| The September 20, 2007 decision by Judge | | | | the filing of a complaint by Midwest Lumber |
| Barker of the United States District Court | | | | the Davises against Branch Banking in which |
| for the Southern District of Indiana in | | | | the plaintiffs alleged that Branch Banking |
| Midwest Lumber v. Branch Banking, 2007 U.S. | | | | should be liable for misrepresentation, |
| Dist. LEXIS 69924 (S.D. Ind. 2007) involves | | | | breach of the covenant of good faith and fair |
| the dismissal of borrowers' lender liability | | | | dealing, interference with business |
| claims, but it also specifically addresses a | | | | relationships, breach of fiduciary duty, |
| release provision in a forbearance agreement. | | | | undue control, economic duress and business |
| Even though lender liability is not my | | | | coercion and negligent misrepresentation. |
| primary focus, certainly forbearance | | | | Significantly, Midwest Lumber/the Davises |
| agreements are pertinent. And the workout | | | | initiated the lawsuit after they had executed |
| industry should be aware of Judge Barker's | | | | the forbearance agreements containing the |
| holding. | | | | release. |
| | | | |
| Parties. The plaintiff was borrower Midwest | | | | Midwest Lumber filed a motion to dismiss the |
| Lumber, a lumber supplier. Mr. and Mrs. | | | | claims based in part upon the releases in the |
| Davis, the principals of Midwest Lumber and | | | | forbearance agreements. Branch Banking |
| guarantors in the subject transactions, also | | | | argued that the forbearance agreements |
| were plaintiffs. The loans in question | | | | released it of any liability toward Midwest |
| involved working capital for the business | | | | Lumber and the Davises. Judge Barker agreed. |
| secured by accounts receivable, inventory and | | | | Midwest Lumber and the Davises made a |
| real estate. The named defendant was Branch | | | | variety of arguments against the |
| Banking and Trust Company, the lender, which | | | | enforceability and effectiveness of the |
| refinanced Midwest Lumber's working capital | | | | releases, but Judge Barker concluded on page |
| loan facility. | | | | 18:having determined that the releases |
| | | | clearly and unambiguously released [Branch |
| Defaults/forbearance agreements. Midwest | | | | Banking] from any claim by [Midwest Lumber |
| Lumber couldn't make its payments, so it and | | | | and the Davises] arising out of their banking |
| the Davises entered into a series of loan | | | | relationship and having further found that |
| modifications and, ultimately, forbearance | | | | [Midwest Lumber and the Davises] were not |
| agreements with Branch Banking. As an | | | | under economic duress when they signed the |
| inducement for Branch Banking to agree to the | | | | releases and that [Midwest Lumber and the |
| terms set out in the forbearance agreements, | | | | Davises] have not returned the consideration |
| Midwest Lumber and the Davises gave | | | | they received from [Branch Banking] in |
| comprehensive written releases to Branch | | | | exchange for signing the releases, all of |
| Banking in each forbearance agreement that | | | | [Midwest Lumber and the Davises] claims in |
| stated in pertinent part: | | | | the Second Amended Complaint must be |
| | | | DISMISSED. |
| [Midwest Lumber and the Davises] hereby | | | | |
| release and forever discharge [Branch | | | | Message. The Midwest Lumber case begs the |
| Banking], its officers, directors, attorneys, | | | | question of whether lenders should demand |
| employees, predecessors and successors (the | | | | general releases in all of their forbearance |
| "Released Parties") of and from any claims, | | | | agreements. Most workout scenarios will not |
| demands, obligations, actions, causes of | | | | involve questionable conduct on the part of |
| action, damages, costs (including without | | | | the lender or allegations of lender |
| limitation court costs and attorneys' and | | | | liability. So, such a release might not |
| paralegals' fees and expenses), expenses and | | | | directly apply in many situations. But there |
| compensation of any nature whatsoever | | | | is no downside from the aspect of the lender |
| (collectively, "Claims"), known or unknown, | | | | to include such general releases in the |
| whether based in tort, contract or any other | | | | forbearance agreements. Indeed, there is |
| theory of recovery, or which may exist or | | | | only upside: protection. The time the |
| might be claimed to exist at or prior to the | | | | parties forbear is the time to get a release |
| date of this Letter Agreement on account of | | | | - even if you don't think you'll ever need |
| or in any way arising out of the Banking | | | | it. Midwest Lumber generally supports the |
| relationship between [Midwest Lumber], | | | | proposition that such a release should be |
| [Branch Banking] and its successors . . .. | | | | effective to bar future lender liability |
| | | | claims brought by the borrowers or |
| Id. at 15. | | | | guarantors, so releases of liability probably |
| | | | should be negotiated into most if not all |
| Midwest Lumber/Davises Lawsuit. The suit | | | | forbearance agreements, if possible. |
| giving rise to the opinion originated with | | | | |