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Thursday, July 26, 2012

Lender Liability - Think Before You Do Something Dumb-Again

Many long time Readers know that I was a licensed attorney in Colorado for several years. Later I worked in the Special Assets Department of a very large bank headquartered in Denver. Subsequent to that job, I managed a similar department for another bank. It was my legal background that brought me to the banks because my job involved the management and collection of problem commercial loans and the related sale of assets acquired through foreclosure or other legal process.

The story I am about to relate does not involve me personally. I do not feel comfortable naming names and identifying any of the people or institutions involved even though what happened occurred decades ago.  I am telling this story now because banks and bankers still do the dumb things that led to the chilling lesson learned by one time employer.

The Special Assets Department I worked in had four attorneys, two non-lawyers, and two secretaries. Our boss was a former tax attorney for the IRS.  He was a senior vice president who reported to one of two executive vice presidents.  The principal character in this story was a non-lawyer who I will call Harold. Harold haled from the Midwest. He fancied himself as being very smart. I think he thought himself to be smarter than the attorneys in the office-maybe even the smartest guy in the bank with 900+ employees.  He may have been. I am not sure. Maybe not.  But I know he thought he was smarter than most people because he had that "I am the smartest guy in the room" attitude. He always had a smart remark, a quick rebuke, or a knowing stare. He stood maybe 5'10" tall and always wore the bank uniform: a single breasted blue blazer and gray slacks. We didn't really have uniforms, but every lender on the commercial floor wore that same outfit at least once a week. Harold wore nearly every day.  He had awful breath. I can still smell it. He was a young guy, maybe thirty five years old when the incident occurred.  He had a college education from the big university in his home state. Harold was no rube.Like I said, Harold was smart. Very smart. 

The story takes place in Denver in the late 1970s. Banks located in Colorado at that time were individual entities. They were stand alone banks. They might have been affiliated with other banks whose stock was held by a holding company, but each bank operated as a single entity.  It was for that reason that the really big bank for which I worked made a large variety of loans throughout the state and even across state lines in some instances. The bank made loans to politicians. (Boy, could I tell you some stories about loans to politicians. But I won't.) The bank made loans to oil producers, farmers, and to small businesses and big businesses (sometimes through participation loans when the dollar amount exceeded the bank's lending limit). The bank also made lots of loans to regular retail bank customers in its personal banking and executive banking departments. Back in the 1970s banks did not make home loans.

One of the loans the bank made was to a borrower who owned and operated an egg production facility located east of Denver. I referred to the place as huge chicken condos where thousand of chickens lived in cages. I was not involved in this loan at any time. I made only one visit when I accompanied Harold to inspect the chicken condos which on that date had no chickens. The place had no chickens or any sign of life.  And that is why Harold and the bank got sued by the borrower.

As I recall the borrower alleged that Harold and the bank over-reached its rights as a secured creditor and engineered an event of default which was the pretext for the bank taking possession of the chicken condos and other collateral which the bank then sold.  I recall Harold had obtained a court order giving him the right to enter upon the property and seize the collateral before he actually stepped foot on the property. The borrower hired some smart lawyers (they always manage to do that) and filed suit in Denver District Court and naming the bank and Harold as defendants. The borrower alleged the initial court order obtained was based on incorrect information that Harold supplied and upon which the court relied and that the subsequent taking and liquidation of collateral were improper from the beginning. A jury trial was had months after the chicken condos were seized. I recall that the trial lasted about a week. Can you imagine how much that cost the bank to defend? Bank lawyers don't work cheap. They churn out hundreds or thousands of billable hours to do research, take depositions, prepare for trial, and then sometimes try the case. They work in groups and carry lots of banker boxes filled with papers.Every minute that they talk to each other or someone involved in the case becomes billable time. And the big bank pays for each and every billable minute like clockwork.

At the end of the trial the jury reached its verdict. The jury found in favor of the borrower and against the bank and Harold.The bank lost its claim to any remaining collateral on the loan and had a monetary judgement entered against it in the amount of one million dollars. The judgment had to be paid (or bond posted in the event of appeal). The bank elected to pay the judgment and limit the loss.

The borrower did not trust the bank. I know why.  Few people really trust banks.  The borrower demanded to be paid the one million dollars in cash. He showed up at the bank with his attorney and a suitcase. A bank guard stood by as a bank officer (not Harold) handed over the money which was counted for accuracy. The borrower left the premises with the bank guard protecting him until he exited the front door.

Fast forward thirty-five years. Banks still have special assets departments and workout officers who deal with collecting problem loans. Sometimes they have characters like Harold who over-reach in trying to collect those loans. Bankers are supposed to rely on the advice of legal counsel when developing and implementing a collection strategy. I'm pretty sure Harold felt he had acted correctly because he got a judge to give him legal authority to go upon the borrower's premises to seize control of the chickens and the real property. The jury that reviewed his conduct months later, however, did not agree.

It seems that no matter how smart some people are or how much training they may have had, some people, like Harold, continue to do dumb things that cause big banks to have to pay up for what judges and juries decide was egregious behavior. There is a legal term for this kind of conduct: lender liability. The borrower typically claims that the lender pursued the borrower so aggressively that the lender's conduct drove the borrower out of business or destroyed the value of the collateral securing the loan. Sometimes borrowers allege that the lender's conduct in the sale and disposition of the collateral, even if rightly seize and sold, impaired the value of the collateral and reduced the amount due care would have generated had the collection and sale process been handled properly. And sometimes the borrower becomes physically or emotionally distressed for which additional monetary compensation is sought. If you have been sued by a big bank or had your home foreclosed upon or your business seized, you may understand the trauma that some borrowers really go through. If you are a banker you would think before you do something dumb-again.

I often tell people I have been plagued by jobs that I have held. I have been a lawyer, a banker, a federal government employee, and a Realtor. All jobs normal people hate.  I never really liked associating with bankers outside of where I worked. Many have the same arrogant attitudes that Harold had. Many are as cheap as any human being I have ever met, except when it came to buying a meal on expense account. And I found some took a bit of pleasure in making other people squirm. I left that life and those people behind when I moved to Key West where today I sell real estate. Today I help people buy dream houses in Key West.

1 comment:

Fred DeFalco said...

Great story, I have a banker in the hen house right now see


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Gary Thomas in a Nutshell

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Key West, Florida, United States
I first read about Key West in a magazine called "After Dark" sometime in the mid 1970's. But it wasn't until March 1984 that I made my first visit to the island that would become my home. I had two weeks for a vacation and reserved a room at Colours Guesthouse (now Marrero's Guest House) for one week. I thought that if I didn't like Key West, I could always go back to Miami or Ft. Lauderdale for the rest of my trip. But after a couple of days in Key West, that was no longer a consideration. But when I wanted to extend my stay for the extra week I found there was no room at the inn. The guesthouse owner did find me a room at LaTeDa, the infamous guesthouse/restaurant. That's a story I'll write another day. But those two weeks in Key West gave me the realization that I had found Paradise. Key West has been my home since 1993 and my only regret is that it took me so long to get here. I am a full time Realtor at Preferred Properties CRI. Let me help you find your new home or business in Paradise. Living in Paradise is not a slogan, it's a way of life.