Parker v. Columbia Bank
1992 Md. App. LEXIS 84, 604 A.2d 521, 91 Md. App. 346 (1992)
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Rule of Law:
A lender-borrower relationship is ordinarily a contractual relationship between a debtor and creditor, not a fiduciary one, and a lender owes no duty to its borrower beyond the terms of the loan agreement unless "special circumstances" exist. However, a claim for promissory fraud may be sustained even if the alleged fraudulent promises contradict the terms of a written contract, as the parol evidence rule does not bar evidence of fraud in the inducement.
Facts:
- Robert and Margaret Parker, physicians with little real estate experience, contracted with builder George Paleólogos to construct a custom home for $385,000.
- The Parkers sought financing from several banks, explaining they needed a loan that would cover nearly 100% of the project's cost, based on its future appraised value. Two banks indicated they would not provide such financing.
- The Parkers then applied for a loan with Michael Galeone, a senior vice president at The Columbia Bank. They alleged Galeone made several representations, including that the bank had investigated and approved the builder, would protect the Parkers' interests, would only release funds after inspections confirmed work was completed, and would find a new builder if Paleólogos defaulted.
- Relying on these alleged representations, the Parkers entered into a $529,000 construction loan agreement with Columbia Bank on March 17, 1989.
- During the construction period, Columbia established a separate banking relationship with Paleólogos, extended him a $250,000 line of credit, and became aware of his severe financial troubles, including nearly 100 bounced checks.
- Columbia did not disclose Paleólogos's financial problems to the Parkers.
- Columbia disbursed loan draws via two-party checks which the Parkers co-signed. By September 1989, 80% of the construction loan funds had been paid out, but the project was only 40% complete.
- Paleólogos performed little work after the final draw and eventually went into bankruptcy, leaving the house unfinished and requiring an estimated additional $350,000 to complete.
Procedural Posture:
- Robert and Margaret Parker sued The Columbia Bank and its officer, Michael Galeone, in the Circuit Court for Montgomery County (a state trial court).
- In a separate action, Columbia Bank initiated foreclosure proceedings on the Parkers' property.
- The Parkers' request for an injunction to stop the foreclosure sale was denied by the trial court.
- The Circuit Court granted Columbia Bank's motion to dismiss all of the Parkers' claims.
- Following the foreclosure sale, the Circuit Court overruled the Parkers' objections and ratified the sale.
- The Parkers (appellants) appealed both the dismissal of their lawsuit and the ratification of the foreclosure sale to the Court of Special Appeals of Maryland (the state's intermediate appellate court), where Columbia Bank was the appellee.
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Issue:
Does a lending bank owe a fiduciary duty to its residential construction loan borrowers to protect their interests, investigate their builder, and disclose negative financial information about the builder when no such obligations are included in the loan agreement?
Opinions:
Majority - Motz, J.
No, a lending bank does not ordinarily owe a fiduciary duty to its borrowers beyond the obligations specified in the loan agreement. The court affirmed that the relationship between a bank and its customer is typically that of a creditor and debtor, not a fiduciary one. A higher duty of care arises only under "special circumstances," which were not present here. The court analyzed a four-part test and found Columbia did not: 1) take on extra services beyond normal lending activities; 2) receive any greater economic benefit than the mortgage; 3) exercise extensive control over the construction; or 4) provide false information in response to specific inquiries about risks like liens. Therefore, the Parkers' claims for breach of fiduciary duty, negligence, negligent misrepresentation, and fraudulent concealment, which all require the existence of such a duty, were correctly dismissed. However, the court reversed the dismissal of the fraud claim. It reasoned that certain alleged statements by the bank's agent—that the bank would protect the Parkers' interests, would inspect work before disbursing funds, and would find a new builder upon default—could constitute promissory fraud if made with a present intention not to perform. Critically, the court held that the parol evidence rule does not bar the introduction of evidence to prove fraudulent inducement, even if the oral promises contradict the written contract. Thus, the fraud claim was allowed to proceed.
Analysis:
This case strongly reinforces the traditional legal doctrine that a lender-borrower relationship is an arms-length, contractual arrangement, not a fiduciary one. By narrowly interpreting the "special circumstances" exception, the decision makes it very difficult for borrowers to hold lenders liable for negligence or for failing to protect them from poor decisions or third-party misconduct. However, the ruling provides a crucial avenue for borrower claims by affirming that promissory fraud is a viable cause of action that is not barred by the parol evidence rule. This creates a critical distinction: while a lender has no implied duty to act as a borrower's guardian, it can be held liable for making explicit, false promises to induce the borrower into signing a loan agreement.
