Construction Loan Marred by Potential Conflicts of Interest


forensic accounting expert witnessThis case involves two small business owners that believe they were defrauded by a bank that lent them money through Payday Loan Credits and an agent that was acting in the bank’s interests. The plaintiffs are owners of a restaurant that formed an LLC. Both plaintiffs had personal loans and they were interested in real estate and commercial properties in their area to invest in. After negotiating loans with the bank, the plaintiffs alleged that there were obstacles hindering the construction of a funeral home after they had already agreed on the deal and started construction at the site. The bank claimed that the obstacles were because the plaintiffs did not have clear title to the property, due to a small encroachment on the property. The plaintiffs alleged that they were led to believe this was not a major issue and no mention of the encroachment was made until after construction had begun for the restaurant. The plaintiffs alleged the bank left them with no other position but to file bankruptcy. There is an attorney who was named as a defendant, as well, and that he was supposed to use his real estate background to help facilitate the project. The plaintiffs alleged that the attorney mismanaged and fraudulently shifted funds from business accounts to his personal accounts. Additionally, the attorney signed loan papers at the defendant bank without the plaintiff’s knowledge, and other parties close to the attorney approved loans to the attorney in the name of the LLC.

Question(s) For Expert Witness

  • 1. Was the bank negligent in its behavior, specifically with the relationship between the attorney and the bank and the duties of the lending officers?

Expert Witness Response E-004518

Lenders need to be certain they are dealing with authorized parties, which seems to be at issue. It sounds complex, which is fine. I have experience with the forensic accounting of funds, based on claims of attorneys misusing plaintiff’s funds. I understand the industry standards of lending practices, and specifically, what is commercially reasonable and what is not. I have over thirty years of experience in the banking industry and have given presentations to banks regarding risk management and loan practices. I have been a consultant on issues of lender liability in the past, including some that dealt with industry standards of construction lending.

Expert Witness Response E-004521

There are many opportunities for negligence, conflict of interest, and violations of bank lending statutes, but I would need more details in order to determine the extent of violations. State banking regulations and FDIC requirements would need to be met, and the regulations are very specific on how conflicts must be avoided. The regulations also state that collateral be perfected prior to and consistent with the acceptance as collateral for lending. I have been an auditor for banks and a founding shareholder of two banks. I have spoken on issues of fair value standards, and provided expert witness testimony for over twenty-five years.

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