$10,000,000+ Kentucky Lender Liability Case Reversed

February 1, 2011 By John S. Egan, Gerald L. Baldwin, Bart L. Greenwald, William T. Repasky

The Kentucky Court of Appeals issued an important decision on January 28, 2011, reversing a much-published lender liability jury verdict against a large regional banking entity.  In Branch Banking and Trust Company v. Larry E. Thompson, et al., Case No. 2009-CA-001427-MR, commercial borrowers alleged that they had been fraudulently induced to enter into a loan transaction and that they also had been fraudulently induced into signing a forbearance agreement which contained a release of claims against the bank.  A jury found in favor of the borrowers and awarded $1,600,000 in damages and $9,000,000 in punitive damages.  The trial court denied Branch Banking and Trust Company's motion for judgment notwithstanding the verdict.  The bank appealed, asserting that the borrowers' claims were barred by the statute of frauds; that the release contained in the forbearance agreement barred the borrowers' claims of fraud and that the borrowers had failed to prove that they had reasonably relied upon any alleged representations as an inducement to execute the forbearance agreement.   

In its decision, the Court of Appeals reversed the trial court's refusal to grant the bank's JNOV motion and upheld an award of attorneys fees to the bank. The Court of Appeals found that the borrowers could not have reasonably relied upon any of the alleged misrepresentations they attributed to the bank.  At trial, BB&T demonstrated that it had provided the forbearance agreement to the borrowers in advance of its execution, with opportunity for review, and the borrowers frankly admitted that they had failed to read the forbearance agreement, the terms of which contradicted the alleged misrepresentations. 

In reaching its decision, the Court of Appeals pointed to at least four important provisions of the forbearance agreement:

First, a merger clause which clearly stated that the forbearance agreement constituted the entire agreement of the parties and superseded all prior understandings.

Second, a boldfaced provision which stated that the bank was under no obligation to extend any future or additional forbearance to the borrowers.

Third, a boldface (and all caps) provision which stated that the borrowers released the bank from any claims that they could have asserted against the bank arising prior to the date of the forbearance agreement.

Fourth, another boldfaced provision which stated that the borrowers acknowledged that they had read the forbearance agreement and had had the opportunity to have the agreement reviewed by their attorneys.  

The decision was rendered by the Court of Appeals with the instruction that it not be published.  Under the Kentucky Rules of Civil Procedure, this means that the decision generally cannot be cited as binding precedent in other proceedings, with certain limited exceptions.  Further, the decision was just rendered and the borrowers have the right to appeal the decision to the Kentucky Supreme Court, if they so elect.

Notwithstanding these limitations, the Court of Appeals decision represents a reversal of what had been a very troubling lender liability case in Kentucky from the lender perspective.  Perhaps more important, the decision underscores the real world value of carefully crafted forbearance agreements in workouts of troubled loan relationships between lenders and borrowers.

For further information, contact John Egan, chairman of Frost Brown Todd's Lending and Commercial Services Practice group, or Gerald Baldwin, Bart Greenwald, or Bill Repasky with the firm's Financial Institutions Litigation group. 

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