Pub. 3 2012 Issue 1

spring 2012 13 Following negotiations, GMAC agreed to refund $59,000 of the funds it seized from Mente and the dealerships (collec- tively, the “Plaintiffs”) and agreed to refrain from enforcing its rights against the Plaintiffs for ninety days if the Plaintiffs promised to waive their rights to sue GMAC. The Plaintiffs, who were represented by an attorney, agreed to GMAC’s terms and the parties executed a Forbearance Agreement. Following the end of the forbearance period, the Plaintiffs sued GMAC for breach of the WSAs alleging that GMAC improperly declared the dealerships out of trust. In upholding the jury’s $4,000,000.00 award to the Plaintiffs, the Court held that the doctrine of unclean hands barred the enforceability of the Forbearance Agreement. The doctrine of unclean hands applies “[w]hen a party seeking relief has committed an unconscionable act immediately related to the equity the party seeks in respect to the litigation.” In uphold- ing the jury’s finding that the doctrine of unclean hands barred enforcement of the Forbearance Agreement, the Court considered several factors including (i) the fact that Mente’s Chevrolet dealership had been operating under the same floor plan with GMAC for twenty five years and that during those twenty five years, GMAC had never demanded im- mediate payment of outstanding funds in Johnson’s absence and where, despite this long history, GMAC demanded instant payment and refused Mente’s request for twenty four hours to locate Johnson and to remit payment; (ii) the fact that GMAC’s seizure caused the dealerships to be unable to meet their financial obligations to third parties and their employees; and (iii) the fact that GMAC offered to refrain from pursuing a cause of action against the dealerships that it knew it was not legally entitled to take as consideration for the execution of the Forbearance Agreement by the Plaintiffs. The Court found that GMAC’s improper actions induced the Plaintiffs to sign the Forbearance Agreement. “By declaring the dealerships out of trust and plundering the Plaintiffs’ inventory, GMAC stripped the dealerships of the ability to generate income and access their own money, thereby placing Mente in an untenable financial situation.” The Court found that the doctrine of unclean hands barred the enforce- ability of the Forbearance Agreement where GMAC’s actions “were taken in bad faith for the purpose of shutting down the dealerships” and where GMAC’s bad faith actions caused the Plaintiffs to waive their legal rights. The Court further found that GMAC breached the terms of the WSA by requiring imme- diate payment for any vehicles sold where the evidence showed that GMAC had never demanded same-day payment. Lenders must keep in mind the lessons learned from this case. Following this decision, lenders should ensure that they negotiate with their borrowers in good faith and be cognizant of their customary practices when dealing with their borrowers, especially those who have a long-term relationship with the lender. Q Julia A. Chincheck is a partner in the Charleston office of Bowles Rice and a member of the firm’s Commercial and Financial Services Group. She concentrates her practice on commercial transactions and banking, credi- tors rights and bankruptcy law, with additional emphasis on lender liability and commercial litigation. Should you require more information, please feel free to contact the author, Julie Chincheck, directly at (304) 347-1713 or via e-mail at jchincheck@bowlesrice.com. Resourceful. Responsive. Reliable. Celebrating 25 Years as Your Strategic Partner, Never Your Competitor 804.239.0452 www.CBBonline.com lenders should ensure that they negotiate with their borrowers in good faith and be cognizant of their customary practices when dealing with their borrowers, especially those who have a long-term relationship with the lender.