One of the ironic issues for failing banks has been the fact that banks that they have had to continue to deal with their borrowers and depositors in the ordinary course of business even though they are already in the queue for resolution by the FDIC. So for example, loans continue to get renewed and documents executed. What happens if you renew a loan shortly before the bank fails, do you have some sort of defense to enforcement of the loan when the successor bank or the FDIC makes demand on you? The Georgia Court of Appeals recently dealt with a set of facts like these in the case of CSS Real Estate Development I, LLC v. State Bank & Trust. CSS Real Estate had entered into a credit relationship with The Buckhead Community Bank d/b/a The Alpharetta Community Bank in February of 2007 to obtain funding to purchase land and construct a hotel.  There were three guarantors on the loan. In October of 2008 the borrower and the guarantors (the “obligors”) agreed to sell the project to Enville, Inc. but they all remained liable as guarantors. A year later the loan came up for renewal and the parties executed new guaranties two days before the bank failed. The FDIC was appointed receiver and sold the assets, including the loan in question, to State Bank & Trust. In July of 2011 that bank sent default letters after payments on the loan were not made and later filed suit to collect the loan.

The borrower and the guarantors responded by claiming that  The Buckhead Community Bank had engaged in fraud and breached a fiduciary duty by concealing the fact that it was about to fail. The trial court granted State Bank & Trust’s motion for summary judgment for judgment on the note and the guarantees. On appeal the obligors asserted that they had been fraudulently induced into renewing the loan and reaffirming the guarantees. They argued that they would have waited to negotiate directly with the FDIC or the successor bank and that their guarantees should be voided due to “bad acts” by The Buckhead Community Bank in failing to keep them informed about the impending receivership of the bank.

The court of appeals began its legal analysis by noting that once a bank has established the facts that a party signed what appears to be a valid guaranty, the guarantors must establish a defense to payment to avoid liability. Fraud is one of the types of defenses that would be sufficient if proven. Under Georgia law fraud requires that a party prove that the defendant knowingly made a false statement to cause the complaining party to act or refrain from acting. The party must also show that it was reasonably justified in relying upon the statement and that it suffered damages as a result. Each of the elements must be established.

At the core of the complaint by the obligors was that they suffered some sort of undefined damages by renewing the loan in the manner that they did. Presumably they felt that they could have struck a better deal with the FDIC or the successor bank. The court found that there was no evidence in the record that the obligors would have acted any differently if they had known about the impending bank failure. In fact, from a practical standpoint, they may have actually received a better outcome by having the loan renewed. Nor could the court find any damages that they suffered due to the renewal. The court held that bare conclusions about possible negotiations with the FDIC that were unsupported by an evidentiary basis cold not form the basis of a claim for fraud and the judgment against the obligors was affirmed.