Can a Lender Use Customer’s Confidential Info for Lender’s Benefit?

Lender’s frequently obtain confidential information from customers. Anyone who has ever completed a loan application or sought commercial financing knows how much data banks want… assets, profit projections, valuations, trade secrets, key personnel, even information about intimate personal relationships. If improperly disclosed, the consequences to the borrower could be devastating. But what happens if the bank tries to usurp the information for its own use?

As crazy as that sounds, we see lenders engaging in this misbehavior more and more. Because there are so few lawyers with the experience and knowledge to sue banks, lenders often get away their misbehavior. Today, some particularly shady banks even will manufacture a pretextual technical default simply so they can acquire a customer’s business or property.

Is this legal? Usually it is not.

For this post, we examine two court cases finding that banks can’t usurp a customer’s business opportunity by using the customer’s confidential information.

Djowharzadeh v. City National Bank and Trust Co. of Norman

Ali Djowharzadeh is an entrepreneur. Sometime in the late 1970’s he learned of a bargain priced duplex available for just $25,000. We don’t know the value of the duplex, but everyone seems to agree it was a “steal” at that price. Because the property had not been listed, others did not know of the great opportunity. After inspecting the property, Ali decided to buy the property and sought a loan from his bank, City National Bank and Trust Company of Norman. (“City National”).

Like any other customer, Ali filled out an application and told the loan officer about the property. The loan officer recognized the property was worth much more but said nothing about his thoughts. Instead he told Ali that the loan committee would quickly make a decision.

The bank turned down Ali and five days later the property was acquired by two women, Mary Louise Symcox and Linda Rogers. These were not ordinary women, however, one was coincidentally the wife of the bank’s president and the other the wife of the bank’s senior vice president. One was also an employee of the bank.

Since the property was not listed, how did the two women discover it was for sale? The loan officer told one of the women. When confronted by Ali, the loan officer said “Well, I'm sorry, my friend, but you know how the loan system works here? ... Well I have to tell her, that's the way it works, because of the position that she has in the board of directors.”

Ali Djowharzadeh was outraged and sued.

The bank refused to admit it was wrong and claimed it owed no duty of confidentiality to Ali. The trial judge agreed and dismissed Ali’s case.

Ali appealed to the Oklahoma Court of Appeals. In 1982, the court reversed the trial judge’s dismissal. Ali was vindicated. The reasons for the favorable decision are worth discussing.

Most people believe that banks have a fiduciary obligation to their customers. While we think they should, the law in most states often says otherwise. Simply because a bank doesn’t always owe a fiduciary duty to it’s customers doesn’t mean that banks can do whatever they want, however.

City National tried to say that since they never loaned the money for the duplex, they owed no duty to Ali. A three judge appeals panel disagreed. In the words of the court, “such a conclusion is outrageous, unthinkable and contrary to common sense and public understanding.”

Although there was no contract and no fiduciary duty under Oklahoma law, the court recognized that the bank still owed duties to Ali. This was especially true since Ali was forced to disclose all the details about the property in order to apply for the loan.

“This intimate, private information is not furnished to any bank official lightly, nor, strictly speaking, voluntarily. Rather, the borrower is compelled to disclose the information. The delicately balanced relationship thus temporarily created is not, in ordinary cases, one composed of equals because of the inordinate power of the bank. The precarious position of the borrower and the relatively superior position of the bank mandates there be a counterbalancing special duty imposed on the part of the bank.”

In ruling for Ali, the court found that the bank owes a duty of fair dealing to potential borrowers and that duty includes a requirement that banks “not use their favored position to the detriment of their customers, either directly or indirectly.”

Lest you think that the City National case is simply too old and limited to Oklahoma, it is still followed today although its acceptance is unfortunately not universal.

Macquarie Bank v. Bradley Knickel

If you haven’t heard of Macquarie Bank, they are located in Sydney, Australia but do business in the United States through a similarly named affiliate. Bradley Knickel is another entrepreneur. He is engaged in oil and gas exploration.

Over a 10-year period, Knickel acquired mineral leases in the Cedar Butte fields of North Dakota. In 2004, he decided to develop those leases and approached Macquarie for financing. In 2005, the bank agrees to lend $20 million and took a first lien position on the project. The loan repayment arrangements were quite complex. In addition to requiring Knickel to repay the money, the bank also took a royalty interest in certain of the leases. That meant that if one of the designated leases produced oil or gas, the bank would share in the profits.

At this point, Macquarie was more then a lender. By taking an interest in the profits they had a relationship that was more than a traditional lender – borrower relationship.

Like many drilling projects, nature doesn’t always cooperate. Knickel found himself behind schedule and $1 million over budget on his first well. In July of 2007, the bank refused to advance further funds and declared the loan in default.

Obviously, the story could have ended here but didn’t.

The bank foreclosed and then through an affiliate acquired Knickel’s property including some of the leases at a sheriff’s sale. In fact, because of their new found knowledge of the oil producing potential of the land in the project area, the bank’s subsidiary went and purchased nearby lease rights. At the same time, the bank was using the seismic data produced by Knickel during the loan application to find a buyer for Knickel’s leases. 

At the sheriff’s sale the bank’s affiliate bid the value of Knickel’s outstanding loan balance and then flipped the property for a huge profit.

Knickel and his companies filed a massive counterclaim against the bank alleging among other things that the bank misappropriated and misused confidential and proprietary information. He also claimed that the bank violated its duty of good faith.

Knickel said as part of the loan process, he had provided the bank highly confidential seismic maps and studies. In many oil and gas producing states, that type of information is considered a trade secret.

Ultimately, the court ruled that although Macquarie did not have a fiduciary duty to Knickel, by virtue of acquiring a royalty interest in the project, the bank was operating “in a capacity greater than a traditional lender.”

The court ruled “that [Macquarie] had a duty to keep the information provided by [Knickel] confidential. A confidential relationship was created between [Knickel and the bank] due to the nature of the lending and net profits arrangement and the value of the information provided. Knickel had a reasonable expectation that [Macquarie] would keep its information confidential, not disclose it to third parties, and not misuse the information for personal gain.”

The court’s decision was in 2010.

Unhappy with the trial judge’s decision, Macquarie appealed. In July 2015, the United States Court of Appeals affirmed the trial judge’s decision. Although Knickel defaulted on his loans, the banks subsequent misconduct ultimately resulted in a judgment in his favor for $1,847,355 and an additional $471,000 in attorney’s fees.

The lesson from these cases is simple. Even if a bank does not owe a customer a fiduciary duty, the bank can still be held liable if it attempts to misappropriate trade secrets or confidential information belonging to its customer. The two cases discussed in this post arrived at the same conclusion albeit from different directions.

How Can I Sue My Bank?

Finding the right lawyer is critical if you want to sue your lender or bank. Most lender liability lawyers are expensive and defend banks. We are different.

MahanyLaw and Judge, Lang & Katers are two boutique law firms that join forces to sue lenders, banks, mortgage companies, special servicers and fiduciaries. No matter what their size, banks can be beat.

As lender liability boutiques, we already have experience and know how to sue banks. We don’t assign a half dozen associates to essentially learn the law. Because we are based in the Midwest, are rates are reasonable too. 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 [hidden email] or by phone at (414) 777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email]

MahanyLaw and Judge, Lang & Katers – We Sue Banks

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