Lender liability litigation has increased dramatically over the past several years. The increase in claims is hardly surprising when one considers recent multimillion dollar recoveries.' Such well-publicized verdicts against lenders serve to encourage borrowers to defend even routine collection claims by striking out at the lender.
Most often borrowers bring lender liability suits following commercial loan defaults. These suits are based on a number of common-law theories for liability including: breach of contract, breach of fiduciary duty,' and breach of good faith, as well as fraud, duress, interference, and negligence. Some suits also raise statutory claims under the bankruptcy laws, the federal securities laws, the tax laws," the environmental laws,' and the Racketeer Influenced and Corrupt Organizations Act (RICO).'
The success of many of these theories of liability has broadened the scope of lender liability and has helped borrowers fight back against overreaching lenders. Because many of the theories are relatively new to the banking area, however, courts have yet to define the theories' parameters. This lack of judicial guidance leaves lenders in a difficult position. They face harsh economic consequences for failure to aid a troubled debtor, and potential liability if they do become involved. The uncertainty of the law makes it difficult for lenders to evaluate their risks. Consequently, evaluation has become more expensive. This evaluation expense and other increased costs eventually are passed onto borrowers and other bank customers. Furthermore, lenders often re-act by narrowing or curtailing important lending functions.
Parts II and III of this Note describe the most prevalent theories of lender liability, focusing on common-law theories and highlighting prominent cases under each theory. Conflicts among jurisdictions are emphasized to show the need for guidelines and standardization. Part IV analyzes the impact of increased liability on lenders, and Part V examines the judiciary's response depicted by several recent cases.
Finally, Part VI concludes that until a body of law evolves in the area of lender liability, both lenders and borrowers will bear the costs of expanded and uncertain claims against lenders.
Frances E. Freund,
Lender Liability: A Survey of Common-Law Theories,
42 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol42/iss3/5