There are times at which a prospective borrower presents himself as quite normal, but, in reality, is quite ill. We have had to deal with this situation. In our case, the borrower was a bi-polar male in his 60s who had a penchant for using his line of credit to bestow gifts on an exotic dancer. What was worse, the public guardian and trustee had been appointed as the guardian for property of the borrower, had notified one branch of the financial institution of the appointment, but had not notified head office so that other branches had no knowledge of the appointment. We settled the matter at a discount.
Accordingly, we were intrigued when another fact situation dealing with a bi-polar borrower made it to the Ontario Court of Appeal in Canada Trustco Mortgage Company v. Pierce Estate, a 2005 decision.
The borrower had been suffering from manic and depressive episodes during 1998 and 1999. In May 1999, the borrower, an investment advisor, and his wife, entered into a five-year loan agreement with the bank for the principal amount of $775,000. The borrower committed suicide in August 1999. The borrower, of course, had invested the loan proceeds very unwisely and had suffered a major loss. The estate did not repay the loan and, accordingly, the bank commenced an action against the estate. For whatever reason, the bank did not join the wife as a defendant in the action.
The wife countered aggressively. She commenced her own action against the bank claiming that the loan, together with the borrower’s illness, caused the borrower’s health to deteriorate and ultimately led to his suicide. She claimed for loss of support and the diminution in the value of the estate.
The wife also defended the bank’s action on behalf of the estate.
The bank brought a motion to dismiss the wife’s action against it. The bank claimed that the pleadings disclosed no reasonable cause of action. The bank also brought a motion to strike out the estate’s statement of defence in the bank’s action.
The bank was successful in each motion and the wife and estate appealed.
The wife based her action on two grounds: negligent misrepresentation and breach of contract. She alleged that the bank was under a duty to warn her that the borrower did not have sufficient income to support payments under the loan and therefore should not have qualified for a loan under the bank’s own guidelines.
One of the constituent elements of the tort of negligent misrepresentation is a duty of care based on a special relationship between the person making and the person receiving the representation.
However, the relationship between an institutional lender and a customer borrower is a purely commercial relationship of creditor and debtor. Since the wife pleaded no special circumstances that would give rise to a fiduciary duty, the bank owed no duty of care to the wife or the borrower in making the loan. In particular, the bank owed no duty to the wife or the borrower to advise them not to borrow the money. Further, the fact that a bank does not comply with its own lending policies does not, in itself, mean that the loan is unenforceable.
Accordingly, the court held that there was no special relationship between the bank and the wife and that there could be no tort of negligent misrepresentation.
Actually, the bank never represented that its loan complied with its own internal guidelines. What bank employee would ever do that? The bank, in this case, said nothing. The wife pleaded that it was an implied term of the loan agreement that the bank would comply with its own lending guidelines.
The court noted that it was difficult to understand how silence from both parties could give rise to a necessary meeting of the minds, essential to any contract, including the creation of an implied term of a contract. Accordingly, the court held that there was no breach of contract.
The court agreed that the wife’s action should be dismissed.
The estate claimed that the borrower used the loan proceeds to purchase securities, a purchase that resulted in a loss of $1.6 million. We are not sure how a $775,000 loan translated into a $1.6 million loss from buying securities; perhaps the stock was bought on margin. The estate claimed the right to set off this loss against the monies owed on the loan.
The Trustee Act states that no action can be brought by or against an estate after the expiration of two years from the death of the deceased. The motions judge had held that the estate’s claim for equitable setoff was equivalent to the commencement of an action and that this defence was statute barred because the estate had not raised it within two years of the borrower’s death.
The Court of Appeal disagreed. It held that a claim of equitable setoff is a claim in the nature of a defence, not an action, and is not subject to the limitation for the commencement of actions in the Trustee Act.
However, the wife was not home free on this defence. The court noted that the claim for equitable setoff arose from the estate’s contention that the bank ought to have warned the borrower that it was not following its loan policies. The court had already held that this was not a valid claim in the wife’s action and felt that it was no more valid simply because it was being raised as a defence in the bank’s action against the estate.
The court therefore struck out the equitable setoff aspect of the estate’s defence.
The court did allow the estate leave to amend the statement of defence to claim (i) that the bank knew the borrower was suffering from a serious mental disorder and was incompetent to execute the loan documents and (ii) that the bank knew or ought to have known of the undue influence that the borrower exercised over the wife concerning all financial and business matters and therefore ought to have ensured that the wife received independent legal advice.
We can understand the first defence. If the bank knew that the borrower was incompetent, it ought not to have advanced the loan. We cannot understand the second defence. It is a defence that would be applicable if the bank were suing the wife herself; however, the bank was not suing the wife, only the estate.
The bank’s action continues, but the defences are curtailed. The estate had brought another action against the bank, claiming that the bank had no right to enforce the loan agreement against the matrimonial home because of the borrower’s undue influence. That action and the bank’s action were ordered to be tried together. We await the results.