Court holds that seller in failed information-technology business deal cannot sue buyer’s lender for breach of loan commitment

This case arose from the unsuccessful sale of a Houston-area information-technology company which will be referred to as the target. The target’s seller agreed to sell his target stock to another Houston-area information-technology company, which will be referred to as the buyer. Seeking financing for the purchase, the buyer’s owner met with the president of a banks division that handled federal Small Business Administration (SBA) loans. The buyer’s owner selected the bank because he and the buyer already had an ongoing banking relationship with the bank.

At their first meeting in September of 2007, the buyer’s owner explained to the bank that a sense of urgency existed, and he needed to close on the loan by year’s end because the target’s seller was anxious to sell the target and already had pending offers from other interested buyers. The bank told the buyer’s owner that the bank could close the loan by then because the bank was a preferred lender and had streamlined the SBA-lending process. The bank issued a commitment letter to finance the acquisition.

Unfortunately, things did not go as planned. Over the next fourteen months, the bank scheduled and postponed numerous closings. By November 2008, the loan still had not closed, and the buyer’s owner decided to seek financing elsewhere. Ultimately, the buyer’s owner never obtained a loan and the buyer never acquired the target. By the time of trial in March 2013, the target no longer had any employees and had essentially failed.

The buyer’s owner contends that the bank never gave the transaction the attention it required. According to the buyer’s owner, the bank repeatedly made promises that the loan would close, each of which was followed by misrepresentations about why the bank could not keep those promises. After promising in September 2007 to close the loan by the end of the year, the bank said in November that it might take until early January 2008. In December 2007, the bank said the loan was in approval, and the buyer’s owner understood it would still be completed by year’s end. In early January 2008, the bank encouraged the buyer’s owner to hold tight; it’s not over til it’s over. In late February, the bank said the closing would occur in early March. In April, the bank told the buyer’s owner that the bank could commit to closing the loan in April or May if the buyer reduced the loan amount. In late June, the bank said it would close no later than July 15. On July 28, the bank promised to close on August 4. On August 6, the bank sent an email saying it had to change some things, and although it was not his happiest hour, . . . the loan will get done. Finally, after the buyer’s owner complained to the banks senior vice-president, the bank told the buyer’s owner that the loan was approved. By October, however, no closing was scheduled, and the bank was still promising that the loan would close soon.

Throughout these months, the buyer’s owner and the target’s seller became increasingly agitated, but the buyer’s owner did not want to start the process over with another bank. Meanwhile, the buyer’s owner and the target’s seller had informed the target’s employees of the impending ownership change and were putting something in place for the transition, but the continuing delays and increasing uncertainty caused employees to leave. Morale at the target was going downhill. In November 2008, the buyer’s owner retrieved his file from the bank, but he returned it a few days later because the bank promised it would find some way to get the loan done. Although the bank’s SBA division president took steps to determine whether another bank would provide the loan, he told others at the bank that the loan was a dead deal and never scheduled another closing date.

The target’s seller sued the bank in October 2009 alleging that the target’s seller was a third-party-creditor beneficiary of the loan commitment letters executed by the buyer and the bank. At trial in 2013, the jury found the bank liable to the target’s seller for breach of contract, awarding the target’s seller $1 million as breach-of-contract damages.

The bank appealed, and the Texas Supreme Court reversed. The Texas high court concluded that the agreement between the bank and the buyer is unambiguous and did not make the target’s seller a third-party beneficiary. Not being an intended third-party beneficiary of the buyer/bank agreement meant that the target’s seller could not sue the bank for breach of contract.

The court held that the bank commitment letters’ references to the loan’s purpose—to finance the buyer’s purchase of an existing business—does not mean that the bank and the buyer intended to confer some benefit to the seller of the stock of the business. Meaning that nothing in the loan-commitment letters clearly, fully, and unequivocally expresses the buyer’s and bank’s intent to contract directly for the target’s seller’s benefit and thus to confer on the target’s seller the right to be a claimant in the event of a breach of the commitment letters by the bank.

This case is referred to as First Bank v. Brumitt, No. 15-0844, Supreme Court of Texas, (Opinion delivered: May 12, 2017)

Comment. One of the major risks in selling a business is that the buyer will not be able finance the purchase.  The certainty of financing is almost as important as the price when evaluating an offer. This risk was higher during  the timeline of this failed deal which happened as the financial crisis unfolded.

By John McCauley: I help people start, grow, buy and sell their businesses.



Telephone:      714 273-6291

Posted in financing acquisition issues, third party beneficiary clause

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