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Fraud Friday – Do Banks Commit Fraud when Projections Don’t Pan Out?

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October 24, 2014

By Bob Coleman
Editor, Coleman Report

pieintheskysmallNot in a recent lawsuit against pens lawyer Diane Schmitt in a comprehensive article about an SBA lender’s liability in a failed Coffee Beanery franchise.

She writes;

Following on the heels of the financial crisis, those of us who regularly represent lenders in workouts and enforcement actions have seen an uptick in so-called “negligent lending” cases – lender liability lawsuits where borrowers claim the bank acted “negligently” or “fraudulently” when making or administering loans. Borrowers can raise such claims to defend against collection actions or to strike first by suing the bank preemptively after a loan default. Two Maryland appeals court decisions suggest that the tide may be turning against such claims.

“In Welshans et al. v. Sandy Spring Bank, decided by the Maryland Court of Special Appeals in August, a borrower obtained a $263,000 SBA guaranteed loan from Sandy Spring Bank to fund a Coffee Beanery franchise. As part of the application process, the borrower prepared revenue projections and a business plan. Sandy Spring Bank deemed the projections “reasonable,” and submitted them to the SBA which approved the loan. When the franchise did not succeed, the borrower sued Sandy Spring Bank. The centerpiece of the lender liability action was the borrower’s allegation that the Bank “knew that [he] would not be able to repay the… loan or acted with reckless disregard of the truth in telling [him] that [he] qualified for the… loan.” Thus, the borrower sought to turn the tables and blame the bank for the failure of the business.

The Circuit Court for Anne Arundel County dismissed the case, finding that the commercial borrower had no viable claim against the bank. The Maryland Court of Special Appeals agreed. Its well-written opinion contains some useful comments and discussion for lenders faced with similar “negligent lending” claims. First, the court explained that the bank had no contractual or tort duty to perform “due diligence” to establish that the borrower could “generate sufficient revenue to repay the loan.” The bank’s obligation was to follow the terms of the loan documents — nothing more, nothing less, as has long been the law in this state. The fact the borrower submitted an expert witness affidavit claiming the bank should have conducted more due diligence did not change this result.

Read the balance of the article here:

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