A federal district court in Tennessee has issued a ruling that follows a recent trend toward declining to hold lenders liable for a duty to disclose information concerning borrowers to third parties unless the bank has a fiduciary obligation to do so. In National Bank of Tennessee v. McDonald, 2006 U.S. Dist. LEXIS 79610 (E.D. Tenn. Oct. 31, 2006), the court held a bank does not owe a duty of disclosure to a loan guarantor.

The Alert recently covered other decisions addressing the circumstances under which a lender has a duty to disclose information about a borrower to third parties that may be adversely affected by such information. See Commercial Restructuring & Bankruptcy Alert, December 2006, p. 1, “Courts Address Whether Lenders Must Warn of Fraud,” at www.reedsmith.com.

In National Bank of Tennessee, the bank sued the guarantor of a corporate debt and moved for summary judgment. The guarantor resisted summary judgment and argued that the bank breached its fiduciary duty owed to the guarantor when it failed to disclose to the guarantor that, among other things, the borrower was delinquent in payments to the bank at the time the guaranty was signed.

The court held that the bank did not have a duty to disclose this information to the guarantor because a fiduciary relationship did not exist between the guarantor and the bank. As stated by the court, absent special circumstances, the bank is not under an obligation to “hold the guarantor’s hand throughout the execution of the guaranty.”

However, an exception to this rule, according to the court, exists if the “guarantor makes specific inquiries of the lender.” Once that occurs, one treads into the murky waters of either disclosing nothing or disclosing all material information. Stay tuned.