Please note this was first published on July 21 and contained a few missing words at the end of the article. The link below will take you to the updated article. We apologize for the confusion this may have caused. 

SFNet’s co-general counsels bring readers up to date on recent lender liability cases and the lessons learned from them.
The past few years have seen strong liquidity in the marketplace coupled with unprecedented government support of certain borrowers; increased competition for secured transactions among banks and non-banks; and surprisingly fewer distressed transactions during the pandemic than would have been anticipated. As a result, lenders have not had to focus as much on managing distressed credits and the potential pitfalls and risks that are associated with them. As a few recent cases discussed below show, assertions of lender liability may arise in various contexts to an unsuspecting lender. The review by a court or other third party after the fact of actions of the lender, emails and other communications between a distressed company and its lender, and internal lender strategy discussions may result in unexpected exposure for the lender.

A complicating factor in many cases is that a lender often assumes that a court understands the structure of asset-based credit facilities as well as the lender. The concepts of overadvances, reserves, cash dominion, and the management of a collateral-based facility are generally understood in secured transactions across the finance industry, but may seem unusual to a court, especially when analyzing a distressed-borrower scenario. The recent Bailey case highlights this issue, and the cases discussed in this article also serve as a reminder that lender liability is alive and well, even in the current financing market.

For the full article please click here:

https://www.sfnet.com/docs/default-source/tsl-tslexpress/tsl0722_lenderliability.pdf?sfvrsn=463ad3d3_2