On February 6, 2024, the U.S. District Court for the Northern District of Texas, recognizing that a lender may assume a role of a fiduciary to a borrower in certain circumstances, denied a summary judgment motion by Wallis Bank on a breach of fiduciary duty claim brought by the bank’s borrower Beaumont Lamar Apartments, LLC. Beaumont executed three contractual loan agreements with Wallis Bank to finance the construction of a 120-unit student housing complex. Wallis Bank demanded construction be split in two phases with two separate loans, rather than one phase as originally contemplated by Beaumont’s architectural and engineering plans. Wallis Bank further required Beaumont to hire Wallis Bank’s longtime associate, Stephen McCune and his construction management company, to serve as both third-party inspector and trust funds manager for the project. For those services, Beaumont was charged $50,000 for Phase I completion guarantee/bond and $20,640 for Phase II; however, McCune charged only $24,450 for the Phase I bond and $18,000 for the Phase II bond. According to Beaumont, Wallis Bank did not disclose to Beaumont the actual amounts charged by McCune, or that Wallis Bank retained any of Beaumont’s payments.
After construction started, Beaumont received a stop work order requiring certain water and concrete work to be completed before construction could resume. The water and concrete work, however, was allocated to Phase II funding as per Wallis Bank’s requirement. When Beaumont requested the funds allocated for the water and concrete work in Phase II be transferred to Phase I, Beaumont alleged that a representative of Wallis Bank erroneously represented that Wallis Bank required a third loan instead of a loan modification because it was not possible to get title coverage on the loan modification. A Wallis Bank representative also purportedly warned Beaumont that, if the third loan was not signed, then Wallis Bank would cease financing and foreclose on the property. The parties executed the third loan agreement, but shortly thereafter, a combination of construction mistakes committed by the general contractor and financing delays caused by mismanagement on the part of Wallis Bank and McCune. The general contractor eventually ceased performance and was replaced by McCune’s company as substitute contractor. Although Beaumont complied with Wallis Bank’s request for a plan for completion of the construction, Wallis Bank ultimately ceased financing and refused to communicate with Beaumont.
The court found that a fiduciary relationship may have been formed between Beaumont and Wallis Bank. The court reasoned that “[a]lthough lenders generally do not owe a fiduciary duty to borrowers under Texas law, an informal fiduciary relationship may arise between them under certain circumstances.” An instance where a fiduciary duty may arise, the court opined, is when extraneous facts and conduct show that there was “excessive lender control over, or influence in, the borrower’s business activities.” In such cases, the court found that a lender must refrain from misleading or concealing information from the borrower and the lender is required to make decisions in the best interests of the borrower, “even if contrary to the best interest of the lender.”
The case is Beaumont Lamar Apartments, LLC v. Wallis Bank, Case No. 4:23-cv-00341-O (N.D. Tex. Feb. 6, 2024). Beaumont Lamar Apartments is represented by Fox Rothschild LLP and Dennie Firm PLLC. Wallis Bank is represented by Murry Lobb PLLC and the Law Offices of David W Alexander PLLC. The opinion is available here.
