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Court: Franchisee can’t blame bank for bad investment

Court: Franchisee can’t blame bank for bad investment

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Don’t expect a bank to save you from yourself, a Maryland appeals court has told a former franchisee of The Coffee Beanery Ltd.

The Court of Special Appeals rejected the franchisee’s claim that Sandy Spring Bank negligently loaned him the money to invest in the ill-fated cafe.

Richard A. Welshans claimed the bank did not perform due diligence on his investment’s viability before lending him $263,000 in 2003 for the café in Annapolis Technology Park, which closed in 2007.

Such an investigation would have revealed that Coffee Beanery personnel had exaggerated Welshans’ return on his investment, his attorney, Harry M. Rifkin, argued in vain.

Welshans’ “whole argument has a surreal quality to it,” Judge Douglas R.M. Nazarian wrote for the 3-0 intermediate appeals court, which upheld the dismissal of his lawsuit.

“Mr. Welshans submitted financial data to Sandy Spring to support his request for a loan, a request nobody forced him to make,” Nazarian wrote. “The fact that Coffee Beanery may have lied to him does not create a duty on the part of Sandy Spring to discover the lies and save him from himself.”

Welshans’ also alleged that the bank might have in fact known the business would fail, but extended the loan in hope of collecting the collateral, which included a home.

Rifkin criticized the court’s decision Tuesday, saying banks “owe a duty to the borrower” to investigate the viability of the business for which the loan is sought

“The bank knew or should have known that this franchise was not viable,” he said.

Welshans and his business partner, Deborah Williams, “never would have gone forward” if Sandy Spring had rejected the loan, added Rifkin, a Pikesville solo practitioner.

The bank’s attorney, James T. Heidelbach, declined to comment on the case. He is with Gebhardt & Smith LLP in Baltimore.

With the café failing, Welshans and Williams — operating as WW LLC — sued The Coffee Beanery in U.S. District Court in Baltimore on Dec. 15, 2005, alleging the Flushing, Mich.-based company had intentionally misrepresented how the Annapolis café would look and operate and exaggerated their expected investment return.

While admitting no wrongdoing, The Coffee Beanery settled the lawsuit with WW LLC last September for a sum that was “inadequate to cover the full amount of their losses from the opening and operation of the business,” Rifkin said.

Welshans eventually repaid the Sandy Spring Bank loan, but outstanding debts resulting from the failed investment led to the foreclosure of his home, Rifkin added.

Despite his displeasure with the Court of Special Appeals’ ruling, Welshans does not plan to seek review by the Court of Appeals, Rifkin said.

“My clients have had enough of this and want to move on,” he added.

Welshans sued Sandy Spring Bank in Anne Arundel County Circuit Court on Sept. 8, 2011, claiming the bank either breached its duty to investigate the business’ viability before approving the loan or knew the café would fail and approved the loan anyway.

The bank, in court papers, has denied wrongdoing and noted the U.S. Small Business Administration had already given its approval for the loan.

The circuit court granted summary judgment for Sandy Spring on Dec. 4, 2012, saying the bank had no legal duty to investigate because that obligation was not specified in any loan documents. The court also rejected Welshans’ fraud allegation as unsupported by any evidence.

The Court of Special Appeals agreed in an unreported decision last Thursday.

The fraud allegation relied “on a dubious inference” that the bank sought to acquire the collateral rather than recover the loan plus interest as specified in the contract, the court said.

“We struggle to understand how Sandy Spring could have committed fraud against Mr. Welshans by lending him money, even if we assume the supporting data [from The Coffee Beanery] were wrong — after all he was the source (as between him and Sandy Spring) of the data,” Nazarian wrote. [E]ven if the data showed the café would not generate revenues sufficient to repay the loan, there is no evidence that Sandy Spring knew such a result was inevitable.”

The case is Richard A. Welshans v. Sandy Spring Bank, No. 2157, September Term 2012.

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