The consequences of a fiduciary relationship
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When parties are borrower and lender, they establish a debtor-creditor relationship.(1) But that is not the only type of relationship that can exist between them. They may, by agreement (express or implied from their conduct), enter into other types of relationships including fiduciary relationships. If they do have a fiduciary relationship, the duties owed to one another are quite different and, from the lender’s standpoint, are considerably more burdensome than the duties owed in a conventional debtor-creditor relationship. The exact factors that create a fiduciary relationship are not clearly defined. This lack of clarity makes it difficult for lenders to know, except in hindsight (when it may be too late), whether a fiduciary relationship has been established with a particular borrower. However, there are certain broad principles that are considered in determining the existence of a fiduciary relationship. Generally, a fiduciary relationship between a lender and a borrower exists when: * The borrower places trust and confidence in the lender.(2) * The lender is (or should be) aware of the borrower’s trust and confidence. * The lender is in a position of superiority, and the borrower is in a position of inferiority, because of some inequality or dependence such as unequal mental ability, unequal business intelligence, unequal knowledge of the facts involved, or similar conditions.(3) Given these conditions, the lender is in a position to influence the borrower’s conduct. Duty of Good Faith versus Fiduciary Duty A lender’s fiduciary duties to a borrower are even greater than the duties a lender owes to a borrower under the obligation to deal in good faith imposed by the Uniform Commercial Code (UCC). The duty to deal Source : accessmylibrary.com |