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Lender Liability Background

Lender liability may be analyzed along the following lines of potential exposure:
  • Contractual Principles
  • Tort Principles
  • Statutory/Regulatory Principles.
With respect to an Agent Bank's liability to other lenders in a credit facility, here are a list of recommendations:

Avoiding Contractual Liability.

1. During negotiations, keep the provisions of the credit documents that protect the Agent unmolested - exculpatory clause, the representation of Lenders that an independent credit decision has been made by them, etc.

2. Preserve in the Credit Agreement the indemnification provisions.

3. Preserve in the Credit Agreement the explicit statement that the Agent has no fiduciary obligations.

4. Review the Agent-only provisions for the purpose of determining whether the Agent is taking on too much responsibility. For example, are opinions and other closing documents to be acceptable to [only] Agent? Is Borrower to provide all financial and other reports to [solely] Agent? Obviously, the undesirability of these Agent-only responsibilities will be weighed against the need for an expeditious closing. However, these factors should be knowingly weighed.

5. With respect to amendments and waivers, recognize that these contractual provisions can be breached by Agents (i) who may "push" the interpretation (often on behalf of a customer relationship) of these provisions for the purpose of avoiding having to obtain unanimous consent of lenders, or (ii) who may too conservatively interpret these provisions ("to be safe") and thwart the Borrowers goals. Obviously, the need for unambiguous drafting of these provisions is critical.

6. Agent should avoid making representations or giving comfort to other Lenders.

7. Contractual duties may have effect outside the loan relationship (e.g., confidentiality).

Avoiding Liability for Torts

1. Do not let the "sales effort" obscure the Agent's duties.

2. Half-truths are no less culpable than misrepresentations (New York has adopted the Restatement 2d of Torts on this point).

3. Remember, there's a reason for the term "agent." That is, there are some functions (including those that are considered ministerial) that only the Agent will perform and the Agent has the responsibility to perform such duties with reasonable care. In addition to so doing, the Credit Agreement should limit the duties and discretionary acts of the Agent (to thereby lessen the Agent's exposure generally), and the Credit Agreement should contain an exculpatory clause (relieving the Agent of liability to the other banks for all but its gross negligence or willful misconduct) and an indemnification clause (whereby the other banks pay their pro rata share of any loss, expense, or liability incurred by the Agent in connection with the facility, other than for Agent's gross negligence or willful misconduct).

4. As party to the Credit Agreement, the Agent is governed by the implied covenant of good faith vis a vis the other Lenders (as well as the Borrower).

Statutory/Regulatory Duties

1. Circular 181, Office of the Comptroller of the Currency.

2. Sets forth duties of lead and selling national banks and obligations of participant and buying national banks.

3. Would a violation of any law or regulation (e.g., Reg U, Fed Operating Standards for Section 20 Affiliates) be per se "gross negligence?"

Relevant Opinions:

1. Hitachi. Hitachi Credit America Corp. v. Signet Bank and Signet Leasing and Financial Corp., No. 3:96CV815, (E.D. Va. December 3, 1996, May 12, 1997, July 7, 1997, and November 17, 1997):

As part of getting Hitachi to buy into a syndicated loan in favor of what proved to be a fraudulent scheme, Signet states to Hitachi in an Assignment Agreement:

(e) To the best knowledge of [Signet], the Master Equipment Lease ... is in full force and effect on the date hereof... ."

Elsewhere in the Assignment, Signet had defined/limited "knowledge" to mean "actual knowledge" (so that in this instance, the "actual knowledge" qualification became a hook).

Based on the foregoing, the court found that Signet had warranted to Hitachi that there was a lease when there wasn't and, thus, awarded $9 million to Hitachi.

2. Ingersoll-Rand. Great Western Capital Corp. v. Ingersoll-Rand Financial Corp., 108 F.3d 337, 1997 WL 68030 (9th Cir., 1997).

In connection with the participation by Ingersoll-Rand to Great Western of loans financing 19 partnerships, two of which proved to be fraudulent, Ingersoll-Rand represented to Great Western that each of the investor notes "to the best of Seller's [Ingersoll-Rand] knowledge and belief is genuine ... ."

Held for Great Western on basis of fraudulent inducement and breach of fiduciary duty.

ADT Operations, Inc. v. The Chase Manhattan Bank, N.A., No. 600694/97 N.Y. Sup. Ct., June 25, 1997).

Confidentiality provision contained in paid off credit agreement thwarted Chase's later attempt to fund hostile takeover of the former Borrower; summary judgment for ADT.

4. Chase/BankBrussels. BankBrussels Lambert and Skopbank v. Chase Manhattan Bank, 1996 US Dist. LEXIS 15631 (Oct. 17, 1996).

Chase forms a syndicate of lenders for a $245 million facility in favor of AroChem. Chase's hold amount in the syndicated credit is $75 million and its upfront fee is $4,950,000. In large part due to the magnitude of Chase's upfront fee, the Borrower cannot meet its Minimum Tangible Net Worth covenant at closing and Chase refuses to discuss its fee or the effect thereof with the other Lenders. However, to keep the other Lenders from abandoning the credit at closing, Chase explains to the Lenders that the cause of the missed covenant is primarily due to market factors as well as Hurricane Hugo and a fire at Borrower's facility.

Held: Agent engaged in misconduct prior to closing. New York law requires a party's disclosure "where [a] party has made a partial or ambiguous statement, on the theory that once a party has undertaken to mention a relevant fact to the other party it cannot give only half of the truth." Chase's breach of this duty was actionable notwithstanding the usual disclaimers in the credit agreement of the participant's independent credit judgment and waivers of all but gross negligence or willful misconduct. Importantly, the court was particularly struck by the magnitude of Chase's upfront fee.

5. Security Pacific.
Security Pacific was liable to Chemical Bank for not perfecting the security interest it held for the loan syndicate by failing to change its UCC-1's to read "Security Pacific Bank, as Agent," when Security Pacific syndicated a loan it had previously held alone.