Words in a Contract Matter

Every contract generally implies a covenant of good faith and fair dealing in the course of it performance by each party. What if party’s reliance on the express words contained in a contract is not in good faith? Can that negate the express provisions of the agreement?

Such was the issue in the recent case of Transit Funding Associates, LLC v. Capital One Equipment Finance Corp., 48 N.Y.S.3d 110, 2017 WL 754335, decided February 28, 2017 by the Appellate Division of the Supreme Court of the State of New York. There, the borrower was a finance company that loaned money to Chicago taxi owners and drivers for the purchase of taxi medallions. In 2009, the borrower entered into a $35 million line of credit with the lender that allowed the borrower to draw down advances as it made medallion loans and that credit line was increased in successive steps over the next three years so by 2012 the credit line had increased to $80 million. The credit agreement provided that over the term of the credit facility, the lender “will make advances” in such sums as the borrower may request, but also contained the following provision:

“Notwithstanding anything to the contrary contained herein, [Lender] reserves the right to make or decline any request for an Advance in its sole and absolute discretion and may condition the availability of an Advance upon, among things, (i) that no Default or Event of Default occurring hereunder or under any Loan Document exists and continues beyond the expiration of applicable notice and cure periods; and (ii) the maintenance of a satisfactory financing condition by [Borrower] and all Guarantors; or (iii) for any other reason determined by [Lender] in its sole and absolute discretion.”

In April 2013 the lender began internal discussions about abandoning the medallion financing industry. Nevertheless, in July of that year it renewed the credit line for a one year term to July 1, 2014 with an automatic three month extension to October 1, 2014. Before expiration of the term of the credit agreement, the lender began “abruptly” to deny funding requests. The borrower later learned that the lender began collaborating with Uber, and later entered into an agreement with Uber, whereby Uber customers received a discount when paying with a credit card issued by the lender.

In March 2014 the borrower asked the lender for its consent to sell 48 medallions pledged as collateral for the line of credit and offered the sales proceeds as substitute collateral. The lender refused. Ultimately, the borrower was forced into liquidation during which the lender imposed new and additional funding requirements, like completion of a field examination and submission of borrowing base certificates.

In subsequent litigation, the borrower asserted a host of claims against the lender, including claims for breach of the credit agreement and breach of the covenant of good faith and fair dealing. The lender moved to dismiss those claims on the basis of the express provisions of the credit agreement quoted above. The court granted the lender’s motion, specifically holding that in view of the provisions of the credit agreement that expressly permitted the lender to deny any funding requests in the lender’s “sole and absolute discretion” and “for any reason”, the lender did not violate the contract by failing to advance funds, “even if that decision put [the borrower] out of business”. As the court stated:

“Because [the lender’s] complained-of conduct consists entirely of acts it was authorized to do by the contract, its alleged motivation for doing so is irrelevant. Simply put, an intent to put [the borrower] out of business cannot justify a lawsuit for a claimed breach of the covenant where the express provisions of the agreement allowed [the lender] to act as it did.”

The take away from this case? Words in a contract do matter. So review them carefully and do not take it for granted that a court will not enforce those words literally.

Kenneth M. Greene focuses his practice on commercial finance, banking and bankruptcy. He works closely with both national and regional banks, commercial lenders, finance companies and factors on important issues that impact the profitability of their operations. He documents and closes secured loans, restructures troubled loans, supports insolvency or bankruptcy proceedings and resolves issues involving creditors’ rights. Kenny can be reached at 336.478.1124 or kmg@crlaw.com.

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