Blockchain and Financial Services Blog

Kentucky Court Says No Fiduciary Duty to Customer

In Kentucky, “a fiduciary relationship is ‘founded on trust or confidence reposed by one person in the integrity and fidelity of another … in which a duty is created in one person to act primarily for another’s benefit in matters connected with [the] undertaking.”’

Monumental Life Ins. Co.,  242 F. Supp. 2d at 449 (citing Steelvest, 807 S.W.2d at 485).  To state a cause of action for breach of fiduciary duty, the claimant must “first show that a fiduciary duty exists.”  Monumental Life Ins. Co. v. Nationwide Retirement Solutions, Inc., 242 F. Supp. 2d 438, 448 (W.D. Ky. 2003).  Kentucky banks generally do not owe their customers a fiduciary duty.  Steelvest, Inc. v. Scansteel Serv. Center, Inc., 807 S.W.2d 476, 485 (Ky. 1991); Sallee v. Fort Knox Nat’l Bank, N.A., 286 F.3d 878, 893 (6th Cir. 2002).

Consistent with this principle, Kentucky courts typically hold that the advancement of loan proceeds pursuant to a debtor-creditor relationship does not give rise to a fiduciary duty of disclosure on the bank.  Indeed, over the last thirty years, Kentucky courts have only found the existence of a fiduciary relationship in two instances.  Specifically, where a bank takes a borrower’s note and collateral and benefits from the provision of services to the debtor and pledgors, a bank has been found to owe a fiduciary duty to disclose material facts affecting the “loan transaction” to the debtor.  Steelvest, 807 S.W.2d at 485.  Additionally, where a bank takes advantage of information garnered from its confidential relations with its debtor and engages in self-dealing has a bank been found to owe a fiduciary duty.  See e.g., Henkin, Inc. v. Berea Bank and Trust Co., 566 S.W.2d 420 (Ky. App. 1978). 

In the recent decision of De Jong v. Leitchfield Deposit Bank, the Court of Appeals of Kentucky, in a case from Grayson County, followed the well-established law in Kentucky regarding whether a bank owes its creditor a fiduciary duty.  2007 WL 4126478 (Ky. App. Nov. 21, 2007).  Indeed, the Court held that the plaintiff failed to allege any facts that supported a finding that the bank owed the plaintiff a fiduciary duty.  In De Jong, the plaintiff was a guarantor on the debt of Lakeview Country Club.  In support of its claim, the plaintiff argued that the bank’s failure to advise him that the amount of the debt exceeded the amount of the bank loan constituted a breach of the bank’s fiduciary duty to him.  The Court found that the bank did not profit from any confidence gained from him or that the bank owed him a fiduciary duty of disclosure.  Even though the Court’s opinion is not final, it provides further guidance to banks by affirming that if a bank does not profit at the debtor’s expense from confidential information received from the particular debtor, then a fiduciary relationship should not be found.

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Attorney Spotlight

William T. Repasky practices with the Litigation Department at Frost Brown Todd. He focuses on lending and commercial services; banking litigation and financial institutions.