Pub. 3 2012 Issue 1

www.wvbankers.org 12 Lenders should follow customary practice and act in good faith in enforcing the provisions of credit agreements. I n a recent decision, Mente Chevrolet Oldsmobile, Inc., et al. v. GMAC , the United States District Court for the Eastern District of Pennsylvania (the “Court”) declined to uphold a forbear- ance agreement where the Court found that the lender’s bad faith actions in- duced the execution of the agreement by the borrowers. The Court also held that the lender breached the terms of a credit agreement where the lender failed to follow its customary practice in dealing with the borrowers. Donald Mente owned two car deal- erships in Pennsylvania. Both dealerships operated under franchise agreements with General Motors and obtained financing through Wholesale Security Agreements with GMAC. Mente entered into his first Wholesale Security Agreement (“WSA”) with GMAC in 1982. Under the terms of the WSAs, the borrowers were re- quired to repay GMAC “faithfully and promptly” for all cars sold. The WSAs did not further define “faithfully and promptly” or provide a specific time period for repayment. In 2006, Mente’s relationship with GMAC began to deteriorate. First, GMAC ordered Mente to reduce the number of used cars on his lots and to increase profits. Shortly thereafter, the parties had a dispute relating to the re- volving line of credit GMAC provided to the dealerships. GMAC then gave the dealerships thirty days to reduce a $500,000 line of credit by half despite the fact that GMAC normally allowed ninety days to reduce a credit balance. Two days later, a GMAC agent audited Mente’s Chevrolet dealership and demanded the immediate payment of $317,841.20 for cars missing from the dealership’s lot. At the time of the audit, Mente was unable to pay the sum due because the sole employee responsible for manag- ing the dealerships’ financial records, Donna Johnson, was out of town. Pri- or to leaving, Johnson had informed GMAC of her absence, as she had done in the past, to ensure that an audit would not take place while she was out and to inform GMAC that the dealer- ships would not pay GMAC for any cars sold during her absence. Follow- ing the audit, Mente requested twenty four hours to locate Johnson because he did not have access to the Chevro- let dealership’s financial records and could not issue checks in her absence. GMAC refused to wait and immedi- ately declared the dealerships out of trust. Later that same week, GMAC’s Director of Commercial Lending sent Mente three letters demanding the payment of over $7,500,000.00 by the following day and informing Mente that the failure to make the payment would result in GMAC’s taking pos- session of both dealerships. Mente was unable to make the required pay- ment in Johnson’s absence and GMAC took possession of both dealerships. Following GMAC’s seizure of the dealership assets, the dealerships were unable to meet their financial obliga- tions and were forced to close. A Lender’s “Unclean Hands” Voids the Enforceability of a Forbearance Agreement By Julia A. Chincheck, Bowles Rice