How small companies, victimized by their lenders, are fighting back in court.
How small companies victimized by their lenders are fighting back
We've heard a lot lately about companies getting into trouble because of what their banks did or didn't do. A switch in loan officers, for example, throws a monkey wrench in a deal. Or a verbal agreement gets tossed aside. Over the past few years, more and more small companies have been taking their bankers to court. What happens then? Do the small businesses survive? And what about the banks -- are they changing their ways? -- J.F.
For Pittsburgh developer George Mowl, it was a leap into the big leagues. After working for years developing modest apartment complexes, he and his wife, Karen, teamed up in 1986 with former Pittsburgh Steelers star Randy Grossman. Together, they purchased Ligonier Highlands, a 700-acre complex in a scenic mountain region of southwestern Pennsylvania.
The property, complete with its own lake, was a developer's dream. Area recreation ranged from skiing and horseback riding to hunting and fishing. But what caught Mowl's eye were the 470 building lots. He pictured them sporting stylish homes -- "luxurious living in a rustic setting," as the brochures would put it. Profits, Mowl estimated, could approach $30 million.
To finance the deal, the developers turned to Horizon Financial, a large savings and loan near Philadelphia. Working with the commercial division, they obtained $1.9 million -- $1.3 million to buy the land and $600,000 to build roads, sewage lines, and model homes. According to Mowl, the S&L agreed to follow up with asset-based lending as the project grew in value. "We'd have a steady stream of money to keep on going," he says.
The work went well. The builders erected nine models, a restaurant, and a clubhouse. Before long they had made more than 30 sales. All systems were go.
A year later, however, when the commercial lending officer retired, Horizon moved the Ligonier Highlands account to its mortgage department. Officers there, unfamiliar with asset-based lending, insisted on rewriting the package as a traditional mortgage. "There was no way we could operate like that," Mowl says. "We needed money, but they wanted to play hardball." It wasn't long before Horizon called the loan due, in the process touching off a nightmare for the 46-year-old developer that continues to this day.
Ligonier Highlands lies dormant. Mowl says he can't repay the loan. Horizon has placed liens not just on the Highlands property, but also on Mowl's apartment complexes in Pittsburgh, obstructing his other development projects. Grossman lost his house in the process and is back at his old job as vice-president of operations and marketing at Bobby Rubino's Place for Ribs.
Not so long ago this episode might have ended quietly in bankruptcy, just one more failed business venture. No more. Over the past few years, lender liability has become a rallying cry for people like George Mowl. They've been fighting back in court, and with a vengeance.
Mowl has hired three law firms, all working on contingency. They have filed three separate lawsuits against Horizon, seeking a total of roughly $340 million in compensatory and punitive damages. Horizon, itself a "troubled thrift," has been seized by the Federal Deposit Insurance Corp., pushing the claims into federal district court in Pittsburgh. The trial is expected to take place in the next few months.
Mowl will tell you he didn't choose the legal route lightly. "I'm just a little guy," he says. "I don't like to sue. I don't like courts and lawyers and that whole ball game -- depositions, discovery, and all. It's very distasteful to me, especially since I'm dependent on other banks. But I had no choice. Horizon was very arrogant. They were out to crush me."
The era of high-profile lender-liability cases came in like a thunderclap in 1984, when a Texas appeals court upheld a jury's $18-million award to Farah Manufacturing Corp., a blue-jeans maker. Farah charged State National Bank of El Paso with fraud. The court agreed. In 1985 another appellate court fueled the fire. It upheld a $7.5-million jury verdict against Irving Trust Co. for terminating a line of credit without advance notice to a borrower. By 1987, of the 10 largest judgments in the country, 5 were lender-liability cases. Like product liability and medical malpractice before it, lender liability has evolved into a specialized legal field, complete with textbooks, a lively lecture circuit, and seminars galore.
Barry Cappello, of the Santa Barbara, Calif., law firm of Cappello & Foley, a pioneer in the field, has practiced this brand of courtroom combat almost exclusively since 1981. He claims to have sued two thirds of America's 10 largest banks. "Borrowers have sued banks for a long time," he says. "It's only recently that the suits have coalesced under the title of lender liability. Borrowers are just taking advantage of basic rights that the law provides when they are injured in a business transaction and applying them to a banking situation." What is new is the size of the awards.
Most lawsuits are brought by small companies like George Mowl's -- companies that may not know how to protect themselves when dealing with banks and bankers. Problems often start when agreements aren't in writing or there's a switch in loan officers. Often it's not an isolated transaction that's critical, but the pattern of a bank's actions that sways a judge or jury. And often jury verdicts -- which tend to rule in favor of the companies -- are overturned on appeal. Consequently, Cappello is careful in his case selection.
"I only take the real horror stories now, the nightmares," Cappello says. "Of the 30 cases I look at each month, maybe 10 are horror stories. I'll take just one of them. The conduct of our clients has to be completely pure for us to take on a major case, and the bank's behavior has to be really egregious, because we're going to be involved in that litigation for four or five years. You have to take banks all the way to trial, and the jury has to hit them over the head before they'll write the check."
