A Primer On Lender Liability For Land Use Investments

"Lender liability results when lenders cross the line from being mere sources of capital for a business to being active participants in that business. For many years, the line was clear. As a result of the decision by the California Supreme Court in Connor v. Great Western Savings and Loan Association, 69 Cal. 2d 850 (1968), the line moved much closer to lenders and became blurred.

In Great Western, homeowners sought damages from the lender, Great Western Savings and Loan Association, for construction defects when the borrower, the developer of a real estate project, built homes with ill-designed foundations that could not withstand the expansion and contraction of adobe soil. The borrowers sought to hold Great Western liable on the grounds that its participation in the real estate development brought it into a joint venture with the developer. Under this joint venture theory, the lender would be held jointly and severally liable for any obligations that the developer might have to third parties, in this case the homeowners who had purchased homes from the developer. The court held that Great Western was so involved in day-to-day operations that it had transcended the line between lender and borrower, and thus was liable for, among other things, the tort liability and mechanics' lien liability of the developer."