In its Oct. 30, 2013 decision in General Electric Capital Corporation v. Tartan Fields Gold Club, Ltd., et al., 2013-Ohio-4875, the Fifth District Court of Appeals made clear that a lender does not waive its right to enforce its rights upon the borrower’s default merely entering into negotiations to restructure a loan; the court further held that the lender’s enforcement of its default rights during negotiations is not an act of bad faith. The court also relied on longstanding Ohio precedent that without more, a lender does not have a fiduciary relationship with a borrower.

In 2007, Tartan Fields Golf Club, Ltd. borrowed $13.3 million from GECC and secured the loan with a mortgage on its Delaware County golf course development. When Tartan Fields approached GECC in early 2009 about renegotiating the loan, GECC required that Tartan Fields sign a “Pre-Negotiation Agreement” that provided, among other things, that Tartan acknowledged that GECC had no fiduciary, confidential or special relationship with GECC; the Pre-Negotiation Agreement also gave both parties the unilateral right to terminate negotiations with three business days’ notice to the other party in their sole discretion and contained an integration clause.

Tartan Fields signed the Pre-Negotiation Agreement on May 5, 2009 but did not make its May 1, 2009 loan payment, either on time or within the five-day grace period, leading to an event of default under the Loan Agreement permitting GECC to accelerate the loan. By a letter dated May 13, 2009, GECC gave Tartan Fields written notice that it had accelerated the loan, and filed its complaint in foreclosure on May 29, 2009. Tartan Fields filed an answer and asserted counterclaims for breach of the Pre-Negotiation Agreement, breach of the duty of good faith and fair dealing and fraudulent failure to disclose material information.

The trial court granted GECC summary judgment on its claims and on Tartan Fields’ counterclaims, and Tartan Fields appealed, arguing that the trial court erred in finding that GECC did not breach the Pre-Negotiation Agreement by filing the foreclosure complaint without giving Tartan three business days’ written notice. The appellate court agreed with the trial court’s reliance on the plain language of the Pre-Negotiation Agreement, which did not contain any language consenting to Tartan Field’s failure to make a payment or otherwise modify the loan documents; the appellate court also agreed with the trial court’s reliance on the parol evidence rule to bar reliance on communications not in the Pre-Negotiation Agreement.

The appellate court pointed out that the Pre-Negotiation Agreement provided that GECC did not waive its rights under the loan documents; that all terms of the loan documents remained in full force and effect during negotiations and that GECC did not have to formally terminate negotiations before enforcing the terms of the loan documents.

Tartan also argued that there was a material issue of fact whether GECC truly intended to renegotiate the terms of the original loan agreement when it entered the Pre-Negotiation Agreement because it never intended to present a loan modification to its loan committee for approval. The appellate court construed this as an allegation of fraud by failure to disclose, and held that i for GECC to have committed such a fraud, it had to have had a duty to disclose arising from a fiduciary or other similar relation of trust and confidence with Tartan. The court did not find such a relationship, holding “[g]enerally, the relationship between a creditor and debtor is not a fiduciary one, but is governed by freedom of contract.” Citing Kohl v. National City Bank, 5th Dist. Tuscarawas No. 05AP05033, 2006-Ohio-2031, ¶ 23, citing Stone v. Davis, 66 Ohio St.2d 74, 419 N.E.2d 1094 (1981). In addition, GECC had acknowledged in the Pre-Negotiation Agreement that the parties did not have a “fiduciary, confidential or special relationship.”

The court rejected Tartan’s final claim that GECC’s initiation of a foreclosure during negotiations was a breach of the duty of good faith and fair dealing, holding that enforcing a mortgage, even during negotiations, is “not an act of bad faith”. {¶ 27}.

The Tartan case is a strong reminder to lender’s counsel to enter into a pre-negotiation agreement that, at the very least contains these terms:

  •  The parties do not have a fiduciary, confidential or special relationship;
  • Both parties have the unilateral right to terminate negotiations in their sole discretion with written notice of a specified length;
  • By entering into negotiations, the lender is not waiving any existing or future defaults;
  • The loan documents remain in full force and effect; and
  • An integration clause.