Case Law Update: Modifications to Loan Agreements

Our firm routinely handles claims by contractors, lenders, and property owners involving construction defects, delays, and contract disputes.  Many times,  parties to a construction loan or development agreement modify the terms of the original agreement.  The terms of these modifications—and how they affect the parties’ obligations—are often disputed.

A recent opinion from the North Carolina Court of Appeals clarifies a foundational principle of contract law in the context of a mixed-use construction project.

The Facts

In French Broad Place, LLC v. Asheville Savings Bank, the plaintiff, French Broad, developed a construction project in Western North Carolina. The project was a four-story building with office and retail space, restaurants, and residential condominium units. French Broad selected the defendant, a construction lender, to finance the project.

In December 2007, the parties executed a loan commitment, which required the defendant to loan French Broad $9,950,000 for the project. The commitment contained several conditions. For instance, it required the defendant to seek funding for a minimum of $2,000,000 from a participating bank. Before the loan closed, the defendant informed French Broad that it was not able to obtain this funding and would only be funding $7,750,000 of the $9,950,000 specified in the loan commitment. The defendant also asked that French Broad seek a replacement lender for the un-funded $2,000,000.

Before the loan closed, French Broad commenced construction on the project, racking up various contractor liens. The loan closed in August of 2008 for $7,750,000. The parties executed a written loan agreement that was secured by a promissory note and a deed of trust in favor of the defendant.

The First Modification Agreement

In November of 2008, French Broad submitted a modification request to the defendant, seeking additional funds in the amount of $725,801. The defendant approved, and the parties agreed to modify the loan agreement, increasing the total loan amount from $7,750,000 to $8,475,801. However, French Broad alleged that the bank wrongfully delayed approving the modification for several months.

In March 2009, the defendant started to refuse to finance the continued construction of the project. At this point, three businesses were set to open in the building, and initial residential condo sales were months away from closing. The defendant also refused to provide take-out loans that it supposedly agreed to provide, which French Broad claimed ultimately caused the project to fail for lack of funding.

The Second Modification Agreement

In June of 2009, the parties executed a second modification agreement, modifying the note, deed of trust, and loan agreement to read as follows:

The total amount of all funds disbursed by Lender to Borrower to date under said Note, CLA [Construction Loan Agreement] and Deed of Trust, as amended by the LMA [Loan Modification Agreement] and Modification of Deed of Trust . . . is $8,475,801. There are presently no Construction Loan funds left to be disbursed. [Emphasis added.]

The Lawsuit

French Broad filed a complaint against the bank in December of 2011, alleging various breach of contract claims. The bank filed a motion to dismiss and a counterclaim seeking payment in full on the promissory note that secured the loan agreement. The defendant also moved for summary judgment on all claims and won. French Broad appealed from this judgment.

The Court’s Analysis: Breach of Contract

First and foremost, French Broad alleged the parties’ agreement required the defendant to provide $9,950,000 in funds for initial financing, instead of the $7,750,000 that defendant actually provided upon the loan’s closing. The Court disagreed.

When the parties closed their loan in August of 2008, their agreement included a merger clause that read as follows:

By signing this document each party represents and agrees that: (A) The written loan agreement represents the final agreement between the parties, (B) There are no unwritten oral agreements between the parties, and (C) The written loan agreement may not be contradicted by evidence of any prior, contemporaneous, or subsequent oral agreements or understandings of the parties.

In other words, the written loan agreement superseded any and all prior agreements between the parties, including the loan commitment. As such, the loan agreement’s provision for $7,750,000 in financing superseded the earlier loan commitment’s provision for $9,950,000.  The Court also referenced the parties’ two written modifications to their loan agreement, whereby French Broad agreed there were no “defenses, offsets, or other claims” regarding any of the parties’ agreements or modifications.

Based on the terms of the loan agreement and the two modifications, the bank was not required to provide $9,950,000 in initial financing. The Court noted that even if the bank was obligated to provide $9,950,000 under the loan agreement, French Broad waived any claims it may have had against the defendant by signing the written modification stating that “the total amount of all funds disbursed by Lender to Borrower to date under said Note, CLA, and Deed of Trust, as amended by the LMA and Modification of Deed of Trust . . . is $8,475,801” and “there are presently no Construction Loan funds left to be disbursed.” In agreeing to these modifications, French Broad destroyed its opportunity to hold the bank responsible for an increased loan amount.

The Modification Request

French Broad also alleged that the defendant breached the loan agreements by wrongfully delaying its approval of French Broad’s modification request. The Court stated that the loan agreement did not require the defendant to loan any more funds to French Broad, and so the defendant did not act wrongfully in delaying French Broad’s request. The parties’ modification stated:

[A]t the request of Borrower, Lender agreed to lend Borrower an additional $725,801.00 by increasing the amount of the Construction Loan from $7,750,000 to $8,475,800.00. To reflect this increase in the amount of the Construction Loan, Borrower and Lender entered into a Change In Terms Agreement dated January 23, 2009 increasing the amount of the Construction Loan, and the principal amount of the Note, from $7,750,000.00 to $8,475,801.00.

The Court concluded that through this language, French Broad specifically waived any claim that the defendant breached the loan agreement by delaying further funding.  In other words, the loan agreement and related modifications together establish that there was no genuine issue of material fact regarding the defendant’s alleged breach. Between traditional principles in contract law and French Broad’s willfully signing various modifications, it ultimately fell on its own sword.

Cases like these can be complex and confusing, particularly when a loan agreement or contract has been modified multiple times. No matter how much money is at stake, it is critical to engage a skilled lawyer to help you navigate a dispute. If you have questions about the law governing your commercial contract, let us know.


If you would like to read the Court’s full opinion, it can be found here. To learn more about our firm’s construction litigation practice, click here.

This article does not establish an attorney-client relationship and must not be construed as legal advice.

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