Ohio Supreme Court Revisits When Banks Owe Fiduciary Obligations to Prospective Customers

August 2007

In a case decided March 29, 2006, Groob v. KeyBank (2006), 108 Ohio St. 3d 348, 2006-Ohio-1189, the Ohio Supreme Court decided that banks and financial institutions dealing at arm’s length with a prospective borrower do not owe fiduciary duties to that prospective borrower absent special circumstances.

The term “fiduciary relationship” has been defined under Ohio law as a relationship “in which special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence, acquired by virtue of this special trust.”  In re Termination of Emp. ofPratt (1974). 40 Ohio St. 2d 107. Similarly, “fiduciary” has been defined as “a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking.”  See Strock v. Pressnell (1988), 38 Ohio St. 3d 207 and 1 Restatement of the Law, Agency (1933), Section 13, Comment a.  A debtor-and-creditor relationship does not generally create a fiduciary relationship unless both parties understand that a special trust or confidence has been placed in the creditor.  See, e.g., Umbaugh Pole Bldg. Co., Inc. v.Scott(1979), 58 Ohio St. 2d 282 (no fiduciary relationship created between a married couple and a credit association, who suggested the couple scale-down their farming operation to keep their home subsequently foreclosed by another creditor); cf. Stone v.Davis (1981), 66 Ohio St. 2d 74 (fiduciary duty was held to arise in the area of loan processing from the negotiation of the terms and conditions of a mortgage loan in which the bank and its customer engaged in an arm’s-length transaction); and Blon v. Bank One, Akron, N.A. (1988), 35 Ohio St. 3d 98 (no duty to disclose that lower interest rates were available where there was no special relationship of trust and confidence between the bank and its borrowers).  From these cases, it is clear that no fiduciary duty arises between a bank and a borrower unless there are special circumstances.  The Ohio General Assembly codified this principle in R.C. 1109.15(D), which states, “Unless otherwise expressly agreed in writing, the relationship between a bank and its obligor, with respect to any extension of credit, is that of a creditor and debtor, and creates no fiduciary duty or other relationship between the parties.”

Construing the facts in the recent Groob v. KeyBank case, the Ohio Supreme Court reasoned there was nothing special about the request for a loan that would have created a fiduciary relationship.  Shortly after she denied their loan application, the KeyBank loan officer improperly used the prospective borrowers’ confidential information for her husband’s competitive advantage.  “The requirement that [Jeffrey] Groob provide the terms of the deal for which the loan was sought was not unusual.  Although [he] and [Lowell] Bowie both testified that they placed a special trust or repose in KeyBank, they also testified extensively about their personal business experience.  During [their] meeting with [the KeyBank loan officer], the parties were dealing at arm's length, looking out for their own best interests.  [The loan officer’s] alleged statement that [Groob and Bowie] had found ‘the goose that laid the golden egg’ is not evidence of a special relationship.  There is also no indication that the loan was wrongfully denied.  Nothing in the record indicates that the parties engaged in anything but arm’s-length negotiations.”  The directed verdict by the trial court in favor of KeyBank on the prospective borrowers’ claim for breach of a fiduciary duty was upheld.

The Ohio Supreme Court likewise found in favor of KeyBank on the respondeat superior claim, ultimately concluding:  “It is well-established that in order for an employer to be liable under the doctrine of respondeat superior, the tort of the employee must be committed within the scope of employment.  Moreover, where the tort is intentional, * * * the behavior giving rise to the tort must be ‘calculated to facilitate or promote the business for which the servant was employed * * *.’” Byrd v. Faber (1991), 57 Ohio St. 3d 56.  For the jury to find KeyBank liable for its loan officer’s intentional improper conduct, the jury would have to find that the act was calculated to facilitate or promote KeyBank’s business. Id.  An employer is not liable under a theory of respondeat superior unless its employee is acting within the scope of his or her employment when committing a tort - merely being aided by her employment status is not enough.

The prospective borrowers were not left without a remedy.  Because the jury found the loan officer had intentionally interfered with Groob’s and Bowie’s business relations, Jeffrey Groob was awarded $50,000 in compensatory damages and $253,000 in punitive damages, and Lowell Bowie received an award of $20 in compensatory damages and $253,000 in punitive damages.