On Friday afternoons, Blawgletter's mind tends to drift. More than usual, we mean.
On this day, whose name honors the Norse goddess Frigg, our thoughts ran to lender liability. For today the First Circuit upheld a district court's rejection of same.
FAMM, which fabricated steel products, borrowed money from Sovereign Bank. FAMM's finances hit the skids, and the company went into "covenant default" on the Sovereign loan. The bank pressed FAMM to hire its choice of a new comptroller, who proceeded to do a bad job. Things got worse. More stuff happened. The bank liquidated FAMM, taking a $4 million hit. FAMM sued.
Let's not go through all the claims, which included fraud, tortious interference, duress, bad faith, breach of fiduciary duty, and other usual suspects in the lender liability Pantheon. No, let's pause on the one that the First Circuit highlighted — the "instrumentality" hypothesis.
That inchoate theory posits that a lender gained such control over a borrower that it (the borrower) turned into the outsider's zombie. The catatonic cat's paw then wreaks havoc.
The First Circuit dispatched the instrumentality claim with a couple of strokes. The first slashed at FAMM's "radical alteration to the theory." Usually Creditor B alleges that Creditor A used its power over the debtor to line Creditor A's pockets, leaving Creditor B little or nothing. But FAMM claimed that Sovereign damaged it (FAMM). "Plaintiffs point to no cases that recognize this novel application of the instrumentality theory, and there is no indication that such an application would be accepted by the Massachusetts courts." FAMM Steel, Inc. v. Sovereign Bank, No. 08-1955 (1st Cir. June 12, 2009) (applying Massachusetts law).
The second whack struck the (faintly) beating heart of the claim. No evidence, the court held, showed that Sovereign in fact wielded enough control to make FAMM its instrumentality.
Contrast FAMM with Schubert v. Lucent Technologies, Inc. (In re Winstar Communications, Inc.), 554 F.3d 382 (3d Cir. 2009) (post here). In that case, the court held that Lucent acquired and then abused its "insider" status as a key supplier to and large creditor of Winstar. Other creditors suffered. Winstar's trustee in bankruptcy could thus recoup $188 million that Lucent extracted from the company.
Our wandering mind connected FAMM with Schubert because — we think — they involved like facts but opposite outcomes. FAMM lost largely because you expect creditors to push borrowers around some and that borrowers in default look at least whiny when they complain the shoving got rough. In Schubert, though, other creditors — through their new friend, the bankruptcy trustee — got the harsh treatment. They seem more deserving. And of course in bankruptcy the rules against inequitable conduct make prevailing on an instrumentality-ish set of facts a bit easier.
