Last week Regions Bank sued Comerica Bank seeking a declaration that Regions is not liable to Comerica in connection with their $53MM syndicate loan to a plant nursery that went very wrong. Regions Bank v. Comerica Bank, civil action 3:14-cv-3607, pending in the United States District Court for the Northern District of Texas.
- The two banks loaned $53MM (total) to the plant nursery based on allegedly massively fraudulent inventory numbers.
- The nursery filed bankruptcy and basically everyone apparently got sued for the alleged fraud.
- Comerica allegedly has been threatening Regions with a lawsuit for misrepresentation or fraud for talking them into the syndicate.
- Rather than wait for the lawsuit, Regions filed its declaratory judgment action.
- In the lawsuit, Regions asserts that Comerica contractually waived any reliance on facts or representations that Regions provided to Comerica. Thus, argues Regions, Regions cannot be liable to Comerica on account of Comerica relying on any information Regions forwarded to Comerica about the borrower.
There are a number of issues related to the lawsuit that are worthy of analysis. (There are also a number of one-liners about money not growing on trees). However, as the case is only a week old it provides a good avenue to illustrate the two levels of reliance waivers in Texas.
What kind of waiver am I talking about? Contracting parties can waive reliance on representations of the other which are not contained in the contract. It seems straightforward – if the representation is not in the contract, then forget I said (or failed to say) anything prior to signing. Why the two levels then?
- The Basic Waiver: The typical waiver of reliance in a contract will essentially say that the parties waive any reliance on non-contractual representations. However, the SCOTX has pointed out that such a contractual provision, like any contractual provision, is subject to avoidance for fraud. Essentially, even if you waive reliance on prior non-contract statements, if someone made a fraudulent misrepresentation that lead to the execution of the contract (without the representation), the contract risks being avoided for fraud.
- The Super Wavier: On the other hand, the SCOTX recognizes that some parties may contractually agree to waive any reliance non-contractual representations, regardless of how fraudulent they might be, if the parties so intended. Thus, the super waiver.
So, which waiver is in your contract? It depends on what the Court thinks you meant when you signed the contract (containing the waiver). Any answer that begins with “it depends” is not a lot of comfort for lender clients and the SCOTX has been somewhat unclear about which is which.
The SCOTX has said that “The contract and circumstances surrounding [the contract’s] formation determine…[how expansive the waiver is]”. Schlumberger v. Swanson, 959 S.W.2d 171. The Court goes on to instruct that lower courts should consider the sophistication of the parties, course of dealings and representation by counsel and, importantly, did the parties intend to put a final end to a long running dispute to determine whether the waiver is basic or super. (Both terms I made up for ease of reading this post so don’t Google them).
I have not parsed through the complaint in the Regions case and Comerica has not yet answered. Also, I am not opining on the merits of either parties’ positions. However, the case provides a good excuse to point out that even if two parties waive any reliance on prior representations, in Texas, that waiver may not be enough to waive claims of fraud. Meaning, the Court may let the case proceed even if a waiver of reliance is contained in the contract regardless of whether the fraud claim is ultimately determined to be without merit.
Lenders should be cautious and deliberate when drafting these waivers of reliance to attempt to remove as much risk as possible that a court will later find that the borrower may sue the lender for fraud.