A recent New York case held that a lender was not liable for fraudulent misrepresentation or for failure to disclose information to investors of the borrower.
LaSalle Business Credit, LLC (“LaSalle”) lent $20 million to Invatech Corporation (“Invatech”). To secure its loan, Invatech granted LaSalle a security interest in its assets. Approximately two years later, Invatech was in default on its obligations to LaSalle. LaSalle and Invatech entered into an amendment of their loan agreement whereby LaSalle waived Invatech’s defaults under the loan agreement. Invatech also entered into agreements with eleven investors who agreed to lend the company $900,000. These loans, although secured by the proceeds of three lawsuits Invatech was a party to, were subordinate to the security interest of LaSalle. Invatech again defaulted under the loan agreement in December 2002, but LaSalle waived the defaults.
After the second waiver, Invatech received the proceeds of the litigation. LaSalle asserted its lien against the proceeds, and Invatech paid the proceeds to LaSalle. In October 2003, Invatech filed for bankruptcy. The subordinated investors then filed suit against LaSalle. They contended that LaSalle conspired with Invatech to defraud the plaintiff subordinated investors, claiming that but for LaSalle’s waiver, Invatech would have been in default. The plaintiff subordinated investors contended that had they known of Invatech’s financial condition, they would not have lent $900,000 to Invatech.
LaSalle filed a motion to dismiss the investors’ complaint. LaSalle denied that the statement in the subordinated loan agreements between the investors and Invatech to the effect that there were no defaults, which was misleading because LaSalle had in fact waived the defaults. LaSalle also contended that the investors were negligent in failing to investigate the financial condition of Invatech and thus could not rely on LaSalle’s action.
The court ultimately agreed with LaSalle and dismissed the investors’ complaint. The court observed that generally a bank does not have an affirmative duty to disclose information regarding a borrower to the borrower’s investors, even where the bank might benefit from the failure to disclose. The court also stated that a bank’s superior knowledge regarding its borrower does not create a duty to disclose. Accordingly, the court held the investors could not pursue a claim against LaSalle.
Lender and borrower representation is a substantial part of our practice. If you have any questions regarding the documentation of loans or investments in a troubled company, please do not hesitate to contact us.