Lenders Leery as Terminella Case Goes to Trial

The area’s banking industry will be watching closely as the dispute between Fayetteville developer Tom Terminella and Metropolitan National Bank of Little Rock goes to trial Oct. 20 in Washington County District Court.

Judge Kim Smith made a pair of key rulings on Oct. 10 and Oct. 13 that went against Terminella, but Northwest Arkansas bankers will be more concerned if his ultimate decision goes against Metropolitan.

“If bankers don’t feel there is a sound basis for the judgment, yes, it would scare them,” said Tim Yeager, University of Arkansas finance professor and Arkansas Bankers Association chair. “But if they look at the details and see something unusual in the contract terms or something exceptional, it wouldn’t seem like such a big deal.”

A successful action by Terminella could encourage more developers to pursue legal recourse against lenders.

Though the matter is completely unrelated to Terminella, troubled developer Brandon Barber used the legal system to — at least temporarily — stave off the foreclosure sale of his $19.4 million Legacy Building by filing for bankruptcy and suing his lender, Legacy National Bank.

Yeager said more legal disputes between borrowers and lenders will have a disquieting effect on an industry that’s already on edge with the national economy on the ropes and the local real estate market in the midst of an overdue correction.

“There’s no doubt the more litigation there is, lenders will become more gun shy,” he said.

Recapping the most recent events (see below):

On Oct. 10, Smith ruled for a bench trial; Terminella had requested a jury trial. On Oct. 13, Smith ruled that Terminella does not have standing to sue MNB as an individual and limited his damage claims to those incurred by Grand Valley Ridge LLC, which was formed to construct an upscale subdivision in Springdale off Butterfield Coach Road.

In between Terminella’s July 2, 2007, counterclaim and the Oct. 13 rulings have been a series of heated exchanges in court, in depositions and in public:

• On Oct. 31, 2007, a contentious deposition between Terminella lawyer Jim Penick and MNB relationship manager Susan Slinkard ended abruptly when the pregnant Slinkard made a sudden trip to the hospital.

MNB attempted to delay the rest of the deposition until Slinkard gave birth, leading Terminella’s attorneys to question the validity of her health concerns. In December 2007, they served Slinkard with a second subpoena while she was at work and she gave birth prematurely the next day.

• Also in December 2007, MNB sought a gag order against Terminella after a series of stories in the Northwest Arkansas Business Journal. Judge Smith refused the request but chided Terminella’s lawyers for attaching the full text of Slinkard’s deposition to a motion.

• In April 2008, MNB entered into an agreement with the Office of the Comptroller of the Currency, which found “unsafe and unsound practices” at the bank. MNB CEO Lunsford Bridges issued a statement saying the bank was “safe and sound.” Terminella issued a press release blasting MNB and citing the OCC agreement as evidence the bank was doing bad business in Northwest Arkansas.

Bridges issued a statement in response, leading Smith to finally issue a gag order against all parties.

What Smith’s latest ruling means is that Terminella’s $25 million damage claim against MNB has been set aside, likely limiting any potential damages to the projected $8.4 million in profits from a full build-out and lot sales from the project.

GVR includes Terminella, Drs. Tom and Myron Morter of Rogers and Tom Bissmeyer of Colorado. According to loan documents, Bissmeyer was listed as a silent partner in GVR with a 25 percent ownership stake and also provided a $500,000 CD as collateral for the loan.

Decisive Issues

Based on his motion for summary judgment, Terminella’s case rests on proving that MNB breached its agreement to fund the GVR loan, thereby absolving Terminella of liability for the loan going into default.

MNB will argue — again, based on its motion for summary judgment — that it acted in good faith with Terminella at all times, attempted to rework the loans even while under no obligation to do so and in any event could ultimately call the loan at any time because it was a demand promissory note.

One legal expert consulted for this story who would talk only under the condition of anonymity, said the case will hinge on where Judge Smith comes down on Terminella’s breach of contract allegations and Metropolitan’s claim to a superior position created by a demand note.

“You do read good faith restrictions into every contract,” said our expert. “But from the bank’s perspective, you can say that if you don’t let us rely on the demand note, it will undermine this kind of contract.

“We are more touchy-feely today, more protective in the law, so the judge is going to listen to Terminella’s argument.”

Terminella alleges MNB breached its loan agreement on GVR by refusing to fund the balance of the $9.63 million loan (more than $7 million had been drawn in the first year of the note) when he was ready to complete the subdivision in time for Spring 2007.

Terminella alleges that he altered the timing of the development with the full knowledge of MNB during 2006 because of the slowing real estate market. Because the loan only provided funds to pay 12 months of interest carry and Terminella’s only ability to repay the loan was through lot sales, he asked the bank in October 2006 for a modification.

While requesting the funds to complete the project, Terminella also asked MNB to defer his monthly interest payments to a lump sum due at maturity.

Terminella also asked MNB to allow him to use the remaining part of loan funds set aside for interest carry to make his November and December 2006 payments. Because he had slowed the project, he had not drawn down all the funds available for the monthly interest payments.

While Terminella alleges that MNB “refused” this request, the bank’s court filings indicate the bank did indeed allow Terminella to draw down the remaining $94,040 and he paid the $4,761 shortfall.

From January to May 2007, MNB and Terminella attempted to hammer out a modification to the loans. After multiple iterations, Metropolitan’s Washington County president Larry Olson, who helped originate the loans in 2005, thought they had a deal as late as May 24.

When Terminella refused to the modification agreement, Olson fired off an e-mail to Terminella and called the decision an “offensive slap in my face.”

Fallout

Our legal expert agreed there could be repercussions if MNB loses: “If you stick banks with liability, this will keep banks from trying to work out loans. It may make it more likely that a bank will draw a line in the dirt. If the bank starts modifying terms and if I’m representing the bank, I’d say, ‘Look, this gets you in trouble.’

“It would make you careful about every step you took. You may try to work it out, but you’d have to make it clear that [the bank] is not removing any options or taking demands off the table.”

Yeager said he has no doubt banks are already modifying behavior thanks to the Terminella-MNB dispute.

Regardless of the Terminella case, Yeager said, “banks will be watching very carefully and talking with their lawyers, asking, ‘How can we structure these contracts so this doesn’t happen to us?'”

Terminella Timeline

Sept. 13, 2005

Terminella receives $9.63 million, three-year loan from MNB to construct a Springdale subdivision.

Dec. 16, 2005

Terminella receives $4.9 million, two-year loan from MNB to refinance five commercial lots in Bentonville.

Summer 2006

Terminella slows timeline of Springdale project as area real estate market begins decline.

Oct. 20, 2006

Terminella pays MNB $48,182 for the monthly interest due after MNB made 12 previous payments from loan proceeds and begins plans to complete Springdale project in time to market lots in Spring 2007.

Nov. 6, 2006

MNB’s Susan Slinkard reports to loan committee that Terminella has requested a change in terms for his loan to defer interest payments until loan maturity.

Dec. 2006

Terminella does not make semi-annual payment due on Bentonville loan.

Jan. 25, 2007

Terminella inquires of Slinkard as to the status of his request to modify terms of both loans.

March 1, 2007

MNB offers Terminella a workout proposal on both loans, requiring payments totaling approximately $540,000, deferring 50 percent of his interest carry while accelerating the maturity of the loans and leaving them in default status.

March 28, 2007

Terminella hosts a gathering of his creditors, including MNB, and has Jim Lindsey speak on his behalf. After the meeting, Terminella offers Olson $50,000, but Olson tells him the amount will not bring the loans current and if the partners were “cash-strapped” they should use the funds elsewhere.

April 2007

MNB liquidates $500,000 CD held as collateral on the initial loan and supplied by Terminella partner Tom Bissmeyer.

April 13, 2007

Terminella receives a third version of MNB’s workout plan. On April 20, Terminella partner Dr. Tom Morter offers two rent houses and $280,000 in cash to meet MNB’s $540,000 demand. MNB accepts rent houses as collateral.

May 15, 2007

Olson informs Terminella that MNB has drawn up a forbearance agreement to resolve the loans.

May 29, 2007

Terminella refuses to sign forbearance agreement.

May 30, 2007

MNB files for foreclosure on both loans. Olson sends e-mail to Terminella calling refusal to sign agreement a “slap in my face.”

July 2, 2007

Terminella and partners Mark Foster and Tom and Myron Morter file countersuit against MNB claiming $50 million in damages.

Source: court filings