Are Loan Documents Enforceable In Wisconsin?

Three recent decisions call attention to the fundamental issue of the extent to which courts will enforce loan agreements and guaranties in accordance with their terms rather than imposing uncertain standards of fairness, equity, or good faith. The Second Circuit recently held that equitable remedies cannot be used to challenge the actions of a lender that acted within its rights under a loan agreement. See Gaia House Mezz LLC v. State Street Bank and Trust Co., 12-2481-CV, 2013 WL 2500579 (2d Cir. June 12, 2013). In Gaia House, after a number of defaults and loan modifications, the lender, State Street, notified the borrower, Gaia House, that it would not be waiving accrued interest in accordance with the loan agreement. After Gaia House obtained financing from another lender to pay off its loan to State Street, including the disputed accrued interest and fees, it brought suit alleging that State Street was not entitled to such interest and fees. According to the court, there was no question as to whether Gaia House defaulted on its obligations or whether State Street was entitled to demand the accrued interest under the loan agreement. The only question before the court was whether equitable considerations should be imposed instead of the express terms of the contract. The Second Circuit found that State Street's actions did not give rise to a claim of equitable estoppel, the covenant of good faith and fair dealing cannot be used "to imply an obligation inconsistent with the other terms of a contractual relationship," and equity need not intervene to prevent "contracted-for financial consequence[s]" under a loan agreement. The United States Supreme Court and the Seventh Circuit have come to similar conclusions. See US Airways, Inc. v. McCutchen, 133 S.Ct. 1537, 1546-47, 1549-50 (2013) ("A valid contract defines the obligations of the parties as to matters within its scope, displacing to that extent any inquiry into [equitable considerations]." (citation omitted)); Continental Bank, N.A. v. Everett, 964 F.2d 701, 705 (7th Cir. 1992) ("Gap-filling methods such as good faith do not 'block use of terms that actually appear in the contract'." (citation omitted)); Market Street Assocs. v. Frey, 941 F.2d 588, 593-94 (7th Cir. 1991) ("[I]t is unlikely that Wisconsin wishes, in the name of good faith, to make every contract signatory his brother's keeper ..."); Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir...