Must Banks Provide Advice To Their Customers During Loan Transactions?
January 04, 2013
When making a commercial loan, do lenders have a fiduciary duty to their Indiana borrowers or guarantors? The Indiana Court of Appeals, in Paul v. Home Bank, 953 N.E.2d 497 (Ind. Ct. App. 2011), said no.
The loans. Paul dealt with two loans to a borrower for the development of a hotel. The first loan involved a promissory note, assignment of leases, a mortgage and a set of guaranties signed by the individual investors, who were also physicians. The second loan, executed the same date, was a line of credit and also involved a promissory note, a mortgage and a set of guaranties signed by the same individuals. The borrower defaulted on both loans, and the bank obtained a summary judgment permitting a sheriff’s sale of the mortgaged property. Since the sheriff’s sale satisfied only the first (larger) loan, the bank moved for summary judgment against the guarantors to collect the debt owed on the second loan.
The “confusion defense.” The guarantors filed their own summary judgment motion making all sorts of arguments, only one of which I will discuss today. The guarantors asserted they should prevail because “they are not lawyers, and [the bank] failed to advise them as to the meaning of the [guaranties].” The guarantors thought the guaranties executed for the first loan released the guaranties for the second loan. The guarantors believed the documents meant one thing and faulted the bank for not advising them that the documents said something else. I have labeled this the “confusion defense.”
No fiduciary duty. The Court dismissed the guarantors’ argument and relied upon the following well-settled Indiana law applicable to the relationship between banks and customers:
[A] business or “arm’s length” contractual relationship does not give rise to a fiduciary relationship. That is, the mere existence of a relationship between parties of bank and customer or depositor does not create a special relationship of trust and confidence. In the context of mortgagor/mortgagee relationship, mortgages do not transform a traditional debtor-creditor relationship into a fiduciary relationship absent an intent by the parties to do so. Absent special circumstances, a lender does not owe a fiduciary duty to a borrower.
The “special circumstances” are “when one party has confidence in the other party and is ‘in a position of inequality, dependence, weakness, or lack of knowledge.’” The evidence must show that the dominant party improperly influenced the weaker party so as to gain an “unconscionable advantage.”
Big boys shouldn’t cry. Applying Indiana law to the facts in Paul, the Court noted that the guarantors were physicians who “embarked upon a sophisticated business venture . . . [and] cannot now complain because they failed to read the [guaranty] or seek the advice of legal counsel before signing [it].” In Indiana, one is presumed to understand the document he signs and cannot be released from its terms due to his failure to read it. The Court affirmed the summary judgment in favor of the bank.
Paul is another illustration of the enforceability of solid loan documents. In Indiana, a well-written guaranty is tough to beat. If you click on the “Guarantors” category to the left, you will see several posts that address a number of defenses that were roundly rejected in Indiana cases. Certainly there are circumstances when a guaranty may not be enforceable or a guarantor may be released, but those cases are rare.