Lender liability is the branch of law that seeks to protect consumers or borrowers from the unfair practices of some lenders. This may be seen in the foreclosure crisis of the 21st century, as there are allegations that mortgage companies unfairly declared bankruptcies on hundreds of thousands of homeowners and foreclosed those homes. When a lender ends a contract with a borrower and moves to repossess or reclaim property in the form of collateral or assets, they must ensure they have followed every rule of law before doing so. The lender must also take steps to make certain the borrower has been thoroughly notified of any possible action that may arise. Should lenders fail to follow the law or take a borrower’s assets in an unfair manner, the borrower has the right to file a claim against the lender. Lender liability cases often include breach of contracts, a close look at fiduciary responsibilities and unfair collateral sales and collections.
How Lender Liability Came About
The first lender liability case filed in the state of Texas was State National Bank v. Farah Manufacturing Co., Inc., 678 S.W.2d 661 in 1984. During the 80s, similar cases rose up across the nation that challenged the power lenders had, especially when borrowers felt that lenders used unfair tactics to repossess or claim collateral. There are generally three areas where lender liability lawsuits seek claims on behalf of borrowers. These include filing counterclaims to collection practices or foreclosure actions, seeking recovery of claims and damages, and what is referred to as “first strike” lawsuits. These lawsuits are filed in anticipation for foreclosure and collection procedures.
- Wisconsin Lenders Beware: Borrowers are Striking Back with Lender Liability: Marquette University law school discusses lender liability law. (PDF)
- Lender Liability Under Cercla: Columbia Business Law Review examines lender liability law.
- Profile for A. Barry Capello: Mr. Capello is the nation’s leading expert on lender liability cases and authored the first treatise on the subject.
- California Finance Lenders Law: California law explains limited brokering authority under their finance lenders law.
- Lender Liability for Failure to Enforce Life Threatening Housing Code Violations: Golden Gate University Law Review examines lender liability in regard to housing codes. (PDF)
- Union State Bank v. Woell: North Dakota court brief highlights Sahadi v. Contil ILL. Nat’ Bank & Trust Co.
- A Return to the 1980s? Lenders Beware: PDF article by Stroock about lender liability.
- Lender Liability in Construction and Real Estate Financing: PDF file from the UPR Business Law Journal regarding lender liability.
Breach of Contract
Breach of contract is the area of law that deals with one of the contract holders violating their share of the contract. In lender liability law, breach of contract most often signifies that a borrower is accusing the lender of failing to uphold their end of the contract. Breach of contract runs close with fraud and is often the basis for many lawsuits. Lender liability law offers protection to borrowers that often found themselves on the defensive side of these suits. Today, borrowers have many options and when a loan agreement has been unfairly or improperly ended, there is legal recourse they may take. This was seen in the case Siegner v. Interstate Production Credit Association of Spokane, Washington, where the plaintiffs accused the credit association of altering their loan documents unfairly and without warning. The case was groundbreaking, as the defendants were found guilty of violating an oral contract, in lieu of the written contract they had written and that the plaintiffs signed.
- Breach of Contract: OLR Research Report by Senior Attorney Christopher Reinhart that explores breach of contract and liability law.
- What Constitutes a Breach of Contract? Judicial Education Center looks at contract law and discusses breach of contracts.
- Binder on Contracts: A look at contracts by Perry Z. Binder from Georgia State University.
- Is Breach of Contract Immoral? Article from Harvard University discusses the moral implications of breaching a contract. (PDF)
- Breach of Trust Defined: Judicial remedies from Ohio Revised Code
- Contract Breach and Contract Discharge Due to Impossibility: A Unified Theory (PDF)
- Breach of Contract and Remedies: In-depth look at the legal implications of a breach of contract from the Chico California State University.
- Disgorgement for Breach of Contract: A Comparative Perspective by Loyola of Los Angeles Law Review (PDF)
- Liability for Breach of Contract: North Carolina Real Estate Commission discusses the case of Helms v. Investment Company.
Fiduciary relationships signify that the parties should have a relationship based upon trust. In a lending situation, it implies that the lender automatically enters into an agreement that they will treat the borrower in an honest and upstanding manner. Fiduciary relationships are often the basis behind lender liability cases as the borrower often claims the lender did not look out for the borrower’s best interest. Though banks and mortgage companies are financial institutions and want to make a profit, they cannot do it at the expense of misleading or persuading borrowers to make investments. In the case Scott v. Dime Savings Bank, Scott successfully sued the bank for breach of their fiduciary relationship.
- The Fiduciary Relationship: LSU Law Center discusses the nature of fiduciary relationships.
- Resolving Conflicts of Duty in Fiduciary Relationships: American.edu looks at fiduciary relationships and their issues.
- Fiduciary Relationships are not Contracts: Boston Law School examines the nature of fiduciary relationships in this PDF document.
- Fiduciary Duty: Cornell University Law School provides a definition for fiduciary duty.
- The Lender as Unconventional Fiduciary: William Mitchell College of Law discusses the natural level of trust that occurs between borrower and lender in this PDF document.
- What Level of Fiduciary Duty Should Mortgage Brokers Owe Their Borrowers: Washington University Law Quarterly explores fiduciary duty by mortgage brokers towards their borrowers.
- Charge to the Fiduciary Responsibility Best Practices Committee: University of Iowa explores fiduciary and corporate responsibility in light of the Sarbanes-Oxley Act. (PDF)
- Fiduciary Duties in Distressed Corporations: University of Maryland explores fiduciary duties or corporate responsibility in distressed corporations and looks at the case Credit Lyonnais Bank Nederland v. Pathe Communications Corp. (PDF)
- Judiciary Principles: Corporate responsibilities to stakeholders are examined in this PDF document by DePaul University’s Journal of Religion and Business Ethics.
Lenders often include language that states if a borrower defaults on the loan or fails to meet their commitment, the lender can repossess the property or assets. This property is often sold after the loan default in what is referred to as collateral sales. When borrowers state a lender inappropriately sold their property they may take legal action. Lenders must ensure that all collateral sales are commercially reasonable by notifying the public of the sale so there can be a substantial number of bids generated and by using qualified appraisals. In the case, Caterpillar Financial Services Corp. v. Wells the plaintiff won after claiming that Financial Services Corporation sold Caterpillar’s property for less than its value and to dealers from their own company. The Uniform Commercial Code governs the terms of lender liability law and specifics such as collateral sales, fiduciary relationships, and breach of contract.
- Rules Governing Sale of Repossessed Collateral Construed: Iowa State University examines Panora State Bank v. Dickinson and the role of collateral sales.
- Reevaluation Section 9-5402 (2) of the Uniform Commercial Code: Western New England University discusses collateral sales and several cases where deficiency in the code is evident.
- Collateral Crises: Yale PDF document that discusses collateral crises and the housing market crash in the 21st century. (PDF)
- Chrysler Corporation v. Superior Court: Santa Clara University examines inappropriate collateral sales in the case of Chrysler Corp and East County Dodge.
- Perfection by Possession in Article 9: Indiana University School of Law examines Article 9 and challenges collateral repossession and sale. (PDF)
- Inappropriate Collateral Releases: The Office of Inspector General U.S. Small Business Administration lists a number of cases involving inappropriate collateral sales.
- Scarvey v. First Federal Savings and Loan Association of Charlotte: North Carolina Business Court examines the case of Scarvey v. First Federal Savings and Loan where plaintiff claimed breach of contract and fiduciary duty.
- FDIC Law, Regulations and Related Acts-Statements of Policy: The Federal Deposit Insurance Corporation discusses their statement of policy and explains point V. Independence of the Appraisal and Evaluation Program with reference to CFR 226.42 (c).
- The Right to an Article 9 Deficiency Judgment without 9-504 Notice of Resale: Valparaiso University Law Review examines UCC 9-504 and its meaning in regards to inappropriate collateral sales. (PDF)