Bank Fiduciary Duties in Commercial Transaction
Recently, a joint amicus brief was filed before the 11th Circuit, on a crucial lending issue. The case involved a bank commercial loan in Florida, and thus invoked Florida law, but there is also relevant law on point in Alabama and other states. A key issue addressed by the brief is whether a commercial bank has a separate fiduciary duty to advise a customer-borrower (and any related guarantors) about the advisability of the borrower (or guarantors) incurring the debt.
The brief argues that commercial lenders do not owe any fiduciary duties, including the duty of disclosure, to borrowers or guarantors unless there is a preexisting relationship of trust and confidence, which has been requested by the customer and voluntarily assumed by the bank. Imposing on commercial lenders a duty of disclosure whenever they are in a superior position of knowledge would expand the circumstances in which commercial lenders owe a duty of disclosure in all commercial loan transactions.
For example, banking regulations require banks to perform extensive due diligence before making a loan. Thus, banks are always in a position of superior knowledge with respect to at least some of the aspects of each commercial loan. Banks are expected to accumulate and assess all necessary information regarding a loan in order to minimize the potential loss to the bank and its depositors (not to the borrower and its guarantors) if the borrower defaults. Banks are not, and should not be, considered insurers of their customers' business ventures as well. To hold otherwise would put commercial lenders at odds with the regulators who oversee them, chill the market for commercial lending, and, in turn, chill the market for commercial development.
The mere existence of a lender-borrower relationship, however, does not impose fiduciary obligations on the lender, absent special circumstances, as stated in Barnett Bank of W. Fla. v. Hooper, 498 So. 2d 923, 925-26 (Fla. 1986) (bank may be found to have assumed a duty of disclosure only where it has established a relationship of trust and confidence with the customer).
The American Bar Association has stated that it is "well settled" that a bank's relationship with its customer is generally viewed as a debtor-creditor relationship and does not lead to a fiduciary relationship absent "special circumstances." John P. McCahey and Alison M.C. Schrag, Bank's Duty to Speak, 14 ABA Comm. & Bus. Lit. 19 (Winter 2013).
It should be noted that "special circumstances" that could lead to the implication of a fiduciary relationship between a bank and its customer may exist where the bank controls or dominates the customer, where the bank makes material misstatements to the customer, or where the relationship between the bank and the customer goes beyond that of conventional banking or lending. But generally, "arm's-length" business transactions do not implicate fiduciary duties.
The brief points out that Florida law is clear, and Alabama law appears to agree, that a fiduciary duty claim against a bank must be premised on the fact that the bank "voluntarily assumed" an obligation to act for the customer. One Alabama case states that a mortgage lender does not owe the borrower a general fiduciary duty.
Moreover, that a bank may have "superior knowledge" about a loan transaction does not create a fiduciary duty. A commercial lender generally has superior knowledge with respect to some aspects of each commercial loan transaction because commercial lenders are required by banking regulations to conduct their own due diligence before making a commercial loan.
For example, fundamental to any bank's safe operations is its loan policy and credit administration. The FDIC regulations require that a bank's credit administration "[b]e consistent with safe and sound" banking practices. 12 C.F.R. § 365.2(b)(1)(i). Those regulations also require that a bank's loan portfolio management include "prudent underwriting standards," assessment of the creditworthiness of the borrower, and a determination as to whether additional credit collateral and enhancements such as guarantees are needed. Id. at § 365.2(b)(2)(ii); see also id. at Part 365, Subpart A, Appendix A. All of this requires a careful analysis by the bank and a type of "second-guessing" as to the credibility of the financing transaction.
The FDIC's Policy Statement on Prudent Commercial Real Estate Loan Workouts clearly states, among other things, that a bank's credit administration must include comprehensive financial information on any guarantor of a loan, monitoring of a guarantor's compliance with the guarantee, and the financial ability and willingness of a guarantor to support the credit. See FDIC Policy Statement on Prudent Commercial Real Estate Loan Workouts. "The institution should have sufficient information on the guarantor's global financial condition, income, liquidity, cash flow, contingent liabilities and other relevant factors . . . to demonstrate the guarantor's financial capacity to fulfill the obligation." Id. at p. 5.
The Office of the Comptroller of the Currency in its Comptroller's Handbook, Rating Credit Risk, April 2001, similarly states that a bank, as part of its risk negotiations, should look for methods to enhance loan quality such as by guarantees. See Office of the Comptroller of the Currency, Comptroller's Handbook, Rating Credit Risk (April 2001). The Comptroller notes that the guarantor must display the capacity and willingness to support the debt, and that "guarantors who attempt to invalidate their obligations through litigation or renegotiations retard, rather than improve, a loan's collectability." Id. at p. 27.
The brief concludes by emphasizing that an essential part of commercial banking is that a bank must consider, when relevant, the advisability of a guaranty on a loan, and bank regulators expect bank management to look to the guarantors to honor their guarantees when the borrower fails in its principal obligation. Bank regulators expect and require that bank management, among other things, conduct thorough due diligence on a prospective borrower, on the facts underlying the financial viability of the commercial enterprise that will benefit from the credit, and on the ability of guarantors to satisfy their guaranty obligations. This process inevitably gives a bank knowledge about, and opinions regarding, the loan, which may (and should) give it particular insight as to whether the bank, from a business and regulatory point of view, should make the loan. The imposition on a commercial lender of a general fiduciary obligation to each customer would run contrary to the basic framework of the industry and essentially make each lender an insurer of each loan transaction.