Borrower Defaults, Sues Banks... But Who One?

Borrower Defaults, Sues Banks... But Who One?

[Post updated through December 2020] We love when the underdog wins. Why? We are one of the very few lender liability law firms that only sue banks. Most lawyers that practice banking law represent the banks and not borrowers. Needless to say, borrowers are almost always the underdogs.


This is the story of a small metal fabrication business that defaulted on a multi-million loan with its lender. After it was sued by the lender, the company turned the tables and filed a counterclaim against the lender claiming the bank’s own actions caused the default. The bank lost making this a must read story.


We pick up the story in 2014. A Louisiana metal fabricator, SMI Companies Global, had a longstanding relationship with Whitney Bank. At the time, it had a loan with that bank that matured on July 1, 2016.


In April 2015, SMI borrowed another $900,000 in the form of a credit line. Although its financials weren’t solid, SMI was paying its bills on time. The due date of the new loan was April 3, 2016.


The second loan specifically referenced that it was to “provide funds for a particular contract with Halliburton.” SMI had signed a major contract to build 8 storage tanks worth about $2 million.


After signing the contract to buy the tanks, Haliburton decided to delay the project by 10 months. By the time Haliburton was ready to proceed, it was March of 2016. Both of SMI’s loans would come due in just one month and SMI had burned through most of the line of credit just to keep the lights on!


SMI Companies sat down with the bank and worked out a three month extension on the $900,000 line of credit until July 2016. They say the bank also verbally agreed to extend the original loan which was also coming due. [The bank knew the company’s financial situation and that it wasn’t likely to pay the maturing $1.5 million loan on time.]


By the beginning of July, SMI Companies had delivered two tanks and repaid Whitney Bank almost $500,000. The other 6 tanks were well under construction. The company clearly was acting consistent with the bank’s promises to extend the loans.


On the due date of both loans, the company pleaded its case to the bank. SMI says the bank agreed to let him finish the tanks so that he could repay most of the loan balances. Several weeks later, however, the company says the bank reneged on the deal. By not extending the loans, SMI was in default.


Everyone agrees that once SMI was declared in default, the company closed its doors, didn’t finish the remaining tanks, lost all its customers, and laid off all 80 of its employees.


Whitney then sued the company for the balance on the two loans. Things then get interesting.


SMI Companies did something unexpected. They turned around and sued Whitney Bank. The fight was on. The bank said the company had both a maturity default. SMI said that by failing to honoring its promises, the bank created the default.


The ensuing testimony of the bankers was anything but consistent.


The president of SMI said that Whitney VP Omer Davis agreed to a workout plan so SMI could finish the tanks. Davis was no ordinary VP; he was the bank’s executive vice president and had authority to approve loans.


Unfortunately, that workout plan was never reduced to writing. Before that could happen, the bank in mid-July without explanation said it was not going to honor checks. That was the beginning of the very quick demise for the company.


You might think this case is nothing more than the proverbial “he said, she said” with SMI having nothing in writing. Davis admitted, however, that there was such a work out plan but couldn’t or wouldn’t testify why that plan was never implemented.


Davis also didn’t know why the loans were transferred to the bank’s special asset department. Incredibly, SMI’s loan officer took an inconsistent position and claimed the decision to pull the plug was made by Davis.


And what did the special asset division’s supervisor say? He didn’t have a clue how the loan wound up in his shop.


It sounds like an old keystone cops movie except 80 people lost their jobs and Vaughn Lane, the owner of SMI, lost his life’s investment and business.


Despite all the verbal promises alleged by Lane and SMI, the bank expected an easy win. After all, the loan documents gave the bank the absolute right to declare a default and not extend the loans beyond their maturity date. And the law in Louisiana is like that of most states, loan agreements or modifications must be in writing.


Maturity defaults are typically honored by the court. If your loan is due, the bank doesn’t have to extend it absent a modification agreement or allonge that is signed and in writing.


Whitney Bank’s Hope for an Easy Win Was Soon Dashed.


U.S. District Court Magistrate Judge Patrick Hanna ruled in favor of the bank as to the $1.5 million loan. That meant the bank was owed the balance of $963,528.83. (Remember, SMI paid back about a half million after the first two tanks were delivered.)


His ruling didn’t stop there, however.


Judge Hanna went on to find that the bank breached its agreements to SMI as to the second loan. He awarded the company $3.5 million on the company’s counterclaims against the bank. In other words, he found that SMI’s economic injuries were caused by Whitney Bank.


That decision was in October 2018. The bank has since appealed.


Bankers throughout Louisiana are both horrified and scared. They secured permission to intervene in the appeal to defend Whitney Bank. The Louisiana Bankers Association suggests mass chaos could erupt if Judge Hanna’s decision is allowed to stand. They say that if courts can uphold hand shake deals, this will cause “instability and ha[ve] a chilling effect on economic growth.”


So be it. That is why we have courts. The real question is whether a customer of a bank be able to rely on the assurance of the bank’s executive vice president? (Remember, that VP doesn’t deny the deal.)


The appeal has been fully briefed. It is anyone’s guess what the court of appeals might do.


We were a bit curious why Whitney would default a loan when it was so close to getting paid. Unfortunately, we see frequently banks take such counterproductive actions.


Judge Hanna believed the opinion of SMI’s expert witness who said the bank probably made a strategic decision to stop underwriting oil and gas sector loans due because of poor market conditions in 2016. That means SMI just happened to be in the wrong place at the wrong time.


Judge Hanna said, “A corporate decision to cease lending to oil and gas services companies would explain the bank’s change in course. However, this change without any notice, evaluation or recognition of the Halliburton line of credit was a not a commercially reasonable standard of fair dealing and was a breach of contract …”


We will let you know how the court of appeals rules.


“Good Faith and Fair Dealing”


The bankers say the law is on their side. Agreements to extend loans or modify terms must be in writing. This is sometimes called the “statute of frauds.” [The reference to the word “fraud” comes from a 1677 law in England called the An Act for Prevention of Frauds and Perjuries. The idea behind the law is that by putting contracts in writing, one avoids fraud.]


SMI, however, also says the law is on their side. Bankers have a duty of “good faith and fair dealing.” Judge Hanna and we believe that good faith means honoring promises.


Even if your state requires loan modifications to be in writing, the doctrine of good faith and fair dealing isn’t the only path to victory. Alternative theories of liability include negligent misrepresentation and a legal doctrine called “promissory estoppel.” The latter involves a promise by the bank and reasonable reliance on that promise to the detriment of the borrower.


Here SMI can show that in reasonable reliance on the bank’s promises, it began making all 8 tanks and paying the bank.


Who is right in this case? That is something for the court of appeals to sort out.


Update December 2020: The Court of Appeals issued a mixed ruling mostly reversing SMI's win over Whitney Bank. 


Sadly, the three judge appeals court concluded that the bank didn't breach its agreement with the company and couldn't be held responsible for reneging on its promises.


"Construing the provisions of the loan documents so that each is given the meaning suggested by the parties’ agreement as a whole, we conclude that, contrary to SMI’s arguments and the magistrate judge’s findings, the statement of the purpose of the loan did not require Whitney to continue advancing funds until the completion of the Halliburton projects... If the parties had intended for Whitney to fund the Halliburton project to completion, or for the loan to mature only after the project was completed, they could have drafted the contractual language that way but they did not.”


The court also ruled that unless an agreement is in writing, it is not likely to be enforceable. That means despite so many promises by the bank, SMI didn't have the right to rely upon them.


The takeaway here is that banks don’t always win. The duty of good faith remains viable and strong in many courts across the country. Unfortunately, all the promises in the world might be meaningless unless in writing. While we think SMI had the right to rely on the bank's promises, an appeals court ultimately disagreed.


Consumers 0, Banks 1 (but the battle never ends). We hope you heed the lessons here and make sure everything is in writing. Don't trust bank officers even when they are promising to help.


To learn more, contact attorney Brian Mahany online , by email [hidden email] or by phone at 877-858-8018 (direct). All inquiries kept strictly confidential.


We also invite you to visit our theories of liability page for more information on a bank’s failure to honor a loan commitment or to renew a loan.


(We regret that we cannot accept consumer cases or residential real estate matters. Our minimum amount in controversy is $5 million.) Services are offered nationwide.

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