28 August 2014
Practice Groups:
Financial Institutions
and Services
Litigation
Restructuring and
Insolvency
Banking & Asset
Finance
North Carolina Supreme Court Clarifies the
Enforceability of Waivers and Releases of Claims
and Defenses in Forbearance Agreements
By Brian Fork
On August 20, 2014, the North Carolina Supreme Court issued an opinion clarifying the
enforceability of waivers and releases of claims and defenses granted by borrowers and
guarantors in forbearance agreements. RL REGI N.C., LLC v. Lighthouse Cove, LLC, No.
427PA13, 2014 WL 4087899 (N.C. Aug. 20, 2014). With little prior guidance from that
state’s highest court on pre-litigation negotiations between lenders and borrowers, the
holding will be welcome news to lenders in North Carolina and illustrates the value of a
properly documented forbearance agreement.
Court Upholds Enforceability of Release of Guarantor’s Claims Contained in
Forbearance Agreement
In Lighthouse Cove, Regions Bank provided over $4 million in financing for the acquisition
and development of approximately 57 acres of real property. The loan was secured by the
real property and the personal guaranties of the borrowers’ individual business partners and
their spouses. Three years after the initial funding of the loan and execution of the
guaranties, the borrowers defaulted on the loan, and the parties entered into a forbearance
agreement. The forbearance provided that the lender would forgo exercising its remedies
under the loan documents for a defined time period in exchange for certain agreements from
borrowers and guarantors, including a “Waiver of Claims” section, whereby the borrowers
and guarantors specifically waived and released any claims that the lender failed to act in
good faith or conduct itself in a reasonable manner, and generally released the lender from
“any and all claims, defenses and causes of action” that occurred prior to the date of the
forbearance agreement. The loan was later purchased by RL REGI North Carolina, LLC.
After the expiration of the forbearance period, the borrowers again defaulted on the loan, and
the lender filed a lawsuit against the borrowers and guarantors seeking recovery of the
outstanding indebtedness under the loan. Connie S. Yow, one of the guarantors, asserted as
an affirmative defense to collection that her guaranty was obtained in violation of the Equal
Credit Opportunity Act (“ECOA”), a set of federal guidelines prohibiting lenders from requiring
a spousal guaranty without first finding that the applicant spouse is not independently
creditworthy. The trial court found that the guaranty violated the ECOA and denied recovery.
The N.C. Court of Appeals affirmed the trial court, finding that the waiver of claims contained
in the forbearance agreement could not waive the defense that the guaranty was obtained in
violation of the ECOA.
The North Carolina Supreme Court reversed the Court of Appeals, finding that the trial court
improperly allowed the guarantor to assert a defense that she waived under the forbearance
agreement, thus depriving the lender of its rights under the forbearance agreement.
Specifically, the Court held that parties are free to waive various rights, including those
North Carolina Supreme Court Clarifies the Enforceability of Waivers and
Releases of Claims and Defenses in Forbearance Agreements
arising under statutes. Although the guarantor did not specifically waive the ECOA defense
in the forbearance agreement, the Court found the “comprehensive language contained in
the agreement” and “overall expansive language of the waiver” to be sufficient to include any
potential claim or defense. Ultimately, the Court stated that “a waiver of potential defenses to
the guaranty, including a potential defense for a violation of the ECOA, was a part of
defendant’s decision to accept the benefits of the forbearance agreement.”
Conclusion
The Lighthouse Cove decision sends a very clear signal from North Carolina’s highest court
that waivers and releases contained in forbearance agreements, modifications, and other
loan documents will be enforced by North Carolina courts. Lenders should be diligent in
properly documenting forbearance agreements, modifications, extensions and other
restructuring documents to include adequate waiver and release language to protect
themselves from affirmative liability and limit defenses to collection based on prior acts.
The decision is also a reminder to lenders to strategically evaluate the use of forbearance
agreements and modifications as opportunities to obtain lender protections and reduce risk
throughout the life of a loan.
Author:
Brian Fork
Brian.Fork@klgates.com
+1.919.743.7351
Anchorage Austin Beijing Berlin Boston Brisbane Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt
Harrisburg Hong Kong Houston London Los Angeles Melbourne Miami Milan Moscow Newark New York Orange County Palo Alto Paris
Perth Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco São Paulo Seattle Seoul Shanghai Singapore Spokane
Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington
K&L Gates practices out of 48 fully integrated offices located in the United States, Asia, Australia, Europe, the Middle East and South
America and represents leading global corporations, growth and middle-market companies, capital markets participants and
entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and
individuals. For more information about K&L Gates or its locations, practices and registrations, visit www.klgates.com.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in
regard to any particular facts or circumstances without first consulting a lawyer.
©2014 K&L Gates LLP. All Rights Reserved.
2