Think Lenders are Not Liable? Think again! Dallas case illustrates the point


Although this was a commercial bankruptcy case the legal principles are the same:

On September 23, 2021, a bankruptcy court in Dallas handed down a 145-page ruling in Bailey Tool & Mfg. Co. v. Republic Bus. Credit, LLC (In re Bailey Tool & Mfg. Co.), 2021 Bankr. LEXIS 3502 (Bankr. N.D. Tex. 2021), provided its answers to some of these questions, offering a cautionary tale of the potential consequences of a court viewing lender loan recovery conduct as overly aggressive behavior in a distressed situation. In light of Bailey, distressed borrowers will likely try to portray lenders’ conduct in administering a loan facility in one or more of the following pejorative ways:

  • Overreaching or taking an active role in micromanaging business decisions of the borrower.
  • Withholding advances in an inconsistent or arbitrary manner.
  • Not keeping clear records that are accessible to the borrower.
  • Not documenting and charging fees and expenses in a clear and accurate manner.
  • Communicating in a confusing or misleading manner.
  • Not addressing any material issues discovered during diligence before consummating the loan transaction.

Emphasis added


Note that the records portion is very interesting because hoemowners NEVER get to see the records of ledner or the successor ledner. they only get to see a Payment History profferred by the company that is claimed to be a “servicer.”

One Response

  1. Interesting statement in the court’s (in re Bailey Tool) footnote 1:

    “The Bankruptcy Court noted that a lender that “exercises excessive control over a borrower… can assume the role of a fiduciary rather than a mere creditor. When such a change occurs, the lender must refrain from misleading or concealing information from the borrower and the lender is required to make decisions in the best interests of the borrower, even if contrary to the best interest of the lender.”

    Would this not support or expand Neil’s article: “Why the SEC Needs to Regulate Falsely Labeled ‘Mortgage Backed Securities'” “excessive control” would apply if the ‘borrower’ is actually a bona fide issuer . . . not a ‘borrower’ making the lender a fiduciary???

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