In 1946, Jimmy Stewart starred in one of the great classic movies, It’s a Wonderful Life. His character was the head of a small local bank. 70 years later, that movie is still played every year at Christmas. One of the great scenes takes place in the bank’s board room. (I won’t spoil it; you can watch it here.)
Seventy years ago, bankers were often portrayed as evil. Today, the limelight goes to the larger banks, institutions like HSBC, Bank of America and Barclays. We can’t read the news without hearing that another big bank is paying a billion dollar fine. What happened to the little banks?
Unfortunately, many are as evil as ever. Recently we represented a 92 year old woman. After a small local bank decided to call her daughter’s loan, the bank’s board was determined to first get more collateral. They wanted to fill their own pockets before pulling the plug. The bank sent its president to mom’s house and had her hurriedly sign papers to “help her daughter.” Those papers contained a personal guarantee.
Remember, there was no helping the daughter at this point. The bank already decided that the loan was going to be pulled. The bank didn’t help anyone but themselves. They seized mom’s money and tried to take her homestead. In other words, they were trying to kick a 92 year old widower on the street.
We sued the bank and won. Like most bank cases, however, the settlement is confidential. We can’t mention the bank’s name or the amount they paid.
Every now and then, however, a case goes all the way to jury. When there is a jury verdict, there can be no gag order or confidentiality agreement. The whole world gets to see just how dirty that some small banks really are. This is a story of one such bank and the punitive damage award they were ordered to pay.
Recently in Montana, a local jury awarded $16,760,000 in punitive damages against First Interstate Bank. The plaintiff was a small logging company, Kelly Logging. The company and its lawyer were awarded a total of $24,637,852. Of that amount, just $286,550 represented actual damages.
Immediately, the bank filed a motion to set aside the jury’s verdict as an “Unconstitutionally Excess Punitive Damage Award.” The bank was so incensed that it even tried to get the court to toss the meager damage award of $286,550.
Few cases go to jury these days. But our judicial system is still built on juries. The right to a trial by jury is a bedrock of our Constitution. Local men and women who come together, hear the facts and decide whether or not to award damages, and if so, how much. When a jury does speak, judges are reluctant to ignore what they have to say.
District Court Judge Ed McLean of Missoula, Montana is one of those judges.
In a 41 page decision, Judge McLean refused to set aside the jury’s punitive damage award of almost $17 million. The case deserves some discussion. The findings of the court should resonate with anyone who has been victimized by a bank, big or small.
Punitive damage awards are not the norm. They can be imposed, however, when a jury believes they are necessary to deter future bad conduct. The U.S. Supreme Court said they can be imposed to further “legitimate interests in punishing unlawful conduct and deterring its repetition.” Courts can insure that juries don’t go overboard but they can’t second guess the amount if it is within a reasonable range.
There are some guideposts. Judge McLean said that the jury’s award should be measured against the “degree of reprehensibility” of the bank’s conduct, the harm suffered by the plaintiff and the difference between the jury’s award and civil penalties authorized in similar cases.
Using those tests, Judge McLean found that First Interstate Bank failed miserably.
What was so bad about 1st Interstate Bank in this case?
Both the jury and court found that First Interstate induced the company to borrow stimulus (SBA) money. In 2009, the economy was in a shambles and the bank knew the logging industry was especially vulnerable. After the company had borrowed the money, the court found that the bank wrongfully offset $762,000 of $1 million in Kelly Logging’s account and “prematurely terminated” the company’s line of credit. In essence, the bank used the government’s loan dollars to repay themselves.
The company owed a ton of money and suddenly had no cash or credit. That predictably resulted in the closure of the business. Between 40 and 50 people out of a job. Entire families with no income to pay their bills.
Judge McLean was incensed. He says that the bank’s actions were not done by accident. Instead, he says, “1st Interstate’s actions were intentional and resulted from a premeditated plan developed and executed over many months.”
The ratio of actual damages to punitive damages in this case was 58:1. While not admitting any wrongdoing, the bank thought a 1:1 ratio was more appropriate. Once again, the court was not persuaded. Here, the bank’s conduct shut down a vibrant local business and disrupted many families. The court found that the jury’s punitive damages award was appropriate and necessary to deter other banks from acting similarly in the future.
Montana has a statutory scheme for punitive damages. Finding that the jury’s award was Constitutional, the court next had to measure it against the law in Montana.
The Montana Code sets the standard for judicial review of punitive damage awards. The court must consider the following factors:
- The nature and reprehensibility of the defendant’s conduct
- The extent of the wrongdoing
- The intent of the defendant
- The profitability of the defendant’s wrongdoing (if applicable)
- The actual damages suffered
- The defendant’s net worth
- Previous punitive damage awards against the same defendant
- Potential or prior criminal sanctions against the defendant
- Any other circumstances
Once again, the court was not persuaded by the bank’s arguments. In fact, Judge McLean noted that it appeared that the bank encouraged Kelly Logging to borrow SBA funds simply so they could take the money and pay of their own credit line.
In our opinion, this is the heart of the case and really no different from our case with the 92 year old woman. In both cases, the banks made up their mind that the borrower would be sacrificed. The banks merely wanted to shore up their own finances at the expense of their borrower / guarantor.
In the words of the court, the jury “obviously determined [the bank’s] intent in wrongfully offsetting the accounts and then unilaterally terminating the loan was its motivation to put profits (‘pennies from heaven’) ahead of its fiduciary obligations, implied and express, to its customer, Kelly Logging and the best interest of Kelly Logging.”
The court could have stopped there but didn’t. Judge McLean said, “Kelly’s success is important, not only for it, a loyal bank customer, but for other businesses in Montana that may find themselves in a similar situation with their lender. Protecting the interests of a company such as Kelly, and trying to assist it to stay in business as a long-time entity as well as advocating for the rights of Kelly in the face of boilerplate bank documents, and a very aggressive defense, was highly important to not only the Kelly’s but the community at large. The jury appreciated the character and importance of the case by returning a significant verdict against 1st Interstate.”
The last chapter on the saga has not been written. Big business and the banking lobby have pushed through a cap on punitive damages that would never allow juries to award more than $10 million no matter how egregious the conduct. Judge McLean tossed that cap but big business and banks don’t go quietly into the night.
The lesson here is obvious. Fighting banks – big and small – is no easy task. Banks will do everything possible to stack the deck against borrowers. One of the most common tools today are jury trial waivers and boilerplate language that says the borrower waives all defenses he may have against the bank. One sided attorney’s fee provisions are also common.
Judge McLean saw right through the bank’s “boilerplate” loan documents and so did the jury.
Cases against banks can be won. Unfortunately, most lender liability lawyers (lawyers that sue banks) charge a great deal for their services and work in large law firms. They are also mostly defense oriented. In other words, they represent the banks.
The law firms of MahanyLaw and Judge, Lang & Katers are different. We are national boutique law firms that have joined forces to sue banks, loan servicers, special servicers and CMBS trusts. Our practice was born out of passion for what we do and a genuine need within the business and borrower community.
For more information, contact attorney Chris Katers at [hidden email] or by telephone at (414) 777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email] or by telephone at (414) 704-6731 (direct).
MahanyLaw –and- Judge, Lang & Katers: Lawyers that Sue Banks!