Can a Lender Encourage its Borrower to Mediate a Dispute With a Third Party, Without Incurring Lender Liability Risks?

An Issue of Control

By: Donald L. Swanson

Hypothetical: Bank’s borrower is in a lawsuit. Legal fees are mounting, with no end in sight. The attention of borrower’s management is consumed by it. Borrower’s business is suffering. And Bank wants borrower to get the case resolved.

Question: Can Bank suggest, insist, or even demand, that customer schedule a mediation session for the lawsuit as soon as possible and make every effort to get the case resolved?

Concern: Bank might be accused of exercising control over the customer and incurring lender liability risks.

Answer: Such a suggestion, insistence or demand should not create lender liability risks. However, if it occurs amid a series of other actions showing an improper level of control, the suggestion / insistence / demand will add weight to those other actions.

Legal Standards for Improper “Control”

Here is an overview of “control” issues for lender liability concerns:

–“There is no clear definition of what constitutes a creditor’s control over its borrower. Rather, the analysis is fact intensive and depends on the circumstances of an individual case.”

–“To establish domination and control by a lender, the allegations must indicate something more than a monitoring of a debtor’s operations and proffering advice to management, even where the lender threatens to withhold future loans should the advice not be taken.”

–“[L]enders should be aware that the more control they have and exert over their borrowers, the more likely it is that they will be held liable under any number of theories.”

–“On the other hand, lenders should generally feel comfortable that they are unlikely to be exposed to liability if they abide by the express terms of their agreements with their borrowers, do not misrepresent facts to their borrowers or other parties, and recognize that their borrowers’ property, even if that property constitutes the lenders’ collateral, is not their own.”

Quotes are from: R. Krasnow, M. Kessler, G. Fail and J. Sussberg, Lender Liability Considerations, a chapter of “Reorganizing Failing Businesses,” a 2006 publication by the American Bar Association.

Encouraging a borrower to mediate a dispute is like encouraging a borrower to see a lawyer or an accountant to resolve a tax issue. There is nothing about such encouragement that is an improper exercise of control. Indeed, giving such encouragement is prudent.

Insisting or demanding might not be the best idea. But it shouldn’t rise, in and of itself, to the level of improper control.


If at any time a bank or other lender senses that a mediation session might help its borrower resolve a dispute, lender should feel free to encourage the borrower to do the mediation.

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