By A. Barry Cappello
Note: This article appeared in the Letters to the Editor column of the Los Angeles Daily Journal, Sept, 20, 2011
This letter responds to “Reality check: A bank’s liability is not that simple,” by Jill Switzer (Sept. 1). In cautioning the reader not to assume that bank liability for depositor claims is “a snap,” Switzer states that “[t]he only situation in which a bank is a fiduciary is when the bank acts as a fiduciary, e.g., its trust department. In all other situations, the relationship between a bank and its depositor is simply one of debtor-creditor, founded on a contract – the deposit agreement. Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465.”
The citation to Price v. Wells Fargo, a lender case, suggests that a bank, as lender, can never be liable for fiduciary breach. As a litigator who has tried, settled, and written about lender liability cases for over three decades, I disagree with that suggestion.
Abundant case law supports imposing fiduciary liability against a lender in situations where the bank, as often occurs, acts as more than an arms’-length lender. Some examples are giving the borrower financial advice or related financial services, acting as agent of the borrower, exercising undue control over the borrower, or situations where the borrower clearly reposed trust and confidence in the lender. (See Rutherford v. Rideout Bank (1938) 11 Cal.2d 479 (confidence reposed in bank manager to provide business and financial advice); Credit Managers Ass’n. v. Superior Court (1975) 51 Cal.App.3d 352 (bank controlled business activities of borrower through compelled use of consultant); Frydman & Co. v. Credit Suisse First Boston Corp., 708 N.Y.S.2d 77 (N.Y.App.Div. 2000) (lender negotiated for borrower); Capital Bank v. MVB Inc., 644 So.2d 515 (Fla.Ct.App. 1994) (advising borrower to acquire defective assets from another of bank’s borrowers); Scott v. Dime Savings Bank, 866 F.Supp. 1073 (S.D.N.Y. 1995) (advising borrower to invest borrowed funds with bank’s investment arm); McFate v. Bank of America (1932) 125 Cal.App.683 (bank acted as agent for mortgagor, mortgagee, and escrow holder for plaintiff in mortgagor-plaintiff exchange); see also, Tate v. Saratoga Sav. & Loan Ass’n. (1989) 216 Cal.App.3d 843 (bank as joint venturer is a fiduciary); see, generally, A. Barry Cappello, “Lender Liability” (Juris Publishing 4th Edition).)
A litigator is well advised to consider fiduciary breach in any case where the lender has engaged in self-dealing, used one borrower to cover another borrower’s debt, tricked the borrower, exploited confidential information, or failed to disclose material information. These are facts that might ground a credible claim for fiduciary breach under existing case law. While lender liability for breach of fiduciary duty is not “a snap,” it is alive and well as a potential option in the right case.