Lender to Lender Duty of Disclosure
Written By: Marija K. Nicksic, Esq., Krieg DeVault LLP
This past October, I attended the IFA’s NexGen Conference in Austin, Texas where I had the unique experience of discussing the challenges and opportunities of the factoring industry with other young industry professionals. Out of all the topics discussed, the topic that ignited the most passionate conversation, by far, was the duty that Factors owe to other Factors in the context of a buyout of a Factoring Client’s portfolio.
The discussion during the conference was separated into two camps. The first group argued it is best business practice for the exiting Factor to disclose if it believed a Factoring Client to be misrepresenting its financial condition or even perpetrating fraud. The second group advocated that the exiting Factor had no such duty to the incoming Factor. As an attorney, the most I could offer to that discussion at that time was to warn against intentional misrepresentations in the contract.
Having undertaken to review this issue, this article discusses what duty, if any, exists between two Factors (or Lenders) engaged in the sale and acquisition of a Factoring Client’s portfolio. In summary, when it comes to onboarding a Factoring portfolio, caveat emptor (buyer beware) governs.
The Factoring industry has grown in recent years, creating a new dynamic among Factors.[1] Whereas previously many Factors knew each other, the industry is now saturated. Acquiring a Factoring Client’s portfolio must be backed with due diligence.
This shift is compounded with the fact that the commercial financing industry has few regulations. On the federal level, there is no regulation on transactions among commercial financers outside of the prohibition of discriminatory practices.[2] In fact, federal regulation was so lacking, some states have stepped-in, for better or for worse, to regulate the commercial financing industry.[3] However, these state-propagated regulatory schemes govern disclosures that the Factor must provide for the Factoring Client and do not touch on transactions between two secured creditors.
Without federal or state regulation, the relationship between two commercial financers is left up to contract law, tort law, and the legal theory that sits between contract and tort law – Lender Liability.[4] As commercial transactions are governed by contracts, contract law is the logical starting point for this analysis. Simply put, the terms of the contract govern the transaction. If a party breaches the terms of the contract, the breaching party is liable to the non-breaching party for compensatory damages caused by such breach. As applied to two commercial financers entering into an agreement to transfer Factoring Client’s portfolio from the exiting Factor to the incoming Factor, the duty of the parties is simple – do not breach the terms of the contract.
In practice, if the exiting Factor has knowledge the Factoring Client is intentionally misrepresenting it Accounts or financial condition generally, the exiting Factor can contract around this information in the Payoff Agreement. The exiting Factor can simply not offer any representations and warranties. If the exiting Factor is offering representations and warranties, as long as the statement if true, the exiting Factor is not at risk of misrepresentation. For example, if the exiting Factor suspects fraud but has not put the Factoring Client in default, the exiting Factor can represent it has not issued a default under the factoring facility. Because that statement is true, the exiting Factor would not be at-risk of misrepresentation. Additionally, knowledge qualifiers such as “to the actual knowledge of” can also be used to contract around these potential issues, as “actual knowledge” is generally accepted to mean that an individual is actually aware of a fact, as opposed to having a general suspicion. In summary, the incoming Factor buying a Factoring Client’s portfolio cannot depend solely on the representations of the exiting Factor when it comes to due diligence of the Factoring Client.
Tort law by itself does not provide much guidance. As tort law generally governs conduct outside of an existing agreement, once the Payoff Letter is signed, the contract governs.[5] However, between contract and tort law, lender liability exists, specifically, the duty of good faith and fair dealing.[6] This duty requires each party to a contract to perform the contract in a manner so that each party can gain what they bargained for.[7] Although it does not create new obligations between the contracting parties, it does control how the parties may act in their own discretion while performing the contract.[8]
The duty of good faith and fair dealing may either be considered a tort claim or a contract claim. However, as courts are hesitant to allow the tort claim except in special circumstances (such as parties to an insurance contract), this article will discuss the duty of good faith and fair dealing as a contract claim.[9]
The duty of good faith and fair dealing may be expressly stated in the contract, but if it is not, the duty of good faith and fair dealing is considered implied.[10] So, when the parties are left to their own discretion to perform the contract, they have an obligation to perform in such a manner that the other party receives the benefits they bargained for. This type of claim needs to tie into a contract provision but cannot be a provision on which the contract speaks on directly. If the contract speaks on the provision directly, the terms of the contract control.[11] For example, if in the Payoff Agreement the exiting Factor agrees to provide copies of a Factoring Client’s contracts with Account Debtors, and the exiting Factor then refuses to turn over these contracts, that is a breach of the Payoff Agreement. However, if the exiting Factor turns over the Factoring Client’s contracts with Account Debtors, knowing those contracts have been falsified, that is a breach of the duty of good faith and fair dealing. While the exiting Factor may have complied with the terms of the Payoff Agreement, there is a presumption that the incoming Factor does not want to use falsified statements to conduct due diligence.
While the duty of good faith and fair dealing imposes some duty between Factors in this situation, it is important to note that it is not far-reaching. In the breach of good faith and fair dealing described above, the exiting Factor can limit its own liability by simply adding a contract provision disclaiming the accuracy of any of the Factoring Client’s documents produced by exiting Factor. Because the Payoff Agreement would then contain language that speaks directly to the accuracy of the Factoring Client’s documents, there is no room for the duty of good faith and fair dealing to govern discretionary action. In short, because the Payoff Agreement specifically states the exiting Factor makes no representations to the accuracy of the Factoring Client’s documents, the incoming Factor cannot claim there is an implied duty for exiting Factor to provide accurate documents.
The exiting Factor may go even further and recite in the Payoff Letter that the exiting Factor makes no representation or warranties as to the accuracy of the Factoring Client’s Accounts at all. The duty of good faith and fair dealing does not have the power to re-write terms of the contract, so the incoming Factor cannot later claim exiting Factor had a duty to disclose the Factoring Client’s Accounts were inaccurate.
Practically, in order for there to be a breach of the duty of good faith and fair dealing, the alleging party must sue the other party, prove a breach of the Payoff Agreement and further prove that the breach is the cause of damages suffered.[12] As a contract remedy, even if the alleging party wins the suit, the most it can recover is compensatory damages[13] (the amount that party expected to make on the contract). The duty of good faith and fair dealing does not replace the need for due diligence and to verify information of the Factoring Client.
In summary, relying on the duty of good faith and fair dealing to control the transactions between two Factors is costly and inefficient. As there is no true duty imposed on these parties, the old adage caveat emptor applies. When entering into a purchase of a Factoring Client’s portfolio from the exiting Factor, the incoming Factor should be relying only on its own due diligence.
[1]Factoring Services Market Size & Trends; Grand View Research; (2025) https://www.grandviewresearch.com/industry-analysis/factoring-services-market; Factoring Market Size & Share Analysis, Mordor Intelligence (2025) https://www.mordorintelligence.com/industry-reports/factoring-market; Key Trends Shaping the Future of Invoice Factoring 2024, Capstone (December 12, 2023) https://capstonetrade.com/key-trends-shaping-the-future-of-invoice-factoring-in-2024/
[2] Which Laws do Lenders need to Comply with? Loan Pro, Modern Credit Platform (2025) https://help.loanpro.io/compliance/which-laws-do-lenders-need-to-comply-with; IV. Fair Lending – Fair Lending Laws and Regulations, FDIC Consumer Compliance Examination Manual (December 2024) https://www.fdic.gov/resources/supervision-and-examinations/consumer-compliance-examination-manual/documents/4/iv-1-1.pdf;
[3]MCA Disclosure Laws Map, Onyx IQ (2024) https://onyxiq.com/commercial-financing-disclosure-laws/#:~:text=with%20the%20state.-,Disclosure%20Requirements,the%20transaction%20has%20been%20consummated
[4]Good Faith and Fair Dealing in Commercial Lending Transaction: From Covenant to Duty and Beyond, by Werner F Ebke and James R. Griffin, Ohio State Law Journal, Volume 49, Page 1237 https://kb.osu.edu/server/api/core/bitstreams/97344394-2bf4-5527-b9e8-b02a45c6568d/content
[5] Is Breach of Contract a Tort? Learn More, Gallagher Krich, APC (May 21, 2022) https://www.tomgallagherlaw.com/tort-law-vs-contract-law/
[6] See footnote 3.
[7] When Can the Covenant of Good Faith and Fair Dealing be Invoked? Kathleen M. Miller, American Bar Association (February 2024) https://www.americanbar.org/groups/business_law/resources/business-law-today/2024-february/when-can-covenant-good-faith-fair-dealing-be-invoked/
[8] Id.
[9] Lender Liability: Law Practice & Prevention, Gerald L. Blanchard, The Business Lawyer, Volume 46, No. 2 pages 753-755 (February 1991).
[10] Implied Covenant of Good Faith and Fair Dealing, Legal Information Institute, Cornell Law School (2025) https://www.law.cornell.edu/wex/implied_covenant_of_good_faith_and_fair_dealing
[11] Lender liability in construction and real estate financing, by Jose A. Diaz, 2 No. 1 U. Puerto Rico Bus. L.J. 165, (2011).
[13] See footnote 4.
About Marija Nicksic
Marija Nicksic is an Associate in the firm's Commercial Real Estate and Lending Practice. Her practice focuses in the areas of business and real estate financing, corporate transactions, as well as corporate acquisitions and dispositions. Ms. Nicksic also has experience in alternative lending transactions, energy projects, factoring of accounts receivables, and general real estate services. This experience includes drafting purchase agreements and loan agreements, in addition to real estate due diligence; including review of title, appraisals, entitlements, leases, surveys and organizational documents. In addition, Ms. Nicksic is an active participant in the Midwest Chapter of the International Factoring Association (IFA).
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.