Originally From:
Lender Liability - 4th Edition - Hardcover
Lender Liability - 4th Edition - Electronic
Improper Control - Chapter 16 - Preview Page
§ 16.01 Overview
While liability for improper control is not imposed as often as liability
for other lender misconduct, the potential impact of control liability may
be devastating. If a bank is in control of a business that generates or stores
hazardous wastes, that bank may find itself picking up the tab for a multimillion
dollar cleanup. Alternatively, a lender that exercises too much
control over a borrower may inadvertently step into the borrower's shoes
and thereby become liable for all of the borrower's debt.
While the mandate to lenders to avoid undue control is clear, it is
less clear how to conform to that mandate. Part of this problem is due to
the lack of a well-defined and well-accepted test for undue control.
Conduct that is commended in one case may be condemned in another.
This may be a reflection of the differing ways improper control is
being asserted: a court may find sufficient control to justify equitable
subordination, but not the imposition of affirmative liability. As the law
on control develops, uniformity may result. In the meantime, courts will
probably continue to weigh various indicia of control and find against
lenders when the scales tip too heavily toward undue control.
§ 16.02 General Principles
Whenever a lender has anything other than an arm's-length
relationship with a borrower, the potential for control liability exists.
Control is generally considered the domination and direction by a lender
over the conduct of the borrower or the borrower's business. The
question, "At what point does control become so great that it results in
liability?" has been the determinative issue in many lawsuits.
The desire to control may be motivated by a lender's good faith
belief that it is protecting both the borrower's and its own interests.
Lender control may even be exercised with the full cooperation and
consent of the borrower. While the borrower may have waived any
claims it may have against the lender or be estopped from asserting them
in such a situation, nevertheless, third parties, including the borrower's
other creditors, can base a legitimate control case on the fact of control.
Lenders commonly insist that borrowers, especially troubled ones,
meet certain requirements to qualify for an initial loan or, later, to
continue to receive financing. In most situations, the lender is exercising
a legitimate right to protect itself by ensuring the loan will be repaid. The
