In a typical lender-borrower relationship, the lender owes the borrower no fiduciary duty.1 However, this general rule is set aside when the lender knowingly undertakes to act on behalf of and for the benefit of another. Such is the case when a lender excessively controls or dominates the borrower.2 This basic principle is recognized by states across the nation.3 When this occurs, the lender owes the customer a fiduciary duty, and the type of obligations imposed will depend on the facts of each case.
For example, in Brown v. Wells Fargo Bank, N.A., 168 Cal. App. 4th 938, 960 (2008), the California Court of Appeal affirmed the trial court’s finding that there was sufficient evidence supporting a fiduciary relationship between the bank and its customer requiring the bank to orally disclose an arbitration provision. In coming to such a conclusion, the court found the following facts persuasive: (1) the customers worked with the bank’s relationship manager for at least 6 months; (2) the bank knew that one of the customers had limited vision and declining health that made him a “little slow”; (3) the relationship manager worked biweekly at the customers’ home office; (4) the relationship manager had access to all of the customers’ financial information and managed their financial paperwork; (5) the relationship manager introduced the customers to an estate attorney and accountant; (6) the relationship manager provided investment advice; and (7) the relationship manager urged the customers to retain another bank employee to handle the stock portfolio. These facts were sufficient to create “a fiduciary relationship between Wells Fargo and [its customers].” Id. at 961. As a result, the bank owed its customers additional obligations to explain the material terms of the agreement and to not treat the agreement as an arm’s-length transaction, thus requiring oral disclosure of an arbitration provision.
The risks of unknowingly becoming a fiduciary are great. Recently, in In re Bailey Tool & Mfg. Co., No. 16-30503, 2021 WL 6101847 (Bankr. N.D. Tex. Dec. 23, 2021), the bankruptcy court found that a lender was responsible for the borrower’s bankruptcy and thus liable for damages in excess of $16 million. In this lender liability suit, the bankruptcy trustee, standing in the shoes of the failed business enterprise, among other various claims, alleged that the lender engaged in improper conduct that destroyed the business enterprise. While the court failed to reach a conclusion on fiduciary duty, the court found that the lender was liable for tortious interference by playing an “active role in the business decisions of the borrower and, in an attempt to secure the course of the borrower's business, the lender intentionally interfere[d] with such things as management selection and borrower’s business contracts.” Id. at *41. The court found that the lender’s actions were “overreaching and drove away the customers . . . and made it impossible for the [borrowers] to fill orders from customers.” Id. at *48. Specifically, the lender declared that the borrowers were in default and took over the management of the borrowers’ businesses. Id. at *13–17. The lender instructed the borrowers’ customers not to pay the borrower and threatened the borrowers’ customers with litigation; withheld funds from the borrowers, causing the borrowers to be unable to fulfill customer orders; and prohibited the borrowers from paying their vendors, causing the borrowers to miss delivery windows. In taking on the role that it did, the court found the lender liable for $16,966,928, consisting of (a) $12,962,084 for breach of contract damages and breach of duty of good faith and fair dealing damages, (b) $12,274,000 for the tort of fraudulent misrepresentations damages (duplicative of the breach of contract and breach of good faith and fair dealing damages and, therefore, not separately awarded, (b) $2,044,844 for contractual and business interference; and (c) $1,960,000 for willful automatic stay.
Brown and Bailey serve as useful case studies for the risks involved when a lender exercises improper control over a borrower’s business and affairs. While some lenders act with the good intention of helping their customers or to protect their investment, such actions may lead to the unintentional creation of a fiduciary duty. The further lenders insert themselves into the decision-making process of the borrowers’ business, the higher the risks of becoming a fiduciary to the borrowers.
1 Kim v. Sumitomo Bank, 17 Cal. App. 4th 974, 979 (1993) (noting that it is “axiomatic” that the relationship of a bank and its loan customers is not a fiduciary relationship).
2 Pension Tr. Fund for Operating Engineers v. Fed. Ins. Co., 307 F.3d 944, 955 (9th Cir. 2002) (noting that the “lender-borrow relationship . . . is normally an arms-length transaction involving no special duty to disclose”).
3 Salek v. Suntrust Mortgage Co., 2018 WL 3756887, at *4 (S.D. Tex. Aug. 8, 2018) (applying Texas law); Roswell Capital Partners LLC v. Alternative Const. Techs., 638 F.Supp.2d 360, 368–69 (S.D.N.Y 2009) (applying New York law); see also LaSalle Bank Nal’l Ass’n. v. Paramont Properties, 588 F.Supp.2d 840, 852 (N.D. Ill. 2008) (summarizing various state’s laws); Miller v. U.S. Bank of Wash., N.A., 72 Wash. App. 416, 426–27 (1994) (applying Washington law).
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