2 hinge on smarter use--or non-use--of email

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For the last several days I've been preparing seriously for a trial in which I'm to be an expert witness. I've been working on this case for over three years. During all this time the borrower and his attorney have been very persistent and resourceful in delaying collection activity, while pursuing an elaborate scenario of lender liability.

I'm once again reviewing the underlying facts of the case as I understand them. And it is obvious to me that there are certain consistent and predictable behaviors engaged in by many delinquent debtors. They are less behaviors of borrowers in general but rather are associated with borrowers who have sought refuge in litigation and counterclaims against the bank. I'm referring to the rapidly growing body of borrower-initiated lawsuits known as lender liability.

Don't look now, but he's trying to slip away

Unfortunately at the bottom of these behaviors is a tendency on the part of some to avoid responsibility for their actions. They somehow have great difficulty in accepting the consequences of what they themselves have done. Their rationales range from "the bank should have known I couldn't repay this loan" to a conviction that the bank dealt with them unfairly.

Interestingly, one of the issues almost never at issue in these sorts of suits is whether the borrower actually received their money.

Here are seven suggestions to anticipate or limit the dangers to the bank arising from lender-liability based lawsuits.

1. Assume that serious problem credit situations are going to be litigated by the borrower.

This, of course, is not universally the case. But lawsuits occur frequently enough that all lenders should be wary. Credit and collateral files should be materially complete and sufficiently formal to document the lending officer's intent, as well as to establish enforceable security interests in any collateral taken.

2. Emails usually become an issue in loan litigation.

Emails are often a casual and imprecise way of communicating between the bank and the borrower and between and among the bank's own staff.

As a witness for either the bank's or the borrower's side of issues I have often seen emails that needlessly hamper a reasonable understanding of what the lender or the borrower probably intended to convey to each other or to others involved in the transaction.

Etch this in your personal radar, lenders:

If a conversation is important enough to document for the proper administration of the credit, then it should be treated with care and discretion. In the fast-paced day-to-day of modern business, we can become frustrated. Or weary of a particular circumstance. Or sloppy.

So we "blurt out" a verbal trail of thought that reflects more durably on our transitory attitudes than perhaps anything that we had really intended to convey.

3. The overly wide use of emails often contributes to a compromise of attorney-client privilege.

This typically arises from an overly broad distribution list of recipients--all those "CCs."

Direct communications between counsel and bank are usually protected from discovery by the other side. But ...

... the inclusion of one or more parties in the distribution list not subject to such protection may seriously compromise the privacy assertions or defenses of legal issues in the bank's case. Such lapses on the part of any bank staffer are unnecessary and reflect a certain mindlessness (or carelessness) of the originator of the email.

4. Credit and collateral exceptions matter.

Bankers occasionally make mistakes and internal systems have been known not to catch lapses on the part of the lending or back-office staffs. The important point to me is that the bank should convey a professional manner and result in its internal processes. Anything less tends to undermine credibility of the bank as viewed by outside parties such as opposing counsel, judges, or juries.

5. Be careful of what you promise to the borrower once problems begin to surface.

 "We'll work with you on this." Easy to say,  harder to live by.

Often, mindless assertions such as can be harmful to your ultimate collection success. Even with categorical assertions in your loan documentation that all binding understandings between the parties must be in writing, oral communications can be problematic in some circumstances to a judge or jury.

6. The evolving meanings of "good faith" and "fair dealing" are occasionally proving to be traps that can snare bank creditors.

Lenders can better insulate themselves from these risks by appearing to act in a less arbitrary fashion, regardless of the affirmative provisions of loan documentation. Lenders need to protect the bank, but often these activities can be done with more finesse and a lighter touch. For example, a seriously delinquent borrower may not have the ability to respond affirmatively to a bank "demand" on a short fuse such as a day or two or within a five day period. But a demand "window" of 30 days may not make a practical difference to the bank's likelihood of success in its collection activities but can considerably soften the appearance of the bank's posture to a judge or jury in terms of being "reasonable."

7. There should be established protocols for file review of any credit relationship that seems headed for litigation.

If there are collateral issues or defects to deal with, better that they be known so that the bank has the opportunity to cure them while there are still opportunities for constructive negotiation with the borrower.

Experienced lenders do not necessarily need counsel at every step of the way. However, there are critical points where counsel's input can be decisive and timely. Some time spent reviewing the file and the bank's circumstances before a suit is filed can often be helpful in limiting the downside to the bank's position.

Don't forget the human dimension

Any credit person experienced in workout situations knows the truth of the old saw, "Honey attracts more flies than vinegar." 

That's why in sharing my experience with anyone facing difficult negotiations with a troubled borrower, I emphasize a short list of principles rather than a long list of rules.

Those principles stress courtesy, reasonableness, and strict professionalism at all times.

Everything we do as lenders these days seems to see the light of day eventually. We should pay more attention today to how our actions and our written record will be perceived tomorrow in the contentious atmosphere of litigation.

About Ed O'Leary Veteran lender and workout expert O'Leary spent more than 40 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending.

Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses and has been a frequent speaker in ABA's Bank Director Telephone Briefing series. You can e-mail him at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . O'Leary's website can be found at www.etoleary.com.

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