Be Careful of Promising Too Much When Closing a Loan

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It’s always a good idea for loan officers, and other bank employees involved in the loan origination process, to make sure that their representations to potential borrowers do not contradict the conditions of the loan commitment or term sheet, or the language of the bank’s loan documents.

In a recent case decided by the Cuyahoga County Court of Appeals,

Natl. City Bank v. Herak, http://scholar.google.com/scholar_case?case=12775065549844238320&q=Herak&hl=en&as_sdt=2,36,

the bank closed a small business line of credit for a corporate borrower, RPH and Associates, Inc. (“RPH”). The principals of RPH made clear to the bank that they did not want to be personally liable for repayment of the line of credit. An “agent” of the bank, perhaps the loan officer making the loan, informed the principals that they could obtain the loan without personal guaranties.

As bad luck for the loan officer would have it, RPH defaulted on the loan, and the bank applied funds from a principal’s deposit account to the outstanding balance of the line of credit. The principal then contacted the bank and demanded that the bank reverse the withdrawal, and the bank complied, deeming the withdrawal a “mistake.”

The bank then sued RPH, and, surprisingly, all three principals of RPH as guarantors. At the trial, the court found that the principals did not check a box on the loan application indicating that they were personally liable as guarantors, even though the bank presented the application into evidence with the box checked.

The trial court entered a judgment against RPH and in favor of the bank for the balance of the loan. Based on the principals’ testimony and the bank’s action in reversing the withdrawal, however, the trial court found that the principals had not personally guaranteed the loan and were not liable for the outstanding balance.

On appeal, the bank argued that other language in the loan application imposed personal liability on the principals. But the Cuyahoga County Court of Appeals determined that the unchecked guaranty box on the loan application contradicted the other language cited by the bank, rendering the loan application ambiguous. That ambiguity permitted the trial court to hear testimony concerning the intentions of the bank and the principals when closing the line of credit, including the statements by the principals that they did not want to be personally liable for the line of credit. The court of appeals affirmed the judgment of the trial court, and the principals skated free of the line of credit.

Based onthe Herak case, financial institutionsshould ensure that any statements made by their employees to potential customers do not contradict the conditions of the particular loan commitment or term sheet, or any provision in a loan document. In addition, each loan document should be consistent with itself and with the other loan documents. Otherwsie, as was the case with the bank in Herak, a lender may find itself in a “he said, she said,” court case, which oftentimes doesn’t go the lender’s way.

Donald E. Miehls, Esq.

Walter & Haverfield, LLP

This overview is intended as general information only. Please note that this information is not legal advice. The reader should consult an attorney with knowledge in this area of the law to determine how the information applies to any specific situation.

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