You're Foreclosing? I'm Suing!

By Gordon Bock

Do banks, those powerful and wise institutions, sometimes behave like bullies? While quite a few borrowers would say yes, U.S. banks have long seemed virtually immune to retaliation for heavy-handed tactics. Now, however, hundreds of borrowers are taking their lenders to court and winning.

Consider the case of Garth Conlan, a vegetable and strawberry grower in Castroville, Calif., who walked into a Wells Fargo branch in 1981 to borrow $3 million. The bankers, eager for business, approved the loan in 48 hours, Conlan's attorneys say. Yet two years later, when Wells Fargo decided that losses from Conlan's 1,505-acre farm exceeded the limit in the loan contract, the bank refused to lend him more money and grabbed $120,000 from another of his accounts to pay off the debt. Those moves forced him into bankruptcy, his attorneys say. So the farmer sued, and last year a jury ordered Wells Fargo to pay him $60 million in damages (later reduced to $35 million).

Multimillion-dollar cases like Conlan's are suddenly proliferating, giving the banking industry a dreaded new buzz phrase: lender liability. Gone are the days, says Victor Roy, a Louisiana banking lawyer, when "suing a bank was ! like suing the Pope." While the increase in lawsuits can be attributed in part to growing litigiousness, some bankers have themselves to blame. In the early 1980s, lenders aggressively sought new borrowers in farming and oil, pushing generous loans under the presumption that the good times would keep on rolling. But when the bottom fell out of petroleum and commodity prices, many ventures were unable to meet payments. In some cases panicky bank officers intervened too harshly, giving borrowers grounds to sue.

The sums sought by irate debtors are approaching bank-busting sizes. Brothers Herbert, Lamar and Nelson Hunt of Texas are suing a consortium of 22 U.S. and foreign banks for $1.5 billion, charging that the lenders committed fraud and conspiracy to force their silver-and-oil empire into bankruptcy in 1986.

Smaller businesses and even homeowners have begun striking back at their bankers. Joseph Ricci, a Falmouth, Me., racetrack operator, last year won a $10 million judgment against Maine's Key Bank, as well as a $5 million loan. Ricci established that the bank's officers had wrongfully terminated his $1 million credit line because they believed an erroneous rumor that he was associated with organized crime. Meanwhile, savings and loan customers are suing thrifts for such transgressions as mortgage-processing delays.

Lawyers for the banks often have trouble building a defense because juries tend to sympathize with the borrowers. The courts are increasingly holding bankers not just to the technicalities of their written contracts but to their verbal commitments as well. As a result, banks have grown more and more cautious about lending money to upstart or marginal ventures, and gentler in their handling of delinquent borrowers. Any such rise in agreeability is good for lenders and borrowers alike, because the costs of jumbo lawsuits are simply passed along to the average banking customer.

With reporting by Scott Brown/Los Angeles and Wayne Svoboda/New York