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Bulletin

Volume 6 Issue 4

April 2007

Liability May Be Imposed on Lender for Cancellation of Closing

 

             The 9th Circuit Court of Appeals has determined that a lender may be liable for economic damages caused by its cancellation of a scheduled closing, causing the would-be borrower to seek financing elsewhere at substantially higher rates.

 

             In the case reviewed, GE and Olyaie signed a commitment letter on March 19, 2001 whereby GE agreed to lend Mr. Olyaie, subject to certain terms and conditions, $700,000 to purchase the gas station he operated.  During negotiations prior to the execution of the commitment letter, at GE’s request, the parties discussed GE obtaining secondary insurance from AIG Insurance in order to mitigate the environmental liability connected to the site.  However, this provision was not specifically stated in the commitment letter. Closing was scheduled for April 24, 2001, six days prior to the April 30 closing deadline in Olyaie’s sale and purchase agreement.  AIG offered the requisite insurance policy at a cost that GE found to be unacceptable.  GE, however, did not offer to pass the cost along to Olyaie; never informed Olyaie of the status of the policy; and cancelled closing on the morning of April 24 without providing an explanation. 

 

             Despite numerous attempts to contact GE beginning the morning of April 24, Olyaie and his attorney were unable to speak to any of GE’s representatives until April 25; but even then received no assurances from them that the loan would close prior to April 30.  When Olyaie’s attorney told GE’s counsel that Olyaie would have to seek alternate financing, GE’s response was that he “should do what he has to do.”  Olyaie then closed with another lender on April 26 at substantially higher rates and sued GE for economic damages arising out of GE’s failure to close.

 

             The district court sided with GE and dismissed Olyaie’s suit.  However, the 9th Circuit Court of Appeals determined that there was merit to Olyaie’s complaint.  Olyaie claimed that GE “anticipatorily breached” the terms of the commitment letter by creating a situation in which it may not have been able to close even by the April 30 deadline.  The Court stated that “given the relative lack of alacrity with which GE Capital responded to Olyaie and its failures of communication, it may have been impossible for it to schedule another signing on or before April 30.  Under these circumstances, we hold that there is genuine issue of material fact whether GE Capital put it out of its power to perform by April 30 when it cancelled the April 24 signing with Olyaie.”  The Court also held that GE may have acted in “an objectively unreasonable manner” by failing to communicate its inability to obtain the environmental insurance in time for Olyaie to assume the extra cost of the insurance and save the deal.  By undertaking to perform an obligation for which Olyaie was originally responsible, then failing to do so and further failing to inform Olyaie of the status of the requirement, GE may have breached the implied covenant of good faith and fair dealing.