Lender Liability Update: Recent Cases and Trends

The trend in lender liability under Texas law finds its roots in State National Bank v. Farah Manufacturing Co., Inc., 678 S.W.2d 661 (Tex. App.--El Paso 1984, writ dism'd by agr.). Farah broadened the scope of lender liability beyond contract claims and recognized exposures under traditional tort theories of fraud, duress, and tortious interference.

By the late 80's, these lender liability theories had been expanded in Texas and elsewhere to lead to large recoveries against the lender. In the 1990's, counsel for the borrowers have continued the attempt to expand the scope of lender liability in contract, in tort, and under the so-called "contort" theories of liability.

This article will primarily focus upon lender liability cases, developments, and trends over the past decade in Texas. This article is not intended to give a complete history or background of all lender liability law and furthermore, does not cover every possible lender liability area such as federal statutory and regulatory exposure.

Causes of Action and Theories of Liability

Lender Liability Claims

Lender liability claims may be generally classified in three (3) major categories:

1. claims seeking recovery of damages;
2. counterclaims to collection/foreclosure actions; and
3. "first strike" lawsuits in anticipation of collection/foreclosure actions.

The first type of claim usually arises where the borrower or attempted borrower asserts a lawsuit for damages based upon a failure to fund a loan or other claim based upon an alleged affirmative action or an omission by the lender which has allegedly caused damages. The second and third categories (the more common claims) usually arise as a defensive strategy to a collection or foreclosure action by the lender. The prevalence of the "counterclaim" and "first strike" type of actions arises from the fact that such claims are often compulsory counterclaims to a collection or foreclosure action by the lender.

Compulsory Counterclaims

Lender liability theories are asserted under contract theories, tort theories, equitable theories, and statutory grounds. Such claims are probably most often asserted by the borrower in a lawsuit brought by the lender for recovery under the loan documents. In fact, courts have held that most lender liability claims are compulsory counterclaims in the lenders' suit on a note or to recover a deficiency judgment after foreclosure.

See Williams v. National Mortg. Co., 903 S.W.2d 398, 404 (Tex. App.--Dallas 1995, writ denied); Jones v. First Nat'l Bank of Anson, 846 S.W.2d 107, 109 (Tex. App.--Eastland 1992, no writ) (causes of action for breach of duty of good faith and fair dealing, breach of fiduciary duty, negligent misrepresentation, conversion, estoppel, and violations of the Deceptive Trade Practices--Consumer Protection Act are compulsory counterclaims to a suit on a note); Lamar Sav. Ass'n v. White, 731 S.W.2d 715, 717-18 (Tex. App.--Houston [1st Dist.] 1987, orig. proceeding) (causes of action for breach of contract, breach of fiduciary duty, usury, duress, estoppel, and tortious interference are compulsory counterclaims to a lender's foreclosure action).

Contract Theories

The courts have increasingly allowed recovery of consequential damages for breach of a contract to lend money. Documents which constitute a "contract" to lend money often include the loan application, financial statements, commitment to lend, line of credit, guaranties, and a promissory note.

The loan application is considered primarily a source of information for the lender, while the loan commitment is the heart of the loan contract. In construction projects, a short-term loan commitment is usually replaced by a permanent loan commitment.

Conditions precedent are an important part of loan commitments, but they must be clearly expressed in the contract. It is also common practice for a lender to require a loan commitment fee. To be enforceable, a line of credit should include all essential terms in the written documents. To create a demand promissory note, precise, unconditional language must be used.

Lender contractual liability is usually based on one of the following concepts: anticipatory repudiation, promissory estoppel, condition precedent, acceleration, duty to inspect, and breach of duty of good faith.

Accord and Satisfaction

An accord and satisfaction is often entered into as part of a workout plan with a troubled borrower. Accords must be supported by new consideration and must be entered into without duress. Accord and satisfaction rests upon a new contract, express or implied, in which the parties agree to discharge the existing obligation by a lesser payment tendered and accepted. Boland v. Mundaca Investment Corp., 978 S.W.2d 146, 148-149 (Tex. App.-Austin 1998, no writ); Advantage Group Investment, Inc. v. Pacific Southwest Bank, 972 S.W.2d 866, 869 (Tex. App.-Corpus Christi 1998, writ denied); Christian v. University Savings Ass'n, 792 S.W.2d 533, 534 (Tex. App.-Houston [1st Dist.] 1990, no writ).

There must be an unmistakable communication to the creditor that acceptance of the lesser sum will satisfy the underlying obligation. Such condition "must be plain, definite, certain, clear, full, explicit, not susceptible of any other interpretation, and accompanied by acts and declarations that the creditor is sure to understand. Ostrow v. United Business Machines, Inc., 982 S.W.2d 103, 104 (Tex. App.-Houston [1st Dist.] 1998, no writ) (holding that valid accord and satisfaction barred a DTPA claim despite DTPA §17.42 anti-waiver provision).

In general, damages in cases of breach of contract to lend money are the extra costs of obtaining funding elsewhere together with any differential in interest rate. Borrowers have the duty to mitigate damages by seeking alternative funding.

With the exception of breach of good faith and fair dealing, contract-based lender liability relies upon traditional contract theories. However, a major change has occurred on the damages side where consequential damages are available. Lenders now face the same liability as other sellers of goods and services in many respects.

Lenders can combat this liability by maintaining good records and using disclaimers of consequential damages clauses in loan agreements and other documents signed by borrowers. Many lenders are also using binding arbitration clauses in hopes of avoiding the punitive damage and treble damage claims which often accompany a lender liability lawsuit.

Loan Commitments

A commitment to lend is an agreement signed by both borrower and lender for a specific dollar amount and for a definite time period. The commitment is commonly in the form of a letter from a lender, a copy of which the borrower signs and returns. See, i.e., 410/West Ave. Ltd. v. Texas Trust Sav. Bank, F.S.B., 810 S.W.2d 422, 425 (Tex. App.--San Antonio 1991, no writ). However, oral commitments are equally valid subject to any applicable statute of frauds. Riverside Nat'l Bank v. Lewis, 603 S.W.2d 169 (Tex. 1980). Loan commitments usually specify:

1. the parties;
2. the amount of the loan;
3. the expiration date;
4. conditions precedent; and
5. other basic terms of the loan.

See AMR Enters., Inc. v. United Postal Sav. Ass'n, 567 F.2d 1277 (5th Cir. 1978) (unless a specific time for the performance of the conditions is stipulated, the commitment must be held open for a reasonable time). The loan commitment is an enforceable contract and, accordingly, may not be canceled except under the conditions set forth in the agreement.

Whether the loan commitment is an enforceable contract is determined under the usual rules of contract law. The commitment must contain all the essential elements of a contract, be unambiguous and indicate an intention by the parties to be bound. F. G. Farah v. Mafrige & Kormanik, P.C., 927 S.W.2d 663 (Tex. App.-Houston [1st Dist.] 1996, no writ); Venture Projects, Inc. v. Morrison, 1999 WL 125446 (Tex. App.--Austin 1999, n.w.h.) (material terms of contract to lend money are the amount of the principal, maturity date, interest rate and repayment terms; the alleged contract in this case was too indefinite to be enforced, as plaintiff only alleged the bank agreed to extend a line of credit for real estate loans if plaintiff maintained deposit balances at the bank).

If the commitment is lacking in these respects, it is not an enforceable contract and the lender will not be obligated under it. Clardy Manufacturing Co. v. Marine Midland Business Loans, Inc., 88 F.3d 347 (5th Cir. 1996), reh. denied, 96 F.3d 1447 (1996). The lender is entitled to consideration in the form of a commitment fee for its agreement to keep the credit available.

However, at least one circuit has upheld a commitment to lend without consideration because the borrower had reasonably relied on the commitment before it was withdrawn. Stanish v. Polish Roman Catholic Union for Am., 484 F.2d 713 (7th Cir. 1973).

Two Types of Loan Commitments

There are two types of loan commitments; bilateral agreements and unilateral agreements. See Valdina Farms, Inc. v. Brown, Beasley & Ass'n, Inc., 733 S.W.2d 688, 693 (Tex. App.-San Antonio 1987, no writ); B. F. Saul Real Est. Inv. Trust v. McGovern, 683 S.W.2d 531, 534 (Tex. Civ. App.--El Paso 1985, no writ). In bilateral agreements, the lender is obligated to lend, and the borrower is obligated to take the loan. See Morgan v. Young, 203 S.W.2d 837 (Tex. Civ. App.-Beaumont 1947, ref. n.r.e.).

In unilateral agreements, the lender commits to lend, often on stated conditions, but the borrower has the right to refuse the loan. See Valdina Farms, Inc. v. Brown, Beasley & Ass'n, Inc., 733 S.W.2d 688, 693 (Tex. App.-San Antonio 1987, no writ); B. F. Saul Real Est. Inv. Trust v. McGovern, 683 S.W.2d 531, 534 (Tex. Civ. App.--El Paso 1985, no writ); Morgan v. Young, 203 S.W.2d 837, 845 (Tex. Civ. App.-Beaumont 1947, ref. n.r.e.).

Unilateral commitments may be treated as simple option contracts for purposes of determining the lender's obligations. The majority of loan commitments are unilateral (option) contracts.

Loan Agreements - Statute of Frauds

Obviously, most loan agreements are reduced to writing. However, Tex. Bus. & Com. Code [Statute of Frauds) §26.02 provides that any loan agreement in which the amount of the loan exceeds $50,000 is not enforceable unless it is in writing and signed by the party to be bound. Tex. Bus. & Com. Code § 26.02(b).

The term "loan agreement" is defined to include promissory notes, agreements, undertakings, security agreements, deeds of trust, commitments, or any combination of the foregoing. Tex. Bus. & Com. Code § 26.02(a)(2).

A loan agreement under Section 26.02(b) must also be accompanied by a separate, written, acknowledgment of no oral agreements which must state in bold-faced, capitalized, underlined, or other conspicuous manner:

"This written loan agreement represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties." (Tex. Bus. & Com. Code § 26.02(e).)

UCC & "Good Faith" Theories

The Duty of Good Faith

Almost every lender liability lawsuit contains the allegation that the lender had a fiduciary relationship, a "special relationship," and/or that the lender has otherwise violated a duty to act in good faith and with fair dealing.

Statutory "Good Faith." Tex. Bus. & Com. Code (UCC) § 1.203 provides that "Every contract or duty within this title imposes an obligation of good faith in its performance or enforcement." Furthermore, the Code defines "Good Faith" as "honesty in fact in the conduct or transaction involved." See Tex. Bus. & Com. Code (UCC) § 1.201(19). This "good faith" obligation is often the source of a borrower's claims against his lender/creditor.

Supreme Court Holds No "Implied" Good Faith in Lender/Borrower Relationship

In Federal Deposit Ins. Corp. v. Coleman, 795 S.W.2d 706 (Tex. 1990) the Texas Supreme Court held that there is no general duty of good faith and fair dealing between a lender and a borrower. Id. at 709. See also English v. Fischer, 660 S.W.2d 521 (Tex. 1983). Another issue raised was whether or not the duty of good faith found in §1-203 of the Texas Uniform Commercial Code was applicable in the guarantees existing in the case. The Court held that even assuming that §1.203 applied, all that 1.203 required was "honesty in fact." Id. Diligence or negligence was not an element of honesty in fact.

In Rabinowitz v. Cadle Company II, Inc., 1999 WL 289149 (Tex. App.--Dallas 1999, n.w.h.), the court held that a guarantor could not waive a creditor's "good faith" requirement under Tex. Bus. & Com. Code (UCC) Section 1.102(c).

No Common Law "Duty of Good Faith" in Mortgagor/Mortgagee

In Georgetown Associates, Ltd. v. Home Federal Sav. & Loan Assn, 795 S.W.2d 252 (Tex. App.-Houston [14th Dist.] 1990, writ dism'd w.o.j.) a debtor sought to recover damages for a foreclosure which it alleged took place and resulted in a grossly inadequate sales price. However, the borrower did not, by summary judgment evidence, show that there was any irregularity in the sale which caused or contribute to the grossly inadequate price.

The Court held that in absence of such evidence, no complaint about the foreclosure could be heard. It specifically rejected that between a mortgagor and a mortgagee there was any obligation of good faith or "special relationship" which would give rise to any other similar duties beyond the terms of the written documents.

Thereafter, citing Coleman, a number of other courts rejected any form of duty of good faith and fair dealing or requiring that a lender do more than follow the appropriate foreclosure statutes. Federal Deposit Ins. Corp. v. Blanton, 918 F.2d 524 (5th Cir. 1990), Security Bank v. Dalton, 803 S.W.2d 443 (Tex. App.--Fort Worth 1991, writ denied); SEI Business Systems, Inc. v. Bank One Texas, N.A., 803 S.W.2d 838 (Tex. App.--Dallas 1991, no writ).

Be aware however, that the duty of good faith requiring honesty in fact under Section 1.203 does exist and can be a source of liability for lenders. See Schmueser v. Burkburnett Bank, 937 F.2d 1025 (5th Cir. 1991). Other cases holding that a lender has no duty of good faith and fair dealing absent some special relationship are Cockrell v. Republic Mortg. Ins. Co., 817 S.W.2d 106 (Tex. App.--Dallas 1991, no writ); Manufacturer's Hanover Trust Co. v. Kingston Inv., 819 S.W.2d 607, 610 (Tex. App.-Houston [1st Dist.] 1991, no writ); Resolution Trust Corporation v. West Ridge Court Joint Venture, 815 S.W.2d 327 (Tex. App.-Houston [1st Dist.] 1991, writ denied).

In Bank One, Texas, N.A. v. Stewart, 967 S.W.2d 419, 440-442 (Tex. App.-Houston [14th Dist.] 1998, no writ), the court held that a lender owes a statutory duty of good faith and fair dealing in every contract pursuant to Tex. Bus. & Com. Code (UCC) §1.203. However, the failure to act in good faith does not give rise to an independent tort action, but at most, an action for breach of contract. Id. citing Hallmark v. Hand, 885 S.W.2d 471, 480 (Tex. App.--El Paso 1994, writ denied).

The "Special Relationship"

In FDIC v. Perry Brothers, Inc., 854 F.Supp 1248 (E.D. Tex. 1994), affirmed in part, 68 F.3d 466 (5th Cir. 1995), the plaintiff/borrower alleged a "special relationship of trust and confidence" with their lender and brought claims for breach of contract, economic duress, promissory estoppel, fraud, wrongful setoff, conversion, and business disparagement. The lender, NCNB, asserted affirmative defenses including the statute of frauds, the parol evidence rule, and the "merger clause doctrine." Finding for the borrower on almost every count, the Plaintiff recovered $6 million against the lender. The court held that:

[w]hile the relationship between debtor and creditor alone does not lend itself to a general imposition of the duty of good faith and fair dealing, Texas courts nonetheless recognize that a duty of good faith and fair dealing may arise: (a) by agreement; (b) in particular circumstances, between the parties as a result of a long-standing, special relationship of trust and confidence between them (although mere subjective intent alone cannot so create the duty of good faith and fair dealing) and (c) may arise when an imbalance of bargaining power exists at least ; when the defendant is responsible for the imbalance. Id. at 1259.

The court found a breach of the duty where the defendant bank, NCNB and its predecessors, had a "hidden agenda" as to the borrowers, promising to renew loans at maturity, actively discouraging alternative financing, and otherwise acting dishonestly to maximize its year end collections. The bank's records demonstrated its unique, unequal bargaining position and its knowledge that its financing was essential to the restructuring of Perry Brothers, Inc.

This case provides a very good outline of the various theories of lender liability law, and also provides guidelines for a lender on how not to get too involved or to close to its borrower/customer. See also Glauser v. State Farm Life Ins. Co., 1994 WL 470355 (Tex. App.-Houston [1st Dist.] 1994, no writ).

Tort Liability Theories

The traditional distinctions between contract actions and tort actions have become blurred by the so-called "contort" claims which plead both contract and tort causes of action. Not surprisingly, the contort claims have found their way into lender liability actions.

Negligence/Negligent Misrepresentation
Failure to Fund

One common problem with respect to banks is whether or not the bank becomes liable for failure to fund a loan or to lend money until an enforceable written loan agreement of some form has been made. Usually, a defense of Statute of Frauds prevents recovery in this situation. However, theories of promissory estoppel or negligent misrepresentation provide a possible source of recovery despite statute of frauds problems. See i.e., Federal Land Bank Assn. of Tyler v. Sloane, 825 S.W.2d 439 (Tex. 1991) and Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164 (Tex. App.-Austin 1996, no writ).

In Federal Land Bank Assn. of Tyler v. Sloane, 825 S.W.2d 439 (Tex. 1991) the plaintiff brought suit for negligent misrepresentation alleging that the bank represented to Sloane that it would loan him money to renovate his farm. Relying upon this representation, Sloane incurred expenses upgrading his chicken coups. Then the bank refused to loan the money, Sloane brought suit.

In order to avoid the bank's statute of frauds defense, Sloane relied upon a theory of negligent misrepresentation and the Texas Supreme Court agreed holding:

The Sloanes do not claim that the bank agreed to loan them money and then breached that agreement; rather, they claim that the bank did not agree to loan them money, yet negligently misrepresented that it had made such an agreement ... Although a claim of negligent misrepresentation may not be used to circumvent the statute of frauds, under the circumstances of this case, the Sloane's claim does not fall within the statute of frauds. Id. at 442.

As laid out for them in Sloane, the plaintiff in Maginn v. Norwest Mortgage, Inc. successfully avoided a statute of frauds by alleging promissory estoppel and/or negligent misrepresentation. The court dismissed the Plaintiff's contract and DTPA claims but remanded the tort claims holding that:

"When a party makes an oral promise to sign a written instrument complying with the statute of frauds, the promise will be enforced, provided the promissor should have expected that the promissee would detrimentally rely on such promise." Maginn v. Norwest Mortgage, Inc., 919 S.W.2d at 167-168; Cobb v. West Texas Microwave Co., 700 S.W.2d 615, 616 (Tex. App.-Austin 1985, writ ref'd n.r.e.).

Negligent Misrepresentation

In Federal Land Bank Assn. of Tyler v. Sloane, 825 S.W.2d 439 (Tex. 1991), the plaintiffs claimed that it had been represented to them that the bank would lend money, and upon reliance, they began construction and improvements on real property to their detriment. The case was submitted to a jury, and the issue of whether or not there had been a negligent misrepresentation by the bank officer involved was submitted. The court distinguished this allegation from the contract to lend money, which would be covered under Texas and Business Commerce Code Section 26.01, the Statute of Frauds.

The Court found that where the bank officer had in fact made representations with the knowledge that the plaintiffs were incurring indebtedness and otherwise being damaged by his representations, a claim for negligent misrepresentation was made and proved. To establish such a tort, the representation had to be:

1. made by the defendant in the course of his business, or in a transaction in which he had a pecuniary interest;
2. the defendant supplies "false information" for the guidance of others in their business;
3. the defendant did not exercise reasonable care or competence in retaining or communicating the information; and
4. the plaintiff suffers pecuniary loss by justifiably relying upon the representation.

Damages in such a case are limited to pecuniary loss. (relying upon Restatement (Second) of Torts §552 (1977)). The court specifically held that mental anguish was not recoverable. See also Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164 (Tex. App.-Austin 1996, no writ).

Therefore, the practitioner should be aware that while the statute of frauds may avoid liability for an agreement to lend money, the doctrines of negligent misrepresentation and promissory estoppel are very much alive and can provide a source of recovery against lending institutions.

Fraud

A lender may become liable for fraud by misrepresenting a material fact or by making a promise with the intent not to perform that promise when a debtor reasonably relies on the representation to his or her detriment. To establish a claim of fraud, a plaintiff must show that:

1. the defendant made a material representation;
2. the representation was false;
3. when the defendant made the representation, he or she knew it was false or made the representation recklessly without any knowledge of the statement's truth;
4. the defendant intended that the plaintiff act upon the statement;
5. the plaintiff acted in reliance upon the statement;
6. the plaintiff thereby suffered injury.

See Clardy Mfg. Co. v. Marine Midland Business Loans Inc., 88 F.3d 347, 349 (5th Cir. 1996), applying Texas law. The elements most often disputed in a claim of fraud are the element of intent, (involving affirmative misrepresentations, fraudulent concealment, and constructive fraud), and the element of reliance. Bank of El Paso v. Stanley Boot Co., 847 S.W.2d 218 (Tex. 1992) (cited and discussed in Formosa Plastics Corp. USA v. Presidio Engineers and Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998).

Bad Faith and Punitive Damages

Assuming that a "special relationship" is shown to exist between a lender and its borrower, damages other than compensatory damages are not available in all cases. Punitive damages may be awarded only for acts or omissions resulting from bad faith and unfair dealing. Yet, not every breach of the duty of good faith and fair dealing constitutes bad faith and unfair dealing.

At a minimum a finding of bad faith requires conduct by the lender which is arbitrary, capricious or unreasonable. Moreover, some courts have ruled that in order to obtain punitive damages, a plaintiff must prove that the defendant consciously pursued a course of conduct with knowledge that the conduct presented a substantial risk of harm to another.

In general, courts have held that punitive damages are recoverable in bad faith tort actions when, and only when, the facts establish that defendant's conduct was aggravated, outrageous, malicious or fraudulent. In commercial lending transactions, such conduct would seem to be the exception rather than the rule.

Breach of Fiduciary Duty/Special Relationship

In Federal Deposit Ins. Corp. v. Coleman, 795 S.W.2d 706 (Tex. 1990) the Texas Supreme Court made it clear that there is no fiduciary duty and no general duty of good faith and fair dealing between a lender and a borrower. However, the Court left open the possibility that if a borrower/plaintiff could establish a "special relationship" with the lender, a breach of duty could be found. Factors which may give rise to a "special relationship" include:

When one party is guided by the judgment or advice of the other party or is justified in believing that the other party will act in his interest and:

1. When one party has acquired influence over the other and has abused that influence;
2. When the parties have worked together toward a mutual goal for a long period of time;
3. When the lender knows or has reason to know that the customer is placing his or her trust and confidence in the lender and is relying on the lender to counsel and inform;
4. when both parties understand that a special trust or confidence has been reposed; and
5. When there is an allegation of dependency by one party and a voluntary assumption of a duty by the other party to advise, counsel and protect the weaker party. O'Shea v. Coronado Transmission Co., 656 S.W.2d 557 (Tex. App.-Corpus Christi 1983, writ ref'd n.r.e.). See also the Perry Bros . case.

Duress & Economic Duress

A lender may be liable under a claim of duress if the claimant can prove the requisite four elements. The elements for a finding of duress are:

1. a threat to do something that the threatening party has no legal right to do;
2. the threat destroys the free agency of the party to whom it was directed and causes the party to do that which he or she would otherwise not do, and which he or she was not legally bound to do;
3. the restraint caused by the threatening party must be imminent; and
4. the person to whom the threat is directed has no present means of protection.

See Deer Creek, Ltd. v. North Am. Mortgage Co., 792 S.W.2d 198, 203 (Tex. App.--Dallas 1990, writ ref'd n.r.e.); Simpson v. Mbank Dallas, N.A., 724 S.W.2d 102 (Tex. App.--Dallas 1987, writ ref'd n.r.e.); State Nat'l Bank of El Paso v. Farah Mfg. Co., 678 S.W.2d 661, 684 (Tex. App.--El Paso 1984, writ dism'd by agmt).

Tortious Interference with Contract

Generally, a debtor must prove four elements to maintain an action for tortious interference with a contractual or business relationship. The elements of a cause of action for tortious interference are:

1. existence of a contract subject to interference;
2. that the act of interference was willful and intentional;
3. that such intentional act was a proximate cause of plaintiff's damage; and
4. actual damage or loss occurred. (Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931 (Tex. 1991).)

Section 766 of the Restatement of Torts (Second) provides that one who intentionally interferes with the performance of a contract between another party and a third person by inducing the third person not to perform the contract may be liable to the other party for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.

The tort of intentional interference with contract imposes liability only if a third person is induced not to perform the contract. The plaintiff need not prove ill will, spite, evil motive, or an intent to harm to recover for this tort. A general intent to interfere is sufficient.

Interference is wrongful if the act does not rest on a legitimate interest or if based on sharp dealing or overreaching or other conduct below the behavior of fair men similarly situated. State Nat'l Bank v. Farah Mfg. Co., 678 S.W.2d 661 (Tex. Ct. App. 1984, writ dism'd by agmt).

Section 766b of the Restatement (Second) of Torts concerns itself with intentional interference with prospective contractual relations not yet reduced to contract. It provides that one who intentionally interferes with another party's prospective contractual relation is subject to liability for the pecuniary harm resulting from loss of the benefits of the relation. The elements of this tort are:

1. a prospective contractual relation between the third party and the plaintiff;
2. the purpose or intent to harm the plaintiff by preventing the relationship from occurring;
3. the absence of privilege or justification on the part of the actor; and
4. the occurrence of actual harm or damage to plaintiff as a result of the actor's conduct. (In re Clemens, 197 B.R. 779, 791 (Bankr M.D. Pa 1996).)

In a successful interference claim, the defendant will be liable for all reasonably foreseeable damages, that is, lost profits and other damages suffered by the plaintiff after the tort occurred.

Wrongful Acceleration

Depending upon the language in the loan documents, the lenders' "wrongful acceleration" of a note may constitute a breach of contract. However, several courts have held that the wrongful acceleration of a real estate note violates the Texas Debt Collection Practices Act and the Deceptive Trade Practices Act as a matter of law. Rey v. Acosta, 860 S.W.2d 654 (Tex. App.--El Paso 1993, no writ); Dixon v. Brooks, 604 S.W.2d 330, 334 (Tex. Civ. App.--Houston [14th Dist.] 1980, writ ref'd n.r.e.).

Additionally, Tex. Prop. Code §51.002(d) requires that a lender on a debtor's residence provide at least twenty (20) days written notice of intent to accelerate by certified mail. That section applies regardless of any agreement to the contrary. Rey v. Acosta, 860 S.W.2d 654, 657 (Tex. App.--El Paso, no writ).

Wrongful Foreclosure and "Chilled Bidding"

The trustee under a deed of trust must conduct a foreclosure sale fairly and may not discourage bidding by acts or statements made before or during the sale. However, the trustee has no duty to take affirmative actions beyond that required by statute or the deed of trust. Peterson v. Black, 980 S.W.2d 818, 822 (Tex. App.-San Antonio 1998, n.w.h.); Sanders v. Shelton, 970 S.W.2d 721 (Tex. App.-Austin 1998, pet. filed); Pentad Joint Venture v. First Nat'l Bank of LaGrange, 797 S.W.2d 92, 96 (Tex. App.-Austin 1990, writ denied); First State Bank v. Keilman, 852 S.W.2d 914, 924 (Tex. App.-Austin 1993, writ denied).

Statutory Claims (Texas)

Texas Deceptive Trade Practices Act

In Riverside Nat.l Bank v. Lewis, 603 S.W.2d 169 (Tex. 1980) the Texas Supreme Court held that the mere lending of money was not a good or service for purposes of finding a consumer transaction under the DTPA. Riverside was distinguished by Flenniken v. Longview Bank & Trust Co., 662 S.W.2d 705 (Tex. 1984), in holding that the basis for the opinion in Riverside was that the complaint was limited to the bank's failure to lend money as they promised.

In Flenniken the basis for the complaint was the fact that they sought to acquire a house, not borrow money from the bank. See also Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164, 166-167 (Tex. App.-Austin 1996, no writ) (where mere loan of money without financial advice was not subject to DTPA liability).

Financial Services

In Herndon v. First Nat. Bank of Tulia, 802 S.W.2d 396 (Tex. App.--Amarillo 1991, writ denied), it was sufficient to allege insofar as consumer status that the financial services purchased from the bank included financial advice as to where and when to obtain financing or abstain from borrowing and how to structure the various financial arrangements of the plaintiffs farming operation. Id.

The decision in Herndon was extended by Magin v. Norwest Mortgage, Inc., 919 S.W.2d 164 (Tex. App.-Austin 1996, no writ), in holding that any services provided by the bank were, as a matter of law, incidental to the contemplated mortgage loan; they were not an objective of the transaction.

Loan of Money Still Not a "Good" or "Service"

Where the allegation is that there was a loan of money, without any further purchase of service, there is still no standing as a consumer for purposes of bringing a claim under the DTPA. Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164, 166-167 (Tex. App.-Austin 1996, no writ); Waite v. BancTexas-Houston, N.A., 792 S.W.2d 538 (Tex. App.-Houston [1st Dist.] 1990, no writ).

Safe Deposit Box is "Good" or "Service"

In Eller v. NationsBank of Texas, N.A., 975 S.W.2d 803, 809-810 (Tex. App.--Amarillo 1998, no writ), the court held that a safety deposit box rental may give rise to a DTPA claim.

Failure to Disclose

In Pack v. First Fed Savings & Loan Assn. of Tyler, 828 S.W.2d 60 (Tex. App.--Tyler 1991 no writ), the defendant bank was sued for DTPA liability involved in a transaction wherein a borrower under a threat of foreclosure entered into earnest money contracts with the two plaintiffs. One plaintiff's contract was subject to the other plaintiff's contract.

The court held that the bank did not violate the DTPA by agreeing with either plaintiff as to who could go forward with a purchase since it was a stranger to these contracts.

In McDade v. Texas Commerce Bank, 822 S.W.2d 713, (Tex. App.--Houston [1st Dist.] 1991, writ denied), a bank was held liable for DTPA damages where it held funds for plaintiff and failed to disclose that it had placed the funds in a regular account as opposed to a money market IRA.

Misrepresentation

In Cal Fed Mortgage Co. v. Street, 824 S.W.2d 622 (Tex. App.-Austin 1991, writ denied), a bank was held liable on the DTPA for misrepresenting six intentions to fund a permanent mortgage. The court reversed on limitations, holding that limitations ran from the time the borrower (1) knew that the defendant would not fund; or (2) that he would have to pay a higher interest rate. The plaintiff had argued that limitations ran from the time he suffered an out-of-pocket loss.

Bank as a "Consumer"

In NationsBank of Texas, N.A. v. Akin, Gump, Hauer & Feld, L.L.P., 979 S.W.2d 385 (Tex. App.-Corpus Christi 1998, n.w.h.), the issue was whether the bank could qualify as a statutory "consumer" while acting in its capacity as the representative of a deceased client's estate and bringing a legal malpractice claim. The DTPA defines a "consumer" as "an individual, partnership, corporation, ... who seeks or acquires by purchase or lease, any goods or services, except that the term does not include a business consumer that has assets of $25 million or more, or that is owned or controlled by a corporation or entity with assets of $25 million or more." Tex. Bus. & Com. Code § 17.45(4) (West 1997).

Holding that Nations Bank qualified as a "consumer" in the transactions, the court held that in order to determine "consumer" status of an action brought by a trustee, executor, or other representative, the court should look to the party being represented. Id at 391.

Texas Property Code

Section 51.002 of the Texas Property Code requires twenty (20) days written notice of default and intent to accelerate a residential real estate note. Therefore, failure to provide such notice has been found to violate both the DTPA and Texas Fair Debt Collection Practices Act. Rey v., Acosta, 860 S.W.2d 654, 657 (Tex. App.--El Paso 1993, no writ).

Usury

Effective September 1, 1997, the general usury law of Texas, which regulates conventional interest is now found in Title 4 Chapter 301 of the Texas Finance Code.

Common Law and Statutory Usury Penalties

Texas Finance Code §301.002 defines "interest" as "the compensation for the use or forbearance or detention of money." Section 305.001 prohibits contracting for, charging, or receiving interest that exceeds the legal limit. The elements of usury are: (1) a loan of money, (2) an absolute obligation to repay the principal, and (3) the extraction of greater compensation than allowed by law for the use of the money by the borrower. Pentico v. Mad-Wayler, Inc., 964 S.W.2d 713 (Tex. App.-Corpus Christi, no writ), citing Tex. Fin. Code §301.001.

Charging of Interest in a Pleading

In George A. Fuller Co. of Texas, Inc. v. Carpet Services, Inc ., 823 S.W.2d 603, (Tex. 1992), the Texas Supreme Court held that a claim for interest in a pleading cannot give rise to a claim of usury. That holding resolved contrary and conflicting opinions of the issue. See, e.g., Moore v. White Motor Credit Corp., 708 S.W.2d 465,468 (Tex. App.--Dallas, 1985, writ ref d n.r.e.); Nationwide Financial Corp. v. English, 604 S.W.2d 458,461 (Tex. Civ. App.--Tyler 1980, writ dism'd); Moore v. Sabine Nat'l Bank of Port Arthur, 527 S.W.2d 209, 212 (Tex. Civ. App.-Austin 1975, writ ref'd n.r.e.); Sumrall v. Navistar Financial Corp., 818 S.W.2d 548 (Tex. App.-Beaumont 1991, writ denied).

Spreading and Savings Clauses

Texas Finance Code §302.101 provides that for purposes of determining usury under a secured loan, interest is spread over the full term of the loan. Texas courts have repeatedly upheld savings clauses which indicate an intent to "spread" interest and avoid usury. Pentico v. Mad-Wayler, Inc., 964 S.W.2d 713, 714 (Tex. App.-Corpus Christi, no writ); Tanner Dev. Co. v. Ferguson, 561 S.W.2d 777 (Tex. 1977).

Bona Fide Error Defense

The bona fide error defense to a usury claim, formerly located at Tex. Rev. Civ. Stat. Article 5069-1.06(a) and now located at Tex. Fin. Code § 305.101, allows creditors to establish that usury was the result of an "accidental and bona fide error" such as a clerical error. However, "[m]erely brushing the miscalculation aside as "erroneous" and presenting arguments based on the correct figure does not establish that the issue is settled as a matter of law. Pentico v. Mad-Wayler, Inc., 964 S.W.2d 708, 713 (Tex. App.-Corpus Christi 1998, no writ); William C. Dear & Assoc., Inc. v. Plastronics, Inc., 913 S.W.2d 251, 254 (Tex. App.--Amarillo 1996, writ denied) (miscalculation or typographical mistake exemplifies bona fide error but must be supported by evidence of honest mistake); Karg v. Strickland, 919 S.W.2d 722, 725 (Tex. App.--Corpus Christi 1996, writ denied) (finding sufficient evidence that ignorance of material fact lead to miscalculations).

Demand Letters Can Be a Charge

However, compare Fuller to Briones v. Solomon, 942 S.W.2d. 278 (Tex. 1992). In Briones, a judgment creditor's counsel made a demand for an amount of post-judgment interest which exceeded two times the stated 10% interest rate in the judgment. The Supreme Court upheld a judgment canceling the principal amount of the judgment and assessing penalties, holding that the usury statute encompasses debts created by judgment. Thus, where the demand for payment was sent directly to the debtor, usury liability was created.

Usury Liability of Attorneys and Other Third Parties

In Lupo v. Equity Collection Service, 808 S.W.2d 122 (Tex. App.-Houston [1st Dist.] 1991, no writ), the debtor sued not only the creditor who had loaned money to him, but also the debt collection service which had sent him the letter demanding an excessive rate of interest. The Court rejected the argument that the Statute was limited to direct parties as evidenced by case law by denying guarantors the right to proceed under the usury statute. Instead, it held that there was a difference between who could recover as opposed to who had to pay damages for usury. The Court reasoned that the usury statute provided only that the obligor could recover usury penalties. However, as to the parties who had to pay penalties, the definition included "any person." Id . at 124. The Court therefore reasoned that any person who made a usurious demand could be subjected to liability, whether they were an original party to the loan.

Obviously, the import of this situation is rather striking, especially if the Supreme Court had not ruled as it had in Fuller . The potential usury complainant therefore has the option of not only suing the party who lent the money in question. but could also sue any intermediary who forwarded the usurious demand, whether it be attorneys or a debt collection service. Further, even to the extent that Fuller provides some relief to the unwary collector, it is only relief in the context that a pleading may not constitute a usurious demand. Attorneys who send out demand letters for their clients on obligations may find themselves a direct party in a usury complaint so long as the Lupo decision stands.

Other Usury Problems

Usury in Lease Transaction

In Kinerd v. Colonial Leasing Co., 800 S.W.2d 187 (Tex. 1990), the Supreme Court upheld a lower court finding of usury in a lease transaction. The plaintiff had sought to acquire some radiator repair equipment, which it obtained through a transaction wherein the defendant purchased the equipment from the manufacturer and then leased it to the plaintiff over a five-year period, after which the plaintiff could have purchased the equipment for one dollar and additional consideration. The Court held that such a transaction could be interpreted as a usurious transaction where it was found that the lease resulted in the payment of $16,909.20 for equipment that was worth $10,000.00. Of an even more interesting nature, the plaintiffs had sued for violations of the Deceptive Trade Practices Act ("DTPA") arguing that the defendant engaged in unconscionable conduct, because the value of the goods received was much less than the cost which was paid for the goods. The Court held that awarding the plaintiff out-of-pocket expenses and the difference in value between the value as represented and the value received was not an overlap of damage with the usury transaction, and thereby greatly enhanced the recovery which the plaintiff might have otherwise had.

Guarantors Still Cannot Sue

Nautical Landings Marina, Inc. v. First National Bank in Port Lavaca, 791 S.W.2d 293 (Tex. App.--Corpus Christi 1990, no writ) held that a guarantor still cannot assert a usury claim where usurious interest is charged to the primary obligor. See also Eubank v. First National Bank of Belville, 814 S.W.2d 130 (Tex. App. Corpus Christi 1991, no writ); Arndt v. National Supply Co., 633 S.W.2d 919, 925 (Tex. App.-Houston [14th Dist.] 1982, writ ref'd n.r.e.).

Single Interest Insurance is Not Usurious

In Sunwest Bank of El Paso v. Gutierrez, 819 S.W.2d 673 (Tex. App.--El Paso 1991, writ denied) the borrower sued claiming that the bank's addition to his loan balance of the cost of single interest insurance after he failed to provide proof of insurance constituted usury. The appeal court disagreed, holding that such a charge is in the category of "separate and additional consideration," not money assessed for the "use, forbearance or detention" of money. Id . at 675.

Usury Defense May Be Waived

Usury is an affirmative defense which must be verified under Tex. R. Civ. P. 93. Where the defendant fails to verify its usury defense, the defense is waived. Advantage Group Investments, Inc. v. Pacific Southwest Bank, 972 S.W.2d 866, 869 (Tex. App.-Corpus Christi 1998, writ denied).

Assuming Debt at Another Bank Not Usury

In Victoria Bank & Trust Co. v. Brady, 811 SW.2d 931 (Tex. 1991), it was held that a bank's requirement that a potential borrower assume pre-existing debt of its partner at another institution was not usurious. The Court treated such a requirement as it would a bonafide fee paid to parties other than a lender. See also First USA Management, Inc. v. Esmond, 960 S.W.2d 625, 627 (Tex. 1997).

Alamo Lumber Cases

In Alamo Lumber Co. v. Gold, 661 S.W.2d 926, 928 (Tex. 1983), the Texas Supreme Court held that a bank can be liable for usury when, as a condition of making a loan, assumption of third party debt is required, because the third party debt must be treated as interest. This case has largely been limited to its facts. Some innovative plaintiffs have tried to use the Alamo doctrine to establish liability where a requirement to guarantee another's debt is a condition to a loan. These attempts have been rebuffed. See, Moore v. Liddell, Sapp, Zively, Hill & LaBoon, 850 S.W.2d 291 (Tex. App.-Austin 1993, writ denied); Sterling Property Management Inc. v. Texas Commerce Bank N.A., 32 F.3d 964 (5th Cir. 1994).

Other cases have held Alamo strictly to its facts. See, Wilgus v. Green, 982 S.W.2d 6 (Tex. App.--Tyler 1994, writ denied) (No Alamo liability unless the party claiming usury has a lender-borrower relationship with lender)

NSF Charges

In First Bank v. Tony's Tortilla Factory, 877 S.W.2d 285 (Tex. 1994) the Texas Supreme Court held that NSF charges constitute charges for processing and the additional work required in connection with handling bad checks, and are not interest for purposes of usury laws.

Charging Violations

In Peoples State Bank of Clyde v. Andrews, 881 S.W.2d 520 (Tex. App.--Eastland, 1994), a defendant who was not the maker of a note received a demand letter and was sued based on the Bank's mistaken allegation that he had assumed the debt. He alleged usury, since he owed no interest on the debt. The bank was not guilty of usury on the grounds that the usury statute is not available to strangers on the debt.

Lender's Attorneys' Fees Charged to Borrower Not "Interest"

In Texas Commerce Bank v. Goldring, the court held that when the bank stepped in to protect its interest in a title dispute involving the Goldrings and their children, the attorney's fees incurred by the bank were for consideration other than the lending of money and therefore, not interest. As the attorney's fees were not interest, they were not subject to usury laws. Texas Commerce Bank, Arlington v. Goldring, 665 S.W.2d 103, 104 (Tex. 1984).

Federal Bankruptcy Laws

Preferential Transfers

The Bankruptcy Code generally prohibits preferential transfers by the debtor within 90 days before the filing of the petition, and this period is extended to one year for transfers to certain classes of creditors, primarily insiders. Under some circumstances, particularly when exercising control of a debtor's business affairs, a lender may become an "insider." Although a number of court opinions have resulted in the application of the extended preference period to transfers to non-insider lenders when as insider guaranteed the underlying debt, the 1994 Act provided lenders with added protection in most such circumstances, and avoids the extended preference period where the creditor is not an insider. 11 U.S.C. §547(b) (1998).

Fraudulent Transfers

The trustee may avoid a fraudulent transfer occurring within one year of the filing of the bankruptcy petition. A transfer is fraudulent if the debtor made it with actual intent to hinder, delay, or defraud an entity to which the debtor is indebted. Absent fraudulent intent, a transfer may be deemed if such transfer results in a debtor receiving less than reasonablely equivalent value in the exchange and one of three conditions exist. Therefore, several circumstances exist under which the taking of additional collateral by a lender may constitute a fraudulent transfer should the borrower enter into bankruptcy proceedings.

In Section 548(a) of the Code provides that the trustee may avoid a fraudulent transfer occurring within one year of the filing of the bankruptcy petition. 11 U.S.C. §548(a) (1998).

While Section 548(a)(1) states that the trustee may avoid the transfer of the interest of the debtor in the property made within one year of the debtor's filing if the debtor made such transfer with "actual intent to hinder, delay, or defraud any entity" to which the debtor was indebted. 11 U.S.C. §548(a)(1) (1998).

Actual intent was found when there was concealment of facts and false pretense on the part of the transferor. McWilliams v. Edmonson, 162 F2d 454 (5th Cir. 1947), cert. denied, 332 U.S. 835, 68 S.Ct. 210, 92 L. Ed. 2d 408 (1947).