Many lending transactions are commenced by a lender sending a customer inquiring about the possibility of a loan what is commonly called a "proposal letter." The letter may in fact be titled as such. The expectation of the lender is that following negotiations with the prospective customer a commitment letter would be isued setting forth the final terms and conditions for the transaction. In no event does the lender expect the outline of terms set forth in the proposal letter to be the final binding agreement of the lender to extend credit to the borrower.
In the case of Clardy Manufacturing Co. v. Marine Midland Business Loans, Inc., 88 F3d 347 (CA5 1996) a lender received a crash course in what can happen if a prospective borrower claims that the proposal letter actually bound the lender to make the loan which the letter described. There the parties had been discussing potential financing for a year and a half before negotiations began in earnest and the lender issued a proposal letter. Marine commenced doing its due diligence on Clardy Manufacturing and a territory manager for Marine decided not to recommend the proposed loan for approval to the home office. The Marine loan officer who had been negotiating with the company then conveyed this information back to Clardy.
Clardy eventually brough suit alleging breach of contract, fraudulent misrepresentation, negligent misrepresentation and promissory estoppel. At a non-jury trial the district judge found in favor of Clardy on the breach of contract claim and awarded damages in the amount of $8,111,467. The district court determined that the letter constituted a "performance contract" which bound Marine to make the loan if Clardy satisfied all of the conditions set forth in the letter. The court found that the language found on the letter stating that "THIS PROPOSAL LETTER IS NOT A COMMITMENT TO LEND" was undercut by the loan officer's use of language elsewhere in the letter. Specifically, the court found that the loan officer had intentionally omitted certain language which the Marine loan policy manual required to included in such letters in order to make the letter sound "more binding."
The omitted language provided in part that "..this letter is not a binding commitment of [borrower] or [Marine], nor does it define all of the terms and conditions of the financing but is a framework upon which the documentaion for this transaction shall be structured , and is a basis for further discussion and and negotiation of the terms as may be appropriate. The credit shall be subject to due diligence review of the business and financial affairs of [borrower].."
On appeal the Fifth Circuit reviewed th letter and found that it was not ambiguous even with the recommended Marine language omitted. The court noted that the letter states that its purpose is to set forth the term and conditions under which Marine "would be willing to consider" extending the credit and further provided that "[i]f the Credit Facilities are approved and Funded" the borrower would be required to pay certain fees. The conditional nature of the proposed deal is further underlined by language stating "Non-Binding Proposal Only: Due Diligence Required." Clardy argued that this language merely established that the letter did not become binding until all of the conditions set forth in the letter had been satisfied. The court disagreed and noted that the letter stated that it would be dependent, of among other things, the completion of the enumerated items. The Marine credit approval process then clearly consisted of more items than just those set forth in the letter.
Loan officers should be cautioned that not to "soften" proposal letters in order to make them sound more palatable to borrowers. This is a typical response by loan officers who do not want to offend propsective borrowers with all of the official sounding language prepared by inside or outside counsel. The truth of the matter is that the clients are sophisticated businesspeople who understand the need for precision in drafting legal documents.
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