Lender Liability – Overview
Lender liability claims are brought by borrowers against lenders. They run the gamut from breach of contract to fraud and often appear in a lawsuit as counterclaims after a lender has brought suit alleging default on a loan contract. Less frequently, borrowers initiate litigation against the lender. Either way, such lawsuits routinely involve claims and counterclaims.
A pivotal issue is whether a borrower defaulted by breaching a term of performance under a promissory note, guaranty or mortgage. The parties may engage in workout negotiations and, if default is uncontested, the borrower will oftentimes want to settle before commencement of litigation. When default is disputed, litigation is more likely.
For a borrower, discovery is a critical phase of the litigation, because the lender is the repository of most of the relevant information. Borrower’s counsel will routinely request discovery early in the lawsuit and focus first on a lender’s production of documents. While much of the production will be boilerplate loan documentation, key information may be found in letters, emails, office memoranda, and policy manuals.
A thorough review of all documents is necessary before deposing bank personnel. These cases are frequently won or lost during depositions where the basis for any alleged default is probed.
Lenders will usually file a motion for summary judgment. Without showing material facts that controvert the occurrence of a default, borrowers run the risk of losing their case before trial.
Trial will encompass both claims and counterclaims. Borrower’s counsel must simplify the pertinent issues to demonstrate to judge and jury that no default occurred or, if there was a default, that the lender caused it. Otherwise, the court may dismiss the lender liability claim during trial before the case goes to the jury for consideration.