Do Bankers Have a Fiduciary Duty to Their Customers?

If a banker loans a bunch of money to a borrower for a deal that goes bad, does the borrower have any recourse by contending that the bank did not adequately vet the loan or counsel the borrower? Does the bank have a fiduciary duty to the borrower?

The short answer from a recent case is no. The case of Wells Fargo Bank, N.A. v. Vandorn, 2012 NCBC 6 is a situation where Wells Fargo sued two individuals and an LLC formed by them to collect on a defaulted loan made to the LLC to buy a lot for a resort development.  The development was billed as a 6,000-acre golf resort in the North Carolina mountains, with the course designed by PGA great Tom Kite. According to the Winston-Salem Journal, the development “collapsed under the bad economy and a massive loan“.

The defendants counterclaimed, seeking to avoid liability on their loan. They alleged that Wells Fargo (then Wachovia) had breached its fiduciary duty to them because it failed to obtain an accurate appraisal on the lot and it also failed to determine that the LLC borrowing the funds was insufficiently capitalized to repay the loan.

Their claim was that Wells Fargo owed them a fiduciary duty to vet the deal because one of the defendants was a client in the bank’s wealth management division, which handles the bank’s wealthiest clients. The division touts itself as providing a “holistic approach” and the advice of a “team of highly experienced specialists.” The defendant argued that he relied on the division for most of “his banking, investment, and insurance needs, and . . . for advice and counseling regarding a broad spectrum of financial matters.” He said this included relying on the bank to obtain a valid and reliable appraisal on the resort. The defendant said the LLC would not have purchased the lot if the bank had appropriately protected them.

In response, the judge noted, “In an ordinary lender-borrower relationship, the lender does not owe any duty to its borrower beyond the terms of the loan agreement.” In this particular case, the judge said the counterclaim didn’t have enough heft. To wit: The defendants did not claim the bank or its employees located, identified or recommended the lot, or that the lot purchase was part of a broader financial plan the bank had developed for the defendant and his partner. Furthermore, the defendants didn’t claim to have sought financial advice about the purchase.

In fact, the defendants indicated that bank became involved in the purchase only after the they had found the lot and decided to purchase it, formed the LLC for that purpose, and approached the bank about financing.

But what if the bank’s wealth management division had recommended the development to the defendants? Would that have established a fiduciary relationship? Perhaps, but the Vandorn decision is the latest in a series of business court decisions where investors in resort development projects have unsuccessfully sought to transfer the burden of their loss to their lenders, See Allran v. Branch Banking & Trust Corp., 2011 NCBC 21 (N.C. Super. Ct. Jul.6, 2011), and Beadnell v. Coastal Communities,  (N.C. Super. Ct. June 3, 2011).