Pub. 6 2016 Issue 1

Guarantors’ “Lost Profits” Completely Offset Lender’s Deficiency Claim By BEN REEVES B E LIEVE IT OR NOT, LENDERS CAN BREACH LOAN AGREEMENTS TOO…AND WHEN THEY DO, THERE CAN BE SIGNIFICANT consequences. In Great Western Bank v. LJC Dev., LLC, 726 Ariz. Adv. Rep. 21 (Ariz. Ct. App. Nov. 10, 2015), the Arizona Court of Appeals affirmed that guarantors’ “lost profits” resulting from the lender’s breach of a loan agreement completely offsets the amount owed under a guaranty. Much can be learned from this unusual outcome. The Loan Agreements In Great Western Bank, the bank’s predecessor entered into an acquisi- tion and development loan (the “A&D Loan”) with Cedar Ridge Investments, LLC (“Borrower”) in May 2007 to allow Borrower to acquire a fifty- home subdivision in Flagstaff, AZ. In January 2008, Borrower entered into a second agreement with the bank to fund the actual construction of homes (the “Agreement”). The Agreement expired on December 1, 2008. The Bank Decides to Cease Funding Construction Loans In July 2008, the bank made an internal decision to cease all construc- tion financing in Arizona. Accordingly, the bank advised Borrower that it “was withdrawing from the Agreement.” Id. at ¶ 4. The Borrower attempted to obtain alternative financing but, as will come to no surprise to those who lived through the Great Recession, was unable to do so. The bank ultimately foreclosed. The Litigation The bank sued the guarantors for an approximate $2.6 million deficiency, but the guarantors counterclaimed, asserting that the bank’s refusal to fund the Agreement constituted an anticipatory repudiation of the contract, breached the covenant of good faith and fair dealing, and gave rise to damages for lost profits. The Evidence at Trial Establishes Breach of Contract At trial, the bank argued that the Agreement did not obligate it to fund 20 www.azbankers.org