Lender Liability and Duty
This practice of lender liability law became popular in the 1980’s. The law requires that lenders treat borrowers fairly. If they do not, then the borrower may bring a claim against the lender for breach of fiduciary duty. We see these claims most recently in the forms of breach of contract, breach of fiduciary duty, and inappropriate collateral sales.
Relationships Between Lenders And Borrowers
The lender-borrower relationship is complicated, yet pretty straight forward. Lenders provide loans and documents to borrowers while borrowers are subject to terms and conditions of these contracts. Lenders however, are not consultants. Meaning, they do not provide any advice to the borrower nor do they take part in managing any of the funds that are borrowed. This results in a very limited fiduciary relationship between the borrower and the lender. Lenders instead have a duty to their own company. This means keeping up with the financial condition of the borrower to ensure that loans can be repaid in an efficient and prudent manner. Lenders are however, bound by specific policies and must act in good faith with the borrower.
Breach Of Contract
Just as a lender may sue a borrower, the borrower may also sue the lender. Rules apply to loan agreements that make them enforceable or unenforceable. For instance all contracts and obligations must be made with mutual consent. Fraudulent contracts are unenforceable. The best way to avoid this is to have all agreements in writing. Oral agreements are hardly admissible in court, so borrowers have a hard time seeking damages if an oral agreement was made.
Breach Of Fiduciary Duty
These cases are rare due to the nature of the lender-borrower relationship. Because lenders do not act as advisors, their duty is not seen as fiduciary.
Inappropriate Collateral Sales
Litigation tends to appear in these cases when a lender sells collateral wrongly after a default. Any sale of collateral must be commercially reasonable. This means the lender must rely on appropriate appraisals and give public notice for a specific period of time to gather many bids. Failure to do so results in a wrongful sale and responsibility for damages.
Contact A Banking Lawyer
Heskett & Heskett can provide expert insight and representation to all kinds of banking service litigation. Send us a message or give us a call for all your banking law needs.