New N.C. Court of Appeals Decision Emphasizes Importance of Loan Document Provisions
by R. Scott Adams
The North Carolina Court of Appeals recently underscored the importance of verifying your bank’s loan documents contain all necessary provisions related to a specific loan, including any forum selection clauses. The lessons learned from this new decision are important to consider when underwriting and preparing documents and agreements associated with complex transactions and when funding deals with other lenders.
In Speedway Motorsports Int’l, Ltd. v. Bronwen Energy Trading, Ltd., et al., No. COA09-558, Slip Copy (February 15, 2008), the Court of Appeals reversed the North Carolina Business Court’s dismissal of a lawsuit based on a forum selection clause requiring that litigation take place in Geneva, Switzerland. The forum selection clause was contained in a letter of credit between Plaintiff and a third-party involved in the lawsuit – not between the Plaintiff and Defendant. Nonetheless, the Business Court said that the third-party claims were closely related to the issues between the Plaintiff and Defendant, and therefore the Swiss forum selection clause operated to require litigation in Geneva.
The Court of Appeals disagreed and referenced the “independence principle” (or “autonomy principle”), which states that every letter of credit involves separate and distinct contracts. Each letter of credit must be viewed separately and independently of any other contracts involved in the transaction.
The take-away for community banks is that in large, multi-faceted transactions, make sure that your documents for the specific loan contain all of the provisions that you require and that you may need in the future. If other lenders are involved in the project, you cannot rely on provisions within their loan documents. If the borrower has multiple loans with your bank, you cannot depend upon provisions in other loan documents to control a given transaction.
As an example, consider a loan made for the acquisition and development of land for a commercial development. The borrower entity might be backed by guarantors or directors with whom your bank has worked before, and another community bank might be involved in funding certain parts of the project. Based on lessons from the recent Court of Appeals decision, your bank’s loan documents with the borrower entity should contain all provisions that you may ever need for the issuance, servicing and collection of the loan. Even if your bank might indirectly benefit from the loan between the borrower entity and the other community bank, any provisions within the documents governing said loan would likely not apply to your loan. Likewise, provisions from other loans that you have issued to the individuals behind the borrower entity would likely not apply to your loan. Therefore, you should be sure that your loan file and final documents contain everything you might need during the life of the loan.
Another lesson to be learned from the recent Court of Appeals decision pertains to choice of venue issues. Although you might not be faced with having to litigate in Switzerland, being forced to file collection lawsuits in other areas of the state can pose an inconvenience and additional costs to your bank. Your loan documents should include a choice of venue provision for the county in which your principal place of business is located or where your attorneys are located. In the event that a loan must proceed to collection, this will ensure that proceedings and mediation occur in a location that is convenient for your bank. Also, you can save travel costs associated with your attorneys having to travel to other counties to litigate the case.
Although this decision was handed down by a North Carolina appellate court, wherever your bank is located, these are important lessons and reminders. It is important for all of us in community banking not to cut corners, not to rely on another party’s documents and not to allow prior dealings to excuse formalities. Be certain that your files contain good and thorough documentation and work to paper your files with specific provisions that will allow you to succeed in the event that litigation arises.