described in Article 9 of the Uniform Commercial Code.  The Court noted that a disposition of property in a commercially reasonable manner “prevents the creditor from acquiring the collateral at less than its true value or understating its value so as to obtain an excessive deficiency judgment.”  Boutros had possession of the property, but had failed to sell or dispose of it and, therefore, the Court held he could not recover as a secured party under Article 9.  However, the Florida Court of Appeals reversed the trial court decision regarding Minoso’s liability as a co-guarantor for the loan.  The Court found that although Article 9 barred Boutros’ claim as the secured creditor now holding the note, he maintained rights as to co-guarantor, which could be exercised in an action against Minoso. 

            

This case illustrates the importance of lenders acting in a commercially reasonable manner when dealing with collateral in order to successfully pursue remedies against a guarantor.

 

The case above is cited as Boutros v. Minoso, Case No. 3D05-1849 & 3D05-1773 (District Court of Appeal of Florida, Third District, July 2006)

 

 

In today’s competitive lending environment, term sheets and commitments are often issued based upon partial information and then, in many cases, need to be extended due to delays in obtaining necessary approvals, permits, consents or other documentation.  During the review process, the lender and its counsel are likely to be expending significant time and effort and incurring considerable expense, only to find out that the original assumptions are false or, with the passage of time, that there has been a material change in circumstances to the borrower, guarantor, or the transaction itself. When this happens, the transaction may no longer meet the lender’s underwriting, legal or documentation requirements. 

 

Unfortunately, in the rush to issue a term sheet, or if the term sheet is attached to a commitment letter that is essentially a transmittal letter, the rights of the lender to terminate the commitment and the obligation of the borrower and guarantor to pay the costs and expenses incurred are not clearly established.  Therefore, it is important that as a lender, you obtain an executed commitment letter, and that the commitment letter contain a provision similar to the following clause to clearly establish these rights and obligations:

 

“This commitment is being made in reliance upon the information supplied by the Borrower and the Guarantor to the Bank in connection with the Loan.  If the Bank, acting in good faith, should determine that any such information or supporting representation of a material nature is false, inaccurate, incomplete or misleading, the Bank may rescind and cancel this commitment and retain all fees theretofore paid to the Bank.  In addition, the Bank shall have no obligation to fund the Loan and shall have the right to retain all fees theretofore paid to the Bank in the event that, in the sole judgment of the Bank, prior to the Loan Closing, there shall be a material adverse change in the value or condition of the collateral, or if the Borrower or the Guarantor shall be involved in any arrangement, bankruptcy, reorganization or insolvency proceeding or shall have suffered any adverse change in his, her, its or their financial condition or if any other event shall occur which would constitute an event of default under the Loan Documents.  The Borrower and the Guarantor shall nevertheless remain liable for all of the Bank's expenses, including attorneys’ fees, in connection with the Loan.”

 

If a lender is not having the commitment letter prepared or reviewed by counsel, the lender should consider consulting with counsel on a periodic basis to confirm that the forms the lender is using adequately protects the lender in this important area.

 

Lerch, Early & Brewer’s Litigation Group represents banks and other financial institutions in a broad array of commercial and lending-related matters.  When a commercial loan goes into default, our professionals assist our clients in related litigation matters, including general loan “work out” situations/debt recovery,

Practice Tip:  Commitment Letters