Banks across the country are slashing consumer charge card limits and home equity lines of credit. But a new Massachusetts court ruling may hamstring local lenders from tightening commercial credit lines. And that’s a decision some Bay State bankers argue will mean even more stringent upfront underwriting, and fewer businesses qualifying for loans.
In an Aug. 26 decision, the Massachusetts Appeals Court ordered Sovereign Bank to pay up to $750,000 to Renovator’s Supply Inc. of Millers Falls. The decorative hardware company sued Sovereign when in 2002 the bank refused to renew a line of credit on the same terms even though it had done so in the past.
The suit was based on Massachusetts’ consumer protection and unfair business acts law, Chapter 93A, which requires in part that businesses disclose information material to a transaction to their customers in a timely way.
It has implications far beyond the specific customer-bank relationship and the relatively small amount of money involved, said industry observers.
“Frankly, I find the judge’s decision to be bizarre,” said one banker who asked not to be identified. “The notion that [the bank doesn’t] have the right to change their credit criteria … I bet you anything this will go further.”
A Sovereign spokeswoman would not say whether the bank intends to appeal. The bank’s attorney, Dennis E. McKenna, of Boston law firm Riemer & Braunstein, did not return a phone call.
The question of how much money in damages it must pay is now back in Superior Court, where the case started. Sovereign has until Sept. 15 to decide upon further action. An appeal would have to be accepted and heard by the state’s highest court.
Ripple Effect
Bank credit officers who hear about the case will be much more vigilant, going forward, some bankers predicted.
“They’ll be telling all their lending officers to send letters to people reminding them when their credit line is expiring and reminding them that past behavior has nothing to do with the future.”
But Peter Smollett, senior commercial lending officer at Hingham Institution for Savings, said the situation never should have happened in the first place.
“This is basic. It’s fundamentals,” he said. “You have to communicate [loan or line term] changes to the borrower, and way ahead of time. There is no excuse for this. Zero.”
The court’s decision won’t affect the way Hingham Savings does business, he said, while noting that he has heard of similar situations between banks and commercial customers at other banks.
Woburn contract law attorney Joseph H. Skerry III represented Renovator’s Supply owners, Claude and Donna Jeanloz. He said he believes Superior Court Judge John A. Agostini, who first heard the case in 2005, was especially concerned that the Sovereign loan officer managing the customer’s $3 million credit line had reservations about continuing it in July 2002, but said nothing to the customers until three days after it expired that November.
“I think that part was interesting to the judge,” he said.
One of the features of renewals on The Renovator’s Supply credit line was that “no one was very fussy about the expiration date,” he added. The Jeanloz’s had drawn against it since 1997 during periods when the loan was technically expired, he said, adding that both Sovereign and previous lender Fleet Bank (part of whose business was purchased by Sovereign in 2000) had honored the draws in prior years.
In November 2002, the company’s owners had written $100,000 in checks against the credit line during the interim expired period, anticipating the credit line would be renewed as it had been in the past, Skerry said.
But the loan officer, who had taken over the Renovator’s Supply account that year, thought that since the credit line was unsecured except by personal assets of the Jeanloz’s, the interest rate should be raised by 1 percent, and a lien on the business’s assets should be attached – terms that were unacceptable to the company’s owners.
Renovator’s Supply lost an estimated $258,000 in holiday catalog sales after its $80,000 check to the post office to mail the catalogues, written during the period when the line of credit had expired, was not honored. The court doubled the amount and added attorney’s fees, plus interest, to make up the $750,000 judgment, Skerry said.
The owners ultimately decided to self-fund their business and eliminate bank credit line relationships at the time, he said, adding that he doesn’t know the company’s present banking relationship status.
