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Peter S Selvin, of Loeb and Loeb, Los Angeles, examines some of the common themes and legal issues presented by the developing area of lender liability litigation in the United States
Companies in the business of lending to individuals or companies in the United States may be familiar with the phrase lender liability. This phrase describes a developing body of American law which has arisen principally in connection with the lenderborrower relationship.
Sources and common themes
Lender liability law is primarily a creation of state, and not federal, case law. Unlike securities, copyright or trade mark regulation, which are governed by federal statutes, the law of lender liability is generally not embodied in any comprehensive statutory scheme. Instead, in the typical case, it is an application of local tort and contract law to the lender-borrower relationship.
Lender liability litigation typically arises in the context of a lender's exercise of a right or power given under an agreement with its borrower. A typical claim involves the assertion by a borrower that a lender exceeded its rights under the pertinent loan agreement. Other common situations include a borrower's claim that a lender made false representations or commitments which are not embodied in the loan agreement or exercised its rights in violation of some further limitation, such as a duty of good faith.
The following cases illustrate each of these situations:
* A bank makes a construction loan secured by a lien on real property. The loan documents contain an out of balance provision which allows the lender to require the borrower to deposit sufficient funds to make up any anticipated shortfalls which result from cost overruns. The borrower fails to make the required deposit and sues to enjoin the lender from foreclosing on the real estate, claiming, in essence, that the lender has unreasonably overstated the projected shortfalls. In its complaint, the borrower asserts claims under state law for breach of contract, interference with prospective business advantage and breach of the implied covenant of good faith and fair dealing (see, for example, Travelers Ins Co v Sumitomo Construction Co, CV-92-1740 SVW (US DC 1993), reported in Lender Liability Law Report, Vo 7, No 5 (November 1993)).
* A developer interested in acquiring real estate advises...