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It's The Law: Don'T Count On Your Banker To Protect You

Question: A while back I borrowed money from the bank to buy some real estate. The initial interest rate was very low, but it was adjustable. The interest rate has increased and I can not afford the payment. I think my banker should have warned me. Do I have a claim against the bank for breach of fiduciary duty?

Answer: Under Florida law, in an arms length borrowing transaction the bank does not owe the borrower a fiduciary duty. Florida courts have upheld a fiduciary duty only rises where there is a fiduciary relationship. A fiduciary relationship involves some degree of dependancy on one side and some degree of undertaking on the other side to advise counsel and protect the weaker party.

Borrowing transactions are generally arms length, so there is no duty imposed on either party to protect the other. To say it another way, a fiduciary relationship arises where confidence is justifiably placed by one party in another and the other party accepts the duties arising from that confidence. A fiduciary relationship can also be created by contract, such as when a principal hires an agent to represent him. Loan circumstances do not generally involve a contract creating a fiduciary relationship between bank and borrower.

A typical direct bank-borrower case is Watkins v. NCNB National Bank. In Watkins, the bank sued Watkins for failure to repay a loan that Watkins used to buy units in a limited partnership formed to purchase, manage and resale a shopping center.

Watkins borrowed the money and bought the limited partnership units after reading a placement memorandum which specified that if 14 units were not sold by July 1, 1986 the monies would be refunded to the initial investors. NCNB was also the escrow agent, under an agreement with the limited partnership to hold purchase monies in escrow and to refund them to the purchasers if 14 units were not sold by the deadline. NCNB allegedly terminated escrow and disbursed the money to the limited partnership, even though it did not meet the 14 unit sale requirement.

The court held that NCNB did not owe Watkins a fiduciary duty. Under its lender borrower relationship, no fiduciary duty was created. Under its escrow contract, it only owed a duty to the limited partnership. Watkins’ claims were rejected and the court entered judgment for the bank.

Despite numerous Florida cases hold on a bank owes no fiduciary duty to a borrower in a normal lending relationship, a bank can have a fiduciary relationship if circumstances warrant. For example, where a bank convince customers to buy houses in a development where the bank had a large loan, even though the bank knew the development was in serious trouble, borrowers were held to have a valid claim for breach of duty by the bank. In those cases, the bank was guilty of self-dealing, trying to get borrowers to buy property from a customer so the other customer could repay its loan, even though the bank knew that the borrowers were buying into trouble.

In Capital Bank v. MVB, Inc., a borrower was induced by the bank loan officer to buy malfunctioning equipment from another bank borrower, who was on the verge of bankruptcy. The court found that the bank loan officer led the buyer to believe that there was a relationship of trust and that the borrower could rely on the officer, who urged the purchase. The bank breached its fiduciary duty by taking unfair advantage of the borrower and not acting in the best interest of the borrower where at induced purchase of the malfunctioning equipment knowing that the seller’s business was weak and that the equipment malfunctioned.

Although claims by borrowers against banks based on fiduciary duty will generally fail in the normal lending situation, other claims may prove viable. Such claims may include fraud or breach of contract. Accordingly, you would be well advised to consult with an experienced attorney about the facts of your particular situation without delay. You may have a claim with pursuit, even if it not for breach of fiduciary duty.

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