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Real Estate Litigation: The Re-Emergence of Lender Liability

On Behalf of | Sep 20, 2010 | Uncategorized

As a rule, economic crises generate whole new areas of litigation—particularly real estate litigation.  In some cases, a crisis can revive an area of law that rested dormant for decades.
Commentators are starting to point to the re-emergence of lender liability litigation.  A spawn of the 1980’s Savings and Loan crisis, the doctrine imposes certain duties on lenders, including, in some cases, fiduciary duties to act in the borrower’s best interest.
As lenders see the value of their collateral plummeting with the market, the natural temptation is to meddle in the borrower’s business.  Taking prudent steps to maximize the value of collateral and likelihood of repayment is perfectly acceptable conduct.  But, trying to make sure the borrower is conducting its business in a fashion that maximizes the chance of recovery on the loan can carry with it serious consequences if the lender goes too far.
A lender involved in what started out as an arms-length loan with a borrower can find itself characterized as a de facto partner in the businesses operations if it crosses the line and exercises undue influence over the borrower’s business.  The lender will be liable for damages that flow from its own conduct.
A whole new wave of lender liability cases is flooding the courts.  As developers saw their projects stall out, lenders nervously watched their collateral tank.  How each side deals with the crisis will be closely scrutinized by a new generation of lawyers relying on the long dormant doctrine of lender liability.