“I Knew You Were Trouble”: Recent Trends in Lender Liability Litigation

On March 28, 2013, my colleagues Nelwyn Inman, Eric Pruitt and Spencer Clift provided an interesting webinar on recent trends in lender liability litigation. They noted that lender liability claims generally arise in the following contexts: (i) claims seeking recovery of damage or “leverage” to accept discounted payoffs, (ii) counterclaims to foreclosure/receivership/guarantor actions, or (iii) “first strike” lawsuits in anticipation of collection/foreclosure actions. Lately, borrowers seem to attack commercial lenders on one of the following grounds: (i) breach of contract/violation of obligation of good faith and fair dealing, (ii) tort claims (e.g., negligent servicing; deepening insolvency), and (iii) breach of fiduciary duties. Typically, lender liability allegations are about leverage.

With regard to alleged interference with or control of a borrower’s business, our team has seen claims relating to: (a) required lender approvals of material leases or renewals, (b) allowing or refusing use of escrows and reserves (tenant improvement/leasing commissions, replacements reserves, etc.), (c) cash water falls with a hard lock box that provide for disbursement of funds for operations, and (d) due diligence by lender (or possible note purchaser) prior to exercise of remedies, including the presence of third parties at property. It is important to consider the ramifications of these type of actions as it is critical that the lender comply with the contractual terms of the loan documents. A lender can get into trouble when it starts taking action that is not provided for in the loan documents.

Another area that borrowers have attempted to litigate is alleged oral modification of loan documents. These arguments typically take the form of either a course of conduct, where the borrower argues that the lender’s actions have waived defaults due to lack of action or objection, or a borrower alleging that a verbal or informal written communication constitutes a modification or extension of loan terms. The underlying loan documents should contain express provisions prohibiting any oral modification of the terms of the written documents and non-waiver provisions based on action or inaction. Assuming those types of provisions are in the documents, the lender should have a strong argument against these categories of claims.

The panelists noted some best practices in dealing with a defaulted loan in order to avoid lender liability allegations:

A. Develop a strategy at the front end of the matter.
B. Focus on the big picture and end game.
C. Do not “run” the borrower’s business.
D. Do not become the borrower’s advisor in any context.
E. Do not act suddenly or erratically in your dealings with the borrower.
F. Honor your agreements/act honorably in your interactions with the borrower.
G. Follow internal policies and procedures.
H. Know your opposition, including opposing counsel.
I. Determine whether a guarantor claim is worth pursuing.
H. Follow the Golden Rule.

Timothy Lupinacci

Timothy Lupinacci

Shareholder at Baker Donelson
Timothy M. Lupinacci, shareholder in the Firm's Birmingham office, is a member of the Firm's Board of Directors, chair of the Financial Services Department and is former office managing shareholder for Birmingham. Contact Tim at tlupinacci@bakerdonelson.com.
Timothy Lupinacci