VRP Law Group, P.C.

A Boutique Business, Employment and Intellectual Property Law Firm

Commercial Loan Documentation Practices of Lenders and Bankers: The Good, the Bad and the Ugly!

Most commercial banks and lenders utilize laser pro or commercially available loan documents for most typical loans. However, there is a tendency to issue and send various letters and amendments to the promissory note throughout the process that often can create a misunderstanding, a lack of meeting of the minds and ambiguities in the interpretation of the promissory note and/or any associated guarantees.

In a recent case, the Lender had issued two letters of credit, executed a promissory note, and a guarantee without taking the time to cross-reference the documents and fully incorporating the borrowing bases in both all documents. The total amount of the loan or the line of credit was increased from 2 million to 2.6 million, but without incorporating the changes in the letter agreement and the original promissory note in the Additional Terms section. Thus, the bank was essentially an unsecured creditor or lender for the excess or increase in the amount of the line of credit from 2 million to 2.6 million, because that amount was only secured against 75% of the accounts receivables.

Unfortunately, the integration provision and the letters were not explicitly referencing the borrowing bases and the Additional Terms section of the new commitment letter did not incorporate the increase in the line of credit and reference additional collateral. This created a problem when the bank went to enforce the original note, because it did not reference the change or increase in the line of credit. Without this change being explicitly incorporated into the promissory note and cross-referenced in the letters of credit and the amendment increasing the borrowing base, the bank was essentially unable to secure the full amount of the line of credit against the accounts receivables or the borrower’s other assets.

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