Client Alerts
February 09, 2011

Kentucky Court Reverses $10 Million Lender Liability Verdict

by Stites & Harbison, PLLC, and Client Alert

The Kentucky Court of Appeals recently reversed the largest Kentucky lender liability jury verdict in recent memory. The decision reversed a jury verdict from the Jefferson Circuit Court awarding a real estate investor over $1.6 million in compensatory damages for fraud and $9 million in punitive damages, but left intact the trial court judgment in favor of the bank for $1.6 million of loan principal and interest and $350,000 in attorneys’ fees.

The dispute arose out of a $3.5 million loan by Bank of Louisville in 2002 to a real estate investor and his wife, secured by numerous residential properties. By 2006, the investor was in perpetual default on his loan payments, and the parties entered into a forbearance agreement, which among other things, extended maturity and authorized an auction of properties to pay down the debt. The forbearance agreement contained standard provisions, including a release of the bank from any existing claims. When the auction proceeds did not satisfy the debt, the bank foreclosed on the remaining properties.

The investor counterclaimed, charging that the bank had defrauded him from the very beginning of the relationship. He argued that his claims were not barred by the forbearance agreement because it had been sent by email, he hadn’t read it, only “scrolled through it – up and down,” and then printed and signed it. The trial court agreed, finding that the investor had adequately pled “fraud in the inducement” and should not be held to familiar forbearance agreement provisions, such as “this is the entire agreement,” “there are no oral representations,” and “borrower waives trial by jury.” Importantly, the trial court held the investor was not bound by the forbearance agreement’s provisions regarding a full release of all existing claims in exchange for a loan modification and extension of maturity date. The investor was allowed to testify that the bank officer had orally summarized the agreement for him, but left out these key terms. The trial judge sent the case to the jury, who entered a $10.6 million verdict in the investor’s favor.

The Court of Appeals analyzed the trial transcript in detail and focused on the investor’s testimony that, even before the forbearance agreement, he had concluded that the bank had defrauded him and “destroyed” his business. In Kentucky, to prove fraud a plaintiff must show “reasonable reliance” on the alleged critical false statements. Here, the Court of Appeals found that any reliance by the investor could not have been reasonable. If the investor already believed that the bank had defrauded him, then he should have obtained the advice of a lawyer or at least read the forbearance agreement before executing it. Accordingly, the Kentucky Court of Appeals reversed the judgment for the investor. The Court left the $1.95 million award in favor of the Bank intact.

The decision overturns a troubling precedent and endorses a number of customary forbearance practices and provisions. Branch Banking and Trust Company v. Thompson is presently designated “not to be published,” and the time to petition for discretionary review to the Kentucky Supreme Court has not yet run.

If you have any questions, please contact Richard A. Vance at [email protected].

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