Debtor's Claim Against Lender Fails for Lack of Proof of Damages
April 7, 2006
Michael Weissman - Chicago
In Condrey v. SunTrust Bank of Georgia, 431 F.3d 191 (2005) a debtor’s multicount complaint against the bank was rejected because the debtor could not prove it had suffered any damages as a result of an alleged oral agreement it made with the bank.
Harrell Equipment Company, Inc. granted SunTrust’s predecessor a first priority security interest in all of its real and personal property in March of 1989 in return for ongoing financing. In 1997, Harrell’s business declined and SunTrust advised Harrell that in order for the financing to continue, the outstanding debt would have to be reduced, expenses would have to be cut and more inventory would have to be sold. Harrell agreed and reduced its debt by $1 million, but SunTrust declined to grant further financing.
While Harrell was contemplating a Chapter 11 filing, Harrell alleged that SunTrust made an oral agreement with it that (a) allowed SunTrust to take possession of all of Harrell’s assets, (b) called for SunTrust to continue to provide financing, (c) required Harrell to reduce its debt to less than $1 million over the following 12 months, and (d) authorized SunTrust to sell Harrell’s inventory and other remaining assets to a third party designated by Harrell.
On March 9, 1999, SunTrust obtained a court order giving it immediate possession of all of Harrell’s personal property. During the remainder of 1999, SunTrust controlled all of Harrell’s operations. On November 15, 1999, SunTrust foreclosed on Harrell’s real estate.
By the end of 1999, Harrell had reduced its debt to less than $1 million. It designated Vada Investors Corporation to purchase its assets. But SunTrust sold Harrell’s assets to LMC Bainbridge.
Harrell sued SunTrust. But the lawsuit ultimately was dismissed because Harrell could not prove it had suffered any damages as a result of anything SunTrust had done.
Turning to a claim of fraud asserted by Harrell, the court said the claim could not be sustained because it was premised on an oral agreement that involved the sale of land, a commitment to lend money, and the sale of goods for more than $500. Such an agreement had to be in writing to be enforceable under the Georgia Statute of Frauds, but there was no writing. Part performance would not excuse the absence of a writing because SunTrust simply did what any secured creditor would do in similar circumstances, which meant no oral contract could be inferred.
Harrell’s claim of conversion was shot down by the fact that SunTrust had obtained possession of Harrell’s assets by court order and by the fact that Harrell had never demanded the return of the assets. Harrell’s promissory estoppel claim failed because the Court said there was nothing to show that what SunTrust had done was detrimental to Harrell’s interests. Simply selling Harrell’s assets to a party that Harrell had not designated did not, in the Court’s view, establish detrimental reliance.
What’s the Point?
There are two components to every lawsuit, i.e., liability and damages. Thus, even if liability can be established, the absence of demonstrable damages precludes recovery. Furthermore, debtors walk on tenuous ground when they sue lenders based on oral agreements. Even in those states that do not have lender liability legislations, the Statute of Frauds is often available as a defense.
For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.