The Supreme Court of Ohio recently issued a decision that reaffirms that lenders in commercial transactions involving sophisticated business entities and individuals generally do not have a duty to disclose to any of the borrowers information learned by the lender in the course of the loan transaction that could increase the risk of default for one of the borrowers.
The Court rendered its decision in Huntington National Bank v. Schneider, 2025-Ohio-2920. The transaction involved was a $77 million loan by the bank to a group of companies and individuals that owned, operated, and managed skilled nursing facilities and other commercial real estate interests. One of the individuals involved in the transaction engaged in illegal financial activity that caused the borrowers to default on the loan. One of the parties to the case, Schneider, was another individual involved in the transaction and had been required by the lender to sign a guaranty agreement by which he accepted personal liability for the full amount of the loans if the loans defaulted. When the loans did, in fact, default, the lender sought to enforce the guaranty against Schneider. In defense, Schneider argued that he should not be held liable under the guaranty because the lender had had access to financial information regarding the bad actor to which he had not had access, and the lender should have disclosed that information to him before he signed the guaranty.
In a decision authored by Chief Justice Kennedy, the Supreme Court of Ohio rejected Schneider's argument. In making his argument, Schneider tried to persuade the Court that Ohio should adopt the position of a portion of the Restatement (First) of Security that provides that a creditor has a duty to disclose facts that materially increase a surety's risk when those facts are not known by the surety at the time an obligation is incurred.
The Court rejected this position.
Instead, the Court reaffirmed well-settled Ohio law that there is no duty to disclose unknown facts that materially increase risk to a contracting party unless a special trust or confidence has been established. The Court further supported its decision by relying upon the principle that contracts fairly made and freely entered into are valid and enforceable, and that unless fraud is proven, courts do not possess the power to save a person from the effects of a voluntary contractual agreement that individual has signed.
The Court also reiterated the principle that a lender in a commercial transaction does not owe a fiduciary duty to a prospective borrower unless it is aware of a special repose or trust; that is, absent an established relationship of special trust or confidence, there is no duty between the parties to a commercial transaction to disclose facts that may materially increase risk to the other.
The case was closely watched by the Ohio Chamber of Commerce and trade associations for commercial lending institutions because the intermediate appellate court had rendered a decision that was in favor of the borrower.
The decision of the Supreme Court of Ohio should provide assurance to lenders entering into commercial loan transactions in Ohio that, absent special circumstances, lenders will not be held liable for failing to disclose to a potential borrower information learned by the lender in the course of the loan transaction that could make the loan a riskier business proposition for the borrower.
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