In real estate disputes, the relationship between the bank and the borrower is typically considered that of debtor and creditor. However, in some cases it can be a fiduciary relationship. In a recent case I handled, the bank interfered with the borrower’s control over selling its real estate from a development project that was funded by a bank loan. The bank moved for summary judgment and we submitted an opposing brief. Here is an excerpt.
The question of whether a lender has assumed a duty of care is a triable issue that precludes summary judgment. AG Capital Funding Partners, L.P. v. State Street Bank and Trust Co., 11 N.Y.3d 146, 159 (2008); Talansky v. Schulman, 2 A.D.3d 355 (1st Dept. 2003). Determining whether a fiduciary relationship exists necessarily involves a “fact-specific inquiry.” AG Capital Funding Partners, L.P., 11 N.Y.3d at 158; Hoyle v. Diamond, No. 08–CV–347C, 2013 WL 1152037 *8-9 (W.D.N.Y. 2013) (denying summary judgment because issues of fact existed as to the existence of a fiduciary relationship).While it the relationship between borrower and lender is usually one of debtor and creditor, Bank Leumi Trust Co. of New York v. Block 3102 Corp., 580 N.Y.S.2d 299, 301 (1st Dept. 1991), a bank can be a fiduciary to a borrower. Scott v. Dime Savings Banks of N.Y., 886 F. Supp. 1073 (S.D.N.Y. 1995), aff’d, 101 F.3d 107 (2d Cir. 1996) cert. den., 520 U.S. 1122 (1997) (bank’s post-trial summary judgment motion denied because jury could find that a fiduciary relationship existed between borrower and bank). The Court will look to “whether a party reposed confidence in another and reasonably relied on the other’s superior expertise or knowledge.” Wiener v. Lazard Freres & Co., 672 N.Y.S.2d 8, 13 (1st Dept. 1998).
The conduct of the parties can create a fiduciary relationship even where there is no written agreement. Frydman & Co. v. Credit Suisse First Boston Corp., 272 A.D.2d 236, 237 (1st Dept. 2000). Fiduicary liability is not dependent on an agreement or contractual relation. EBC I, Inc. Goldman, Saks & Co., 5 N.Y.3d 11 (2005).
A fiduciary relationship has been found between a bank and borrower where the bank exercised increased control and influence over the borrower’s actions. Dime Savings Banks of N.Y., 886 F. Supp. 1073, supra (bank encouraged borrowers to borrow extra money, induced them to invest and participated in stock purchases and earned commissions). “A fiduciary relationship may arise between a bank and its customer where the bank assumes control and responsibility over the customer’s assets and operations, or where the customer places special trust and confidence in the bank and thereby becomes dependent upon it.” ADT Operations, Inc. v. Chase Manhattan Bank, N.A., 662 N.Y.S.2d 190, 193 (Sup. Ct. N.Y. Co. 1997).
In European-American Bank v. Mr. Wemmick, Ltd., 160 A.D.2d 905 (2d Dept. 1990), which involved very similar facts, the Appellate Division, Second Department, denied a bank’s motion for summary judgment and held that material issues of fact existed concerning the lender’s breach of fiduciary duty of good faith dealing and fraud and equitable estoppel.There, the bank had extended a business credit line and subsequently terminated the loan agreement and demanded payment. The borrower claimed that the bank breached various oral representations to it. The borrower submitted affidavits which alleged that bank officers, knowing that the bank would terminate its agreement with the borrower, nevertheless made repeated oral assurances that the agreement would not be terminated and further encouraged the borrower to expand its business. The Second Department held that the claims for an alleged breach of the bank’s fiduciary duty of good faith dealing and fraud presented triable issues of fact. The court also held that equitable estoppel may preclude the bank from disputing whether it made such oral assurances.
Courts in other jurisdictions follow New York law. Conflicting plausible allegations as to the nature of the relationship requires a “fact intensive inquiry.” Simon v. National City Mortg. Co., No. 2:09–cv–376–FtM–29DNF, 2010 WL 1539970 (M.D. Fla. Apr. 19, 2010); Barnett Bank of West Florida v. Hooper, 498 So. 2d 923 (Sup. Ct. Fla. 1987) (bank may have assumed duty to disclose facts material to transaction, peculiarly within its knowledge, and not otherwise available to its customers, when bank involved in transaction and established confidential or fiduciary relationship and stands to benefit).
In Temp-Way Corp. v. Continental Bank, 139 B.R. 299, 318 (E.D. Pa. 1992), the Eastern District of Pennsylvania stated that:
“Although a lender does not ordinarily owe a fiduciary duty to a borrower, a fiduciary relationship may arise if the lender gains substantial control over the borrower’s business affairs. Control over the borrower is demonstrated when there is evidence that the lender was involved in the actual day-to-day management and operations of the borrower or that the lender had the ability to compel the borrower to engage in unusual transactions.” Id.(finding no fiduciary duty created by charging interest on a checking account).In Pearson v. U.S., 831 F.Supp.2d 514 (D. Mass. 2011), a real estate developer sued the FDIC alleging negligence by David Bigda, the FDIC account officer, in the management and liquidation of loans that the Plaintiff had with several failed banks. The Federal Court held that the Plaintiff borrower had set forth a claim for breach of fiduciary duty based on the lender’s bad faith in connection with offers the bank obtained to purchase the property that secured the loan, where the lender ignored plaintiff’s presentment of potential buyers of the mortgaged property, and this resulted in the plaintiff selling the properties for less than the offers plaintiff had received: Id. at 520.
“The allegation that Bigda refused to deal with Plaintiff’s purchasers, as further evidenced by Bigda’s history of contentious behavior towards the Plaintiff, constitutes a sufficient allegation of bad faith in the foreclosure sales process on the part of the FDIC. Accordingly, in conjunction with the allegation in the Amended Complaint of damages and causation, the Plaintiff has properly set forth a claim for breach of fiduciary duty with respect to Bigda’s conduct during the foreclosure sales process of the Capitol Bank loan collateral properties.” Id.at 520-21
If you have any legal questions or need help with fiduciary duties, please contact Attorney Scott Lanin at (212) 764-7250 x 201 or use the contact form in the right sidebar.
