Where limitation of liability clause in loan participation agreement was sufficiently prominent to be enforceable, the lead lender could be liable only for breaches of contract resulting from gross negligence or willful misconduct; participant’s contract right to require lead lender to repurchase loan on default was not an unenforceable liquidated damages clause. 2010-1 SFG Venture LLC v. Lee Bank & Trust Co., No. A15A0271, 2015 WL 4114064 (Ga. Ct. App. July 9, 2015).
The lead lender for a defaulted commercial real estate loan brought an action for breach of a participation agreement against a participant bank after the participant failed to pay its pro rata share of expenses incurred to secure and maintain the value of foreclosed property securing the debt. The participant counterclaimed for breach of the agreement and rescission, arguing that the expenses incurred were grossly unreasonable and that the lead lender was in breach of the participation agreement because it failed to notify the participant of “material adverse information.” Id. at *2. The lead lender moved for summary judgment based on an express limitation of liability provision in the participation agreement, which limited the lead lender’s liability for any action taken with respect to the loan “except in the case of gross negligence or willful misconduct.” Id. at *2. The trial court denied the motion, determining that the limitation of liability provision was unenforceable because it was not prominently displayed in the agreement.
On appeal, the Court of Appeals of Georgia reversed, finding that the limitation of liability clause was enforceable. Under Georgia law, because an exculpatory clause may amount to an accord and satisfaction of future claims and waive substantial rights, its enforceability requires it to be “explicit, prominent, clear and unambiguous.” Holmes v. Clear Channel Outdoor, Inc., 644 S.E.2d 311 (Ga. Ct. App. 2007). In determining whether a limitation of liability clause is sufficiently prominent, a court may consider a number of factors, including whether the clause is contained in a separate paragraph, whether it has a separate heading, and whether it is distinguished by features such as font size. Though font size is one of many important factors, it is not determinative of prominence. See Grace v. Golden, 425 S.E.2d 363, 365 (Ga. Ct. App. 1992) (holding that an exculpatory clause placed after the legal description in a security deed and in the same font as the legal description was nevertheless prominent because the drafters had not intended to “camouflage” the provision to prevent it from being detected). Here, because the clause in favor of the lead lender was contained in its own paragraph, announced in bold font and underlined text by a heading that clearly informed the reader of the content (“Limitation on Liability of SFG”), the court held that the clause was sufficiently prominent. The court further noted that the agreement indicated that both the lead lender and the participant helped draft the participation agreement. The limitation of liability clause therefore had all the hallmarks of “a reasonable allocation of risks in an arms-length business transaction.” 2010-1 SFG Venture LLC, 2015 WL 4114064, *4 (citing RSN Properties, Inc. v. Engineering Consulting Servs., Ltd., 686 S.E.2d 853 (Ga. Ct. App. 2009)).
The court also held that the limitation of liability clause limited the lead lender’s breach of contract liability to only those breaches arising from conduct constituting gross negligence or willful misconduct. The participant argued that the lead lender had breached specific terms of the agreement that did not reference the limitation of liability clause. Although the court found that certain clauses of the agreement set forth circumstances that would constitute a breach of the agreement, the court concluded that those clauses must be read in conjunction with the limitation of liability clause. Accordingly, conduct might constitute a breach of contract, but it would not result in liability and be a compensable breach unless the breach resulted from conduct constituting gross negligence or willful misconduct.
Finally, the court rejected the lead lender’s argument that a clause that required the lead lender to repurchase the participant’s interest in the loan upon material default under the loan, constituted an unenforceable liquidated damages clause. The court found that the repurchase clause did not limit recovery for a breach to a specified amount; instead, it gave the participant an “option” to demand that the lead lender repurchase its interest “in addition to all the other remedies available to it at law or equity.” Id. at *9. Therefore, the lead’s failure to repurchase the participation interest upon proof of a material loan default constituted an independent breach of the agreement that would entitle the participant to pursue damages.
