Understanding Lender Liability

Written by Economic Development Jobs on October 16, 2018. Posted in Intellectual property law, Partnership dissolution, Securities-related transactions

An enormous number of commercial disputes and bankruptcy filings go on each year in courtrooms, lawyer’s offices, and in front of an arbitrator. Some of the complex civil litigation issues can be difficult to understand. One issue that is not always well understood is the issue of lender liability.

What Is Lender Liability?

Lender liability is always the result of something the lender has done or failed to do. In general, lender liability comes into play when a lender has broken a federal or state law or has breached common law. It may also be the result of violating an agreement or harming or lying to a borrower in some way. Lender liability can arise both intentionally and unintentionally.

What Are the Penalties?

The penalty to be applied when a lender is liable will depend on each unique situation. Where a lender has been fraudulent or in some way wronged a borrower or broken the law, the lender may be held liable for damages and penalties. In bankruptcy court, lender liability may mean that a lender’s claims are subordinated to that of others or even canceled entirely. There may also be civil penalties or even criminal charges if state or federal laws have been broken.

Example Situations

Common Law Lender Liability

Typically, a breach of common-law happens when a lender attempts to exercise inappropriate control over borrower. This may manifest in forced re-negotiations of loan documents that favor the lender, or in attempts to restrict the borrower’s activities in some way. So long as the lender operate strictly within the law and within the confines of the agreement with the borrower, it is not common for liability to be applied in these cases.

Federal and State Laws

more commonly, lender liability is activated because of a breach of federal or state laws. These may be tax laws, security laws, racketeering laws, or violations of standards like the Fair Labor Standards Act. Legal liability may come into play if, for instance, there is a confidentiality agreement between the borrower and the lender which the lender violates in some way.

Real Harm

Another way that lender liability may be applied is if the lender does something to harm the borrower or any of the borrower’s other creditors. This type of violation is sometimes seen when a lender owns stock in the borrower’s company and uses their position as a stockholder to undermine the company or harm it in some way. If a lender owns stock as part of its collateral on a borrower, they must exercise reasonable care over that stock.

Constructive Fraud

Another way that lender liability can become an issue is if the lender lies in some way to the borrower at the time of the lending agreement. Even if the lender did not do this with intent to defraud the borrower, the borrower still may have a case for lender liability.

Lender liability is just one small part of the complex civil law code of the United States, and of each individual state. While it’s possible to get a basic grasp of an issue like liability from an article like this one, the safest course for any borrower or lender concerned about the issue is to contact a professional expert in civil law.

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