Meet the author

Adrienne L. Baker


Rogers, AR


The Arkansas Court of Appeals recently overturned a trial court judgment and decree of foreclosure in favor of a bank, citing evidence of borrower duress and that the bank may have prevented the borrowers’ performance of their obligations under the loan documents. What does this decision mean for lender-borrower relations in the State of Arkansas? Read on for more.

In Levitt v. Today’s Bank, the Levitts defaulted on commercial loans when their trucking business failed. The business failed because several tractor trailers – which were also intended to serve as the bank’s collateral – were repossessed and sold by a third party who purported to be the owner of the tractor trailers. The lender filed for foreclosure. The borrowers filed bankruptcy, and the bank was allowed to proceed with foreclosure. In the foreclosure, the borrowers filed a counterclaim against the bank, alleging negligence by the bank, asserting they executed loan modification documents under duress, and claiming the bank rendered their performance of the loan agreements impossible. From the bankruptcy trustee, the bank purchased the borrowers’ businesses and all of their claims. The bank then dismissed the borrower counterclaims against the bank in the foreclosure, and the trial court entered summary judgment and a decree of foreclosure in favor of the bank. This appeal ensued.

On appeal, the Court of Appeals held that summary judgment in favor of the bank was inappropriate because genuine disputes of material fact remained. Specifically, the Court said there was evidence that the borrowers signed the loan modification documents under duress. There was also evidence that the borrowers’ performance was rendered impossible by the actions of the bank. Therefore, the Court remanded the case to the trial court to proceed to a trial.

It is not uncommon for borrowers facing foreclosure or replevin to argue that they signed loan documents under duress, or “If the bank had only done X, Y, and Z, I would have been able to keep up with my loan payments.” In our experience, these arguments generally are not well received by trial courts. Duress is a high bar to chin. And most people have an immediate negative reaction to the notion that if the bank had only lent someone more money or given them more chances, then the borrower could have paid off the loan. This is especially true when all the bank did was exercise its rights under the loan documents. But, in this situation, the facts were a bit more nuanced. The borrowers testified the bank threatened them with criminal consequences if they did not pledge their personal home to further secure the commercial loan. The borrowers also testified that during origination of the commercial loan, the loan officer told them he would take care of having the tractor trailers retitled in the names of the borrowers. Ultimately, they testified, he failed to take care of it, and as a result the title owner was able to repossess and sell the tractor trailers. These two pieces of evidence were enough to convince the Court to overturn the trial court judgment in favor of the bank.

The Court was not concerned with whether criminal consequences were possible and warranted under the circumstances. It was the fact of the (alleged) threat that caused the Court to find there was evidence of duress. The Court also said it was for a jury, not the judge, to decide who was telling the truth – the borrowers who testified the loan officer promised or agreed to take care of the title transfer, or the bank representative who testified this conversation never occurred. Additionally, the Court held the bank did not buy the borrowers’ claims and defenses from the bankruptcy trustee. The bank only purchased claims. So, while the bank was entitled to dismiss the claims against the bank, it was not in a position to withdraw the defenses which had been asserted by the borrowers in the foreclosure. Ultimately, a jury will decide whether the evidence supports findings of duress and prevention of performance.

What are the takeaways from this case?

  1. If you have a sizeable problem loan, consider getting your attorney involved before you start negotiating with your borrower. They can help you evaluate the risks and rewards of various mechanisms for encouraging borrower performance.
  2. Do not threaten criminal action against a borrower in an attempt to elicit specific actions by them. In this case, it was not clear that a threat of criminal prosecution was actually made by the bank or that a threat would have been unfounded. Nonetheless, the Court said borrower testimony of a criminal threat was enough to create a jury question on duress. Make it a policy not to threaten criminal action. Your loan officers and employees should be able to testify, “we do not threaten criminal action against our customers, and I did not break from our standard practice in this instance.” 
  3. The bank is entitled to exercise its rights under the loan agreements, even if doing so makes the borrowers unable to perform. If the bank is considering actions which are not specifically outlined in the loan documents, such as offering to get involved with a borrower’s business or transactions either during loan origination or thereafter, remember that failure to perform or failure to perform with a reasonable degree of care may lead to a claim by the borrower that the bank’s actions (or inaction) prevented performance by the borrower. The duty of care between a lender and borrower is generally that of creditor and debtor. But, a bank can unintentionally take on a heightened degree of care, up to and including a fiduciary duty, by agreeing to take on additional tasks which are outside the typical loan origination and servicing pipeline.

Have a problem brewing? The knowledgeable banking law attorneys at WLJ have years of experience with loan origination, problem loan workouts, foreclosure litigation and defense of lender liability claims.