- Federal Court Rules That Lender May Assert Negligence Claim Against Another Lender
- January 20, 2012
- Law Firm: Lerch Early Brewer Chartered - Bethesda Office
A U.S. District Court in Texas has ruled that under Texas law, an existing lender may assert a negligence claim against new lender in connection with failed payoff of the existing lender debt.
In September 2007, Sambrano Corporation obtained a $4 million secured line of credit from Compass Bank. A portion of the proceeds of the Compass line of credit were to be used to refinance Sambrano’s existing line of credit with City Bank. However, rather than remit payment directly to City Bank, Compass advanced the full amount of the line of credit directly to Sambrano, which, unbeknownst to Compass, did not repay the City Bank line of credit.
In January of 2008, Compass and City Bank initially discovered that both credit facilities remained open and fully funded. After failing to recover its line of credit from Sambrano, City Bank filed a lawsuit against Compass, asserting, among other claims, that Compass acted negligently by directly advancing to Sambrano the proceeds of the Compass line of credit, instead of sending payment directly to City Bank to pay off its line of credit.
In order to maintain a claim for negligence, a plaintiff generally must establish, among other elements, that the defendant owed a duty of care to the plaintiff. Arguing that it had no duty to ensure the loan proceeds were used to repay City Bank, Compass moved to dismiss the negligence claim. Despite the fact that Compass did not have a direct relationship with City Bank, contractual or otherwise, the District Court refused to dismiss the negligence claim.
In its complaint, City Bank alleged that Compass was aware (a) of the existing City Bank line of credit, (b) that the proceeds of the new Compass line of credit were to be used to repay the existing City Bank line of credit facility, (c) that the most appropriate and secure way to ensure such repayment was for Compass to remit payment directly to City Bank, and (d) that having both lines of credit open and fully drawn at the same time posed a risk to City Bank and Sambrano’s other creditors.
The District Court stated that Texas law provides an exception to the general rule that a lender owes no duty to someone with whom it has no lending or other relationship. In particular, the District Court stated that under Texas law, a lender may owe a third party a duty of care in relation to the conduct of the lender’s customer if the lender:
Knows the identity of the third party,
Is aware of a potential harm to a third party, and
Has a way to avoid that harm.
Reasoning that City Bank’s allegations, if true, would give rise to a duty of care under Texas law, the District Court denied Compass’ motion to dismiss City Bank’s claim for negligence.
This decision is an excellent reminder to lenders: when refinancing an existing loan it is always the best practice to remit payment directly to the existing lender or a title company in escrow.
This case is cited as City Bank v. Compass Bank, 2010 U.S. Dist. LEXIS 66260 (W.D. Tex. July 2, 2010).