Lender Liability - 4th Edition - Hardcover
Lender Liability - 4th Edition - Electronic
Breach of Fiduciary Duty - Chapter 14 - Preview Page
§ 14.01 Overview
When lender liability began to emerge as a viable body of law in the
1980s, breach of fiduciary duty quickly became a popular theory among
borrowers. The reason for its popularity was that if the test could be met
to establish a fiduciary relationship, then a finding of liability was
virtually guaranteed because of the presumptions in favor of the
beneficiary in a fiduciary relationship. If liability was found, tort
damages were generally awarded, including punitive damages.
By the end of the 1980s, the courts severely restricted these theories.
Now, a fiduciary relationship is generally found between a lender and
borrower only in certain well-defined situations, such as when the lender
is acting as an agent or financial advisor of the borrower.
Borrowers alleging predatory lending schemes are increasingly
attempting to invoke this theory. In circumstances where the lender
uses authorized loan brokers, the broker's fiduciary duty to the
borrower may possibly be imputed to the lender. Alternatively, where
the lender, or its agent, undertake such tasks as drafting the borrower's
loan application, inaccurately state and/or value the borrower's assets
or income, and continually reassure the borrower that the loan is
appropriate, the lender may arguably become a fiduciary, either as
agent of the borrower or by engendering the borrower's reliance on it.
In such situations, it remains to be seen whether breach of fiduciary
duty will become a more viable claim.
§ 14.02 General Principles
The relationship between a lender and borrower is generally not
fiduciary. The majority rule is that if no more than an arm's-length
debtor-creditor relationship is present, a fiduciary relationship will not be
found. The lender's main problem with this rule is that there are so many
exceptions to it.1
If no exception to the rule exists, a fiduciary relationship will not be
found.2 This has led to the mistaken belief, often articulated by lender's