The Tennessee Court of Appeals, Middle Section: SK Food Corporation, et al. v. FirstBank, Case No. M2016-01019-COA-R3-CV, filed 02/28/2017, recently had the opportunity to consider whether a party, faced with a “take it or leave it” proposition from a lender in negotiations for a loan to allow the party to work out of its financially stressed situation, could avoid the commitment fee on the proposed loan on the basis of economic duress.  The Court said “no.”

As a preliminary matter, the Court first held that the lender did not breach the commitment letter by failing to close the loan.  The commitment letter required the borrower to provide a “first lien” on the real property that was to serve as collateral for the loan. But, the borrowers had already encumbered the property with another loan that could not be removed or subordinated.

In response to the lender’s motion for summary judgment, the borrowers submitted affidavits that they executed the commitment letter “without a proper review or consideration of the information presented” and that the proposed commitment letter would be withdrawn if not accepted that day; they further stated that they were in “financial distress and facing foreclosure” by another lender.

The Court found that summary judgment for the defendant lender was appropriate, there being no material issues of fact as to the allegation of duress.  “Duress” is defined as “a condition of the mind produced by the improper external pressure or influence that practically destroys the free agency of the party, and causes him to do an act or make a contract not of his own volition, but under such wrongful pressure,” and that it requires “unlawful restraint, intimidation, or compulsion that it overcomes the mind or will of ordinary persons.”

The Court assumed that the borrowers were in financial difficulty, as alleged, but found that the “take it or leave it” offer was not a wrongful act establishing economic duress. It noted that Restatement (Second) of Contracts § 176 cmt. a (1981) provided that an ordinary contractual offer commonly implies a threat by the offeror not to enter into the contract unless his terms are accepted; such terms are “an accepted part of the bargaining process.”  Finally, the Court noted that there was no evidence that the lender had caused the borrower’s financial distress.