“The primrose way to the everlasting bonfire” Shakespeare, Macbeth, Act 2, Scene 3.
While Massachusetts is generally lender-friendly when it comes to commercial lender liability cases, there is one situation where Massachusetts appellate courts have affirmed lender liability for substantial damages. These were cases in which the lender led a borrower down “the primrose path,” letting them think that all was well, and then attempted to change the deal at the last minute to extract unwarranted or previously not agreed upon concessions from that borrower.
As is true in most states, Massachusetts imposes duties of good faith and fair dealing on parties to a contract. Generally, that means that a party may not intentionally try to deprive the other party to a contract of the benefit they bargained for. Similarly, Massachusetts bars parties from engaging in unfair and deceptive acts and practices. The duties of good faith and to not act unfairly or deceptively can be violated where a lender intentionally or negligently misleads a customer into a false sense of security only to then use approaching deadlines to extract additional, previously not agreed upon, concessions at a time the borrower has little choice but to agree. A review of two Massachusetts lender liability cases is helpful in explaining the pitfalls.
In the Renovator’s Supply case in 2008, the lender assured an existing borrower that, as it had done countless times before, the lender anticipated renewing a one-year revolving line of credit on identical terms. As a result, the borrower did not seek alternate financing or make any other arrangements to meet its financial needs. On the eve of the line’s maturity, the lender advised its borrower that the interest rate on renewal would be significantly higher than the previous rate and that personal guaranties would for the first time be required. When the borrower balked at these changes, the lender simply allowed the line of credit to expire and would not make additional advances. While this was permitted under the express provisions of the loan documents, the lender did not offer any short-term extension of the line to the borrower so it could find alternate financing. The borrower, a catalogue company on the eve of printing and mailing its quarterly catalog to its customers, was forced to engage in financial gymnastics to generate the funds needed for the catalogue without access to its line of credit. The borrower then sued the lender for the additional costs and damages it suffered as a result of the last-minute drastic demands and retaliatory actions of the lender. The Court found that the lender “had lulled [the borrower] to a point beyond its credit deadline and had exploited that timing in an attempt to force the unwanted additional credit terms upon the company.” The Court awarded the borrower not only its actual damages, but also multiple damages and attorney’s fees.
In the Tufankjian case from 2003, a potential borrower applied for a loan to finance the acquisition of an automobile dealership. The lender approved the acquisition loan at a favorable interest rate but also asked the borrower for an opportunity to provide the floor-plan financing once the purchase was complete. When the borrower declined the offer of floor-plan financing, the lender agreed to just make the acquisition loan. There was never a commitment letter issued for the loan. On the eve of the scheduled closing date for the purchase of the dealership, the lender suddenly conditioned the closing upon the borrower’s agreement to accept a less favorable interest rate and to use the lender for its floor-planning. Since at that point the borrower had no ability to arrange for alternate financing for the acquisition, the borrower went ahead with the “revised” financing terms. Immediately after the closing, however, the borrower refinanced the loans elsewhere and sued the original lender for the damages suffered by being forced to agree to the more onerous loan terms and for the costs of then refinancing elsewhere. The Court found that the lender “by its actions, was seeking ‘to recapture opportunities forgone on contracting and to secure a better deal.” The court imposed significant liability on the lender including actual damages, multiple damages and attorneys’ fees.
What are the lessons from these cases? Never lead a borrower to believe everything is “all set” and then at the last moment, when the borrower’s hands are tied, use that predicament as an opportunity to get a better deal for the lender. If circumstances change and you must change course, it is better practice to give the borrower a short-term extension or other reasonable runway to make other financing arrangements. Never presume that you have the right to use economic leverage that you may have created to improve the benefits to the lender. Be fair and reasonable; be forthright and honest; do not act rashly absent exigent circumstances; do not mislead or allow a borrower to act on what you know is a misunderstanding; honor the spirit of an agreement, not just its letter. Do not lead your borrower down the “primrose path” as it could lead to “lender liability hell.”
This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.