Memorandum

To: Professor Kirby

From: Crystal Waddy
Date: November 13, 2009
Re: Duty under Alabama law in lender-borrower relationships.

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,

on the promise to repay it or its equivalent.

Many times the question is raised, within a lender-borrower relationship, whether

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,

while many others believe they do.

“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.

“Creditor-debtor/lender-borrower relationship between a bank and its customer

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

the customer defaulted on two promissory notes.”3 Power Equipment filed a

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

reliance that is the cornerstone of a fiduciary relationship.”5

Borrowers many times allege that a lender owes a fiduciary duty to them. But, in

order for a fiduciary duty to be owed a fiduciary a fiduciary relationship must be

established. A fiduciary or confidential relationship is defined within Bank of Red Bay v.

King, which states:

Such a relationship is one in which one person occupies toward

another such a position of adviser or counselor are reasonably to

inspire confidence that he will act in good faith for the others

interest, or when one person has gained the confidence of another

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

trust and confidence are reposed by one person in another who, as a

result, gains an influence or superiority over the other; and it appears

when the circumstance makes it certain the parties do not deal on

equal terms, but, on the other, weakness, dependence or trust,

justifiably reposed; in both an unfair advantage is impossible.6

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

lender made a promise to the borrower and an agreement of confidence or trust, no

fiduciary dusty is owed.

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,

fraudulent suppression, wantonness, and negligent supervision after negotiations failed.”7

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

theory of fraudulent suppression of information.

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

the alleged commitment.”8

Under Alabama law “the trial court in a fraudulent suppression action must

consider and apply the following factors in determining whether, under the particular

circumstances a duty to disclose exists:”

(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)

other relevant circumstances.9

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

special circumstances.”13 If the borrower has established and agreement of confidence

and trust with the lender; a duty is owed. Once the lender takes on the position to advise

the borrower a duty has become established.

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

disclosing such information is unlawful, and is considered to be guilty of fraud.

Whether a lender owes a duty to a borrower can be supported strongly by both

points of views. It all depends on how the facts are presented in the case and what form

of duty can be applied to them. Using a fiduciary relationship to establish a fiduciary

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

position to advise a borrower in respect to his/her interest, and an agreement of

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

courts decision whether truly a duty is owed.