Avoiding Lender Liability for Credit-Related Actions in California

Aside from general statutory prohibitions on lender discrimination, there are certain circumstances under California law in which lenders may be held liable for credit-related actions, such as negotiating or denying credit. See generally 11 Cal. Real Est. § 35:3 (explaining that the business of lending money is subject to the Unruh Civil Rights Act, Cal. Civ. Code § 51 et seq., the Fair Employment and Housing Act, Cal. Gov. Code § 12900 et seq., the Federal Fair Housing Act, 42 U.S.C. § 3601 et seq., and the Equal Credit Opportunity Act, 15 U.S.C. § 1691, et seq.). Specifically, lenders have been held liable for credit-related actions where, among other things, the lender (1) breached a loan commitment; (2) committed fraud; or (3) breached a fiduciary duty owed to the borrower.

The Lender-Borrower Relationship

As a general rule, a lender does not owe a duty of care to a borrower when the lender’s involvement in a transaction does not exceed the scope of its conventional role as a lender of money. Oaks Management Corp. v. Superior Court (2006) 145 Cal.App.4th 453, 466 (“[I]t is established that absent special circumstances . . . a loan transaction is at arms-length and there is no fiduciary relationship between the borrower and lender.”); Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096 (holding lender owed no duty of care to a borrower in preparing an appraisal of the real property that was security for the loan when the purpose of the appraisal is to protect the lender by satisfying it that the collateral provided adequate security for the loan, and noting that “as a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money”).

California courts therefore characterize the relationship between a lender and a borrower in a normal commercial context as an arm’s length and adverse transaction with each party pursuing its own separate economic self-interest. See Mitsui Manufacturers Bank v. Superior Court (1989) 212 Cal.App.3d 726 (granting summary judgment in favor of bank, and holding borrower and guarantors of commercial loan could not maintain tort cause of action against bank for breach of covenant of good faith and fair dealing based on bank’s refusal to honor oral commitment to extend or roll-over short term loans where contracting parties’ relationship lacked characteristics of fiduciary relationships; transactions between bank and borrowers and guarantors involved quintessentially ordinary arms-length commercial transaction between two parties of equal bargaining strength, any breach of which could adequately be remedied by ordinary contract damages); see also Kim v. Sumitomo Bank (1993) 17 Cal.App.4th 974, 979 (holding defendant bank did not owe borrower a fiduciary duty as might arise if the bank were so involved in the borrower’s daily operations as to effectively control the borrower, and noting that California courts have determined that the relationship between a bank and a commercial borrower “does not constitute a special relationship for the purposes of the covenant of good faith and fair dealing”).

For a lender to acquire duties of disclosure or special duties of care for the borrower’s interests, the relationship must be more than a usual borrower-lender relationship, and the lender’s role must go beyond that of a mere lender of money. See e.g., Barrett v. Bank of America (1986) 183 Cal.App.3d 1362, 1368–69 (holding evidence supported claim of constructive fraud where Bank officer had a close relationship with borrower’s principal, provided investment advice, received confidential financial information, and otherwise created a special relationship of trust and confidence). Similarly, a lender that assumes direct or indirect control over a borrower may assume the same fiduciary duty to the borrower that is owed by officers and directors. See Credit Managers Assn. v. Superior Court (1975) 51 Cal.App.3d 352, 360–61 (holding plaintiff pleaded cause of action for breach of fiduciary duty where bank required a third person take control of the borrower’s business and implement management policies dictated by the bank, or else it would foreclose its lien).

In keeping with the general arm’s length nature of the normal borrower-lender relationship, there is no common law duty under California law to consider or offer a loan or a loan modification in the absence of a special relationship or a particular statutory or regulatory requirement—even in the residential lending context. Lueras v. BAC Home Loans Servicing, LP (2013) 221 Cal.App.4th 49, 64–68 (holding bank did not have a common law duty of care to offer, consider, or approve a loan modification, or to offer residential mortgagor alternatives to foreclosure); Perlas v. GMAC Mortg., LLC (2010) 187 Cal.App.4th 429, 436 (“A lender is under no duty to determine the borrower’s ability to repay the loan. . . . The lender’s efforts to determine the creditworthiness and ability to repay by a borrower are for the lender’s protection, not the borrower’s.”) (citation and internal quotation marks omitted). Simply put, “[a] commercial lender pursues its own economic interests in lending money.” Perlas, 187 Cal.App.4th at 436 (citation omitted).

Although a lender may not owe affirmative duties to a borrower, once the lender acts through one of its officers or agents, it may be held liable for damages resulting from a borrower’s reliance on any false misrepresentations which the lender either knew to be false, or which the lender had insufficient information to know if they were true or not. See e.g., Lueras, 221 Cal.App.4th at 830 (holding borrower could state claim for fraud where foreclosure sale took place after lender represented in writing that the foreclosure sale would not happen).

In addition to fraud and breach of fiduciary duty, a lender may also be liable for its actions after making a loan commitment to a borrower. If a loan commitment constitutes a contract binding on the lender, or if there is reasonable and foreseeable reliance on the lender’s commitment, then the lender cannot later impose new conditions on the loan, and may be liable for reasonably foreseeable damages if it breaches its commitment. See e.g., 999 v. C.I.T. Corp., 776 F.2d 866 (9th Cir. 1985) (where lender made loan commitment and subsequently attempted to add a new term to the loan for a prepayment penalty, the court held that the lender had breached the loan commitment, the borrower was not required to mitigate damages by accepting the loan with the onerous new terms, and the borrower was entitled to recover damages for the loss of a business opportunity which was foreseeable to the lender at the time the loan was made).

The Lesson for Lenders

To avoid actions giving rise to affirmative obligations or fiduciary liabilities, lenders should always keep in mind their role as lenders with an interest in getting repaid, not in managing a borrower’s business.