Commercial borrowers have been known to experience the pains of “buyer’s remorse” when faced with the realities of paying back a loan. They may feel in over their head with monthly payments, they may bristle at an interest rate which feels oppressive, they may even think that the lender did something wrong by lending the money in the first place. This feeling is natural when a borrower is enduring a monthly struggle while a lender sits back and collects profits over the long life of a loan.
Legally speaking, however, a commercial borrower usually has no recourse against a lender whose conduct is relatively above-board – that is, not fraudulent. Under California law, a lender general owes “no duty of care” to borrowers when the lender in a transaction “does not exceed the scope of its conventional role as a mere lender of money.” Generally, there can be no claim based on “improvident lending” or “negligent underwriting.” Court’s see lender/borrower transactions as “arm’s length” contracts which it would rather not disturb. As usual, however, there is an exception to the general rules that may apply in a variety of situations.
This exception can be found where a commercial lender is an “active participant” in an on-going relationship with a commercial borrower after the loan is funded. So, what qualifies a lender as an “active participant”? A leading 1968 California Supreme Court case held that a lender bank owed a duty of care to a commercial borrower when it “undertook business relationships” to help develop a tract of land for a housing development. The court reasoned that the bank knew that the developers were inexperienced, undercapitalized and that “damages from attempts to cut corners in construction was a risk reasonably to be foreseen.” While an aggrieved borrower may not have experienced the same circumstances as seen here, this case opens the door to arguing that an on-going lender/borrower relationship matters when assessing liability.
A more recent 2013 case further explores the question of when a commercial lender owes a duty of care to a borrower. This Court of Appeals case concerns a loan for a renovation of a pricey rental property. The plaintiff claimed that the bank lender failed to make money disbursements when they were needed, did not review his loan modification request in good faith despite reassurances from bank personnel. In essence, the plaintiff viewed the bank’s conduct as bent on foreclosure while it falsely claimed that it was working to resolve the issues to the borrower’s best interest. To aid in its decision, the court examined six factors known as the “Biakanja factors” to test whether the lender owed a duty of care to the borrower:
- The extent to which the transaction was intended to affect the borrower
- The foreseeability of harm to the borrower
- The degree of certainty that the borrower suffered injury
- The closeness of the connection between the lender’s conduct and harm to the borrower
- The moral blame attached to the defendant’s conduct
- The policy of preventing future harm
Like many legal tests, these six factors provide not much more than a framework for a court to work from. There is no fixed formula which renders commercial lender liability black and white. The good news is, these types of fact-intense tests can provide a basis for a skilled Business Attorney to effectively argue on a plaintiff’s behalf.