The Kansas Court of Appeals affirmed a decision by Judge James Charles Droege of the District Court of Johnson County holding a lender liable for counterclaims in a breach of note case and awarding the borrower compensatory and punitive damages (Bank of America, N.A. v. Narula, Case No. 102,853 in the Court of Appeals of the State of Kansas, July 29, 2011).
While Bank of America was able to obtain a judgment for the principal amount of its loan, that judgment was offset by compensatory damages awarded to the borrower for breach of contract, breach of the duty of good faith and fair dealing, lack of consideration, breach of fiduciary duty, negligent misrepresentation and fraud. Moreover, the trial court found Bank of America liable for punitive damages in the amount of US$750,000.
In light of this outcome, lenders in Kansas should take protective steps such as the following:
- Exercise care about marketing yourself as a "trusted financial advisor." If you encourage the borrower to rely on you for advice and counsel, you could face allegations in tort claims.
- Be clear and correct in your explanation of a swap agreement, including potential termination payments.
- Include a financial insecurity provision in all loan agreements, especially when a construction loan will convert to a permanent loan.
- Never trade your borrowers’ investment accounts contrary to their instructions.