The most common theme to banking disputes and litigation, in both the commercial and consumer context, is that the parties often fail to adequately communicate with each other.
By Brian RichThe prominence of financial institutions in American society, together with often intense media glare and aggressive government enforcement, can sometimes make it seem that the pursuit of litigation against banks is inevitable. Undoubtedly, some protracted disputes are unavoidable, but this article attempts to explore some best practices both to minimize litigation risks in the first place and to adequately address them once they arise.
Common sense is not that common. As with most aspects of life, common sense often goes a long way toward minimizing problems. Exercising common sense in every interaction, both before and during litigation, is almost always the right approach. If a borrower makes a reasonable request for assistance, either in terms of gathering information or coming to terms on reasonable payment accommodations, it is often in the bank’s best interest to work with them, even if it requires an “out of the box” solution. Likewise, extending additional credit to a borrower with a long history of defaults or credit problems is likely not in either party’s best interests and is likely to create, rather than minimize, issues in future litigation. Knowing when to push a customer and when to concede is often a decision based less on raw financial data than a full analysis of what is reasonable under the circumstances and what will ultimately benefit both parties.
Treat your legal counsel as counsel. No piece about minimizing litigation risks is complete without some discussion of the role of the lawyer. Lawyers, of course, are trained to interpret, understand and advise on the protection of legal rights. Just as it is important that clients avoid unnecessarily “micro-managing” lawyers on legal strategy and tactics, it is equally important to remember that the lawyer’s role is to counsel. Astute lawyers can and should be viewed as partners in reaching the client’s goals. But that same legal input and advice must be viewed in the context of what are often much larger business considerations and what impact that advice may have on events outside the legal subject of the lawyers’ advice. The old adage, “Experts should be on tap, not on top” may be overstating the point, but some perspective as to the roles is still helpful.
If litigation does arise, the lawyer also becomes the “face” of the bank both to the customer that lawyer may be communicating with or through and to the judge or jury that may ultimately decide the issue. Inevitably, that lawyer’s tone, actions and conduct will be ascribed to their client. Of course, this does not mean that a bank should select their lawyers based on personality. But just as a good lawyer can identify litigation risks, represent the interests of a client and establish credibility in court, a lawyer who’s sending off-putting messages either verbally or non-verbally can also create unnecessary distractions, even from a meritorious case, which can jeopardize the client’s interests. Astute clients can, and should, both monitor and recognize the differences.
No two banks are the same. Banks are not monolithic, even though contemporary society often tends to think of them that way. When attempts are made to portray a financial institution as a “bad actor” simply because of its industry, it is important to accentuate the differences, particularly insofar as those differences pertain to business practices, leadership or track records. Most litigation cases do not require a full-scale industry defense, but rather an explanation as to what the parties in that case did or did not do. Just as it is important to avoid the temptation to demonize adversaries, a banking party should defend itself on its own merits and resist the urge to feel weighed down by its association with what is sometimes an (unfairly) maligned industry.
Communication Is key. The most common theme to banking disputes and litigation, in both the commercial and consumer context, is that the parties often fail to adequately communicate with each other, meaning the borrower did not understand the terms of the loan, or the bank did not adequately respond to their request for information. Banking customers who adequately understand the terms of the relationship through prompt and thorough communication are less likely to contest enforcement later, or at the very least be less successful in litigation. Similarly, banks with the best portfolios are often those that have practices in place that prioritize effective communication.
Be boring, but be human. Business is business. Loan transactions need not be scintillating, and litigation that is exciting, while perhaps entertaining, is usually best avoided due to the unpredictability of the outcome. While it may be tempting to fight an incendiary communication, allegation or claim with sarcasm, disdain or humor, those responses rarely age as well as communications that are bland, concise and strictly accurate. At the same time, avoid legalese and “bank speak.” Communications should be professional, responsive, succinct and transparent. Above all, they should be honest and easy to understand. While difficult to do in practice, treating every communication as if it will be displayed as an exhibit in a court proceeding—or a client’s post on social media—in the future will ultimately yield tremendous dividends.
Identify the issues. It can sometimes be difficult to easily determine what is behind a default or dispute. Is a borrower actually disputing a debt, or can they just not pay it, for example, due to some personal or business emergency? Offering a mortgage modification to a borrower with no income may not be responsive to their needs (and may actually create more problems than it solves), just as threatening foreclosure to a customer who has not made a mortgage payment because they have a potentially legitimate question on an escrow advance (a question that might be resolved with a simple explanation) may not serve either party’s actual interests. Early identification of what the actual issues are can maximize the chances of addressing and disposing of them before they lead to larger problems.
Less may not be more. Banking cases, particularly in the residential or consumer context, are very often both emotionally fraught and stem from communication errors or information gaps. A residential borrower who does not understand how the bank is calculating their payment may not be satisfied from a simple breakdown of what is due, but might need to speak to someone to establish a comfort level that the bank hears and appreciates their concerns. Most customers who do not understand how the bank applied their payment will not be satisfied with a 50-page history of loan transactions that can be difficult to understand and decipher, even though that might technically be responsive to their request. Some borrowers who want their “day in court” are often satisfied without it if they feel that the bank has listened to and understood them, even if the ultimate outcome is different than what they think it should be.
While there may in many circumstances be perfectly legitimate reasons not to turn over documents or other information carte blanche, comprehensively addressing borrowers’ questions—even with information that they may not have requested but that might deepen their understanding—often carries long-term benefits in avoiding litigation issues and delay, particularly where they will ultimately receive that information in the litigation anyway. In the right context, an early conversation with a borrower to address concerns is almost always preferable to having that same “conversation” occur in a deposition or in front of a judge or jury.
Admit mistakes. The cover-up often really is worse than the “crime.” When banks make mistakes, history shows that attempting to “explain away” or conceal those mistakes is generally counterproductive. Accepting mistakes not only assists in controlling the narrative of the case but also builds both credibility and good will. This is particularly true in the litigation context, where judges and juries are far more likely to favorably treat a party they view as having honestly addressed the issues before them. Admitting and getting in front of a mistake maximizes the ability to put it into context, own it and allow the affected parties to move on. Accepting responsibility also neutralizes the ability of an opposing party to exploit errors.
Brian Rich is a partner in the commercial litigation and financial institutions and lending practices areas at the law firm of Barclay Damon.