No meeting of the minds when bank merely agreed to agree

In First American Bank v. Urbandale Laser Wash, LLC, Urbandale Laser Wash, LLC and Walnut Creek Laser Wash, LLC borrowed $2.679 million from First American Bank to buy and operate two car washes.  Each LLC executed one promissory note, secured by a real estate mortgage and a security agreement.  Steve Golden, a principal of the entities, executed a limited guarantee for each loan. After a default in July 2012, the parties negotiated to reach a modification, including a forbearance agreement.  In April of 2013, the loan officer emailed Golden and said a proposal was going to loan committee.  The committee approved the proposal, and the proposal was sent to Golden.  Golden said his attorney needed to review the proposal. Golden's attorney responded to the proposal with 13 requested changes.  Instead of accepting the suggested changes, the bank sent a notice of default and demand for payment.  The bank put an administrative hold or freeze on debtors' accounts.  

The bank then filed a petition to foreclose the mortgages and security agreements.  The borrower answered, arguing as an affirmative defense that the parties had agreed to a forbearance agreement, and raised four counterclaims:  breach of the forbearance agreement; breach of the account agreement by freezing the account; conversion; and breach of the duty of good faith and fair dealing.   Upon cross motions for summary judgment, the court ruled in favor of the bank.  The debtors and guarantor appealed. The debtors claimed that there was an issue of fact as to whether the parties had reached a forbearance agreement.  The debtors first pointed to the loan officer's verbal statement that the lender would agree to Golden's proposal of only one limited guarantee. The Court of Appeals concluded that the loan officer did not have the independent authority to accept Golden's loan modifications.  Instead, when the committee considered the proposal, the committee changed the terms of the proposal.  As the party making the offer, the bank was, in the words of the Court of Appeals, the 'master of the offer.' Golden next argued that the parties agreed on 'many of the terms'; however, the Court of Appeals concluded that because Golden's acceptance did not conform strictly to the bank's offer in all conditions, there was no contract. Golden made several arguments as to whether a forbearance agreement had to be in writing to be enforceable, whether the parties' emails constituted writings, and whether partial performance defeated the writing requirement.  None of these arguments were persuasive, because the Court of Appeals simply found that the parties had no agreement rather, they had 'a nonbinding agreement to agree.'  Email from the loan officer made it clear that a written loan agreement would be necessary.  Since no such written agreement was executed, the parties had no 'meeting of the minds' and no contract. Regarding the affirmative defense that the bank breached the duty of good faith and fair dealing, the Court held that the duty is implied in performing and enforcing a contract, but not in entering into a contract. Regarding the freezing of the account and the later setoff, under the language of the notes, the bank had the right to take possession of the moneys in the bank accounts and set off against the amount owed without notice or demand.  The fact that the bank voluntarily sent a demand letter did not limit the bank in any way; setoff did not have to coincide with the date in the demand letter. Moreover, the Court of Appeals was not concerned by the bank's delay in affecting a setoff.  The account was administratively frozen in June 2013, but the bank did not perform a setoff until January 2014.  Although Golden argued that the delay amounted to a breach of contract, the Court of Appeals disagreed.  No case law or provision in the account agreement required setoff with a certain time period.  Even if the bank was required to affect a setoff with a reasonable amount of time and did not, Golden was not harmed by the delay.  In fact, the Court of Appeals treated the administrative hold to serve the same purpose as a setoff, yet affording flexibility to lift the hold, had the parties reached a voluntary resolution. The Court of Appeals also rejected the argument that using account funds as a protective advance was a breach of contract, because the notes specifically allowed the bank to receive rents and profits from the property and apply to the payment of necessary charges and expenses. Because the bank's actions were taken pursuant to contracts between the parties, the Court of Appeals summarily rejected debtors' remaining counterclaims regarding breach of duty of good faith and fair dealing and conversion.

First American Bank v. Urbandale Laser Wash, LLC is yet another case where financial institutions are well served to focus on fundamental aspects of loan documentation.  In this instance, where no written forbearance agreement was ever executed, multiple counterclaims and myriad arguments raised by the debtor were to no avail.  For other recent Iowa cases highlighting the importance of focusing on the fundamentals of loan documentation, see recent blogs addressing FoGE Investments, LLC v. First National Bank of Wahoo, and U.S. Bank v. Lamb.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Mollie Pawlosky