The types of lender liability claims that are frequently made include the failure to honor a loan commitment or to fund a loan, improper servicing or exercise of remedies (particularly in liquidation), and breach of contract or fiduciary duties. Such claims might be made on their own, or in an attempt to prevent a lender's enforcement of the loan against the borrower.

Lenders-including those making SBA loans, who must address specific SBA requirements in addition to ordinary prudent lending principles-must carefully balance the need to properly document, service and liquidate a loan against the risk of taking the types of actions that might give rise to a lender liability claim.  This can be particularly challenging when the borrower is not represented by counsel, lacks the sophistication to understand some of the documentation that is required, and solicits the lender to perform the very act that could provide the basis for the borrower's later lender liability claim: the drafting of the borrower's own non-loan documents. This article will focus on bases for lender liability claims rooted in the documentation process.

When documents relate to the borrower alone, and are not, strictly speaking, "loan documents," assisting the borrower in their preparation creates substantial risk, as the lender assumes control of a document to which it is not a party and expects to receive no direct benefit.  The lender's drafting may not reflect the borrower's actual intent with respect to its business, may impose on the borrower obligations it did not attend to assume, may alter relationships between the borrower and third parties, or may result in tax consequences that are unexpectedly (and avoidably) onerous. Examples of documents, the drafting of which might seem innocuous but which create significant risk to the lender, include:

• purchase agreement and amendments thereto;
• corporate documents such as bylaws, partnership or LLC agreements, resolutions and member or partner certificates; and
• lease agreements to which the borrower is a party.

While the lender bears lesser risk from advising the borrower of terms that such documents will need to reflect in order to allow the loan to be made compliant with SBA regulations or lender underwriting or from reviewing documents to make sure that they contain necessary terms, a much more significant risk arises when the lender (or counsel retained by the lender) drafts those documents for the borrower. The preferable course of action is to advise the borrower to retain a professional to prepare the documents or, less preferably, to suggest that the borrower purchase and complete form documents.  In some situations, brokers working with the borrower can facilitate the preparation of documents.  Such alternatives will significantly reduce the likelihood of a successful lender liability claim against the lender 

For more information regarding lender liability, please contact Amy at abrownstein@starfieldsmith.com or at 215.542.7070.  

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