Matthew J. Forstadt Banking Law Blog on Lawyers.com

As corporate lawyers in Las Vegas who practice national and Las Vegas commercial law and handle banking law matters on a local and national level, at Kolesar & Leatham we are often presented with cases that involve lender liability.

In the 1980’s lender liability claims and defenses made many a lawyer rich, left bankers befuddled and did little to advance the course of justice.  Lender’s liability is an umbrella term for a lender’s actual or potential liability to its borrower or third parties for claims relating to a loan.
 
Perhaps the most talked-about theory of lender liability is the concept of good faith and fair dealing. Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. The covenant of good faith and fair dealing requires that neither party do anything to deprive the other of the benefits of the agreement.  In the event of breach, general tort remedies might be available to the borrower. The obligation of good faith present in every contractual relation is not an invitation to the court to decide whether one party ought to have exercised the rights provided to it by agreement. Rather, it is an implied undertaking not to take opportunistic advantage of a borrower. When the contract is silent, the principles of good faith and fair dealing fill the interstitial gaps.

The objective standard of good faith is one of honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. To prevail, the borrower must present evidence that the lender acted in an arbitrary, capricious, or unreasonable manner that exceeded the borrower's justifiable expectations.  For example, in what could be a classic case, the borrower and lender operated for years under a line of credit loan secured by a blocked account into which all revenues were deposited and credited against the loan balance, giving the lender total control over the borrower's cash flow. When the bank refused to advance additional funds, the borrower, unable to use the blocked account, collapsed. The court held that the lender must have a legitimate objective for cutting off funding and must give adequate notice of its decision. In a case such as this, the damages to be paid by the lender can be in the millions of dollars over and above the amount of the unpaid loan.

When the loan documents give the lender discretion, the covenant of good faith and fair dealing will be implied so that the lender must exercise that discretion reasonably and not arbitrarily and capriciously. Bad faith, or the absence of good faith, will not be found if the lender acts in the manner authorized by the loan documents and if the circumstances justify the lender's action and the way such action was taken. 

If you want to learn more about good faith and fair dealing and other lender liability issues you can access a full version of the article Lender's Liability - The Claims, They Are Going to Keep on Coming on our website and find out more about our team of experienced Las Vegas business attorneys.

Kolesar Leatham & Chartered
3320 W Sahara Ave # 380
Las Vegas, NV 89102
(702)979-2357