Condo meltdown could spur more lender-liable lawsuits

There may be a surge in lender-liable lawsuits coming in the Sunshine State.

Developers who are unable to restructure delinquent mortgages through workouts could try to sue lenders in order to stop foreclosures.

In a lender-liability lawsuit, developers often claim lenders acted in bad faith by cutting off funding for their loans. If the lender fails to disperse the funds quickly enough, the developer could lose his crew and ultimately his condo buyers who are frustrated with the delays.

This is the most common scenario for a lender-liability suit, according to Harold Lewis, a partner in the Miami law firm of Pathman Lewis.

“We have tons and tons of condominium construction projects taking place in South Florida. You are going to see more of these lender-liability cases because they are just a natural outgrowth of failed projects,” Lewis said. “These developers have a lot of equity at risk and they’ll fight in court to save it.”

According to Matthew Zifrony, director of Ft. Lauderdale-based law firm Tripp Scott’s real estate practice, these suits give developers a chance to seek monetary damages from the lender in a trial jury. That’s not the case in a foreclosure suit, decided by a judge.

“The suit buys developers time since a jury trial takes longer to resolve,” Zifrony said. “These loans trend higher in a weak real estate market and were common in the late 1980s.”

As Zifrony noted, lender-liability claims are not new. Many attorneys still remember representing clients in these types of claims during the economic downturns of the early 1980s and during the 1990s. This may, however, be the latest chapter in a similar story.

As the environment grows more difficult for lenders, banks will become more aggressive in efforts to get a return on their investment. At the same turn, developers will get more aggressive about demanding the next construction draw so they can pay their general contractor and complete the project on time.

For all the warning signs, Larry Kellogg, partner in the Miami law office of Tew Cardenas LLP who focuses his practice on complex litigation matters, said he hasn’t seen any increase in lender-liability counterclaims to condo development foreclosures yet.

What he has seen, though, are lender-liability suits arising out of residential foreclosures, especially in bankruptcy courts.

“The courts are looking very carefully at disclosure documents because of hidden charges to unsophisticated borrowers,” Kellogg said. “They’re also slamming lenders for making false claims for charges that aren’t truly owed.”

Lenders have learned the hard way that the best approach is to have loan documents that provide protections including waivers of jury trials, according to Harvey W. Gurland, Jr., a partner at the law firm of Duane Morris LLP in Miami.

Lenders have also learned that the safest approach is to steer clear of actions that even suggest the lender is “assisting” in the borrower’s business plan, he continued, because borrowers can use that assistance as a defense in court or as a way to seek money damages from lenders.

“There are some developers who are looking for more time to extend loan repayments and the court system is one avenue,” said Gurland, who has defended lender-liability counterclaims throughout the state of Florida over the past 30 years.

Many borrowers developed creative theories to avoid their contractual obligations, but the courts and even juries rejected many of those arguments.

“If lenders continue to rely upon loan documents that are properly prepared and avoid communications with borrowers that conflict with those documents they have the best chance of defeating lender-liability claims,” Gurland said.