Banker confidentiality obligations
A developer asked recently whether materials submitted to a bank in connection with a proposed lending transaction would be subject to confidential treatment by the lender.
The materials to be submitted included financial projections and other sensitive materials about the company’s prospects.
The client wondered whether, in the absence of a specific agreement with the lender to treat these materials confidentially, the bank would be under a legal obligation to keep such information confidential. The bank is located in New York and the loan documents were to be governed by New York law.
Many loan documents do not explicitly require lenders to keep information obtained from a borrower confidential. This may be because many borrowers assume that lenders are bound by an obligation to keep such information confidential and do not ask for a confidentiality provision, perhaps thinking of jurisdictions like Switzerland and the Cayman Islands that have historically held strong bank secrecy policies, or perhaps assuming that there is some implied duty of confidentiality in the relationship between the borrower and the lender. However, there is no implied duty of confidentiality running from a lender in favor of a borrower under New York law. Borrowers should be aware that, absent highly unusual circumstances, they cannot rely on New York common law to protect financial or other sensitive business information provided to a lender unless the parties have expressly agreed that the lender will keep such information confidential.
Depositors v. Borrowers
Courts in a number of states have held over the years that banks have a duty not to disclose confidential information received from borrowers and depositors. One early court decision to this effect was Peterson v. Idaho First Nat’l Bank in 1961 in which the Idaho supreme court held a bank liable for damages to a depositor where the depositor was fired from his job after the bank disclosed to his employer that he had written checks against insufficient funds. In Milohnich v. First Nat’l Bank of Miami Springs, a court in Florida held a bank liable to a depositor for revealing information to a third party that led to the depositor being subjected to various lawsuits.
The New York courts have consistently taken a more conservative approach to this issue. New York courts have recognized that banks have a fiduciary duty to depositors under which a bank may not disclose confidential information about the depositor’s accounts, but the protection afforded a depositor by this duty is a weak one that can be overridden in circumstances where public policy considerations favor disclosure of the information. (For example, federal anti-money laundering statutes compel banks to disclose information about deposit accounts to regulatory authorities in specific circumstances. Disclosure by banks of depositors’ confidential account information in such circumstances may well have been permitted even under New York common law given the public policy considerations that favor disclosure in connection with criminal matters.)
However, in the case of a borrower-lender relationship, New York law clearly comes down on the side of the lender in providing that the lender has no duty to maintain the confidentiality of information received from a borrower in the context of a loan transaction. One of the earliest New York court decisions to address the issue was Graney Development Corp. v. Taksen — a New York appeals court decision in 1978 — in which an officer of the bank disclosed to another bank and a person who intended to sell certain property to the borrower that the borrower had defaulted on a loan to the bank. While noting in some general terms that borrowers may have expectations of confidentiality, the court said it found no reason to impose a duty of confidentiality on the bank in a borrower-lender relationship and held that relationship to be “solely that of creditor and debtor.” The court distinguished the bank-depositor relationship, in which the bank acts as agent for the depositor and the depositor has a reasonable expectation that confidentiality of account records will be maintained.
Confidentiality expectations in the borrower-lender relationship under New York law were also addressed in Sharma v. Skaarup Ship Management Corporation, a 1988 federal district court case. In Sharma, the borrower had a series of loan agreements with a large New York bank to finance tankers used in the shipping industry. Ultimately, the borrower defaulted on the loans, and the tankers were transferred by the bank to Skaarup Ship Management Corporation, which was also a customer of the bank. The borrower sued, alleging among other causes of action that the bank had disclosed the borrower’s confidential financial information to Skaarup in connection with the transfer in breach of the bank’s duty of confidentiality. A federal district court in New York dismissed the borrower’s claim for breach of duty of confidentiality based on the reasoning in the Graney decision, noting that a bank’s relationship with its borrowers differs from its relationship with depositors. The court cited Graney for the proposition that “one who defaults on his debts cannot expect that the default will be kept a secret.”
A subsequent case in which the confidentiality issue arose was Boccardo v. Citibank, N.A., a 1991 case in the New York state courts that involved a bank representative falsely reporting to a third party that there were insufficient funds in the borrower’s line of credit account to cover a check that the borrower had written on the account. As a result, the third party refused to proceed with a transaction with the plaintiff. The plaintiff brought suit on a theory of tortious breach of confidentiality. Noting the prior decision in Graney, the court in Boccardo said, “New York courts have not definitively recognized a cause of action based upon a breach of confidence theory in the context of bank/customer relationships” and it dismissed the borrower’s claim.
A somewhat more recent New York federal court case raised the possibility of a narrow exception in New York law relating to confidentiality in the borrower-lender relationship. In Bartell v. OnBank & Trust Co. in 1996, the court addressed a borrower’s claim that an employee of the bank had improperly distributed the borrower’s loan application materials, albeit in an altered form, to attendees at a mergers and acquisitions seminar sponsored by the bank as an example of the bank’s services. The borrower claimed that it suffered damage to its reputation as a result. The court said New York law does not recognize a duty of confidentiality on the part of a lender in favor of a borrower unless the borrower can show malice or bad faith on the part of the bank. The court held that the borrower had made a sufficient showing of malice to survive the bank’s motion to dismiss the claim.
In sum, borrowers in loan transactions governed by New York law should not have an expectation that financial plans, projections and other sensitive business information are automatically subject to a duty of confidentiality on the part of the lender. New York is a major banking center, and its courts have been reluctant to impose non-disclosure duties on lenders that some other states have imposed by case law or statute. Borrowers providing particularly sensitive material to a bank in the course of a lending relationship should attempt to negotiate a specific confidentiality under-taking on the part of the bank.