“Can I sue my bank for breach of fiduciary duty” is a question we often hear. Many folks are quite surprised when they receive our answer. As a general rule, in most states banks do not owe a fiduciary duty to customers. There are exceptions, however.
There is a popular misconception that lenders owe a fiduciary duty to their customers. Even lawyers often get confused.
The term “fiduciary” comes from the Latin word fiducia. It means “trust”. One dictionary defines the term as meaning a person who has the obligation to act for another under circumstances that require” trust, good faith and honesty”. To most of us, that certainly sounds like what we expect from bankers. After all, we entrust them with our money.
Unfortunately, when it comes to the relationship between banks and borrowers, the general rule is that no fiduciary duty owed.
If a bank normally isn’t a fiduciary, who is? Common examples include lawyers, doctors, trustees and investment advisors. Surprisingly, stockbrokers are not fiduciaries, although the administration is trying to change that.
Why does it matter? If a borrower or customer can prove the bank owes a fiduciary duty, it becomes much easier to prove that the bank acted in its own self interest and not the customer’s best interest. In most jurisdictions that also means punitive damages become available.
Exceptions to the Rule
If the general rule is that banks owe no fiduciary duty to customers, what are the exceptions?
First, the general rule is not universal. For example, in 2009 the Utah Supreme Court recognized a new “limited fiduciary duty.” Texas and California also apply a heightened duty of care on banks.
Second, regulators and state legislatures can create laws that impose a fiduciary duty. There is a push right now to create a fiduciary duty in residential and consumer loan transactions, especially when the lender or its agent incorrectly states a borrower’s income and assets or improperly reassures borrowers that they can afford the offered loan.
In the run up to the 2008 financial meltdown, many lenders or loan brokers were pushing people into loans they couldn’t afford or not explaining how adjustable rate mortgages worked. Today we are seeing these predatory tactics being used with low income car buyers and “buy here, pay here” car dealers.
The law in this area is still emerging and has rarely been applied in commercial settings, however.
Another exception is where the lender becomes a financial advisor. Borrowers who are private banking or “wealth management” clients of a bank are generally owed a fiduciary duty. Ditto if the bank provided financial planning, tax planning or trust services to the customer.
Although banks rarely supply these services to commercial borrowers, those borrowers can still benefit from these rules if the principal of the business relied on the bank for advisory services. Most courts won’t let a bank be a fiduciary for some types of transactions but not others.
For example, lets say that I am a private banking client of Wells Fargo. They manage my private investments. In this scenario, they owe me a high duty of care, they are fiduciaries.
Now let’s say that my law firm also has its business account at Wells Fargo and borrows $250,000 on line of credit to finance new computers. Normally that would be a traditional customer – lender relationship. Because I am the principal of the law firm and also a private banking client, the bank probably can’t successfully claim they have a fiduciary relation on one account but not on another account. If the bank owes a fiduciary duty to a customer for any reason, that duty generally then carries across all relationships between that customer and the bank.
Yet another exception to the rule occurs when the bank takes a financial interest in the borrower’s project. Once the bank stops wearing its banking hat and becomes a partner or investor, it becomes easier to show that the bank owes its customer a higher, fiduciary duty. (Recently we wrote about a bank that took a royalty interest in its customer’s oil drilling project. The court found a fiduciary relationship there.)
Years ago banks were content to make their profits from the interest they collected on loans. No more. Now many banks are demanding they get a piece of the action in return for a loan. Today that kind of behavior is legal but it can come with a high price tag for the banks. This exception is often the one we use when trying to collect punitive damages from misbehaving banks.
Finally, when a bank misbehaves, many court will also find a fiduciary relationship. In the typical relationship between a bank and a business customer, the courts assume that both are sophisticated and both have relatively equal borrowing power. If you don’t like the terms being offered to you there are dozens of other banks out there. When a bank overreaches or exerts undue influence on the borrower, however, the bank can suddenly find itself a fiduciary.
Let’s look at common examples.
Fiduciary Duty – Lender Fails to Act in Good Faith
A New Jersey appeals court recently ruled a bank can have a fiduciary duty if it engages in an “egregious breach of the lender's duty of good faith and fair dealing.” We see cases where a bank repeatedly threatens to call a loan and put the borrower out of business for some hyper technical alleged breach. Why? Simply so the lender can extort additional personal guaranties, higher interest and fees or additional collateral. When that happens, courts become more willing to impute a fiduciary duty.
Bank Takes Effective Control of the Borrower
Another scenario arises when banks take so much control of a customer’s business that they effectively call all the shots. Placing a manager in the customer’s business, deciding what bills the borrower can pay or making the business hire a designated management consultant can be enough to make the bank a fiduciary.
Can you sue a bank for breach of fiduciary duty? The answer is often yes but it takes creative lawyering to do so. The pendulum is slowly swinging away from banks and towards borrowers but most of the change has been on the residential / consumer side. A business borrower’s best bet is to demonstrate the bank took control of the borrower’s business or violated a duty of good faith.
The above list is not exhaustive and we caution that there are often large differences between states. We also remind readers that even if no fiduciary duty exists, it is often possible to get punitive damages and attorney’s fees through use of the federal and certain states’ civil RICO laws (Racketeer Influenced and Corrupt Organizations Act).
[See also our next post dealing with time periods for suing banks for breach of fiduciary duty.]
How Can You Sue Your Bank?
Finding the right lawyer is important if you want to successfully sue your lender or bank. Most lender liability lawyers are expensive and defend banks. Not us.
MahanyLaw and Judge, Lang & Katers are two independent, national boutique law firms that join forces to sue lenders, banks, mortgage companies, special servicers, and yes… fiduciaries.
Many businesses think it is impossible to sue their bank. After all, banks are big, have lots of money and are powerful. No matter what their size, however, banks can be beat. In fact, these days most lenders are afraid of going before a jury.
As experienced lender liability lawyers, we already have experience and know how to sue banks. We don’t assign an army of untrained associates to essentially learn the law on your nickel. Because we are based in the Midwest, are rates are reasonable too. Often we can work with your existing lawyer to further reduce costs. That means we charge less than big law firms and often can charge far fewer hours too.
Need more information? Contact attorney Chris Katers at firstname.lastname@example.org or by phone at (414) 777-0778. The author of this post, attorney Brian Mahany, can be reached at email@example.com.
MahanyLaw and Judge, Lang & Katers – We Sue Banks