Growers and ‘Lender Liability’ Claim Suffer Loss in B of A Case

A $47-million fraud verdict against Bank of America was overturned Wednesday because a three-judge panel found no evidence that the bank was responsible for the huge financial losses of two families of apple growers and processors.

The decision was expected to have a significant effect on lawsuits against banks by borrowers because it followed a narrow definition of the bank’s responsibility.

In 1985, a Sonoma County jury awarded the families $47 million in damages after finding B of A guilty of unethical business practices that caused their apple businesses to lose millions of dollars and fail.

The jury accepted the argument by lawyers for the families that two B of A branch managers had promised long-term financing for an apple processing plant even though there was no written contract.

In reversing the jury verdict, the three-judge panel from the California 1st District Court of Appeal ruled that B of A was not legally responsible for the demise of the businesses because there was no written contract for long-term financing.

Lawyers for B of A said the panel’s decision was a significant victory that will have an impact on 50 or more other claims of so-called lender liability against banks in California. B of A alone has 30 similar cases pending.

A lawyer for the apple growers, A. Barry Cappello, said Wednesday’s reversal would be appealed to the California Supreme Court. If the case fails there, he said he would seek a second trial in Sonoma County.

At the time it was awarded, the judgment was the largest verdict in state history in the area of lender liability. The doctrine says that bankers can be held responsible for a borrower’s losses if the bank gets too tough in suddenly calling in a loan or failing to live up to an agreement to extend more credit.

While the huge punitive damages handed out by juries are often reversed on appeal, the trend toward such suits has worried banks and caused many to revise procedures to avoid rough treatment of borrowers that have trouble making payments.

The suit against B of A was brought by the George M. Jewell family, major apple growers in Sebastopol, and the family-owned James O’Connell Co., one of two major apple processors in the Sonoma County community.

Jewell was a financial backer of the O’Connell company and lost a substantial amount of money when the processor went bankrupt in 1982 after a long struggle to survive.

B of A had loaned money to O’Connell and to Jewell during the struggle. The lawsuit claimed that two of the bank’s branch managers had broken promises of long-term financing to keep the processing plant open. The lawsuit said the bank secretly wanted the O’Connell plant to fail because B of A’s biggest customer in the area was a rival apple processor.

As evidence of the bank’s commitment to provide money, the lawsuit said one branch manager had promised that a plan would be “worked out” and that the manager’s regional superior had told Jewell during a visit to the plant that “we’re going to be able to help you.”

In its decision, the appeals panel said encouragement and promises did not constitute a binding agreement that committed the bank to provide long-term financing. They said the essential terms of a contract, such as a loan amount and terms, were absent.

The trial judge had reduced the judgment to $26 million following the jury’s verdict, but the apple growers had sued to have the full amount reinstated. That demand, too, was rejected by the appeals court.

Since the 1985 verdict, two larger judgments have been handed down in California lender-liability cases, $50 million against B of A and $60 million against Wells Fargo. Both jury verdicts have been appealed.