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Theresa Driscoll Shares Insights On A Recent Lender Liability Decision With ABF Journal

Moritt Hock & Hamroff Partner Theresa Driscoll’s recent article in the ABF Journal examines a recent lender liability decision in the Bailey Tool & Manufacturing Company bankruptcy case and provides important guidance to lenders as to the line between proper enforcement of loan defaults and bad faith. Her article is highlighted in the “Most Innovative Companies” issue, released for the second quarter of 2022.

Last December, a bankruptcy court in Dallas issued a 145-page decision and entered an approximate $17 million judgment against the debtor’s prepetition lender for damages arising from the lender’s breach of the loan documents, breach of the duty of good faith and fair dealing, fraud (through fraudulent misrepresentations), and tortious interference with business and contractual relationships. The court sided with Bailey Tool, that claimed their lender made it impossible to continue their metal fabrication business even though they had contracts and the ability to fill them.

In its decision, the bankruptcy court found that the lender “grossly interfered” with the company’s business by:

  • Injecting itself into corporate governance by trying to remove the company’s president and owner and hiring consultants to make business decisions
  • Insisting on paying vendors and employees itself
  • Micromanaging which expenses were paid
  • Communication directly with the company’s customers and demanding they pay the lender instead, threatening litigation in the process
  • Employing armed guards at the company’s locations
  • Withholding advances in an “inconsistent or arbitrary” manner
  • A lack of transparency and misrepresentation of Bailey Tool’s available funds to create the illusion of default
  • Calling default for a condition known to the lender in underwriting
  • Demanding the company’s principal pledge their home as collateral, even though this is not admissible under state law

The bankruptcy court further determined that the lender’s conduct in the administration of the loan amounted to bad faith, and that Bailey Tool had a bright future were it not for the actions of the lender. This case offers valuable insight for lenders, and Driscoll shares these key takeaways to aid lenders in mitigating risk when aggressively pursuing repayment following an event of default:

  • Lenders should consider requiring issues identified during underwriting to be cleaned up before closing on the loan
  • Lenders should clearly communicate all actions taken under loan documents
  • Disclose all fees and expenses being charged at the time they are charged
  • Follow the loan agreement; if wishing to exit the agreement take steps consistent with the loan document.
  • Consider the consequences of your actions and how it will affect the image of the business you’re working with.
  • Be careful what is put into writing. Internal communications should be devoid of emotion that could demonstrate an improper motive.
  • Do your diligence before asking for additional collateral to ensure property is not exempt within state law.

As Driscoll says in the piece, “Recognizing the difference between aggressive enforcement and bad faith is critical to minimize risk for lenders.” She goes much deeper into the issues in her piece, including an analysis of factual findings that led to the bankruptcy court’s rulings.

If you have questions about loan enforcement, contact Driscoll’s team in the Secured Lending, Equipment & Transportation Finance Practice Group.


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