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