Legal Blog

Fiduciary (Bank)

Does a bank have a duty to a borrower to provide it with advice regarding a loan? If there is a duty and if it is breached, is it merely negligence or has the duty ascended the ladder to become a fiduciary duty? These concepts were discussed in Scavarelli v. Bank of Montreal, a 2004 decision of the Ontario Superior Court of Justice.

Lead-In

Counsel for a financial institution should always worry in this type of case when the trial judge’s decision commences:

“Chartered banks in Canada no longer restrict their business to historical banking activities. Today, banks have branched out and offer a wider variety of services and products to their customers. This development not only changes the nature of the relationship between a bank and a customer but it also can change the legal aspects of that relationship as well.”

Allegations

Debtors obtained a loan from the bank to finance their corporation, which was purchasing a video franchise. They applied for a loan under the Canada Small Business Financing Act, formerly a program under the Small Business Loans Act. The bank decided that the debtors did not qualify for such a loan, but did qualify for a regular business loan including personal guarantees and a mortgage to secure the debt. The bank made the loan, the business failed, and the bank exercised its rights to seize the security and repay the loan. For whatever reason, the debtors allowed this to happen. Then, the debtors commenced an action against the bank.

The debtors alleged that the bank breached either its fiduciary duty of care or an ordinary duty of care in failing:

1. To provide a small business loan (SBL);

2. To advise the debtors that they were increasing their personal exposure from 25%, the percentage for which they would be liable under an SBL, to 100%;

3. To recommend that the debtors contact another bank to obtain an SBL; and

4. To recommend independent legal advice to the female debtor, who was the spouse of the male debtor.

Sympathies

The debtors were extremely unsophisticated. The male was 55 years of age with a grade 10 education and was employed as a sales representative of a brewery. His spouse was 44 years of age with a grade 12 education, employed part time as a registered practical nurse.

The bank was – well – the bank was a bank. That says it all.

He said – They said

The male debtor agreed that the bank officer told him that he would not qualify for an SBL but did “not recall that the (officer) informed him about the special features of” an SBL limiting his liability to 25%; he was never advised to obtain an SBL at another bank.

The bank officer stated that he reviewed the loan application with the male debtor and refused to grant an SBL because the SBL amortisation of 5 years was, in his opinion, far longer than the useful life of the assets that the corporation was purchasing. When he advised the male debtor of the refusal and the reasons for it, the debtor asked if there were any other financing options. At this time, the bank officer informed him about regular financing with full security and personal liability. The bank officer waived ILA for the female debtor because it was the bank’s policy not to require ILA in circumstances in which the female debtor was an officer and director of the corporation and would be involved in its day-to-day activities.

Eight days later, the bank officer met with both debtors and discussed why he refused an SBL. He did not discuss, at that time, what the personal liability would have been had he granted an SBL and he did not discuss ILA.

The actual loan documentation was executed 7 months later at the offices of the debtors’ lawyer.

Fiduciary

Normally, the relationship between a bank and a debtor is a conventional debtor-creditor relationship. There can be negligence involved in this relationship, just as there can be negligence involved in any relationship. The fiduciary relationship evolves from this ordinary relationship when the bank crosses the line and starts to give business or investment advice such that the debtor can reasonably assume that the bank has undertaken to relinquish its own interests and to act solely in the interests of the debtor. The debtor must then rely upon the advice that the bank is proffering.

The judge accepted the evidence of the loans officer and noted that the officer reviewed the features of an SBL with the male debtor and drew to his attention that it resulted in only a 25% personal liability. That he did not also repeat this information to the female debtor was irrelevant. Both were directors and officers of the corporation and the female debtor was content to allow the male debtor to act as her agent regarding the purchase of the franchise and the dealings with the bank.

The judge held that the bank was within its rights to refuse the SBL and noted that the debtors had plenty of time to shop around to find another bank to grant an SBL and talk to their lawyer or accountant. Although the judge did not give full reasons, he found that the bank did not cross the line and was not in a fiduciary relationship with the debtors. Accordingly, there was no reason why the bank had to inform the debtors to apply for an SBL elsewhere.

Negligence

The judge did not really discuss the concepts of negligence. Rather, he simply stated that the bank did not breach its ordinary duty of care. The fact that he decided that the bank officer conducted his assessment in a thorough and professional manner might have had something to do with his decision.

ILA

Finally, the judge put to rest the usual thrown-in defence of ILA. He found that the female defendant understood that she and the male defendant were 100% liable and, in any case, the bank’s policy of not insisting on ILA from a director and officer who was actively involved in the corporation’s business, was quite reasonable.

The judge dismissed the debtors’ action.

Warning Note

     Do you remember the lawyer? He was a bit player in this story. He probably prepared the mortgage documentation in accordance with the bank’s instructions and signed up the debtors. However, did he have a duty of care to discuss the possibility of an SBL with the debtors?

     If the debtors mentioned their problem in obtaining the SBL from the bank, then the issue was raised and the advice that the lawyer gave determines whether he breached a duty. We cannot comment on this scenario because there are too many permutations.

     The scenario that worries us is probably more usual. Nobody says anything about an SBL. Does a commercial or real estate lawyer have a duty to know about the SBL program and to actively raise it with every small businessperson who would seem to meet the criteria? Question to client: “Have you considered an SBL?”

     It is possible that, in the Scavarelli matter, if the debtors did not raise the issue and the lawyer did not raise the issue, there might be a possible breach of duty on behalf of the lawyer.

     We suggest that lawyers should review the SBL program and, at least, ask the question. We do not want to see a case in which, because a lawyer never raised the SBL option, the lawyer is joined as a defendant.