Bank’s Duty of Good Faith | Holding Banks to a Good Faith Standard

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Attorney and financial author Brian Mahany looks at lender liability law establishing a bank’s duty to act in good faith:

Transcript of Lender Liability Lawyer Brian Mahany on a Bank’s Duty to Act in Good Faith with Borrowers

So much of what we do in lender liability cases comes down to holding banks to a standard of good faith. But what exactly does “good faith” mean and how does it apply when someone sues a bank?

Definitions of Duty of Good Faith as Relates to Banks and Borrowers

The duty of good faith stems from both the common law and the Uniform Commercial Code. Many states also have their own laws that also impose a duty on lenders to act in good faith.

Whether the duty is grounded in the common law or in statute, the definitions are similar. The Uniform Commercial Code or UCC defines Good Faith to mean “honesty in fact and the observance of reasonable commercial standards of fair dealing.” Courts have interpreted the common law in the same way and have said behavior such as conjuring up pretended disputes, distorted interpretations of contractual terms, falsification of facts or conduct which is candid but unfair violates the duty to act in good faith.

Examples of Banks Violating their Duty of Good Faith

Courts have recognized the duty of a lender to act in good faith in the following circumstances:

  • Exercise of undue control over the borrower’s business
  • Improper acceleration of a note and / or declaration of default
  • Failure to provide advance notice of a default or termination of credit
  • Creation of excuses to avoid extensions of credit or advances on funds
  • Improper exercise of offsets
  • Adding additional loan conditions
  • Improper foreclosure and disposition of collateral, and
  • Not providing reasonable notice to cure defaults

There are many other examples and every loan agreement and relationship is different. The important take away is that banks simply can’t do whatever they feel like.

–  Brian Mahany, Lender Liability Lawyer & Author

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