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Brad Reid

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Credit Relationships Are Contractual, Not Confidential

Posted: 11/30/2013 11:29 am

When borrowing money, carefully understand the contract. Ignore oral statements and set aside ideas of "fairness." Rights and duties are controlled by contractual language. Recent court decisions (as well as older ones) explicitly state that there is no relationship of trust and confidence ("confidential") between borrowers and lenders. "There is, moreover, particularly no confidential relationship between lender and borrower ... for they are creditor and debtor with clearly opposite interests. ..." (Abdullahi v. Bank of America, decided by the U.S. Court of Appeals for the Eleventh Circuit on November 20, 2013, quoting a 1993 Georgia decision).

The plaintiff sued for wrongful foreclosure, promissory estoppel (detrimentally relying on another's promise), and constructive fraud (gaining an unfair advantage by deceit). In upholding the dismissal of of the lawsuit, the Court found no breach of legal duty by the lender. Additionally, alleged statements by the lender's employee concerning payment extensions, rescinding the foreclosure, etc. were not promises. The contract provisions "served to place appellant on due notice that he could not .. reasonably rely upon any words or other course of dealing ..., other than a modification agreement actually reduced to to writing" (quoting a 1998 Georgia decision). A claim of constructive fraud requires the existence of a confidential relationship and "no confidential relationship exists between a bank and its customers borrowing funds" (quoting a 1984 Georgia decision). "The mere fact that one reposes trust and confidence in another does not create a confidential relationship" (quoting a 1993 Georgia decision).

Since the Renaissance and accelerating with the industrial revolution, older forms of lifetime relationships ended. Mobility and urbanization elevated contractual relationships, the transitory agreements between strangers. The famous British legal scholar Henry Sumner Maine essentially made this observation in 1861 in his treatise "Ancient Law" concerning the movement from status to contract. This may be understood as a logical development as individuals gained freedom of action and were released from tightly controlled groups. Our society celebrates freedom of contract. Simultaneously, individuals long for business relations that are characterized by trust and "doing the right thing."

A November 4, 2013, mortgage insurance decision by the federal Court of Appeals for the Seventh Circuit (Cohen v. American Security Insurance Company and Wachovia Mortgage), quoted blunt language from its prior 1992 decision. "Contract law does not require that the parties behave altruistically toward each other: it does not proceed on the philosophy that I am my brother's keeper. That philosophy may animate the law of fiduciary obligations but parties to a contract are not each other's fiduciaries..."

In fairness, lenders have always been cast as villains. Consider Shakespeare's play, "The Merchant of Venice," first performed in 1605. The lender Shylock demands a pound of flesh, as the lending agreement provides. He is only prevented from acquiring it by the clever technical legal argument of the disguised Portia. The agreement does not include blood.

In fairness, if one cannot rely on the language contained in a contract, then the contract is worthless. Yet, there is the spirit of the law, a very ancient concept. Balancing the technical language contained in a contract with broader concepts of fairness and relationship is a never ending task for courts and society at large.

 
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