Alerts

Second Circuit Confirms Good Faith Lender Had No Fiduciary Duty to Borrower and Had Not Participated in Borrower's Fraud

April 5, 2005

Secured lenders will be reassured by the Second Circuit's April 1 decision in Sharp Int'l Corp. v. State Street Bank & Trust Co. (In re Sharp Int'l Corp. & Sharp Sales Corp.), No. 04-0214, 2005 U.S. App. LEXIS 5241(2d Cir. Apr. 1, 2005). The court affirmed the lower courts' finding that a secured lender was not liable for aiding and abetting management's breach of fiduciary duty, and not liable for receiving a $12.25 million loan repayment from a closely held borrower it correctly suspected of engaging in massive fraud. The decision limits the scope of a lender's duties to its borrower. Absent the lender's participation in its borrower's fraud, the lender should have no liability on a fraudulent transfer theory or on any other basis.