Arbitrating Lender Liability Claims

• Publication year: 1989
• Pages: 879
• Citation: Vol. 05 No. 1989 Pg. 879

18 Colo.Law. 879 Colorado Lawyer 1989.

1989, May, Pg. 879. Arbitrating Lender Liability Claims

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879

Arbitrating Lender Liability Claims

by A. Bruce Campbell

Enormous, non-merit driven jury awards are forcing lenders seriously to consider binding arbitration as an alternative to traditional litigation of disputes with borrowers. Lenders and their counsel widely share perceptions that jurors identify with borrowers, that jurors are unsympathetic with lenders and that skilled borrowers' counsel sometimes can manipulate jurors to dangerous extremes. Recent experience suggests that these perceptions are accurate.(fn1)

This article discusses the appropriateness of arbitration in lender liability disputes and how lenders can best plan for this process.

Underutilization of Arbitration

Lenders, like other professionals, should be held to a high standard of accountability for their conduct. However, lender skepticism about the courtroom is understandable when it is no longer shocking to read about seven- and eight-figure verdicts for lost profits of enterprises that have not been profitable for years (or never even operated) or to learn of multi-million-dollar punitive damage awards, many times the amount of actual damages.

The threat to the survival of lenders who lose such cases is obvious. Legislatures and appellate courts are reacting to this threat and extreme results at the

trial court level. New statutes are placing limits on non-compensatory and non-pecuniary losses.(fn2) Appellate courts are reversing some of the more notorious huge jury awards.(fn3) Some bankers are taking a proactive approach and are not waiting for help from somewhere else. They are turning from litigation to arbitration.(fn4)

The jurors' perception that the bank is the bully in a "big guy/little guy fight" has started lenders looking to arbitration. However, arbitration has other things to recommend it besides avoiding potential ill-conceived jury verdicts. It is cheaper, faster, private and occurs in a forum more conducive to compromise. It often has more qualified decisionmakers who are better able to understand complex, technical cases. These decision-makers also have more time to commit to the process, as they are not struggling with dockets crowded with hundreds or thousands of cases. Finally, the arbitration process in some jurisdictions, including Colorado, does not allow exemplary or punitive damage awards.(fn5)

Yet, there are other lender perceptions that explain why arbitration has not been used more often in lender/borrower disputes. Historically, the lender and bank counsel have been more familiar with litigation in the courtroom than with arbitration in the conference room. The mismatch of lender/borrower resources has often been a strategic advantage to the banker in court. Moreover, there are certain perceived procedural disadvantages to arbitration. A mistaken decision is subject to limited appellate relief. Lack of discovery can lead to adjudication by surprise and can discourage settlement based on both sides' understanding of relevant facts. Lack of motion practice can preclude summary dismissal of frivolous cases. Arbitration is reputed to be inclined toward "splits of the baby," rather than hard decisions on the merits. Arbitration also may lack procedural safeguards of the rules of evidence. The arbitration clause often does not reach key litigants who may be brought in to a single lawsuit. Many arbitration awards leave parties with no explanation of how arbitrators arrived at their decisions.

Some of these criticisms are serious grounds for pause before deciding to arbitrate. However, most of these potential problems can be mitigated or eliminated by sound planning for arbitration, backed by skillful drafting of the arbitration provisions of loan documents.

Negotiating the Arbitration Clause...