When a contract between two loan servicing corporations contained a drop-dead date specifying that it could not be extended past June 2018, the district court erred in granting one corporation an injunction that kept the contract in force past the drop-dead date. The appellate court found that interpreting the contract as the district court did would have trapped one party in the contract with no way to extricate itself and that this outcome could not have been the intended outcome of the agreement.
BankDirect Capital Finance and Capital Premium Financing both participate in the market for loans to finance insurance premiums. In 2010, Capital Premium exhausted the line of credit that funded its operations. It approached BankDirect with a request for operating capital. BankDirect was willing to purchase the loans that Capital Premium made, and to pay Capital Premium to service those loans while they were outstanding, but it demanded a right to purchase Capital Premium’s business outright after five years.
Capital Premium agreed to the terms and the contract went into force in December 2010. The option to purchase could be exercised near the fifth anniversary. If BankDirect elected not to purchase Capital Premium, then either side could extend the term by notice given before Jan. 4, 2016; otherwise, the deal would wrap up on Jan. 31, 2016. Any extension could not exceed the contract’s drop-dead date, June 1, 2018, after which neither side would have any obligation to the other.
BankDirect exercised the purchase option in November 2015, but Capital Premium refused to honour it. BankDirect then filed suit under diversity jurisdiction, seeking to enforce the option to purchase. Capital Premium counterclaimed, demanding an injunction that would require BankDirect to continue purchasing the loans and paying it to service them. BankDirect continued dealing with Capital Premium through May 2017, when it seized several of Capital Premium’s accounts and stated that it would no longer buy any loans from Capital Premium.
The district court concluded that Capital Premium was entitled to a preliminary injunction requiring BankDirect to continue business with Capital Premium in the same way it had been doing earlier while it resolved the dispute on the merits. The district court did not, however, address the significance of the June 2018 termination date. BankDirect then appealed.
The appellate panel began by finding that the original injunction should have had a termination date of June 1, 2018. The panel stated that the district court may have concluded that the termination date in the contract was invalid when BankDirect attempted to buy Capital Premium. However, the panel noted, because Capital Premium refused to honour the transaction, the parties remained in an arms’-length business transaction, and therefore the drop-dead date in the contract retained its significance. The panel noted that if the termination date was not honoured, BankDirect would effectively be trapped in a contractual agreement with Capital Premium with no way to extricate itself and that this result could not have been contemplated as an outcome of the agreement. The panel determined, therefore, that judgment should have been entered for BankDirect, and that the district court needed to perform a calculation of damages on remand.
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