Lessons learned from decades of banking litigation

For close to forty years my professional life has revolved around disputes between borrowers and the institutions that fund them. The work has carried me from Philadelphia courtrooms to depositions taken in distant cities, from the reading rooms of the Supreme Court to the cluttered desks of community bankers trying to keep a deal alive. The patterns that emerge after decades of banking litigation are not the patterns most law students expect. They are not about brilliant motions or surprise verdicts. They are about discipline, paper, and the slow accumulation of small mistakes that grow into very large lawsuits.

Australian readers will recognise some of these patterns because your own banking sector has lived through its own period of reckoning. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry turned a harsh light on how institutions in Sydney, Melbourne, and Brisbane treated their customers, and it produced a wave of litigation that echoes cases I have tried in Pennsylvania and New York. The lessons that follow apply on both sides of the Pacific, even where the statutes and the names of the regulators differ.

These reflections are not theoretical. They are drawn from cases involving commercial letters of credit, leveraged real estate workouts, agricultural credit disputes, and consumer mortgage claims. They are written for lawyers, business owners, risk officers, and curious readers who want to understand what actually happens when a banking relationship collapses and a complaint is filed.

The foundations: documentation and the seeds of disputes

Most banking disputes do not begin with fraud or bad faith. They begin with a clause that no one read carefully when the loan was made, a covenant that lost its meaning as the business grew, or a promise made in a side conversation that never found its way into a written agreement. I have seen multimillion-dollar fights turn on the definition of a single word, and I have seen modest disputes balloon because the original file was incomplete or unsigned.

The first lesson is therefore the most boring and the most important. Documentation discipline must start before the money moves. That means written commitment letters, written term sheets, and a closing binder that a stranger could read years later and still understand the deal. It means capturing every oral commitment in a confirming email within the same business day. When the loan goes bad, the bank that followed this habit can usually tell its story cleanly. The bank that did not will spend the next two years fighting about what was actually said in a meeting that no one can now locate.

In Australia, where the major banks have spent the better part of a decade overhauling their credit processes after the Royal Commission, the parallel is striking. The Australian Prudential Regulation Authority now expects institutions to demonstrate not just compliance with prudential standards but a genuine culture of accountability. That culture lives or dies in the file cabinet.

Lender liability and the duty of good faith

The most theoretically interesting question in banking litigation is whether a lender owes a borrower a duty of good faith, and if so, how far that duty extends. American courts have answered the question in dozens of different ways. Some treat the lender as a private party free to act in its own economic interest. Others recognise an implied covenant that the bank will not exercise its contractual rights in a commercially unreasonable manner. The dividing line is rarely bright.

What decades of practice have taught me is that the question is usually decided long before the appellate court gets involved. The outcome turns on what the bank did, and did not do, when the borrower first fell behind. Did the bank return phone calls? Did it consider a workout in good faith? Did it provide a written reason when it refused a forbearance request? Or did it simply send form default notices until the sheriff arrived?

A lender that behaves badly in these early months is the lender that will find itself answering a lender liability counterclaim, often with a regulator's subpoena sitting on the desk. The lesson is uncomfortable for risk officers, because it counsels restraint at the very moment when the bank's instinct is to harden its position. A measured, documented, and human response to a default is ethically sound. It is also the single best litigation prophylaxis available.

Negotiation, workouts, and the art of resolution

Litigation is the visible part of banking disputes, but the larger work happens in the shadow of the courtroom. Workout negotiations, mediations, and structured forbearance agreements resolve the great majority of my matters before a verdict is ever returned. The skill set required for this work is different from the skill set required for trial. It calls for patience, financial fluency, and the ability to read the other side's real constraints rather than its public posture.

A useful habit I have developed is to ask every client, at the start of an engagement, what a successful resolution would actually look like in business terms. The answer is rarely the same as the answer to the question, "What do you want the court to do?" A borrower may want a reduced interest rate and a longer amortisation. A bank may want the borrower removed from management but the loan kept current. Once those true objectives are on the table, settlement becomes possible in ways that an adversary process can never fully replicate.

This is one reason why mediation has grown so dramatically across the common law world. In Sydney and Melbourne, experienced commercial mediators are now embedded in the regular practice of complex banking matters, and the federal courts actively encourage parties to attempt resolution before the costs of a full trial accumulate. The lesson for younger lawyers is that the case you settle well is often the case your client remembers most fondly.

The regulatory wave and its long shadow

A banking dispute today is rarely just a private dispute. The same facts that give rise to a civil complaint can trigger a regulatory inquiry, a criminal referral, or a class action by customers with similar grievances. American banking lawyers have lived with this layered exposure for years. Australian practitioners have caught up rapidly, particularly after the Royal Commission produced referrals to ASIC and a steady stream of shareholder claims against the major institutions.

What this means in practice is that the modern banking lawyer must think in parallel tracks. A telephone call from a borrower may need to be treated simultaneously as a piece of potential evidence, a topic for a privilege analysis, and a possible trigger for a regulatory notification. The discipline of keeping those tracks separate, while still moving the matter forward, is one of the harder skills to teach and one of the most important to learn.

The lesson here is that risk management is no longer a compliance department's problem. It is a litigation department's problem as well. The lawyer who spots a regulatory dimension early is the lawyer who saves the client the worst kind of surprise, the kind that shows up in a headline before it shows up in a complaint.

The human element: clients, counsel, and counselors

Behind every banking dispute there is a human story. A family farm that borrowed against three generations of work. A small manufacturer in regional Victoria that expanded just before a downturn. A couple in suburban Perth who trusted a broker with their retirement savings. The legal arguments matter, but the people matter more, and the lawyer who forgets that fact will do the case badly even if the law is on their side.

I have learned to spend the first hour of any new engagement simply listening. What did the client understand the deal to be? What did the bank say that mattered? What is the client actually afraid of? These questions rarely produce a single line of admissible evidence, but they almost always produce a strategy that is humane, credible, and sustainable across the long arc of a case that may take three or four years to conclude.

The companion lesson is to choose counsel on the other side with care. A banking dispute can be fought to the last syllable, or it can be managed with a view toward the professional relationships that both firms will need to maintain long after the file is closed. Civility, in this corner of the practice, is not a soft virtue. It is a strategic asset. Readers who want a deeper look at the man behind these observations can learn more about my background and my published work on edmannino.com.

Cross-border lessons for the Australian reader

Australian banking law is its own creature, grounded in the Corporations Act, the National Consumer Credit Protection Act, and the common law tradition that the country shares with the United Kingdom and the United States. The procedural rules differ, the regulators have different names, and the major players operate under different prudential frameworks. Yet the litigation patterns repeat with remarkable fidelity.

A US case about a bank's duty to give a borrower a meaningful chance to cure a default will find echoes in Australian decisions about unconscionable conduct. A fight over a letter of credit in a federal court in Manhattan will look familiar to a litigator in the Federal Court of Australia. The vocabulary changes. The human pressures, and the legal architecture that responds to them, remain recognisable.

For an Australian practitioner, the most useful habit is to read the comparable work in the United States not as binding authority but as a source of strategic imagination. How did the American court frame the question? What facts did the judge find dispositive? Which arguments failed, and which ones opened a door? That kind of reading, done regularly, will sharpen instincts in a way that no domestic seminar can match. Those who enjoy accompanying their legal reading with photography and travel notes may appreciate the visual reflections I have collected over the years, where I share images from the cities where these cases have played out.

If you are facing a banking dispute, or advising someone who is, the most important step is the first one. Pick up the telephone, gather the file, and talk to a lawyer who has lived through this kind of matter before. The law rewards preparation, and the first conversation is where that preparation begins. Call my office in Pennsylvania to set up a consultation, and let us talk through what the documents actually say and what the realistic paths forward may be.