A recent decision by Bankruptcy Judge Stacey Jurnigan in the U.S. Bankruptcy Court for the Northern District of Texas is being touted as the new Farah Manufacturing lender liability opinion for the 2020s.
While an extreme case, Judge Jurnigan’s decision in in Bailey Tool & Mfg. Co., et al. v. Republic Bus. Credit (In re Bailey Tool & Mfg. Co.), Adv. No. 16-03025-SGJ (Bankr. N.D. Tex. Dec. 23, 2021) will likely open the door to future litigation by distressed borrowers and trustees, and it serves as a cautionary tale on what lenders should avoid when entering into, executing, and performing obligations under lending agreements.
- Lenders should address any concerns they discover during the due diligence process with clarity and before entering into agreements.
- Regardless of the discretion a lender has under an agreement or any alleged breach of the agreement by its counterparty, it is imperative that they follow and comply in good faith with the terms of the agreement.
- Lenders should not exceed their duty by micromanaging and taking an active role in controlling business decisions for the borrowers.
- Lenders should not unilaterally withhold advances in an erratic manner.
- Lenders should keep clear records that are accessible to the borrower, and document fees and expenses with full transparency.
- Lenders should not communicate in a confusing or misleading manner.
- Lenders should turn over excess funds to the borrower after the loan is paid in full.
Lenders are well-advised to seek counsel from their trusted advisors when facing difficult issues with borrowers, in order to avoid the fate of the lender in Bailey Tool.