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Lender Liability: Evaluating, Minimizing and Defending Claims

Defending Against Attacks on Loans in Workout, Default and Bankruptcy

presents

Today's panel features:Mark J. Kalla, Partner, Dorsey & Whitney, Minneapolis

W. Mike Baggett, Chairman Emeritus; Shareholder, Winstead, DallasSteven I. Fried, Principal, Capital Finance, Indian Wells, Calif.

Wednesday, August 12, 2009

The conference begins at:1 pm Eastern12 pm Central

11 am Mountain10 am Pacific

The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions emailed to registrants to access the audio portion of the conference.

A Live 90-Minute Audio Conference with Interactive Q&A

Lender Liability: Evaluating, Minimizing and Defending Claims

Contract Liability

Mark Kalla, Partner, Dorsey & Whitney LLP, with the assistance of Elizabeth Temple,

Associate, Dorsey & Whitney LLP

Overview

• Is there a unified theory of “Lender Liability”?

• Contract and Quasi-contract• Tort• Statute• Other Common Law

Contract Claims

• The lending relationship is a contract relationship that can subject the lender to claims for breach of any of the written terms of a contract.– This applies not only to the final executed

loan agreement, but to commitment letters and other documents evidencing the intent of the parties to create a binding commitment.

– The breach of contract action can also apply to oral or imputed agreements.

Covenant of Good Faith and Fair Dealing

• The Uniform Commercial Code specifically imposes an obligation of good faith in the performance and enforcement of contracts. UCC § 1‐304.

• Separate from the UCC statutory obligation, courts read an implied duty of good faith and fair dealing into every contract. E.g., Van Gemert v. Boeing Co., 553 F.2d 812, 815 (2d Cir. 1977). – Courts disagree as to whether it breaches the duty of good faith and fair

dealing to alter a course of conduct, even if that course of conduct was inconsistent with the contract’s written terms.

• Compare Schaller v. Marine Nat’l Bank of Neenah, 388 N.W.2d 645 (Wis. Ct. App. 1986) (holding that obligation to act in good faith did not require bank to continue honoring overdrafts, even after doing so 36 times)

• with Kendal Yacht Corp. v. United Cal. Bank, 123 Cal. Rptr. 848 (Cal. Ct. App. 1975) (holding bank liable for not honoring overdrafts after encouraging borrower to believe that overdrafts would be honored)

Credit Agreements• Breach of Express Covenants

– Normal breach-of-contract rules apply.• Breach of Commitment Letter

– Generally the lender has no obligation to make a loan, or to protect an inexperienced borrower.

– The development of a special relationship, however, may give rise to such duties.

– Lender must use reasonable care in the application process and must comply with laws regarding discrimination, redlining, etc.

• Letters of Intent– Though letters of intent to make a loan may expressly disclaim their status as a

commitment, care should be taken that they not express a binding intent.• See Teachers Ins. & Annuity Assoc. v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987)

(identifying five factors with which to determine whether parties intended to be bound: (1) the language in the agreement; (2) the context of negotiations; (3) the existence of open terms; (4) partial performance; and (5) whether it was customary in the relevant marketplace to put the agreement in a final form).

Credit Agreements• Oral Agreements or Amendments

– Contracts may and should provide that they cannot be changed except by an express written agreement.

– Notwithstanding such provision, contracts may be changed or supplemented by oral agreements between the parties.

• Course of Dealing—review loan files, correspondence, officer comments, and email.

• Clear Channel case has raised the possibility that a court could award specific performance of a commitment letter. BT Triple Crown Merger Co. v. Citigroup Global Markets Inc., 2008 N.Y. Misc. LEXIS 2682, at *2 (N.Y. Super. Ct. May 7, 2008).

Demand Notes• Wording and tenor of demand note may provide false

protection to the lender.– Some courts have refused to enforce the terms of a demand

note and have imposed an extra notice obligation on the lender.• Reid v. Key Bank of S. Me., Inc., 821 F.2d 9 (1st Cir. 1987).• But see Pavco Industries Inc. v. First National Bank, 534 So. 2d 572

(Ala. 1988) (holding that implied duty of good faith did not apply to demand note); Larson v. Vermillion State Bank, 567 N.W.2d 721, 724 (Minn. Ct. App. 1997) (“Minnesota law does not subject a lender to a duty of good faith, separate from the express terms of a loan agreement, in calling due a demand note.”).

• See also Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir. 1990) (“[P]rinciples of good faith . . . do not block use of terms that actually appear in the contract.”).

Insecurity Clauses• Not very helpful as an after-the-fact justification for improper

acceleration.• An insecurity clause provides that a secured lender may accelerate

indebtedness when it deems itself insecure.• Such clauses are enforceable only if the lender “in good faith

believes that the prospect of payment or performance is impaired.” UCC § 1‐208.

• Demand note should be drafted with clear language and no wiggle room.

• Loan and security agreement cannot cover all circumstances for all borrowers, so insecurity clause may be necessary.

• Enforceability of such clause not without litigation costs.– See K.M.C. Co. v. Irving Trust Co., 757 F.2d 752, 760-63 (6th Cir. 1985)

(affirming jury verdict that lender breached the duty of good faith and fair dealing by, without notice, refusing to advance funds under a line of credit relying on an insecurity clause).

Material Adverse Change and Material Adverse Effect Clauses

• Is the change material?• Does the loan agreement require lender to

reasonably forbear?• Did lender suggest that it never enforced or

wouldn’t enforce such clause?• Was the “adverse change” in existence or

reasonably foreseeable at the outset of the loan?

• Negotiations concerning MAC or MAE clauses can be important in their enforcement.

Acceleration Clauses

• Acceleration cannot be based upon waived defaults.

• Lender must adhere to conditions precedent for acceleration. – Adequate notice– Opportunity to cure

Discretionary Advance Clauses

• May not be completely discretionary

• May be tempered by course of dealing and other communications between parties

Construction Loan Agreements

• Construction Defects– A lender is typically not liable for construction defects.– However, where lender’s relationship with developer depended

upon purchasers financing with lender, lender was found to have such duty. Connor v. Great Western Savings & Loan Association, 69 Cal. 2d 850, 447 P. 2d 609 (1968).

• Duty to Inspect– Typically no such duty exists, but construction lenders, who often

inspect for own purposes, should make sure to disclaim any such duty for benefit of the Borrower.

– Disbursements• Case law has created significant obligations upon a lender who has

contracted to make disbursements under a construction loan agreement. Davis v. Nevada State Bank, 103 Nev. 220, 737 P. 2d 503 (1987).

Damages Compare Contract & Tort Damages• Generally, Lender Liability actions based

upon Contracts are limited to the terms of the contract and consequential damages.

TORT THEORIES OF LIABILITY –DIVIDING LINE BETWEEN CONTRACT AND TORT -CONTORTS

W. Mike BaggettWed., August 12, 2009

Dallas, Texas

2

Fraud and Misrepresentation

Elements of Fraud – That a material representation was made– That it was false– That, when the speaker made it, he knew it was

false or made it recklessly without any knowledge of its truth and as a positive assertion

– That he made it with the intention that it should be acted upon by the party

– That the party acted in reliance upon it– That he thereby suffered injury

3

Fraud and Misrepresentation, contd.

Representation Must Be of Material Fact – Not an Opinion, Judgment, Probability or Expectation

Reasonable Reliance Party Executing Documents Charged With Knowledge

of Contents Promise to Act in the Future Not Actionable Unless No

Present Intent to Perform Promise to Do a Criminal Act Conditional Promise Not Actionable Unless Condition

Satisfied Authority of Party Making Representation

4

Fraud and Misrepresentation, contd.

Parol Evidence Exclusion of Oral Representations That Vary or Contradict the Terms of a Written Agreement

Course of Dealing Will Not Vary or Contradict Written Agreement

Custom and Usage Will Not Provide New Terms for a Contract

Statute of Frauds to Restrict Enforcement of Oral Commitments for Loan in Excess of $50,000.00

5

Duress Elements of Duress

– There is a threat to do something which a party threatening has no legal right to do

– There is some illegal exaction or some fraud or deception– The restraint is imminent and such as to destroy free agency

without present means of protection

Economic Duress Only Where Threatening Party was Responsible for Claimant's Financial Condition

Duress Only Where Threatening Party Has No Legal Right to Take Threatened Action

Statement of Legal Opinion Where Recipient Had Access to Legal Counsel Is Not Duress

6

Intentional Interference with Contractual Relations

Elements of a Cause of Action for TortiousInterference – Existence of a contract subject to interference– That the act of interference was willful and

intentional– That such intentional act was a proximate cause of

plaintiff's damage– Actual damage or loss occurred

7

Breach of Fiduciary Duty / Good Faith and Fair Dealing

UCC Section 1-203 Duty of Good Faith – Good Faith In Fact

Good Faith and Fair Dealing Will Not Impose a Duty Contrary to Express Contract Terms

The Relationship Between Mortgagee and Mortgagor Does Not Give Rise to a Duty of Good Faith and Fair Dealing.

FDIC v. Coleman, 795 S.W.2d 706 (Tex. 1990)

8

Statute of Fraud / Loan of Money Must Be in Writing and Executed to Be Enforced

9

Damages – Contract or Tort –Benefit of Bargain Damages Only In Contract Case (Lost Profits)

TORT THEORIES OF LIABILITY –DIVIDING LINE BETWEEN CONTRACT AND TORT CONTRACT

W. Mike [email protected]

214.745.5400

Copyright Capital Finance 2009

Lender Liability: Lender Liability: Evaluating, Minimizing Evaluating, Minimizing and Defending Claimsand Defending Claims

Best Practices to Minimize Best Practices to Minimize Lender Liability ClaimsLender Liability Claims

Copyright Capital Finance 2009 2

Before A Claim Is MadeBefore A Claim Is Made Train Your Client – “An Ounce of Prevention…”

Review Loan Documents for Latest Protective Language

“Thou shall take no precipitous action”

Document, Document, Document

Keep It Clean

Expect to read everything you put in the file out loud in a courtroom


After A Claim Is MadeAfter A Claim Is Made

Statute of Frauds

Arbitration Clauses


Retracting existing financing Retracting existing financing

What is the basis for retracting financing?

Beware of Dragnet or Big MAC clauses

“Thou shall take no precipitous action”


Loan workouts Loan workouts

State clearly what you expect from the other side in writing

Include a waiver of lender liability claims to the date of modification


ForeclosuresForeclosures

Always liquidate personalty before realty

Make sure liquidation sales are adequately advertised

Credit Bids should reasonably approximate current fair market value


Bankruptcy considerations Bankruptcy considerations

Theory of Deepening Insolvency

Preference Payments


MultiMulti--lender considerationslender considerations Mutual Account (Split Borrowing)?

Participation Loan?

Make sure participation agreements include provisions for a default of Lead Lender

Indemnity for Lender Liability

“Experience, Expertise, Integrity & Clarity”

©Steven I. Fried, Principal Capital Finance 45605 Navajo Drive Indian Wells, California 92210-8872 Email: [email protected] Web: http://www.BankingExpertWitness.com Telephone: (760) 776-5749 Facsimile: (760) 776-9179

All the predictions are for a flood of upcoming lender liability litigation surrounding real estate lending in general and

particularly sub-prime lending. The rules are also changing at lightning speed. This article addresses some of the known and potential issues as of this writing.

Avoiding Lender Liability in Sub Prime Loans I want to start off by saying there is no ironclad way to avoid a claim or lawsuit involving lender liability or

any other potential litigation. All any lender can do is follow the right steps in making or restructuring a loan.

This article outlines the most common issues I have seen in my years reviewing claims or litigation where a lender was a party to the dispute. The article is divided into three parts: those issues common to any claim of lender liability, areas of specific concern to sub-prime lenders, and common sense.

Lender liability is a catch-all phrase used to describe several theories under which a lender may be sued for doing something or not doing something in connection with a loan or loan commitment. AmericanBanker.com defines it as “An informal term referring to various manifestations of actual or potential legal liability arising from the conduct of a financial institution lender. Generally, lender liability arises from allegations that a lender has violated a duty (whether implied or contractual) of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders.” Within this definition are numerous variations, interpretations, and completely new causes of action. Some of these new causes of action are gaining acceptance particularly because of the difficult economic circumstances the country is currently facing.

If litigation arises in this area, it is usually extensive and expensive. So, what are the factors to consider in assessing or avoiding lender liability? What follows is not an all-inclusive list, but some of the most common issues arising in lender liability lawsuits. Each case has its own set of characteristics and circumstances that must be examined in context.

Factors Common to All Loans

Commitments – Some states have laws requiring that a “promise” to lend (over a certain amount) must be in writing. This is your first chance to avoid lender liability. If you have agreed to lend money, you should put it in writing and that writing should be as detailed as possible. Spell out exactly what you did and did not agree to. Perhaps more importantly, you should specify what would cause you not to go ahead with the commitment. Reliance on a material adverse change clause or other types of “dragnet” clauses (in commitments or loan documents) are subject to lots of interpretation and fraught with danger.

Documentation – Document, document, document. I am not referring to loan documentation here but to notes and memos you should place in the customer’s file. This tip has a bearing on just about every aspect of lender liability. When a financial transaction goes bad, everyone’s motives and due diligence will be questioned. No matter how well-intentioned your actions were meant to be, they will be questioned if things don’t go as everyone expected. The implied covenant of good faith and fair dealing, undue influence, deepening insolvency and breach of contract all can be turned one way or another based upon how well documented the file is. Yes, document, but keep it clean. Just the facts. Leave out any emotional or personal observations. Everything you put in a customer’s file you might be reading out loud in a courtroom.

Change – Don’t make any sudden changes in the pattern of dealing. Whether it relates to the payment or acceptance of checks, interpretation of loan documents, defaults or any other behavior that is established; don’t change what you have done in the past without adequate notice or reason.


Servicing – The lender has a duty to process any loan application or loan with reasonable care. Negligent calculation of the applicant's qualifications might induce a cause of action against the lender for failure to use proper due diligence. Once a loan is made, the lender has an obligation to service it properly. This is particularly common in loans where the lender has some continuing role such as construction or other asset-based loans. It may also become an important issue during modifications, workouts, and liquidations.

Confidentiality - There are an increasing number of claims involving confidentiality. The right to financial privacy and other laws make the disclosure of unnecessary financial information concerning someone’s affairs in the making or collecting of a loan especially volatile and serious. Make sure that any public disclosures are absolutely legal and necessary. Any attempt to value or liquidate collateral should also be handled with extreme care.

Fraud – I mention fraud only in passing. It generally is not an issue that one normally connects with lender liability but fraud is a two-edged sword. Lenders can be accused of fraud, in which case it is also lumped in with lender liability. This cause of action will be found when a party is damaged as a result of a lender's material representation that is known to be false such as promising to make a loan or agree to a restructure when there is no present intention to do so. This cause of action exposes the lender to both actual and punitive damages.

Factors Specific to Sub-Prime

The factors mentioned above as common to all loans, to the extent they apply to any loan, would also apply here. It should also be noted that many of the issues that follow would apply to almost any real estate secured loan.

Channel Checks /Application Origination – Even though it is not exclusive to sub-prime loans, it is much more prevalent in the sub-prime market that lenders receive loans or loan applications through one or a series of intermediaries. Know your source!

Does each referral source have sales and underwriting staffs that are properly trained? Are their internal controls adequate to discourage mistakes in the preparation and submission of loan packages? Have you provided the referral source with your underwriting guidelines? Has your referral source provided an applicant with all appropriate disclosures and accurately explained to a prospective borrower exactly what the benefits and risks of the transaction are? Last and most important; do you periodically test check loans submitted from each referral source for quality control and compliance?

Does the source of the transaction have financial standing? Is the source licensed? How long have they been in business? Does the source of the loan referral have adequate finances to withstand the inevitable charge-backs or counter-claims? Beyond the obvious risk of losing the principal, there is an increasing trend toward holding the ultimate lender responsible for any actions of a loan broker, wholesaler or mortgage banker.

Duress – Don’t tell the borrower how to run their own affairs. You should provide as much unbiased information and education as you can, but don’t push the other side into making a particular choice. Whether it’s called duress, undue influence, or interference, if things turn out badly, any advice you gave (by internal staff or a broker), can be seen as attempting to impose a course of action against the judgment of the other party.

Compensation – Lenders should examine their compensation schedules carefully. An issue that, invariably, will come up if a loan or pool of loans experiences difficulty is a question of whether anyone in the origination chain had a financial incentive to take (or not take) a particular action. Any sort of specific compensation such as premiums (front-end, back-end, yield spread, or other) or bonuses will be scrutinized for evidence of conflict or “clouded” judgment.

Interference – This can be related to a duress claim and several others as discussed above. I have mentioned it here because I have seen numerous lenders make this mistake when trying to sell collateral, especially real estate collateral and the kind of real estate collateral usually seen in sub-prime loans. You should not attempt to sell real estate collateral in which you have no equity interest. The most common example of this is when a lender attempts to sell collateral which has not been fully foreclosed upon. Although the temptation to “assist” a troubled borrower or move a non-performing loan off the balance sheet


is great, any prospective purchaser for the lender is also a prospect for the borrower. Any communications regarding the collateral by the lender prior to full foreclosure may give rise to a claim of interference and should be handled extremely carefully. If you decide to help a borrower in selling collateral prior to fully foreclosing on collateral; consult with counsel and/or obtain a legal and enforceable waiver.

Common Sense

All borrowers and all loans have their own unique set of circumstances and can not be viewed out of context. Once you have a full and complete understanding of the facts and circumstances, ask yourself one simple question. Would I recommend the actions being offered to a close family member who is similarly situated?

Stay away from “Neutron Loans.” A neutron loan, like a neutron bomb, destroys the borrower but leaves the collateral standing. There are lenders who specialize in “loan-to-own” and get compensated accordingly. Priced into those loans are the costs of extended bankruptcy, deferred maintenance, foreclosure costs, declining collateral values, reputation risk, and legal fees. Unless you are prepared to assume these risks, stay away.

Some institutions have a policy of making the originating lender responsible for decisions on non-performing or sub-performing loans while others transfer the responsibility to a special department for such loans at the first sign of trouble. Each of these policies has its pros and cons. Whichever alternative you face, if you are concerned that lender liability might be an issue in your transaction, always speak with knowledgeable counsel. Counsel who is experienced in these types of actions may tell you the claim has no merit, analyze the claim and suggest a compromise, or tell you to settle.

Another factor to consider when a loan becomes “non-performing” are anti-deficiency statutes. Certain states, for certain types of loans, have anti-deficiency statutes. In other cases any potential deficiency balance may be the subject of negotiations where the issue is not a matter of law such as short sales. Be prepared that any request to waive a deficiency balance which is denied might result in a lender liability claim. These claims can be complex, expensive, and involve industry standards of practice and conduct.

While this article focuses on lender and borrower behavior rather than mistakes in the actual documentation for a particular loan, the current wave of loan modifications requires some discussion of documentation to consider when modifying a loan. In addition to everything we’ve discussed above, when modifying a loan, also consider the following since any of these mistakes might lead to a lender liability claim down the road. Laws have changed and sometimes vary State by State. Again, document everything you do in the context of what you did, why you did it, who requested it, and what promises were made by either party. Don’t run afoul of new disclosure requirements. Make you sure you have appropriate consents from investors or junior lien holders. If foreclosure does become necessary, make sure you have all of your loan documents. In this era of pooled loans, securitizations and sub-servicers, the courts are taking an increasingly dim view of partial or incomplete proof.

This summary is certainly not all-inclusive on the issues of lender liability. It merely represents some of the most common issues. If confronted by a particular situation, as always, we are available to help you sort through these complex issues.

(About the authors: Mr. Fried is a principal in Capital Finance, a litigation consulting and support firm specializing in complex banking and commercial finance matters. He can be reached at (760) 776-5749 or [email protected] or at http://www.BankingExpertWitness.com )

© Copyright 2008 Capital Finance. All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. Revised October 20, 2008.

““““Experience, ExpertiseExperience, ExpertiseExperience, ExpertiseExperience, Expertise, Integrity, Integrity, Integrity, Integrity & Clarity & Clarity & Clarity & Clarity””””

Steven I. FriedSteven I. FriedSteven I. FriedSteven I. Fried, Principal, Principal, Principal, Principal

Capital FinanceCapital FinanceCapital FinanceCapital Finance

45605 Navajo Drive45605 Navajo Drive45605 Navajo Drive45605 Navajo Drive

Indian WellsIndian WellsIndian WellsIndian Wells, , , , California 92210California 92210California 92210California 92210----8872887288728872

Email: Email: Email: Email: [email protected]@BankingExpertWitness.comSteven.Fried@[email protected]

Web: http://www.BankingExpertWitness.comWeb: http://www.BankingExpertWitness.comWeb: http://www.BankingExpertWitness.comWeb: http://www.BankingExpertWitness.com

TelephoneTelephoneTelephoneTelephone: (760) 776: (760) 776: (760) 776: (760) 776----5749574957495749

Facsimile: (760) 776Facsimile: (760) 776Facsimile: (760) 776Facsimile: (760) 776----9179917991799179

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told me to do it that way” or “we’ve always done it that way.” told me to do it that way” or “we’ve always done it that way.” told me to do it that way” or “we’ve always done it that way.” told me to do it that way” or “we’ve always done it that way.” As a result, these people will not be convincing to a judge As a result, these people will not be convincing to a judge As a result, these people will not be convincing to a judge As a result, these people will not be convincing to a judge

and jury; esand jury; esand jury; esand jury; especially after a rigorous crosspecially after a rigorous crosspecially after a rigorous crosspecially after a rigorous cross----examination.examination.examination.examination. A convincing consultant or expert must be able to explain the A convincing consultant or expert must be able to explain the A convincing consultant or expert must be able to explain the A convincing consultant or expert must be able to explain the

logic or rationale of what was or was not done in easily understandable language.logic or rationale of what was or was not done in easily understandable language.logic or rationale of what was or was not done in easily understandable language.logic or rationale of what was or was not done in easily understandable language.

Also, Also, Also, Also, I understand that attorneys must ask certain questions of a I understand that attorneys must ask certain questions of a I understand that attorneys must ask certain questions of a I understand that attorneys must ask certain questions of a potential expert for the obvious reasons; but the potential expert for the obvious reasons; but the potential expert for the obvious reasons; but the potential expert for the obvious reasons; but the

interpretation of the answers may be flawed. My favoriteinterpretation of the answers may be flawed. My favoriteinterpretation of the answers may be flawed. My favoriteinterpretation of the answers may be flawed. My favorite is “How many times have you testified at trial?” While I have is “How many times have you testified at trial?” While I have is “How many times have you testified at trial?” While I have is “How many times have you testified at trial?” While I have

handled my fair share of cases, very few have gone to trial and all have settled in mhandled my fair share of cases, very few have gone to trial and all have settled in mhandled my fair share of cases, very few have gone to trial and all have settled in mhandled my fair share of cases, very few have gone to trial and all have settled in my client’s favory client’s favory client’s favory client’s favor;;;; usually after submitting usually after submitting usually after submitting usually after submitting

a report. My point here is that picking the right expert, not necessarily the one who has gone to court the most, can a report. My point here is that picking the right expert, not necessarily the one who has gone to court the most, can a report. My point here is that picking the right expert, not necessarily the one who has gone to court the most, can a report. My point here is that picking the right expert, not necessarily the one who has gone to court the most, can

really help your case. really help your case. really help your case. really help your case. Perhaps better questions to ask are “How many expert reports have you wPerhaps better questions to ask are “How many expert reports have you wPerhaps better questions to ask are “How many expert reports have you wPerhaps better questions to ask are “How many expert reports have you written?” ritten?” ritten?” ritten?” and “How many and “How many and “How many and “How many

of those cases resulted in a favorable settlement?” of those cases resulted in a favorable settlement?” of those cases resulted in a favorable settlement?” of those cases resulted in a favorable settlement?” No expert No expert No expert No expert can turn a case without merit into a winner; but the right can turn a case without merit into a winner; but the right can turn a case without merit into a winner; but the right can turn a case without merit into a winner; but the right

expert can highlight the strong parts of your case with enough credibility to induce a favorable settlement.expert can highlight the strong parts of your case with enough credibility to induce a favorable settlement.expert can highlight the strong parts of your case with enough credibility to induce a favorable settlement.expert can highlight the strong parts of your case with enough credibility to induce a favorable settlement.

WWWWaiting Too Long To Hire An Expertaiting Too Long To Hire An Expertaiting Too Long To Hire An Expertaiting Too Long To Hire An Expert

There are three ways that waiting too long to hire an expert hurts your cause. There are three ways that waiting too long to hire an expert hurts your cause. There are three ways that waiting too long to hire an expert hurts your cause. There are three ways that waiting too long to hire an expert hurts your cause. Probably the most unpleasant of these Probably the most unpleasant of these Probably the most unpleasant of these Probably the most unpleasant of these

reminds me of the promo line for a local radio legal talk show reminds me of the promo line for a local radio legal talk show reminds me of the promo line for a local radio legal talk show reminds me of the promo line for a local radio legal talk show ------------ “this is where you call me on the tel “this is where you call me on the tel “this is where you call me on the tel “this is where you call me on the telephone and I tell ephone and I tell ephone and I tell ephone and I tell

you that you have absolutely no case!” Seriously though, getting an early read on a case from a consultant/expert can you that you have absolutely no case!” Seriously though, getting an early read on a case from a consultant/expert can you that you have absolutely no case!” Seriously though, getting an early read on a case from a consultant/expert can you that you have absolutely no case!” Seriously though, getting an early read on a case from a consultant/expert can

save you a lot of save you a lot of save you a lot of save you a lot of aggravation and aggravation and aggravation and aggravation and moneymoneymoneymoney. . . .

Perhaps more important is the second reason which is Perhaps more important is the second reason which is Perhaps more important is the second reason which is Perhaps more important is the second reason which is thethethethe expert can expert can expert can expert can help youhelp youhelp youhelp you considerably to frame the issues considerably to frame the issues considerably to frame the issues considerably to frame the issues.... A A A A

good expert good expert good expert good expert has the industry experience to immediately spot where standards and practices have been violatedhas the industry experience to immediately spot where standards and practices have been violatedhas the industry experience to immediately spot where standards and practices have been violatedhas the industry experience to immediately spot where standards and practices have been violated and can and can and can and can

explain why these departures are important for your caseexplain why these departures are important for your caseexplain why these departures are important for your caseexplain why these departures are important for your case. They . They . They . They hahahahave alsove alsove alsove also seen and participated in nu seen and participated in nu seen and participated in nu seen and participated in numerous merous merous merous similar similar similar similar

““““Experience, ExpertiseExperience, ExpertiseExperience, ExpertiseExperience, Expertise, Integrity, Integrity, Integrity, Integrity & Clarity & Clarity & Clarity & Clarity””””

cases so they can translate cases so they can translate cases so they can translate cases so they can translate between between between between breaches breaches breaches breaches andandandand causes of action. You causes of action. You causes of action. You causes of action. You may may may may lose this very valuable assistance if an expert lose this very valuable assistance if an expert lose this very valuable assistance if an expert lose this very valuable assistance if an expert

is not retained before a complaint is filed.is not retained before a complaint is filed.is not retained before a complaint is filed.is not retained before a complaint is filed.

One of my favorites is being retained after the discovery period is closOne of my favorites is being retained after the discovery period is closOne of my favorites is being retained after the discovery period is closOne of my favorites is being retained after the discovery period is closed. A good expert can tell you exactly where ed. A good expert can tell you exactly where ed. A good expert can tell you exactly where ed. A good expert can tell you exactly where

to look in the files to support your position. What may not seem important or relevant to look in the files to support your position. What may not seem important or relevant to look in the files to support your position. What may not seem important or relevant to look in the files to support your position. What may not seem important or relevant or simply not thought of can be or simply not thought of can be or simply not thought of can be or simply not thought of can be

very revealing for your case. Conversely, there are many document requests that may be invery revealing for your case. Conversely, there are many document requests that may be invery revealing for your case. Conversely, there are many document requests that may be invery revealing for your case. Conversely, there are many document requests that may be informative; but, as a practical formative; but, as a practical formative; but, as a practical formative; but, as a practical

matter, will never be obtained. As an example in my individual area, regulatory examinations, though very revealing, will matter, will never be obtained. As an example in my individual area, regulatory examinations, though very revealing, will matter, will never be obtained. As an example in my individual area, regulatory examinations, though very revealing, will matter, will never be obtained. As an example in my individual area, regulatory examinations, though very revealing, will

never be released. never be released. never be released. never be released.

Not Taking Your Expert Not Taking Your Expert Not Taking Your Expert Not Taking Your Expert To DepositionsTo DepositionsTo DepositionsTo Depositions and Trial and Trial and Trial and Trial

To someone who knows the industry To someone who knows the industry To someone who knows the industry To someone who knows the industry and its related hedge words, not taking your expert to depositions and its related hedge words, not taking your expert to depositions and its related hedge words, not taking your expert to depositions and its related hedge words, not taking your expert to depositions (or trial) (or trial) (or trial) (or trial) can can can can

be really damaging. be really damaging. be really damaging. be really damaging. Very often, the subject of the Very often, the subject of the Very often, the subject of the Very often, the subject of the examinationexaminationexaminationexamination will say something that, to the uninitiated, may sound will say something that, to the uninitiated, may sound will say something that, to the uninitiated, may sound will say something that, to the uninitiated, may sound

logical and reasonable; but, the answer may have been logical and reasonable; but, the answer may have been logical and reasonable; but, the answer may have been logical and reasonable; but, the answer may have been carefully phrased and/or contain industry jargon that narrows or carefully phrased and/or contain industry jargon that narrows or carefully phrased and/or contain industry jargon that narrows or carefully phrased and/or contain industry jargon that narrows or

limits the response. An expert who is intimately familiar with the language of the trade can suggest questions to expose limits the response. An expert who is intimately familiar with the language of the trade can suggest questions to expose limits the response. An expert who is intimately familiar with the language of the trade can suggest questions to expose limits the response. An expert who is intimately familiar with the language of the trade can suggest questions to expose

limiting language. limiting language. limiting language. limiting language. Having your expertHaving your expertHaving your expertHaving your expert appear at trial only for their appear at trial only for their appear at trial only for their appear at trial only for their own testimony deprives you of your expert’s own testimony deprives you of your expert’s own testimony deprives you of your expert’s own testimony deprives you of your expert’s

opportunity to hear and dissect opportunity to hear and dissect opportunity to hear and dissect opportunity to hear and dissect opposing testimony and perhaps suggest questions to be put to the other side. opposing testimony and perhaps suggest questions to be put to the other side. opposing testimony and perhaps suggest questions to be put to the other side. opposing testimony and perhaps suggest questions to be put to the other side. The result The result The result The result

of this ability to probe carefully hedged answers can completely change the impressions iof this ability to probe carefully hedged answers can completely change the impressions iof this ability to probe carefully hedged answers can completely change the impressions iof this ability to probe carefully hedged answers can completely change the impressions intended to be left by the ntended to be left by the ntended to be left by the ntended to be left by the

opposing side and, if a trial follows, opposing side and, if a trial follows, opposing side and, if a trial follows, opposing side and, if a trial follows, reverse the impressions intended to be left by the opposition on a judge and jury.reverse the impressions intended to be left by the opposition on a judge and jury.reverse the impressions intended to be left by the opposition on a judge and jury.reverse the impressions intended to be left by the opposition on a judge and jury.

Limiting The Information Given To Your ExpertLimiting The Information Given To Your ExpertLimiting The Information Given To Your ExpertLimiting The Information Given To Your Expert

Occasionally, an attorney will not give his expert all the infOccasionally, an attorney will not give his expert all the infOccasionally, an attorney will not give his expert all the infOccasionally, an attorney will not give his expert all the informationormationormationormation he has. Sometimes the attorney will discuss this he has. Sometimes the attorney will discuss this he has. Sometimes the attorney will discuss this he has. Sometimes the attorney will discuss this

information with their expert and both agree that it really would not add any value for the expert to review the information with their expert and both agree that it really would not add any value for the expert to review the information with their expert and both agree that it really would not add any value for the expert to review the information with their expert and both agree that it really would not add any value for the expert to review the

information. If that is the case, then “no harm…no foul.” If that isn’t the case, information. If that is the case, then “no harm…no foul.” If that isn’t the case, information. If that is the case, then “no harm…no foul.” If that isn’t the case, information. If that is the case, then “no harm…no foul.” If that isn’t the case, you could be headed for disaster. you could be headed for disaster. you could be headed for disaster. you could be headed for disaster. If a If a If a If a

document contains information unfavorable to your position and you don’t show it to your expert; it’s a safe bet that the document contains information unfavorable to your position and you don’t show it to your expert; it’s a safe bet that the document contains information unfavorable to your position and you don’t show it to your expert; it’s a safe bet that the document contains information unfavorable to your position and you don’t show it to your expert; it’s a safe bet that the

other side will. Picture the scene where opposing counsel asks your expert, other side will. Picture the scene where opposing counsel asks your expert, other side will. Picture the scene where opposing counsel asks your expert, other side will. Picture the scene where opposing counsel asks your expert, “Mr. ……….., now t“Mr. ……….., now t“Mr. ……….., now t“Mr. ……….., now that you’ve read this hat you’ve read this hat you’ve read this hat you’ve read this document; does that change your opinion?”document; does that change your opinion?”document; does that change your opinion?”document; does that change your opinion?” The major reason expert witness testimony is invaluable can The major reason expert witness testimony is invaluable can The major reason expert witness testimony is invaluable can The major reason expert witness testimony is invaluable can bbbbe summed e summed e summed e summed

up in one word, credibility. If the expert loses credibility with a judge and/or jury; the result can be worse than if yup in one word, credibility. If the expert loses credibility with a judge and/or jury; the result can be worse than if yup in one word, credibility. If the expert loses credibility with a judge and/or jury; the result can be worse than if yup in one word, credibility. If the expert loses credibility with a judge and/or jury; the result can be worse than if you had ou had ou had ou had

no expert at all. no expert at all. no expert at all. no expert at all. I was taught, early in my career, to I was taught, early in my career, to I was taught, early in my career, to I was taught, early in my career, to never defend an untenable positionnever defend an untenable positionnever defend an untenable positionnever defend an untenable position....

Allow SAllow SAllow SAllow Sufficient Timeufficient Timeufficient Timeufficient Time

Give the expert enough advance notice that you will need his or her services. A wellGive the expert enough advance notice that you will need his or her services. A wellGive the expert enough advance notice that you will need his or her services. A wellGive the expert enough advance notice that you will need his or her services. A well----reasoned, logical opinion needs reasoned, logical opinion needs reasoned, logical opinion needs reasoned, logical opinion needs

to take into accoto take into accoto take into accoto take into account a multitude of factors; some of which may not immediately come to mind. In many of the cases I unt a multitude of factors; some of which may not immediately come to mind. In many of the cases I unt a multitude of factors; some of which may not immediately come to mind. In many of the cases I unt a multitude of factors; some of which may not immediately come to mind. In many of the cases I

have worked on, I was surprised that simply reflecting back on the facts caused me to have worked on, I was surprised that simply reflecting back on the facts caused me to have worked on, I was surprised that simply reflecting back on the facts caused me to have worked on, I was surprised that simply reflecting back on the facts caused me to remember additional facets whichremember additional facets whichremember additional facets whichremember additional facets which

added to oradded to oradded to oradded to or solidified my opinion. solidified my opinion. solidified my opinion. solidified my opinion. IIIIn one recent case, the attorney I was working with was surprised to learn about n one recent case, the attorney I was working with was surprised to learn about n one recent case, the attorney I was working with was surprised to learn about n one recent case, the attorney I was working with was surprised to learn about

certain industry customs that I had previously considered so mundane as to not be worthy of mentioning. This is sort of certain industry customs that I had previously considered so mundane as to not be worthy of mentioning. This is sort of certain industry customs that I had previously considered so mundane as to not be worthy of mentioning. This is sort of certain industry customs that I had previously considered so mundane as to not be worthy of mentioning. This is sort of

a bonus for plenty of advance warning and frequent comma bonus for plenty of advance warning and frequent comma bonus for plenty of advance warning and frequent comma bonus for plenty of advance warning and frequent communication.unication.unication.unication.

If a report is required, I always like to read it over at least a few times to make sure the thoughts conveyed present all If a report is required, I always like to read it over at least a few times to make sure the thoughts conveyed present all If a report is required, I always like to read it over at least a few times to make sure the thoughts conveyed present all If a report is required, I always like to read it over at least a few times to make sure the thoughts conveyed present all

the pertinent facts in an the pertinent facts in an the pertinent facts in an the pertinent facts in an ““““easy to read and understandeasy to read and understandeasy to read and understandeasy to read and understand”””” fashion. fashion. fashion. fashion. My past experience has been that a wellMy past experience has been that a wellMy past experience has been that a wellMy past experience has been that a well---- reasoned and reasoned and reasoned and reasoned and

wewewewellllllll----organized opinion or report organized opinion or report organized opinion or report organized opinion or report promotes settlement. promotes settlement. promotes settlement. promotes settlement. A A A A hurried expert analysis hurried expert analysis hurried expert analysis hurried expert analysis is usuallyis usuallyis usuallyis usually flawed flawed flawed flawed;;;; allowing allowing allowing allowing aaaan opposing n opposing n opposing n opposing

attorney attorney attorney attorney totototo have a field day question have a field day question have a field day question have a field day questioning a "rush job."ing a "rush job."ing a "rush job."ing a "rush job."

The attorneyThe attorneyThe attorneyThe attorney----expert team is critical to the successful litigation of complex casesexpert team is critical to the successful litigation of complex casesexpert team is critical to the successful litigation of complex casesexpert team is critical to the successful litigation of complex cases. Experts must be objective. Experts must be objective. Experts must be objective. Experts must be objective;;;; the the the the

expert's job is to vigorously search for facts and the truth. expert's job is to vigorously search for facts and the truth. expert's job is to vigorously search for facts and the truth. expert's job is to vigorously search for facts and the truth. Selecting the right expert for your needs is no easy task, but Selecting the right expert for your needs is no easy task, but Selecting the right expert for your needs is no easy task, but Selecting the right expert for your needs is no easy task, but

diligent work with experienced trial counsel in the selection and preparation process pays invaldiligent work with experienced trial counsel in the selection and preparation process pays invaldiligent work with experienced trial counsel in the selection and preparation process pays invaldiligent work with experienced trial counsel in the selection and preparation process pays invaluable dividends.uable dividends.uable dividends.uable dividends.bbbb

(About the author: Mr. Fried is a principal in Capital Finance, a litigation consulting and support firm specializing in complex (About the author: Mr. Fried is a principal in Capital Finance, a litigation consulting and support firm specializing in complex (About the author: Mr. Fried is a principal in Capital Finance, a litigation consulting and support firm specializing in complex (About the author: Mr. Fried is a principal in Capital Finance, a litigation consulting and support firm specializing in complex banking and commercial finance matters. He can be reached at (760) 776banking and commercial finance matters. He can be reached at (760) 776banking and commercial finance matters. He can be reached at (760) 776banking and commercial finance matters. He can be reached at (760) 776----5749574957495749 or or or or [email protected]@[email protected]@BankingExpertWitness.com) itness.com) itness.com) itness.com)

Copyright Copyright Copyright Copyright 2005 Capital Finance. All rights reserved. No portion of this article may be reproduced without the express written permission of the 2005 Capital Finance. All rights reserved. No portion of this article may be reproduced without the express written permission of the 2005 Capital Finance. All rights reserved. No portion of this article may be reproduced without the express written permission of the 2005 Capital Finance. All rights reserved. No portion of this article may be reproduced without the express written permission of the ccccopyright holdeopyright holdeopyright holdeopyright holder.r.r.r. Revised March, 2008) Revised March, 2008) Revised March, 2008) Revised March, 2008) 1 ,2 ““““My Kingdom for an Expert!My Kingdom for an Expert!My Kingdom for an Expert!My Kingdom for an Expert!”, By”, By”, By”, By Michael B. LeeMichael B. LeeMichael B. LeeMichael B. Lee, Beirne, Maynard & Parsons L.L.Beirne, Maynard & Parsons L.L.Beirne, Maynard & Parsons L.L.Beirne, Maynard & Parsons L.L.P.P.P.P.


©Steven I. Fried, Principal Capital Finance 45605 Navajo Drive Indian Wells, California 92210-8872 Email: Steven.Fried@Banking ExpertWitness.com Web: http://www.BankingExpertWitness.com Telephone: (760) 776-5749 Facsimile: (760) 776-9179

No matter how experienced you are as a lender or how much of your customer’s best interests motivated your actions; when a banking relationship runs into trouble the next two words you could easily hear are lender liability.

Good Banker or Lender Liability- A Banking Conundrum?

I was prompted to write this article because of the reflections I had on my own training and career in

banking contrasted with my experience as an expert witness in finance related cases. I was also thrilled to legitimately sneak in the word conundrum as the new buzz word in economic circles. Years from now, people will be able to date this article for using that word much like the buzz word of several years ago – gravitas. Nevertheless, I am concerned about the conundrum that exists between my training as a lender and my recent experience testifying as an expert witness in financial litigation.

I spent more than 30 years as a lender in commercial banks including over 20 years as a senior policy-making officer and turnaround specialist for troubled banks. In all the training I received and in the experiences I had, good judgment was a most valued ability. I have always worked in a decentralized lending environment where authority, analysis, judgment and responsibility were left to line lenders. After a long period of supervision and assessment of your skills, you were given authority to evaluate lending circumstances and make the decision on every type of loan situation; aggressive new loans, borderline customers and workouts. In fact, the loan administrations in which I worked insisted that the originating officer handle the workout if that circumstance should arise, in order to “learn from your mistakes.”

A bank, like any of its customers, is organized to make a profit. It, therefore, requires sales which are usually generated, in large part, by the very same officers responsible for granting loans. Banking is the only industry where the Salesman and the Credit Manager are one and the same person. One of my old bosses told me that being a loan officer was like “a barrel tapped at both ends.” The tap on one end is that you must provide intelligent loan decisions to establish and maintain the bank’s loan relationships while the tap at the other end represents your duty to protect the bank’s capital. Between those two tapped ends lies the conundrum.

There isn’t a business in the world that hasn’t run into difficulties at some point in its history. Sometimes difficulties arise from good things happening such as when sales growth outstrips working capital or problems can occur from not so good things like an unexpected supply shortage, rise or fall in market prices, etc. Sometimes the difficulties are just a “bump in the road” and sometimes they aren’t. It’s at these times that even the most experienced loan officer gets to really earn their pay; “Do I make the next advance or not?”. Interestingly enough, whether you decide to support your customer or “pull the plug,” you need to keep in mind two words – Lender Liability. Regardless of which way you decide to go, if things don’t work out well, you may be hearing them all too soon.

As I said at the outset, what prompted me to write this article was the apparent conflict between my training (and I think I had great training) and the rising volume and sophistication of lender liability claims. Judging by the inquiries I get and recent cases I have been involved with, lender liability claims are skyrocketing in number and size.


Banks, bank counsel and other interested parties have tried mightily to limit this expansion. Many states have passed laws to limit lender liability claims. Loan documents frequently contain mandatory arbitration clauses and a waiver of jury trial and courts have tried to narrow lender/borrower disputes to within the “four corners” of the loan documentation. All to no avail. In the “old days” a borrower might say “you should have never lent me that much money because you knew I couldn’t handle it.” Now the claims involve Fraud, RICO, at least five kinds of negligence along with the milder old favorites of Breach of Contract and the Covenant of Good Faith and Fair Dealing. Having watched the process frequently and at very close range over the past few years yet firmly believing in the tremendous economic benefits for all concerned of a well-trained, intelligent loan officer; what is a banker to do? (Conundrum - A paradoxical, insoluble, or difficult problem; a dilemma)

There are three things to do:

Hopefully, you have been doing this all along; but certainly when a borrower hits that first bump in the road and you are called upon to make difficult decisions; DOCUMENT, DOCUMENT, DOCUMENT. Assuming there are no blatant facts to undermine your actions to this point, the first place an experienced opposing counsel will look is to the bank’s policies and procedures searching for deviations between policy/procedure and actions. There are many other places they will look based upon the individual circumstances which are precluded here by space limitations. The key ingredient is that it’s okay to deviate from policy so long as you follow proper procedures and DOCUMENT the valid business reasons for your actions.

Second, I strongly suggest you read an article entitled “THE TEN COMMANDMENTS FOR AVOIDING LENDER LIABILITY” By Helen Davis Chaitman. Paraphrasing Commandment Number 1 (and I don’t believe it is a coincidence that this is the first commandment); “Thou Shall Take No Precipitous Action”. I have seen an awful lot of situations where the bank could have eliminated litigation, perhaps resurrected the relationship and saved tremendous amounts of money by only living up to this commandment. By following the other 9 commandments as well, you stand a good chance of avoiding further, very substantial liability and litigation.

Thirdly, should you find yourself in a potential lender liability situation, call us (a shameless self-promotion). Seriously, an experienced, credible and totally independent third party to vouch for the bank’s faithfulness to industry standards and practices can make the difference between recovery and loss.

(About the author: Mr. Fried is a principal in Capital Finance, a litigation consulting and support firm specializing in complex banking and commercial finance matters. He can be reached at (760) 776-5749 or [email protected])

© Copyright © 2005 Capital Finance. All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder.