Daily Development for Wednesday, September 23, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LENDER LIABILITY; WAIVER OF CLAIMS: Agreement to renegotiate a debt that was a factor in alleged misapplication of setoff rights by a lender constitutes a waiver of claims against the lender for such misbehavior.

Holland v. Peoples Bank & Trust Co., 3 So. 3d 94 (Miss. 2008).

Holland was the borrower on several loans from Peoples Bank and Trust Company. Holland also attempted to set up at Section 1031 exchange from the sale of other land with the bank as the qualified intermediary. The bank received the proceeds from the sale of the land and applied them to a loan owed by Holland to the bank. The bank claimed that the agreement for the Section 1031 exchange had never been completed and that the sale proceeds were never deposited in an escrow account.

Holland, who was represented by counsel, subsequently entered into a workout agreement regarding the loans and signed an amended promissory note renewing the loan.

Holland then brought an action against the bank alleging, among other things, that the bank misapplied the proceeds from the sale of the land and thereby breached a fiduciary duty to Holland. Holland also alleged negligent misrepresentation and fraudulent misrepresentation. The bank argued that any possible claims that Holland had against the bank were waived when Holland entered into the workout agreement and signed the renewal notes. Holland argued that the workout agreement and renewal notes only pertained to the loans and were not related to the alleged misapplication of the proceeds from the sale.

The trial court granted the bank's motion for summary judgment on this issue. On appeal the Mississippi Supreme Court, in a decision by Justice Carlson, affirmed. By executing the workout agreement and renewal note, Holland waived all possible claims that he had against the bank.

Reporter’s Comment 1:  The court relied on Austin Development Company, Inc. v. Bank of Meridian, 569 So. 2d 1209 (Miss. 1990). In the Austin Development case the bank held a letter of credit as collateral for its loan and failed to make a timely demand for payment on the letter. As a result the borrower went into default and had to sign a renewal note. When the borrower brought an action against the bank for negligence in failing to make demand on the letter of credit, the court held that by signing the note, the borrower waived his negligence claim against the bank. In the Austin Development case, the negligence claim arose out of roughly the same set of facts. In the Holland case, the claims that the court held were waived arose of out what appears to the editor to be a separate transaction. The Holland case therefore arguably is an expansion of the waiver doctrine applied in Austin Development.

Reporter’s Comment 2:  It is interesting to the Reporter that the fact that the borrower executed a renewal note seems sufficient to the courts in both the Austin Development and Holland cases to waive the other claims, without the necessity that the note or workout agreement reference the other claims. In Austin Development there was only a note and not a workout agreement. In Holland the borrower signed a workout agreement as well as a note, but the court did not quote from the workout agreement or make reference to any of its terms. In neither case did the court scrutinize the wording of the relevant documents, but found that the fact that a renewal note had been signed sufficient without any express waivers. Most of the workout agreements that the Reporter sees contain pages and pages of detailed waivers. Are these detailed waivers really necessary, and do they potentially create a risk that if we try to cover every circumstance, we risk missing one?

Comment 3:  In Austin Development the borrower was an experienced commercial developer. In Holland the borrower was a cotton broker and commodities trader who was represented by counsel. Would a court apply this waiver doctrine as strictly if the borrower was an unsophisticated consumer? The author of the Austin Development decision, Justice Roy Noble Lee, noted in that opinion that he had dissented in an earlier case applying this waiver doctrine because the borrower was "an unsophisticated woman who had been defrauded by her husband, and she signed a promissory note initially based upon a representation of the Bank, which turned out to be false." 569 So. 2d at 1212 n. 2.

The Reporter for this item was Rod Clement of the Mississippi bar, writing in the July, 2008 issue of the Newsletter of the Real Property Section of the Mississippi Bar.  Reprinted with permission.

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