For lenders and service providers, communication is perception. If the last few years have established anything, it is that the perception of borrowers, regulators and, in litigation, judges and juries, have and will dramatically influence not only the outcome of a dispute but, risk assessments, profitability and business practices.

Let’s take a brief look into how everyday communications—whether by content or tone—can have a dramatic and wide-ranging influence, especially in a litigation setting.

In the last several years, lenders and service providers have increasingly been in the public eye. And in some instances they have been perceived as prone to ruthless actions, sharp practices and overreaching. This change in perception has had an increasing effect on how lenders are treated in litigation by juries, and, in some cases, by judges. With this shift, lenders and services have experienced higher litigation risk and greater litigation costs.

Look at some of the pertinent factors leading to this more hostile environment and their impact:

THE INFORMATION AGE
Our lives are governed by an increasing demand for higher speed and greater volume. In the business world, the solution for these demands has largely been to replace letters and phone calls with emails and similar types of quick communications. While letters were generally drafted, edited and many times redrafted and phone calls were typically undocumented, emails are generally quick, first drafts, and in many instances part of a flurry of back-and-forth communications prepared on an extemporaneous basis.

EVIDENCE IN A LAWSUIT
Often, there are hundreds, if not thousands, of emails exchanged between various individuals both inside and outside the institution long before a potential dispute is recognized. As the matter moves toward trial, out of this mass of emails, there will customarily be only five to 10 upon which a party will focus and present at trial to hammer home a theme.
Generally, as harsh as it sounds, an attorney in litigation is not conducting a search for the truth, but is instead endeavoring to present the strongest case for his or her client. The attorney will, in reviewing emails, look for every statement by the other side that may provoke a judge or jury to look negatively on the opposition and every ambiguity that can be skewed to strengthen his or her client’s position and weaken the position of the opposing party. Since the judge or jury hearing the matter may already have a predisposition against the lender or servicer, this negative view can in many instances be exacerbated by the lender or servicer’s own emails.
Trial results are often driven more by perceptions and likes and dislikes than by legal theories or who is “right.” The impreciseness of communications may, as a result, become a critical factor in the outcome of a trial or whether a party can even risk going to trial as opposed to being forced into an otherwise unacceptable settlement position.

THE ECONOMIC ENVIRONMENT
With the unexpected downturn in the economic environment, the number of uncured loan defaults rose throughout the industry. Lenders and servicers were required to handle these defaults with a staff not adept at handling the volume of communications that resulted and through systems and remedies that were not designed or equipped to manage the conditions presented. The result was, to a certain degree, a chaotic environment where lenders and servicers were viewed as they had not been viewed since the Great Depression. While the number of foreclosures has now significantly declined, the regulatory environment and government oversight is more draconian than ever.

THE SHIFT IN PRECEDENT
As the view of lenders and servicers became more polarized, previously relied-upon and well-recognized protections and defenses against litigation became weakened or destroyed by new legislation and court decisions that favored borrowers and guarantors. Specifically, a long established series of cases to the effect that the court would not look beyond the four corners of the loan documents was cast to the wayside if:

• The borrower or guarantor made the contention that the loan documents did not accurately reflect what was represented by the lender and relied on by the guarantor or borrower; or
• Through a stream of communications between the borrower and the lender or servicer, an agreement was formed under which the lender must forbear, modify or waive rights. This may be argued based on nothing but a series of emails exchanged between the borrower and lender; or
• Even if no contract was formally entered into, the lender is liable based on a verbal commitment or loan modification that was never documented but is nevertheless binding based on representations that were justifiably relied on.

With the downturn in the economic environment and a growing number of attorneys who wished to maintain a viable practice, a broader group of lawyers emerged who specialized solely in the representation of borrowers. This resulted in borrowers having significantly greater access to representation by lawyers who had superior expertise in this particular area of law and who regularly challenged lenders and servicers, often on an extremely aggressive basis.

Each of these factors has resulted in the need for lenders and servicers to be significantly more cognizant of the implications of their communications, to standardize communications where possible and to consider a change in who is communicating on behalf of the lender or servicer if it appears that a material dispute may be on the horizon.

MAXIMS OF COMMUNICATIONS
In view of the concerns expressed above, the following precepts are helpful considerations in limiting risk of a communication going awry:

• Fast paced communications have created enhanced risk of an ambiguity or poorly based phrase becoming the center point of the borrower or guarantor’s entire case.
• Desperate borrowers with creative attorneys will look to distort the meaning of communications to gain an advantage.
• Poor communications can lead to a wide range of claims based on theories of written contract or promissory estoppel that are harder and more costly to defend.
• Use of confidential communications should be considered in internal communications.
• Claims of fraudulent inducement in the making of a loan are now a greater risk.
• Every written communication is a potential exhibit at trial.
• Focused and short is better than long and complex.
• The less editorial the better.
• Ambiguity creates risk.
• Maintain a theme and focus based on the purpose of the communication and the desired outcome.
• Recognize risk of a potential lawsuit; stay vigilant.

TYPES OF COMMUNICATION TO AVOID
Based on these postulates certain communications need to be avoided:

• Unintended promises or assurances (may result in a binding obligation that was not intended).
• Ambiguous statements (allows for distorted interpretation).
• Conveying internal discord (this will often broaden the scope of a lawsuit).
• Poor follow-up (inflammatory at all levels).
• Breaching the attorney/client privilege (opens up enormous problems and risk of disclosure).
• Heavy handed statements (can be deadly even if fully accurate).
• Untrue statements (very difficult to overcome at trial).
• Oversell (avoid promising more than you are certain you can deliver).

USE OF A PRE-NEGOTIATION OR CONFIDENTIALITY LETTER
One widely used method to avoid risk of an errant email or other communication being used by an adversary is a “pre-negotiation” or “confidentiality” agreement pursuant to which all communications with the borrower and its affiliates are acknowledged to be confidential in scope. Such a letter would typically be signed before discussions of a possible change in the loan documentation or loan terms. Reference should also be made that these communications are initiated at the borrower’s request and that the communications are to be used solely for purposes of facilitating discussions between the parties and not otherwise, and are to remain strictly confidential in all respects.
This type of agreement can also be used to document a variety of facts that cannot otherwise be disputed and the admission of which might be helpful at a later date, such as the loan amount, the operative loan documents, that there are no offset or setoff claims and existing defaults and maturity date.

USE OF ATTORNEY COMMUNICATIONS AND INTERNAL COMMUNICATIONS
Communications in confidence between an attorney and his or her client are privileged and not subject to discovery by a third party or forced disclosure. This applies whether the attorney is in-house, retained or just consulted.
Involvement of an attorney in communications within an organization or within departments can be an effective tool to maintain sensitive communications in confidence as long as only personnel and consultants of the organization are made privy to the communications with the attorney.
Such communications are rarely challenged as discoverable and discovery of such communications is even less often ordered by a court as long as the conditional nature of the communications is strictly maintained.

DISCLAIMER: This article is intended solely to raise awareness and not to render advice nor for purposes of reliance. Competent counsel should be contacted as to any specific areas of concern. Awareness of risk combined with prudent policies and training are the best weapons available to minimize these risks and prevent costly mistakes arising from poor or careless communications or internal documents.

Eric Dean’s article originally appeared in Private Lender by AAPL, November/December 2016