiated modifications in 2009 and 2010 was sufficient consideration for the all-encompassing release of any ECOA/Reg B claim flowing from original execution of guaranties in 2006.
Negotiating a comprehensive release in amendment/modification documentation – as a quid pro quo for granting a borrower additional time and/or means to meet its obligations – obviously cannot prevent the filing of a vexatious counterclaim in a bank initiated foreclosure action, but doing so is nevertheless highly advisable because the presence of release language can only help any effort mounted to obtain summary dismissal of such a counterclaim.