Lender Liability
Sometimes borrowers have disputes with banks and other lenders over misconduct by the lender. For example, if the lender acts in bad faith to advance its own interests at the expense of the borrower, that may give rise to a lender liability dispute.
During the 1980s, a body of law, called lender liability law, developed that gives special protections to borrowers injured by banks and other lenders. The caselaw gives the borrower both an affirmative claim against the lender, as well as a defense to actions by the borrower to compel repayment of the loan. And borrowers began to bring lender liability lawsuits.
The innovation introduced by the new law was the concept that every contract had an implied covenant of good faith. Thus, even if the bank was entitled by the contract to behave in a particular way, it can't behave in that way if acting in bad faith. For example, one court has held that the stated reason for taking a certain act must be the real reason, and not a pretext for some ulterior motive.
For example, banks sometimes become worried about recovering a loan made under a line of credit to a business experiencing financial difficulties. The bank may try to improve it's situation by indicating that it will lend new money if the business pays down the existing debt. And once the debt has been paid off, the bank may invoke a clause in the lending agreement that entitles it to withhold new loans. That's an act of bad faith, which may entitle the business to advance a lender liability claim.
In a case handled by the Firm, the court imposed sanctions on a bank for taking a frivolous appeal to coerce action helpful to it. The case was discussed in the leading treatise involving lender liability cases. Chu v. Green Point Savings Bank and Cullen and Dykman, 218 A.D.2d 781, 631 N.Y.S.2d 252 (2nd Dept. 1995), discussed at M. Budnitz, The Law of Lender Liability p. S-13-1 (Warren, Gorham & Lamont 1990)
During the 1980s, a body of law, called lender liability law, developed that gives special protections to borrowers injured by banks and other lenders. The caselaw gives the borrower both an affirmative claim against the lender, as well as a defense to actions by the borrower to compel repayment of the loan. And borrowers began to bring lender liability lawsuits.
The innovation introduced by the new law was the concept that every contract had an implied covenant of good faith. Thus, even if the bank was entitled by the contract to behave in a particular way, it can't behave in that way if acting in bad faith. For example, one court has held that the stated reason for taking a certain act must be the real reason, and not a pretext for some ulterior motive.
For example, banks sometimes become worried about recovering a loan made under a line of credit to a business experiencing financial difficulties. The bank may try to improve it's situation by indicating that it will lend new money if the business pays down the existing debt. And once the debt has been paid off, the bank may invoke a clause in the lending agreement that entitles it to withhold new loans. That's an act of bad faith, which may entitle the business to advance a lender liability claim.
In a case handled by the Firm, the court imposed sanctions on a bank for taking a frivolous appeal to coerce action helpful to it. The case was discussed in the leading treatise involving lender liability cases. Chu v. Green Point Savings Bank and Cullen and Dykman, 218 A.D.2d 781, 631 N.Y.S.2d 252 (2nd Dept. 1995), discussed at M. Budnitz, The Law of Lender Liability p. S-13-1 (Warren, Gorham & Lamont 1990)