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Discussion.
Relationships between lenders and borrowers can become very complicated when
legal action is taken, because one person defaults the other, while conducting business
together. A lender is someone who lends money or gives out credit within business
matters. And, a borrower is someone who receives money or credit in a loan agreement,
or not a lender owes a duty to the borrower. A duty is work or an action that someone is
obliged to perform for moral or legal reasons. Some people or critics, along with courts,
feel strongly that lenders owe no duty, whether it’s a fiduciary duty or a duty to disclose,
“Courts have traditionally viewed the relationship between a bank and a customer,
as a creditor-debtor relationship that does not impose a fiduciary duty on the bank.”1
Lending relationships became the product of arms-length bargaining and that it would be
out of the norm to require a lender to act as a fiduciary for the interest of the opposite
party. Which means that both the lender and the borrower act independently, acting
within their own self interest, and have no relationship with each other.
does not ordinarily impose a fiduciary duty on the bank.”2 A good case to reference to,
1
Faith, Hope & Love, Inc. v. First Alabama Bank of Talladega County, N.A., 496 So. 2d 708 (Ala. 1986).
2
Bank of Red Bay v. King, 482 So. 2d 274 (Ala. 1985).
which supports the theory that no duty is owed to the borrower by the lender, is Power
Equip. Co. v. First Alabama Bank. In this case First Alabama Bank (“Bank”) brought an
action against its customer, Power Equipment Co. (“Power Equipment”), “alleging that
counterclaim, claiming that the “Bank was liable to it for breach of contract, breach of
duty of good faith, breath of fiduciary duty, fraud, wrongful disclosure and racketeering.”
4
The Circuit Court entered a judgment in favor of the Bank and dismissed Power
Equipments counterclaim. The Supreme Court affirmed the judgment. Within this case
the lender owed no fiduciary duty to the borrower because the wrongful diversion made
by a former officer of the Bank, did not give rise to a fiduciary relationship between the
customer and the Bank; also, because the customer knew of the wrongful acts done by the
officer before signing another agreement with the Bank. The “prior knowledge of
wrongdoing should have caused distrust on part of borrower, not the confidence and
Borrowers many times allege that a lender owes a fiduciary duty to them. But, in
inspire confidence that he will act in good faith for the others
3
Power Equip. Co. v. First Alabama Bank, 585 So. 2d 1291 (Ala. 1991).
4
Id.
5
Id.
and purports to act or advise with the others interest in mind; where
One could argue that if the relationship cannot be established between the lender/creditor
and the borrower/debtor, no fiduciary duty is owed to the borrower/debtor. Unless the
Another case, which helps support the theory that a lender owes no duty to a
borrower, is Armstrong Bus. Serv.’s, Inc. v. AmSouth Bank. In this case “prospective
borrower brought an action against lender and loan officer for breach of contract,
The Supreme Court concluded that the prospective lender owed no duty to disclose
information to the prospective borrower, and therefore was not liable to the borrower on a
The facts of this case involved the owner of Armstrong Business Services
(“ABS”), who sued AmSouth Bank (“Bank”) for a tort and contract claim arising from a
failed negotiation between the two, concerning a $5.2 million loan request. ABS was
looking to purchase a franchise, and was seeking help for a loan from the Bank. ABS
and a loan officer, from the Bank, met and spoke with each other many times before
6
Bank of Red Bay v. King, 482 So. 2d 274 (Ala. 1985).
7
Armstrong Bus. Serv.’s, Inc. v. AmSouth Bank, 817 So. 2d 665 (Ala. 2001).
coming to an agreement about a solution. ABS sent the Bank many documents
concerning financial data. The loan officer eventually sent ABS a letter letting them
know they were qualified for a loan. ABS took it as though the Bank was approving
them for the $5.2 million loan, but the agent stated he told the owner the letter was only
that of interest. ABS then advised their attorney’s to send a letter agreeing to acquire the
franchise. When ABS phoned the Bank to check on the update of the loan, they were
informed that “the Bank would not fund the loan request. The owner of ABS alleges that
the Bank owed a duty to disclose that they took on the position that the “agreement did
not constitute an absolute commitment to the loan, that they did not intend to honor the
alleged commitment and that the loan officer in question was without authority to make
Under Alabama law “the trial court in a fraudulent suppression action must
consider and apply the following factors in determining whether, under the particular
(1) the relationship of the parties; (2) the relative knowledge of the
parties; (3) the value of the particular fact; (4) the plaintiff’s
opportunity to ascertain the fact; (5) the custom of the trade; and (6)
From the ABS case, it can be concluded that breaching a promise “outside a contract or a
duty imposed by the common law does not support a tort cause of action.”10 The
Supreme Court held that the “record supplies no basis for a holding that the Bank owed
ABS a common law duty that could support its claims of negligence or wantonness based
8
Id.
9
Ala. Code 1975 § 6-5-102.
10
817 So. 2d 665.
on its loan application policies.”11 A banks internal policy of notifying mortgagors of the
cancellation is more so for the banks benefit and does not imply a duty.
Whether a lender owes a duty to a borrower can be viewed in two separate ways.
The theory that a lender does owe a duty to a borrower, can be based off the fact that
“although creditor-debtor relationship between a bank and its customer does not
ordinarily impose a fiduciary duty on the bank,”12 but, “such a duty may arise when the
customer reposes trust in the bank and relies on the bank for financial advice, or in other
and trust with the lender; a duty is owed. Once the lender takes on the position to advise
A good case to reference to, in support of a duty owed, is Brasher v. First Nat’l
Bank of Birmingham. In Brasher, the defendant advised the plaintiff about her legal
interests in proceeds of her deceased husbands insurance. All which included a “probate
of the will, and management and investment of the property of the estate.”14 The
defendant then convinced the plaintiff to enter into a consent decree, but failed to disclose
the contents and legal effects of the decree. This caused the plaintiff to bring suit against
the defendant. The court concluded that “the defendant was under duty to disclose to the
plaintiff the facts in respect to the alleged participations, and if it under took to advise the
plaintiff in respect in her interest and did advise her to enter into the said consent decree,
it was under duty to disclose to her its contents and legal effects.”15
11
Id.
12
Bank of Red Bay v. King, 482 So. 2d 274 (Ala. 1985).
13
Faith, Hope & Love, Inc. v. First Alabama Bank of Talladega County, N.A., 496 So. 2d 708 (Ala. 1986).
14
Brasher v. First Nat’l Bank of Birmingham, 168 So. 42 (Ala. 1936).
15
Id. at 44.
Once a lender crosses that line and begins to advise the borrower a duty is formed,
and the lender has a duty to disclose any information of importance to the borrower. Not
points of views. It all depends on how the facts are presented in the case and what form
duty and proof that there is no contract or duty imposed by law, supports the theory that a
lender does not owe a duty to a borrower. On the other hand, when a lender takes on the
confidence or trust is made, a lender does owe a duty to the borrower. Whether there’s a
duty owed to a borrower by a lender can be argued in many ways, but in the end it’s the