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From Banking and Finance Law Daily, February 21, 2014

Conditioning loan on purchase of unrelated property could be illegal tying requirement

By Richard A. Roth, J.D.

A bank that required a borrower to buy property that secured a bad loan as a condition of receiving a business investment loan would have violated the Bank Holding Company Act prohibition on anticompetitive tying arrangements, a federal district court has said. If the bank engaged in the conduct alleged by the borrower, it will be liable for treble damages (Halifax Center, LLC, v. PBI Bank, Inc., Feb. 18, 2014, McKinley, Chief U.S. District Judge).

Transaction history. According to the borrower’s complaint, the transaction began with his request for a $6 million loan to finance his purchase of a promissory note from the Department of Housing and Urban Development. The note was secured by a mortgage on a Chicago, Ill., apartment complex. The borrower said that the bank agreed to make the loan but, after he had become contractually obligated to HUD, told him the loan would be made only if agreed to buy an unrelated property on Halifax Drive in Owensboro, Ky. (the Halifax property).

The bank told the borrower that it held a mortgage on the Halifax property and the loan was in default, the borrower said. That gave the bank the ability to direct the owner to complete the sale.

The bank’s written credit memorandum for the note purchase loan said expressly that the loan was conditioned on the borrower’s purchase of the Halifax property, he said. The borrower financed the Halifax purchase with a separate loan from the bank, which included a partial personal guarantee and other provisions that were advantageous to the bank. According to the borrower, he and the bank signed a purchase agreement for the Halifax property on the same day the loan to buy the note from HUD closed. That agreement was signed by the bank, he noted, not by the property owner.

A year later, the borrower wanted to borrow more from the bank for the Chicago property. He claimed that, as a condition of the additional credit, the bank required him to renegotiate the Halifax property loan at a higher interest rate and to personally guarantee the entire loan.

Tying arrangement claim. The borrower subsequently sued the bank, complaining that the bank’s actions violated the BHCA ban on tying arrangements. As far as is relevant to the claim, the statute prohibits a bank from conditioning an extension of credit on the borrower’s agreement to obtain additional property from the bank, or to provide additional property or services to the bank in a way that is not usual in connection with a loan (12 U.S.C. §1972).

The bank asked the judge to rule that, even if it had done precisely what the borrower claimed, it had not violated that ban. The judge disagreed.

Tying arrangement analysis. The judge began by noting that there were three elements to a claim of an unlawful tying arrangement under the BHCA. At this point in the case, the borrower had to describe actions by the bank that:

  • tied the note purchase loan to the acquisition of the property in an anticompetitive manner;

  • were not usual or traditional in banking; and

  • benefitted the bank.

The facts alleged by the borrower satisfied all three requirements, the judge said.

The borrower’s claim that he was required to buy the Halifax property as a condition of the note purchase loan described a tying arrangement, the judge first said, noting the explicit inclusion of the requirement in the bank’s own credit memorandum. The bank’s reliance on the fact that it was not the seller of the Halifax property was irrelevant, the judge said. The bank coerced the borrower into participating in its bad loans, and that was an anticompetitive tying practice.

Requiring the borrower to relieve the bank of a nonperforming loan to an unrelated customer was not a usual or traditional banking practice, the judge said.

The bank’s course of conduct alleged by the borrower would have benefitted the bank by erasing a bad loan, allowing the bank to avoid the expense of a foreclosure, and eliminating the possibility that the bank would end up owning the Halifax property, the judge said. Moreover, since the Halifax property purchase price was said to have been set at precisely the unpaid balance of the bank’s loan secured by the property, the borrower asserted that he paid more than the property was worth in order to fully retire the nonperforming loan.

Waiver. The bank also was unable to convince the judge that the borrower waived his tying arrangement claims when he later renegotiated the note purchase loan. First, the documents relating to the renegotiation did not include any express waiver, the judge said.

Neither was there any showing of an implied waiver, he continued. While a defense to a loan might be waived by continuing to make payments, the borrower was not attempting to stop the bank from collecting the loan. Rather, he was asserting a separate statutory cause of action. There was no reason to conclude that this separate cause of action was waived by renegotiating the loan.

The case number is 1:13CV-00071-JHM.

Attorneys: Charles E. English, Sr. (English, Lucas, Priest & Owsley LLP) for Halifax Center, LLC.

Companies: Halifax Center, LLC; PBI Bank, Inc.

MainStory: TopStory BankingOperations Loans KentuckyNews

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