Firm Wins Trial to Enforce Client’s Loan, Defeating Borrower’s Defense of Commercial Frustration

Adam Rabin and Havan Clark represented firm client, Steve Earsley (“Plaintiff”), who recently prevailed at trial in a case styled Steve Earsley v. Joseph A. Petri, Case No. 20-6949, in the Fifteenth Judicial Circuit in Palm Beach County, Florida. Plaintiff was an investor in a privately owned substance abuse treatment center in Palm Beach County, who made a personal loan to the center’s CEO. The purpose of the loan was to assist the CEO in funding a capital contribution that would help avoid dilution of his membership interest in the center when it began bringing in new investors to stay financially afloat.

Plaintiff sued the CEO (“Defendant”) for breach of a promissory note and breach of a pledge agreement but voluntarily dismissed the claim for breach of the pledge agreement. In response to Plaintiff’s claims, Defendant initially alleged four affirmative defenses, then withdrew three of them, and went to trial only on his affirmative defense of commercial frustration.  Defendant’s commercial frustration defense alleged that Plaintiff could not enforce his promissory note against Defendant because Plaintiff knew that Defendant’s sole funding source to repay the loan would be his receipt of member distributions from the center, but Plaintiff interfered with the center paying such distributions to Defendant.

After a two-day bench trial, Fifteenth Judicial Circuit Judge Richard L. Oftedal rejected Defendant’s commercial frustration defense and entered final judgment for Plaintiff in the amount of $337,938.41, including principal and prejudgment interest.

In rejecting the defense of commercial frustration, the Court first determined that even if Defendant’s allegations were true that Plaintiff took steps to prevent the center from making member distributions to Defendant, Plaintiff’s conduct did not rise to the level of commercial frustration. The Court reasoned, in part, that Florida courts have been reluctant to excuse a contractual obligation when a party to the contract caused the intervening event. The Court further reasoned that the doctrine of commercial frustration is not intended to allow contracting parties to blame one another for nonperformance and then to be excused from their contractual obligations. Instead, the Court concluded the doctrine exists “only for those unique and extraordinary circumstances where an unforeseeable risk at the time of the formation of the contract later manifests and totally frustrates or destroys the purpose of the agreement.”

As a second basis for rejecting Defendant’s commercial frustration defense, the Court ruled “there was an insufficient evidentiary basis from which the Court can conclude that [Plaintiff] embarked on [a] course of action with the specific intent of frustrating [Defendant’s] ability to satisfy the Note.” Instead, the Court found that it was ultimately Defendant’s failure to fund his pro rata share during several capital raises that caused the dilution of his membership interest and contributed to his inability to repay Plaintiff’s loan.

After obtain the final judgment for Plaintiff, Plaintiff moved to recover attorney’s fees and costs, which remains pending.