Pub. 6 2016 Issue 1

the construction of homes. Rather, it contended that the Agreement was merely a “guidance line” that left the deci- sion of whether to fund, or not fund, the construction of any individual home up to the bank’s discretion. Although the language of the Agreement did set some conditions on fund- ing, the Court of Appeals held that “the Agreement was as much a loan agreement, i.e., a contract binding on its signa- tories to the lending and borrowing of money, as any loan agreement ever written, notwithstanding Borrower’s obliga- tion to provide certain information to [the bank] before it could make a draw.” Id. at ¶ 14. Thus, the bank’s unilateral decision to “withdraw” from the Agreement without analyz- ing each individual draw request breached the Agreement. Id. at ¶ 13. The Evidence at Trial Establishes Lost Profits The guarantors 2 went on to prove that the breach caused them damages in the form of lost profits. The following three factual findings established lost profits: • First, notwithstanding the bank’s termination of the Agreement in July 2008, Borrower remained current until October 2008. The bank’s own records showed that Borrower’s progress on construction in August 2008 was “acceptable.” Id. at ¶ 26. Thus, the trial court found that the Borrower would have performed but for the bank’s withdrawal. • Second, notwithstanding the automatic expiration of the Agreement in December 2008, the trial court de- termined that the bank would have extended the loan as it would have been in the bank’s economic interest to do so. With extra time, the trial court determined that Borrower would have sold all the homes but for the bank’s withdrawal. Id. at 30. • Third, the bank’s own appraiser offered evidence that home sales in Flagstaff remained consistent through- out 2009, which would have allowed the Borrower to sell homes at a rate sufficient to service the loan and make Borrower a profit. Id. at ¶ 38. Thus, the trial court concluded that the Borrower would have made a profit in the aggregate amount of somewhere between $2,808,000 and $3,500,000. Id. at ¶ 37. Guarantors Prevail at Trial and on Appeal Because the lost profits exceeded the amount of the asserted deficiency, the trial court declined to enter any judgment against the guarantors and awarded them their attorneys’ fees and costs. On appeal, the bank argued that the lost profits were, at best, speculative, but the Court of Appeals declined to disturb the trial court’s findings of fact. Thus, the Court of Appeals affirmed and – again – awarded the guarantors their fees and costs. Conclusion There are a couple of interesting things to learn from this decision. First, the case provides a stark reminder to banks to perform a thorough review of their loan documents before asserting a breach. Second, although the notion that anyone could have made a profit by developing homes in Arizona in 2008-2009 is somewhat counterintuitive, the trial court’s conclusion was supported by evidence (from the bank’s own appraiser) – and therefore very unlikely to be disturbed on appeal. See id. at ¶ 38. It appears that the bank attempted to rebut the evidence by arguing that “the loss was more likely caused by a declining economy rather than a breach of the Agreement.” Id. at ¶ 38. Although this argument seems accurate, banks should remember to confront every defense, even if it seems incredible, with specific evidence. w Ben Reeves is a partner in the Bankruptcy, Reorganization, and Insolvency Group at Snell & Wilmer, L.L.P. 2The trial court ruled that Restatement (First) of Security § 133 (1941) allowed the guarantors to assert Borrower’s offset, and neither party contested this ruling on appeal. 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. 21 ISSUE 1 . 2016