Lender Liability Risks – Oral Representations and Negotiations

By J. Patrick Murphy

Two recent lender liability cases highlight the risks lenders must consider when negotiating with and discussing proposals with borrowers.  Lender liability is based on many legal theories.  The cases discussed in this update illustrate potential liability based upon misrepresentation and promissory estoppel.

In Schrager v. North Community Bank, 358 Ill. App. 3d 696, 767 N.E.2d 376 (App. Ct. Ill. 2002), an Illinois court of appeals addressed the claims of an investor in a development firm that sued a bank and two of its officers for fraudulent and negligent misrepresentations about the development firm made during conversations between the investor and the bank officers.  At the time of the conversation, the bank held a mortgage on land owned by the development firm.  When the investor asked the bank officers about the owners of the development firm, the bankers told the investor that the owners were excellent developers and very good businessmen.  At the time the statements were made, the development firm had been overdrawn at least 57 times in the previous year and construction on the firm's projects had been delayed due to various disputes.  No additional inquiries were made by the investor to the bankers.  The appellate court determined that (a) it was for a jury to conclude whether comments by the bankers about the developer were opinions or factual affirmations, (b) facts were alleged sufficiently for a jury to find that the banker assumed a fiduciary role and (c) it was for a jury to decide whether the plaintiff justifiably relied on the statements by the bankers.

In Milandco Ltd. Inc. v. Washington Capital Corp., No. 97 8119, 2001 U.S. Dist. LEXIS 20770 (E.D. Pa. Dec. 12, 2001), a developer bought the rights to develop a golf course and soon thereafter, solicited and received a letter of intent from a bank for funding the development of the golf course.  The letter of intent included several conditions for closing, including the requirement of a written definitive agreement.

Following the delivery of the letter of intent, the parties negotiated and exchanged three drafts of the definitive agreement but the parties were unable to agree on a final form of the agreement.  No agreement was ever signed by the parties and the bank did not provide any financing to the developer.  The developer subsequently sued the bank on a number of lender liability theories, including promissory estoppel.  The trial court granted summary judgment for the lender on all counts.  However, the court of appeals reversed the trial court on one count, finding that a question of fact existed with respect to whether the representations made by the bank concerning agreements to provide financing were sufficient to support a claim of promissory estoppel.  Under Pennsylvania law, to establish promissory estoppel, the party must prove: (a) misleading words, conduct, or silence by the defendant; (b) unambiguous proof of reasonable reliance on the misrepresentation by the plaintiff; and (c) no duty of inquiry on the plaintiff.

The appellate court also rejected the argument that sophisticated parties should have known that the financing would not be made absent a signed definitive agreement.
As these cases indicate, lenders must be careful negotiating and discussing transactions with customers.

If you have any questions regarding these decisions or would like a copy of the cases, please contact any member of our Commercial Lending Group.
 

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© 2002 Chambliss, Bahner & Stophel, P.C.