Assessing "Lender Liability" in Workouts

This article addresses some of the main theories by which lenders may be exposed to liability in a workout situation. So-called “lender liability” is not itself a separate cause of action. Rather, it is a term of art often used to describe a situation in which a lender has been found liable to a borrower (or others) for an act or omission of the lender. Much has been written on the potential liabilities faced by secured lenders in the context of the enforcement of their security— owner/occupier environmental liabilities, successor employer liabilities, liabilities resulting from improvident realization efforts, etc.—but little commentary in Canada exists on the potential liability risks to lenders in a workout situation where there is an existing lending relationship and some negotiation involving the restructuring of such loan (including forbearance of any rights or remedies) or a proposed transaction by the borrower subject to lender consent under the loan agreement.

This article seeks to add to the little existing commentary on the subject by discussing certain of the main potential bases of lender liability in a workout situation—namely, (i) where lenders are alleged to owe a fiduciary duty to the borrower and to have breached such duty and (ii) under tort theories, where lenders are alleged either to have acted negligently or interfered intentionally with the economic relationships or interests of the borrower. As we will discuss, while each of these potential risks of liability has been subject to a relatively considerable amount of attention and judicial consideration in the United States, in Canada, fewer examples exist in the jurisprudence. The jurisprudence that does exist, in general, appears to indicate that the risks to lenders in a workout situation are minimal, provided that a lender is acting qua lender and in accordance with its contractual rights.

Read the full article here (PDF).

Reproduced with permission of the publisher from National Insolvency Review, vol. 30, no. 1, February 2013.

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