LENDERS’ LIABILITY
Banks that play hardball with borrowers are finding themselves the target of suits alleging breach of good faith, breach of fiduciary duty, fraud, intentional infliction of emotional distress and even slander.
Not long ago, the main thing banks had to worry about was whether their borrowers could pay their loans back on time.
Today, bankers face a new concern that was spotlighted in California last month by a pair of multimillion-dollar jury verdicts favoring troubled farm borrowers over Bank of America and Wells Fargo Bank, respectively.
Already faced with the specter of default by borrowers in distress, bankers now must also face the very real worry that these borrowers will file suit against them--and win--under a new legal doctrine known as lenders’ liability.
“It is one of the hottest areas of the law today,” said Edward M. Waller Jr., a Tampa, Fla., lawyer who co-chairs the American Bar Assn.’s Banking Litigation Committee. “Courts are recognizing new causes of action and new duties that banks never faced before.”
Banks that play hardball with their borrowers today are being held liable for compensatory and punitive damages under such causes of action as breach of good faith, breach of fiduciary duty, fraud, intentional infliction of emotional distress and even slander.
In a typical lenders’ liability suit, a distressed borrower will argue that the bank made conditions worse by suddenly calling in a loan, seizing collateral or failing to live up to an agreement to extend further credit.
Most Cases Thrown Out
To be sure, such lawsuits are not easy to win. A debt, after all, is a debt. Nine out of 10 lenders’ liability cases get thrown out of court, experts say, and the huge punitive damages that juries sometimes award are almost always reversed on appeal.
Still, bankers are clearly worried by the trend. Across the country, they are flocking to seminars to learn how to revamp procedures to avoid roughshod treatment of borrowers who have problems meeting their obligations.
“Bankers must be reasonable when dealing with problem credits--and, more importantly, must be able to document to a jury’s satisfaction that they are being reasonable,” said St. Louis attorney Maury Poscover, chairman of the Commercial Financial Services Committee of the American Bar Assn.
“Anything that smacks of bad faith can get them in trouble in front of a jury,” he added. At the seminars, bankers calling in loans are urged to give their borrowers plenty of time to line up new financing and to resist the temptation to take a direct hand in managing the debtor’s business.
It is no coincidence the two recent celebrated court decisions in California--Robert Stanghellini’s $50-million win against Bank of America in Sutter County and Garth Conlan’s $60-million victory over Wells Fargo in Monterey County--involved farmers.
Such lawsuits, by their very nature, originate with troubled borrowers, a group in which farmers are well-represented as a result of the sustained downturn in agriculture that began in the early 1980s. More than a dozen such lawsuits involving farmers are pending in California, lawyers say, and more are on the way.
“I get phone calls from farmers every day,” said Lodi, Calif., attorney Richard R. Murphy, who represented Stanghellini and has half a dozen similar lawsuits pending.
Barry Capello, a Santa Barbara attorney who won a $47-million verdict--reduced on appeal to $26 million--for a Sebastopol, Calif., apple grower against Bank of America, notes that banks poured billions of dollars into agriculture in the 1970s, confident that the loans would be repaid because of soaring land values.
“Then money got tight, all those asset-based loans went to hell and the banks--especially the sick banks--panicked and started to move against their farm borrowers,” Capello said.
He said he turns down at least nine out of 10 cases brought to him. “I only take the real nightmares and horror shows,” he said.
And while the doctrine of lenders’ liability applies to all borrowers, “it is a good deal easier for a farmer or other unsophisticated borrower to make a case,” Waller, the Tampa lawyer, said. Judges and juries view the farmer as being at a disadvantage in dealing with banks and their batteries of lawyers.
“The farmer is the epitome of the American dream. Farmers’ cases against big institutions like banks play very well in front of rural juries,” said Poscover, who represents banks and generally takes a dim view of such lawsuits.
Lodi attorney Murphy predicts a new wave of lawsuits involving all kinds of troubled borrowers as a result of recent well-publicized decisions. “It isn’t just farmers that are getting hosed, it’s all kinds of businesses,” Murphy said.
“And it isn’t just Bank of America that’s doing the hosing. The bankers all went to the same school. You can’t believe how deceptive and duplicitous they are until you sit through a trial, like the jury in the Stanghellini case did,” Murphy added.
B of A Appealing Verdict
Bank of America, which denies any wrongdoing, is appealing the verdict. “Our basic position is that these lawsuits are based on a false premise--that somehow we want our borrowers to fail,” spokesman Peter Magnini said.
“We make our money when the borrowers pay us back,” he continued, adding that “these are serious judgments that are part of the larger pattern of distress in agriculture.”
Stanghellini charged that Bank of America encouraged him to borrow money in ever-increasing sums and to boost his production beginning in 1980.
By 1985, after several successive tomato crop failures, his operation was deeply in debt and the bank refused to advance more money until his elderly mother and aunt pledged $800,000 as additional collateral.
Then, Stanghellini’s lawsuit charged, the bank cut off his credit and seized the collateral. “First they gained our confidence, then they grabbed everything,” Stanghellini said in a telephone interview.
“They broke bread with us. They advised us on how to run our business. One of their lending officers even said my mother and aunt reminded him of his mother. He called them his ‘favorite people,’ ” the farmer said.
Stanghellini, whose family had farmed its Robbins, Calif., ranch for more than 50 years and whose grandfather had been a friend of Bank of America founder A. P. Giannini, and his relatives were awarded $20 million in compensatory damages and $30 million in punitive damages.
The other big winner last month was Garth Conlan, a Castroville strawberry and vegetable farmer who was awarded $10 million in actual damages and $50 million in punitive damages against Wells Fargo.
Conlan contended that the bank forced him into bankruptcy in 1984 when it yanked his credit after he had run up a debt of more than $5 million.
The bank also instructed customers of Conlan’s to send their payments directly to Wells Fargo--creating, in the eyes of the jury, a duty to handle those funds as a trustee or custodian would.
Wells Fargo has vowed to appeal, saying through its attorneys that the decision could have a major effect on California’s banking industry because it appears to expand the body of law governing relationships between borrowers and lenders.
Effect of Case Disputed
Conlan’s lawyer disputes that view. “The only thing precedent-setting about this case is the magnitude of wrong by Wells Fargo,” San Francisco attorney William M. Lukens told the American Banker, a trade publication, last month.
In any case, lenders’ liability lawsuits are now a permanent part of the legal scene--and they are getting bigger.
Last year, the Hunt brothers--famed Dallas oil magnates--sued 23 banks charging deception and fraud in connection with loans to their troubled energy businesses. The Hunts are seeking treble damages of $15 billion.
