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Bulletin

Volume 6 Issue 2

February 2007

Lender Has No Duty To Disclose Financial Information of Borrower to Guarantor

 

The U.S. District Court for the Eastern District of Tennessee has ruled that a lender has no duty to disclose the financial condition of a borrower to a guarantor when there is no fiduciary relationship nor a specific request from the guarantor to the lender for such information.

 

Frederick McDonald, II guaranteed a $750,000 loan from National Bank of Tennessee to Southeast Machining LLC.  The promissory note executed by Southeast Machining went into default and National Bank of Tennessee brought suit against McDonald, as guarantor.  McDonald responded by filing a counterclaim against National Bank, alleging negligence and fraud.  The essence of McDonald’s defense and counterclaim was that National Bank was aware that Southeast Machining had been delinquent on some note payments and might be in financial trouble, and failed to disclose that information to McDonald when he executed the guaranty. 

 

With respect to McDonald’s counterclaim, the Court observed that under Tennessee law a lender has no duty of disclosure to a guarantor unless: 1) there is a previous fiduciary relationship between the lender and the guarantor; 2) the transaction is intrinsically fiduciary and calls for perfect good faith; or 3) the guarantor makes specific inquiries of the lender.  In a fiduciary relationship, the Courts look for the presence of a relationship of trust and confidence between the parties.  Applying these rules to McDonald’s counterclaim, the Court ruled that none of these conditions were present in the instant case.

 

McDonald’s guaranty expressly stated that National Bank made no representations about the creditworthiness of Southeast Machining, and that absent a request for information, National Bank had no obligation to disclose any information about Southeast Machining to him.  The guaranty also stated that it was McDonald’s responsibility to remain adequately informed of Southeast Machining’s financial condition.  Accordingly, the Court dismissed McDonald’s counterclaim.

 

As demonstrated by this case, a guaranty should specifically state that the lender makes no representations to the guarantor of the financial condition of the borrower, disclaim any duty to advise the guarantor of any changes in the financial conditions of the borrower, and disclaim any fiduciary relationship between the lender and the guarantor.

 

This case is cited as National Bank of Tennessee v. McDonald, No. 2:03-CV-401 (E.D. Tenn. 10/31/06).

 

 

The Importance of Obtaining a Purchase Money Security Interest

 

The Court of Appeals of Utah has determined that, where a new lender pays off what was originally a purchase money security interest and then finances a new loan to a new entity covering the same collateral as the original loan, the original purchase money security interest is extinguished even though the new loan covers the same collateral.