In MERV Properties, L.L.C. v. Forcht Bancorp., Inc. 2015 WL 5827775, 61 BCD 170 (Bankr. 6th Cir. 2015), the 6th U.S. Circuit Bankruptcy Appellate Panel (BAP) affirmed summary judgment entered by the bankruptcy court for the Eastern District of Kentucky in favor of defendant bank on plaintiff borrower’s fraud and collusion claims.

In MERV Properties, L.L.C., plaintiff, a limited liability company, obtained a loan from the bank for the purpose of purchasing and renovating a mall. The loan was guaranteed by four guarantors: two individual members of plaintiff LLC, a corporate member of the LLC and a nonmember spouse. After plaintiff purchased the mall, it defaulted on the loan, and the bank filed a foreclosure action. During the foreclosure proceedings, the parties entered into a forbearance agreement that contained a broad release by plaintiff and the guarantors in favor of the bank. The sole shareholder of the corporate guarantor signed the forbearance agreement on behalf of plaintiff as borrower and on filed for Chapter 11 bankruptcy. The bankruptcy court confirmed plaintiff’s plan, but plaintiff defaulted on its obligations to the bank under the plan. The bank subsequently foreclosed on the mall. Following the foreclosure, plaintiff commenced an adversary proceeding against the bank, the sole shareholder of the corporate member and one of the individual guarantors, alleging fraud and collusion. The bank moved to dismiss.

In granting summary judgment in favor of the bank, the bankruptcy court ruled that the release was valid and enforceable. On appeal, plaintiff argued that there were genuine issues of material fact regarding the validity of the forbearance agreement and the release contained therein. In particular, plaintiff claimed that the forbearance agreement was not properly authorized by plaintiff, that it was induced by fraud, and that it was unconscionable.

In addressing the merits of plaintiff’s arguments, the BAP explained that absent a recognized exception, such as fraud or unconscionability, the release in the forbearance agreement was a valid contract between the bank and plaintiff. The BAP found that the bank met its initial burden of showing that the forbearance agreement on its face appeared to be a valid contract between the parties, supported by adequate consideration. The BAP noted that the forbearance agreement was signed by three members of plaintiff and ruled that the bank reasonably relied on the members’ apparent authority to execute the agreement on plaintiff’s behalf.

The BAP rejected plaintiff’s argument that the members of plaintiff could not bind plaintiff to the forbearance agreement because they had “adverse interests” to plaintiff. The BAP explained that the adverse interest exception did not apply because the forbearance agreement benefitted plaintiff. Further, the record did not show that the bank facilitated or colluded with any fraud or theft by members of plaintiff. In addition, the BAP noted that the only evidence of the bank’s role in any fraud or collusion were vague allegations that the bank failed to follow reasonable banking practices.

Finally, the BAP found that there was no support in the record for plaintiff’s claim that the forbearance agreement was unconscionable. Accordingly, the BAP affirmed summary judgment in favor of the bank and further ruled that the release in the forbearance agreement covered any and all claims.