A creative attempt by a borrower to forestall foreclosure and recover damages against its lender ended badly for the borrower, with the borrower and its counsel being sanctioned.

In Nantasket Management, LLC v. Velocity Commercial Capital, LLC, 2024 WL 3552668 (D. Mass. July 26, 2024), the borrower (“Nantasket”) sued the lender (“Velocity”), seeking to enjoin foreclosure of rental properties and to recover damages. After Nantasket had defaulted on its loans from Velocity, the parties discussed refinancing, and Velocity had conditionally approved refinancing pursuant to conditional term sheets (the “Conditional Refinance”). The term sheets stated, among other things, that the proposed loan terms were only “conditionally approved” by Velocity, that they “do not represent a promise to lend,” that they are “subject to [Velocity’s] underwriting, appraisal review, and quality control standards,” and that a “decision to approve [Nantasket’s] loan application can only be made by [Velocity’s] credit department upon completion of [its] internal underwriting process.” 

Velocity ultimately decided not to proceed with the refinancing, informed Nantasket that its application had been denied and noticed foreclosures on the rental properties. Nantasket promptly sued Velocity in state court, asserting claims for breach of contract, promissory estoppel, breach of implied covenant of good faith and fair dealing, and unfair and deceptive business practices. Nantasket also filed a motion for a preliminary injunction to stop the foreclosures. Velocity removed the case to federal district court and filed a motion to dismiss the complaint and for sanctions. The court denied the injunction, dismissed the complaint in its entirety, and granted sanctions.

As to the breach of contract claim, pointing to language such as that quoted above, the court found that “[t]he unambiguous language of these documents plainly demonstrates that Velocity did not agree to lend money to Nantasket or promise to do so, and that the documents did not grant [Nantasket] final approval for a refinancing loan.” As to the promissory estoppel claim, the court found that “[b]ecause the relevant documents’ plain language precludes any promise to lend, … relying on them for the existence of a contract to lend would be unreasonable.” The claims for breach of the implied covenant and unfair business practices met a similar fate.

Granting Velocity’s request for sanctions under federal Rule 11, the court found that, given the language quoted above and other indications that no loan had been agreed, “no reasonable attorney would prosecute or defend the Complaint based on the legal theory that the Conditional Refinance documents were an actual agreement to lend.” Nantasket also relied on allegations of “surprise” that Velocity was denying the refinancing; the court found these allegations to be demonstrably false in view of Velocity’s written communications over several months. The court awarded Velocity its reasonable attorneys’ fees and costs for the litigation.

As we've previously written, lender liability remains a litigation risk under certain circumstances.  However, the Nantasket case shows that a borrower is best advised to be cautious about asserting a lender liability claim where there is written documentation rendering the claim implausible.