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  • WisBar News
    December 15, 2010

    Contract's merger clause helps bank succeed in dispute over Wisconsin Towers project

    Dec. 15, 2010 – A merger clause in a bank's lending agreement barred a real estate firm from obtaining breach of contract damages for the bank's failure to extend additional loan amounts for a condominium project in Milwaukee, the Wisconsin Supreme Court recently held.

    Contract’s merger clause helps bank succeed in dispute over Wisconsin Towers project

    Town Bank gave City Real Estate LLC a commitment letter for $9 million for a condominium project in Milwaukee. But a subsequent agreement only provided for $2.5 million. In a recent opinion, the Wisconsin Supreme Court ruled that a merger clause in the subsequent agreement nixed the commitment letter.

    By Joe Forward, Legal Writer, State Bar of Wisconsin

    Contract's merger clause helps bank succeed   in dispute Wisconsin Towers projectDec. 15, 2010 – A merger clause in a bank’s lending agreement barred a real estate firm from obtaining breach of contract damages for the bank’s failure to extend additional loan amounts for a condominium project in Milwaukee, the Wisconsin Supreme Court recently held.

    In March 2004, City Real Estate Development LLC (City Real Estate) sought a loan from Town Bank to purchase and convert the 22-story Wisconsin Tower into residential condominium units. Town Bank signed a commitment letter for a total of $9 million advanced in two phases, $2.5 million to purchase the building and $6.5 million for construction of the condo units.

    The commitment letter required City Real Estate to meet certain conditions prior to closing of the loan, which it failed to do. Primarily, the commitment letter required City Real Estate to execute and return a credit agreement by a certain date in June 2004 and contribute equity capital of $900,000 prior to closing.

    Subsequently, the parties entered into a “term credit agreement” (TCA) in July of 2004. Under that agreement, Town Bank promised to lend City Real Estate $2.5 million to purchase the building. Town Bank informed City Real Estate that the prior commitment of $6.5 million was no longer effective, and additional financing would have to be reapproved.

    Meanwhile, City Real Estate lost a potential commercial tenant and its condo pre-sales were lower than expected. Town Bank informed City Real Estate that it should seek alternative financing for the condo construction phase, which it did. A month after Town Bank lent the $2.5 million pursuant to the TCA, City Real Estate repaid the debt in full.

    Lawsuit

    In January of 2006, Town Bank sought a declaratory judgment that under the TCA, it was not obligated to provide City Real Estate with additional financing beyond the $2.5 million. City Real Estate counterclaimed, alleging a breach of contract for failing to extend an additional $6.5 million under the initial commitment letter.

    The Milwaukee County Circuit Court denied Town Bank’s summary judgment motions and the case proceeded to jury trial. The jury awarded City Real Estate $600,000 for breach of contract.

    Town Bank appealed, and the appeals court reversed, concluding that the TCA was unambiguous, and in any event, City Real Estate did not meet the conditions stated in the initial commitment letter. City Real Estate appealed to the Wisconsin Supreme Court, which affirmed the appeals court ruling.

    In Town Bank v. City Real Estate Development LLC, 2010 WI 134 (Dec. 14, 2010), the supreme court majority – in an opinion written by Justice Annette K. Ziegler – affirmed 5-2 that the parties’ TCA foreclosed City Real Estate’s attempt to introduce evidence of Town Bank’s prior agreement to extend an additional $6.5 million to fund the project.

    Merger clause

    The TCA included a “merger clause,” which stated that the agreement was intended “as a final expression” of the agreement between Town Bank and City Real Estate “and as a complete and exclusive statement of its terms.”

    This merger clause foreclosed the possibility that the TCA was not a final expression of the parties’ intent, and thus “precluded City Real Estate from introducing evidence of any prior understandings or agreements that may have existed between the parties, including the commitment letter,” the majority explained.

    In addition, unlike the circuit court, the supreme court majority concluded that the TCA was unambiguous and, therefore, only the TCA – not the commitment letter or any other agreements – could be considered in construing the contract between the parties.

    Further, the majority rejected City Real Estate’s argument that the TCA did not unambiguously exclude the commitment letter because it did not expressly negative the commitment letter or the two-phase nature of the financing.

    “City Real Estate’s interpretation of our case law necessarily implies that hereinafter, lenders – or all contract drafters, for that matter – would be obligated to expressly identify and exclude in their contracts any prior oral or written communication between the parties that may rise to the level of an agreement, lest risk its inclusion within the contract,” Justice Ziegler wrote. “We refuse to impose such an unnecessary and cumbersome burden on contract drafters.”

    Under the four corners of the TCA, Town Bank met its obligation to lend $2.5 million, the majority concluded. Because Town Bank fully complied, Town Bank should have been granted summary judgment, and even assuming the commitment letter constituted a separate and enforceable contract, City Real Estate did not meet all of its conditions, the majority noted.

    Dissent

    Chief Justice Shirley Abrahamson and Justice Ann Walsh Bradley dissented. Bradley penned the dissent, arguing that the majority’s analysis “introduces uncertainty in the lending process and creates uncertainty in well-established law.”

    The implication of the conclusion that the TCA’s terms precluded consideration of the commitment letter is that “any written contract with an unambiguous integration clause necessarily supersedes all existing agreements between the parties, unless the integration clause specifically references an existing agreement,” Bradley explained.

    Instead of a case in which one agreement supersedes another, the dissent agreed with the Wisconsin Bankers Association – which filed an amicus curie brief – that the TCA and the commitment letter agreement were distinct agreements and should be interpreted separately.

    “The majority’s conclusion that the court is barred from considering the Commitment due the TCA’s [merger] clause … introduces uncertainty in contractual relationships … and may yield undesirable and unforeseen consequences” Bradley wrote.

    Bradley noted that a party that signs one contract “may put into question” other outstanding agreements between those same parties, under the majority’s analysis.

    Attorneys

    Thad Jelinske and Michael Anderson of Mawicke & Goisman S.C., Milwaukee, represented City Real Estate Development LLC. Paul Erickson and Kari Race of Gutglass, Erickson, Bonville & Larson S.C., Milwaukee, represented Town Bank.



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