James R. Balmforth: Complex Lender Liability Issues In Foreclosure

Lender liability is an area of law that protects borrowers who have been wronged by lenders that failed to uphold their contractual obligations or treat them fairly in regard to loans and loan agreements. Whether borrowers have contractual relationships with lenders for small operational expansions or to fund multi-million dollar projects, financial service providers must treat them fairly. When they don’t, borrowers have a right to take action.

When determining whether it is time to pursue legal action against a lender, and involve an experienced attorney to guide you through the process, consider the following:

• Breach of contract: Lenders have long used civil lawsuits to sue borrowers who breached loan agreements. With the rise of lender liability, borrowers now also have a right to sue lenders who breach contractual obligations established in a loan agreement, such as failing to honor a loan commitment. By working with attorneys who have experience in this area of law, borrowers can position themselves to bring effective claims and seek recoveries of their damages.

• Fraudulent conduct: Lender liability may arise from the fraudulent conduct of lenders, such as fraudulently induced agreements, misrepresentation, predatory lending, or other violations of state or federal laws, including the False Claims Act. While fraud may result in criminal investigations and criminal penalties or civil sanctions, borrowers will need to take legal action in civil court to recover their own damages.

• Breach of fiduciary duty: Fiduciary duty refers to the obligation one party (the fiduciary) has to act in the best interest of another. Depending on the circumstances, lenders may argue to limit borrowers in bringing claims that the lender-borrower relationship was fiduciary in nature. However, borrowers can work with attorneys to explore their options in determining whether a fiduciary duty may have arisen in regard to carrying out loan agreement terms or was assumed by a lender due the scope of their control over a borrower.

• Bad faith: Lenders have an obligation to deal fairly with borrowers and handle loan agreements and relationships in good faith. There are many ways they may fail to do this that can be grounds for lender liability claims, including improper default or foreclosure notices, improperly enforcing personal guarantees, wrongfully interfering with third party contractual relationships or a borrower’s daily activities, wrongfully failing to honor or renew loans, and more.

Lawyer objective in lender liability cases is to ensure banks, financial services, and other lenders treat their customers and borrowers fairly. Because these financial institutions have considerable power and deep resources, working with an attorney becomes critical to leveling the playing field. As such, borrowers who have been wronged by lenders that violate a duty of fair dealing or good faith should take initiative to involve a lawyer as soon as they can. Doing so can make the difference in one’s legal journey, and can help ensure the correct steps are taken at every phase. Lender liability is a complex and evolving area of law, and it is not one all attorneys are equipped to handle.

Avoid Legal Liabilities In Bank Foreclosures

The involuntary sale of real estate properties by banks or other note holders can expose the latter entities to lender liability suits and/or liabilities or liens that pass with the property if either proper procedure is not followed. Avoid additional legal trouble by working with an experienced lender’s lawyer.

Our mortgage lender foreclosure team manages the entire process including:
• Ensuring the chain of paperwork is complete
• Establishing the note holder’s right to commence foreclosure action
• Providing notice prior to sale of foreclosed property
• Attending mediations as required by court rules
• Spotting potential liability issues that the lender could face upon assuming title to real estate owned properties
• Advising on title insurance issues and asserting title insurance claims when appropriate
• Obtaining required ratification orders
• Drafting audits
• Closing on the passage of title instruments
• Determining the costs and benefits of pursuing a deficiency judgment after a loss

Managing Lender-Owned Property

As the economic and real estate landscape evolves, so do the legal implications of handling foreclosed property and bank owned homes. For this reason, it is crucial to remain up to date on jurisdictional and statutory requirements such as whether “as-is” clauses in legal ads are effective in the jurisdiction or if an affirmative obligation to make disclosures concerning the real estate is required. Similarly, the Uniform Commercial Code carries its own strict set of statutory rules that must be complied with in order to pass good title to the property acquired by a lender in the event of a UCC foreclosure and avoid jeopardizing the ability to obtain a deficiency judgment, which rules are especially sophisticated when intangible property changes hands. In addition to overseeing the foreclosure process in court, Ascent Law LLC has bank lawyers can also help parties avoid liabilities associated with the sale of the foreclosed property.

Attorneys should consult with you on all relevant points including:
• the cost/benefit of promotional advertising
• appropriate auctioneers
• bidding strategy and terms of sale

Avoiding Foreclosure Auctions

In some cases, foreclosure may not be the best course of action for asset protection. With advice of legal counsel, a “deed in lieu of foreclosure” solution may be possible. Furthermore, lenders may opt instead to work with the property owner, bringing payments up to date, or working out other more cost effective alternatives. Whatever course of action is ultimately chosen, compliance with all applicable state and federal laws are mandatory. Working with an experienced mortgage lending law firm is the best way to ensure that the chosen course of action meets all legal requirements.

Lender Liability Defenses

Common types of lender liability defenses – An attorney represents financial institutions involved in commercial litigation over the following types of lender liability allegations:
• Commercial foreclosure issues
• Bank or mortgage fraud
• Predatory lending
• Misrepresentation
• Breach of contract
• Breach of fiduciary duty
• Bad faith claims
• Usury

Understanding Lender Liability Lawsuits

Lender liability lawsuits borrow from two areas of law: Tort claims and contract law. Contract claims involve a breach of contract or breach of a loan agreement. Tort claims allege that some financial injury occurred to the borrower due to:
• Fraud,
• Negligence,
• Breach of fiduciary duty,
• Fraudulent concealment, or
• Breach of the implied covenant of good faith.
In tort cases, a borrower typically alleges that the lender is guilty of some kind of malfeasance and that the initial contract is unenforceable. For example, if a borrower alleges that a lender agreed to extend the maturity date of a loan upon request and then refuses when the time comes, the borrower can bring a lender liability suit against the lender. Key to cases alleging negligence is the extent to which a lender owes a borrower a duty of care. A possible defense to a tort claim is that the lender owed the borrower no such duty and fulfilled their end of the loan contract that the borrower agreed to. However, this would not insulate a lender from a claim of fraud or fraudulent concealment. Even in cases where a duty of care can be established, the lender can argue that the borrower was also negligent. A lender can also blame a third party for contributing negligence to the borrower’s damages. Lastly, a suit against a lender must be brought within the statute of limitations.

Litigating Lender Liability Lawsuits

To avoid lender liability lawsuits in the first place, lenders should require that borrowers sign a forbearance agreement as a contingency to negotiating a settlement. The agreement should contain standard releases and waivers as well as an alternative dispute resolution requiring mediation prior arbitration or lawsuit. This ensures the borrower cannot file any action in a court of law against the lender. However, in certain cases, the borrower will still be entitled to a jury trial.

What To Do After A Lawsuit Has Been Filed

After the borrower has filed a lender liability suit, the lender is tasked with examining the merits of the case against them. The lender will need to:
• Be responsible for gathering facts and evidence,
• Place an internal hold and preserve all documents related to the borrower
• Investigate the terms of the agreement to determine whether or not an arbitration clause exists. If it does, the case can be moved out of the courts.
Mediation is not outside the realm of possibility, and the lender should also analyze whether or not the borrower can file for bankruptcy.

Responding To a Lender Liability Lawsuit

After the lender has determined that there are no grounds on which to compel arbitration, the first move in a lender liability suit is to find any grounds on which to dismiss the case. The lender may also want to move the case from state to federal court. The most aggressive response at the lender’s disposal is to file a cross-complaint or an anti-SLAPP motion.

Anti-SLAPP Motions In Lender Liability Lawsuits

SLAPP suits (known as strategic lawsuits against public participation) allege that the plaintiff in a suit is attempting to silence or intimidate the defendant by burdening them with the cost of a lawsuit. The defendant must prove that the lawsuit lacks even a modicum of merit. If a defendant files an anti-SLAPP motion, the court will determine, based on the merits of the case, whether or not the lawsuit should move forward. To determine whether or not a lawsuit has merit, the court will use a two-factor test. First, the court will decide whether the suit hinders the exercise of the defendant’s constitutional rights. If the court determines that the suit does impede the exercise of the defendant’s rights, the court will then determine whether or not the lawsuit has a probability of prevailing based on the merits of the claim. If the court believes the case has no merit, or is unlikely to prevail based on the evidence presented, the anti-SLAPP motion will be granted and the case will be dismissed. Anti-SLAPP motions are best employed if a defendant files a lawsuit in retaliation after a lender has exercised their rights to collect a debt.

Advantages of Borrower Representation

Due to the knowledge and insight into the strategy of a lender liability defense, a lawyer who represents lenders may have a slight advantage should he or she come to represent a borrower. In these cases, the attorney will need to determine what duties the lender owed to the borrower. He will also need to determine whether the lender broke or breached the trust or contract.

Bank and Lender Liability

Lender liability litigation typically includes claims for breach of fiduciary duty, promissory estoppels, breach of contract, or related statutory violations. The claims typically allege that the lender engaged in conduct that resulted in the failure of a project or undertaking by the borrower. Lender liability claims are oftentimes complex, both in terms of developing the facts and applying the relevant law. We have experience with these claims. Foreclosure litigation proceedings require a firm with a particular understanding of Utah foreclosure law, as well as experience with the types of complicated legal issues that these cases typically pose. Attorneys have experience in the various types of legal issues facing the mortgage lending and servicing industry. Attorneys possess the skills to manage complex foreclosures involving residential homes, condominium projects, office buildings, apartment complexes and other commercial properties. Real Property Litigation practice includes foreclosure on defaulted mortgage loans, deeds in lieu of foreclosure and the sale of REO properties for our mortgage lenders. In addition, the practice encompasses trial and appellate representation before federal and state courts. Attorneys counsel and defend clients on matters involving the Truth-in-Lending Act (TILA), the Fair Credit Reporting Act (along with state credit reporting acts), Fair Debt Collection Practices Act (FDCPA), Fair and Accurate Credit Transactions (FACTA), Real Estate Settlement Procedures Act (RESPA and the Consumer Protection Act Equal Credit Opportunity Act (ECOA). Working closely with Bankruptcy and Restructuring Department, representation of lenders and loan servicers extends to serving as counsel in connection with the purchase or sale of debt, restructuring, and the enforcement of the rights of lenders, including commercial mortgage foreclosure proceedings and bankruptcy lift-stay proceedings.

Foreclosure Attorney Free Consultation

When you need legal help with real estate law and foreclosures in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.