Great Western Bank v. LJC Development, LLC – 11/10/2015

November 19, 2015

Arizona Court of Appeals Division One holds that a construction financing agreement is a binding commitment and not just a guideline for future financing at the lender’s discretion where the agreement’s express terms obligate the lender to make loans to the borrower.

Great Western Bank terminated its construction loan agreement with a real estate developer prior to the agreement’s expiration.  The developer was unable to secure alternate financing for the project and defaulted on the loan.  Great Western foreclosed on the loan, sold the property, and sued the developer’s guarantors for the remaining loan balance.  The developer’s guarantors counterclaimed, arguing they were entitled to offset and affirmative relief for lost profits resulting from Great Western’s anticipatory repudiation and breach of the implied covenant of good faith and fair dealing. 

Great Western argued that the agreement was not a binding commitment to finance the development, but merely a “guidance line” for future financing at Great Western’s discretion. After a bench trial, the superior court disagreed, holding that Great Western breached the loan agreement by unilaterally terminating financing without conducting case-by-case review of the developer’s loan requests.

Great Western appealed, challenging the trial court’s interpretation of the agreement and the sufficiency of the evidence regarding breach and lost profits.   

The Court of Appeals affirmed.  It held that the agreement was a binding commitment, even though loan requests under the agreement were subject to case-by-case approval.  The Court of Appeals noted that the agreement was titled “Loan Agreement,” identified Great Western as “Lender” and the developer as “Borrower,” and obligated Great Western to “make the Loans” contemplated by the agreement and developer “to accept such Loans.”  Citing established contract principles, the court refused to construe the agreement as an uncommitted loan facility, which would render the language in the agreement meaningless. 

The Court of Appeals similarly refused to second-guess the trial court’s factual determinations, concluding that sufficient evidence supported its findings as to Great Western’s breach and the developer’s lost profits.

Judge Jones authored the opinion; Judges Howe and Swann joined.