The Deal is Off? What to Do When Your Lender Backs Out in Bad Faith

Your business has spent months working toward a critical goal: securing financing for an expansion, an acquisition, or a major new project. You have a commitment letter in hand. You have made plans, entered into agreements with vendors, and informed key stakeholders, all in reliance on your lender’s promise to fund. Then, without warning, you get the call: the bank is pulling the financing.

For any business owner, this scenario is a nightmare. But when the lender’s reasons seem flimsy, pretextual, or completely unrelated to the terms of your agreement, you may be facing more than just a broken deal. You may be a victim of lender liability based on a breach of the covenant of good faith and fair dealing.

The Duty of Good Faith and Fair Dealing

Underlying every contract in Wisconsin is an implied covenant of good faith and fair dealing. This is a foundational principle in commercial law that, while not precisely defined, requires that neither party do anything that will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.

Even when a loan agreement gives a lender “discretion” to make certain decisions, that discretion is not absolute. The bank must exercise its judgment honestly, fairly, and in a manner consistent with the reasonable expectations of both parties. It cannot use its contractual power arbitrarily or for a malicious purpose.

Recognizing Bad Faith: Common Red Flags

It can be difficult to distinguish between a lender exercising legitimate business judgment and one acting in bad faith. However, certain actions should raise immediate concern. A lender may be acting in bad faith if it:

• Uses a Pretext: Cites a minor, technical default (e.g., a late-filed document) that it would normally waive as a reason to terminate a multi-million dollar credit facility.
• Invents New Conditions: Suddenly demands new, burdensome, or impossible-to-meet conditions right before the closing date that were never part of the original term sheet or commitment letter.
• Misuses a “Material Adverse Change” Clause: Declares a “material adverse change” (MAC) has occurred to justify pulling financing when there has been no genuine, substantial downturn in your business’s financial health or prospects.
• Acts on an Ulterior Motive: Terminates your financing not because of a legitimate concern about your creditworthiness, but because the bank wants to exit a particular industry, reduce its portfolio in your region, or give a better deal to one of your competitors.

Essentially, if your lender’s actions feel like an attempt to engineer a default or create an excuse to escape its funding obligation, you should investigate further.

Protecting Your Business: Critical Next Steps

If you suspect your lender has pulled your financing in bad faith, you must act decisively to protect your rights and mitigate your damages.

1. Preserve All Documentation: Immediately gather and secure all communications with the lender. This includes emails, letters, meeting notes, and records of phone calls. A clear, documented timeline is your most powerful tool.
2. Scrutinize Your Agreements: Work with your legal counsel to perform a detailed review of the commitment letter, loan agreement, and all related documents. Understand exactly what the contract permits and forbids.
3. Calculate Your Damages: The harm caused by a lender’s bad faith withdrawal goes far beyond the loss of the loan itself. Damages can include lost profits from the scuttled project, harm to your business’s reputation, out-of-pocket expenses incurred in reliance on the loan, and the cost of securing more expensive replacement financing.
4. Seek Legal Counsel Immediately: Lender liability claims are complex and fact-intensive. Engaging experienced commercial litigation counsel is essential to assess the viability of your claim, engage with the lender from a position of strength, and, if necessary, pursue legal action to recover the damages your business has suffered.

A lender’s commitment to provide financing is not merely a suggestion; it is a contractual obligation. When a bank breaches that obligation in bad faith, it can and should be held accountable.