What is Lender Liability?
Lender liability is alleged to have occurred when a borrower or prospective borrower sues a lender for breach of contract, violation of state or federal statutes, or other wrongful behavior. A lender (bank or other financial institution) may incur liability when it has failed to act in good faith, taken a controlling interest in a borrower’s business operations, misrepresented or withheld material facts, or otherwise broken the law as it relates to the borrower. In such instances, victims of lender liability may seek legal counsel and turn to the courts for relief from the enforcement or even recover damages. Such lawsuits usually require the services of a lender liability expert witness to evaluate the practices of the lender against industry and legal standards.
The law on lender liability has evolved over several decades. In the past, litigation typically only occurred when a lender was seeking to enforce a debt obligation; however, current lender liability standards and regulations allow borrowers to hold lenders accountable as well.
There are several liability theories that determine when a lender will be responsible to a borrower. These include where a borrower alleges liability based on:
- Claims in contract;
- Claims in tort;
- Common law claims; and
- Statutory provisions.
Claims in Contract
Claims in a contract are among the most commonly litigated lender liability claims. These claims typically relate to allegations of a breach concerning pre-loan conduct, conduct during loan administration, and conduct when the loan is in trouble. Examples of these claims include:
- Failure to honor obligations under a commitment letter or term sheet, i.e., failing to lend after the loan commitment becomes binding;
- Charging different rates than those contained in the agreement;
- Failing to extend a loan or rejecting loan payments;
- Improper reaction to loan default, i.e., improper foreclosure on collateral; and
- Breach of the covenant of good faith and fair dealing, i.e., the unconscionable exercise of discretion by the lender.
The occurrence of any of these actions, however, may not be conclusive evidence of lender liability. Determining if a breach has occurred may require the involvement of a lender liability expert witness.
One issue that commonly arises in these claims is the effect of parol evidence on the written lending contract. Although the general rule is that oral evidence is not admissible to contradict certain written contracts, there can be exceptions to this rule. One of these exceptions is where the “course of dealing” between the parties shows an intention to be bound on different or additional terms not contained in the agreement.
Claims in Tort
Claims in tort are founded on civil wrongs that arise out of the lender’s behavior. Examples of these claims include:
- Fraud or misrepresentation: Knowing misstatement or withholding of material facts that the lender has a duty to disclose. An example could involve inducing a borrower to purchase an overvalued property from the bank at foreclosure so that the bank can avoid a loss on a bad loan.
- Negligence: Breach of the lender duty of care that leads to damage such as financial trouble for the borrower. Although the general rule is that a lender does not owe a duty of care, this will only be the case if the lender does not go beyond their scope as a traditional lender. An instance of this might be if an employee of a lender, who is not a licensed financial adviser, provided investment advice.
- Economic duress: Where a lender threatens a borrower with actions that they do not have a legal right to take, economic duress may result. An example might be if a banker told a developer, who is a customer, to sell lots at a substantial discount to one of the banker’s family members who want to build homes, or else the bank might freeze the developer’s line of credit.
Any such claims may require the services of a lending tort expert witness.
Common Law Claims
One of the most prevalent common law claims in lender liability litigation is the breach of fiduciary duty. A fiduciary duty is owed in a relationship – where one party is deemed to owe special duties to the other and must take special care of their interests. Some examples of fiduciary relationships include that of a doctor and patient. Or, a lawyer and the client.
While the general rule in lender-borrower relationships is that no fiduciary relationship exists, there are instances where the contrary may be shown. For example, when a lender offers tax or legal advice, it may be held to have a fiduciary duty to the borrower.
One of the principles usually considered in determining if a fiduciary relationship exists is whether the transaction was conducted “at arm’s length.” Special circumstances that may indicate that the lending transaction was not arm’s length could include but are not limited to:
- The lender decides which payment obligations should be met and when. If a lender placed one of its employees in a customer’s office and decided which bills to pay or took a role in determining who is hired and fired could be enough to make the lender a fiduciary.
- The lender provides advice on a business deal structure, how much inventory should be kept on hand, setting prices for products offered for sale, or offering special terms to certain customers.
Statutory Provisions
Statutory claims against a lender may be based on state or federal law. The provisions of the Uniform Commercial Code usually play a role in claims founded on statutory provisions. This is because the code imposes an obligation of good faith and fair dealing, independent of contractual terms, on all transactions within its scope.
As always, determining if a lender has fallen short of these duties will ultimately be resolved during litigation. A lending liability expert witness can assist the parties in such cases.
Conclusion
Borrowers who believe they have been unlawfully dealt with by lenders may seek redress through the courts. A lender liability expert witness may be retained to conduct an investigation and provide opinions relevant to these claims or the defenses to it.
About the Author
Jason D. Koontz, CRC, is a former banking Senior Vice President with over 20 years of lending, cash management, and bank operations experience. He has vast hands-on experience in bank lending practices, deposit accounts, and matters involving residential real estate. Mr. Koontz has extensive, coast-to-coast, experience as an expert witness (retained in over 150 matters). He has served as an expert witness in cases involving commercial loans, residential mortgages, residential construction lending, predatory lending, debt collection, underwriting, consumer protection, fraud, truth in lending, lender liability, loan servicing, deposit accounts, residential property valuation, and USPAP compliance. He has been engaged in multiple matters where predatory and abusive loan practices were alleged. Mr. Koontz has extensive testifying experience at deposition and trial.
Telephone: (646) 397-3835 Cell: (304) 541-5394 jasonkoontz1@gmail.com
