Lender Liability in Construction and Real Estate Financing
| Autor | José A. Díaz Brugueras |
| Páginas | 145-166 |
LENDER LIABILITY IN CONSTRUCTION AND REAL ESTAT E
FINANCING
JOSÉ A. DÍAZ BRUGUERAS
I. Introduction .......................................................................................................................................................... 165
II. Lender Liability Arguments – Contract Th eories ................................................................................ 167
A. Anticipatory Repudiation ......................................................................................................................... 167
B. Promissory Estoppel and Negligent Misre presentation ............................................................ 170
C. Conditions Precedent – Lender Satisfaction .................................................................................... 174
D. Acceleration ................................................................................................................................................... 175
E. Bad Faith or Breach of Implied Covenant of Good Faith and Fair Dealing ......................... 176
III. Lender Liability Arguments – Non-contrac t and Tort Theories ................................................. 178
A. Instrumentality ............................................................................................................................................. 178
B. Equitable Subordination .......................................................................................................................... 181
C. Fraud and Related Theories .................................................................................................................... 182
IV. Remedies ............................................................................................................................................................. 184
V. Conclusion ............................................................................................................................................................ 186
It has been said that the love of money is the
root of all evil. The want of money is so quite as
truly.”1
I. INTRODUCTION
Economic prosperity and industry booms do little to portray the extent to
which individuals and corporations reach in order to protect their financial
interests. It is during economic hardships and recessions, periods such as the
one we are currently going through, when the true colors of contracting
parties in financing agreements are revealed.
As Puerto Rico’s economy continues to deteriorate, and the real estate
industry along with it, we may expect continuous foreclosures and frequent
litigations in the near future regarding defaulted construction loans. Along
with these foreclosures will come numerous defensive arguments, on behalf
of borrowers, who will do anything to avoid the onerous results of
foreclosures and the subsequent execution of personal guarantees that
comes with them. One of these arguments, Lender Liability, will be discussed
and developed in this article through the examination of treatises,
jurisprudence, and actual situations which I myself have had the opportunity
to witness. Predominantly, I wish to examine cases under which courts
1 SAMUEL BUTLE R, EREWHON, 179 (1872).
166
U.P.R. Business Law Journal
Vol. 2
sustain the lender liability argument and what are the remedies granted to
the prevailing party, with particular focus on construction loan agreements.
Unsurprisingly, lender liability gained prominence and acceptance as
a substantive body of law during the early 1980’s,2 at which time the United
States was also experiencing a deep recession. Lender liability law basically
consists of the principle that lenders must treat their borrowers fairly and, in
those instances in which they do not, they can be subject to borrower
litigation under a variety of legal claims.3 Indications of potential lender
liability include inordinate lender control, atypical lending practices, lack of
professionalism, abuse of a special relationship, and conflicts of interest.
Lender liability theories often permit a plaintiff to go beyond the four corners
of loan documents. According to Edward F. Mannino:
Awards in recent lender liability suits have been obtained on a wide
range of theories – tort, contract, and statutory, some new and some
old. Breach of contract, fraud, misrepresentation, duress, control,
and intentional infliction of emotional distress are each settled
common law doctrines, which are now being applied to lender
liability cases, while bad faith, breach of fiduciary duty, and joint
venture are new or evolving common law doctrines of lender
liability. Statutory requirement, including those set forth in RICO,
CERCLA, federal tax, and federal securities laws, also supply
additional theories of lender liability.4
Throughout this article, the different theories under which lender
liability awards have been obtained and which may apply to construction
financing agreements will be discussed in further detail.
As it pertains to Puerto Rico and its jurisprudence, although the
doctrine of lender liability, as such, has not been the direct target of scrutiny,
the local Supreme Court has had more than enough opportunities to examine
most of the theories under which lender liability claims have been upheld.
Namely, Puerto Rico’s Supreme Court has thoroughly examined the theories
of breach of contract, fraud, misrepresentations, estoppel, good faith
requirements, and excessive control by lenders. We should expect some new
local jurisprudence in the next few years with regards to these topics and
how they pertain to real estate financing, as there are currently dozens of
large foreclosure suits and borrower counterclaims either in the District
Court or in the Court of Appeals. Nevertheless, given the lack of substantive
2 Cappello & Noël, LLP, What is Lender Liability? (1999), available at
http://www.cappellonoel.com/news_articles/what_is_lender_liability.html.
3 Id.
4 Edward F. Mannino, New Developm ents in Lender Liability: Theor ies of Lender Liability
Litigation, 1993 A.B.A. SEC. BUS. L. 3.
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