South Florida financial institutions must be scrupulous in their dealings with their lending customers. If a bank engages in questionable actions that result in financial harm to the customer, it may become a prime target for a lender liability lawsuit.

Over the past few years, the number of lawsuits against lenders has increased, reflecting the region’s economic downturn and slow recovery. The continuing tight credit market has also put more stress on banks and borrowers, increasing the risk of a lender liability lawsuit.

There are many ways a bank’s actions can be viewed as “self dealing” by the courts. In one recent case, a bank became aware of a check-kiting scheme and attempted to protect itself through by a highly questionable strategy. An officer at the bank convinced one of his customers to invest in the check-kiting entity, so that funds would be available to cover the bad checks and pay off the bank. That was not a good idea, as the court ruled in favor of the customer in a lender liability lawsuit, and the bank had to pay substantial damages to compensate the customer for his losses.

In another case, a bank officer suspected a commercial loan made to a business was going bad because of problems with the business and convinced another customer to acquire the business without disclosing its knowledge of the financial condition of the business. After the purchase was completed, the customer found out about the business’s financial problems and proceeded to file a lender liability suit against the bank.

A more recent case revolved around the sales price in a real estate transaction. In their contract, the buyer and seller agreed that the appraised value of the property would determine the purchase price. The buyer went to a bank that commissioned an appraisal as part of the loan process. The committee letter gave the bank the right to reject an unsatisfactory appraisal. l. The bank rejected the first appraisal because of a problem with the methodology of the appraiser, which resulted in with a low value, and approved a second appraisal with a higher value. The buyer contends the bank acted in its own interest because the use of lower appraisal would have required the bank to write down the value of the loan on its books but it did not have to do so if it utilized the higher appraisal. Now, the question before the court in the ensuing lender liability lawsuit is whether the bank was acting in its own interest in the transaction because the acceptance of the higher appraisal resulted in a higher purchase price to the buyer.

Over the past 25 years, the courts have held that a bank has certain fiduciary responsibilities to its customers, including the duty to disclose information with regard to transactions involving the bank that would affect the customer’s financial situation. If a bank has “inside” knowledge about such transactions, it should be very careful about how it uses that information to avoid possible harm to its customers.

To avoid questionable situations, it’s essential for a financial institution to have clear internal policies and procedures regarding customer relationships, loans, collection activities, etc., and to train its employees as to the proper use of such procedures. . It’s far better to resolve the issue before it arises through training and procedures than to have to mount a legal defense in an expensive and lengthy lender liability lawsuit.