April 20, 2022

How Not To Lend – A Lender Liability Tutorial

Written By

Lea Pauley Goff
Member, Stoll Keenon Ogden PLLC

Remember the TV show What Not to Wear, that helped us avoid sartorial disaster? A recent lender liability decision counsels lenders on avoiding a liability disaster. To learn more, continue reading below.

On December 23, 2021, a U. S. Bankruptcy Court in Texas issued findings of fact and conclusions of law in favor of a bankruptcy trustee on multiple contract and tort claims against a lender.[1] After a bench trial, this court found, in a 145 page decision, that the lender, under factoring and inventory loan agreements, engaged in multiple forms of wrongdoing, forcing its borrower into liquidation. The Court found damages exceeding $17 million. This is not a record-setting lender liability decision but it has received national press, likely because of the eye-popping nature of the Court’s conclusions.

Bailey Tool & Manufacturing Company and two related companies (collectively “Bailey”) were in financial distress and sought to transfer their banking relationship from Comerica to Regions Bank. During that process, they entered into what were intended to be interim factoring agreements and inventory loan agreements with Republic Business Credit, LLC (“Republic” or “Lender”).

The loans were expensive and the loan documents, as drafted by Republic, were “designed to let Republic do whatever it wished in determining eligibility, availability, or defaults.” [p. 57] The loan documents gave Republic nearly unfettered discretion to deny advances and charge fees, which it did aggressively. This caused Bailey to default on another small obligation, prompting Republic to declare its own loans in default and quit advancing, which in turn caused Bailey to miss a payroll. When advances resumed, Republic began choosing which of Bailey’s vendors would be paid, paying them directly, and trying to replace Bailey’s management team – the Court cites an email in which Republic even declined to allow Bailey to purchase coffee and Gatorade for its employees.

Further, Republic’s internal emails referred to Bailey having availability on the loans at the same time Republic was telling Bailey that there was no availability. Upon the resumption of some funding, the Court found that Republic effectively “controlled virtually every major component of the Debtors’ business” [p. 130], destroyed long-time customer relationships, caused “Bailey catastrophic harm” and “crippled its chances to continue as a going concern.” The Court found that Republic “coerced” [p. 61] Bailey’s owner and his wife to pledge their exempt homestead on the debt, contrary to Texas law, and took much of the value of that home at sale. Republic was eventually paid in full (including even the inflated amounts it was claiming), but declined to release Bailey’s excess funds without a liability release, which Bailey declined to give.

Bailey ended up in Chapter 11, where Republic’s continued refusal to surrender Bailey’s excess funds helped scuttle the reorganization and the case converted to Chapter 7, so a trustee was appointed and eventually became the plaintiff.  The Court, after a bench trial, characterized the Lender’s misconduct as including:

The Court accepted the trustee’s experts’ testimony that, absent Republic’s misconduct, Bailey could have reorganized. It concluded that Republic acted in bad faith and at times with malice. [p.92]. The Court found multiple intentional breaches of the written agreements; breaches of the duty of good faith and fair dealing; fraud and negligent misrepresentation; tortious interference with contract; and violation of the automatic stay. The Court concluded that, even in some financial distress, there was enterprise value in Bailey before Republic’s bad behavior. The eventual judgment of nearly $17 million is to include nearly $2 million in punitive damages and stay violation penalties.


SKO’s Bankruptcy and Financial Restructuring practice advocates for clients in all aspects of business insolvency – including Chapter 11, lender liability, credit default negotiations, and lien priority and intercreditor disputes.  Lea, who has practiced in this area for over 35 years, with her SKO team,  represent clients in Kentucky and Indiana, but also in New York, Delaware, Florida, California and other jurisdictions.

[1] The U.S. Bankruptcy Court for the Northern District of Texas, in the case styled In re Bailey Tool & Manufacturing Company, Case no. 16-30503-SGJ-7, issued its Findings Of Fact And Conclusions of Law In Support of Judgment Imposing Liability On Factoring Company, Republic Business Credit, LLC (“Findings and Conclusions”)[Doc. 369] on December 23, 2021. The Findings and Conclusions followed a bench trial in mid-2021 and state that judgment will be entered subsequently. As of May 1, 2022, the actual judgment had not been entered. The docket reflects motion practice concerning the attorney fees to be included in the eventual judgment.

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