Landmark Ruling on Liability of Employers and Banks

Overview

On March 29, in Groob v. KeyBank, the Supreme Court of Ohio issued a ruling that has far-reaching implications for employers and banks.

The specific question in the case was whether a bank may be held liable when a bank employee uses confidential information obtained from a prospective borrower for the employee's personal advantage. In answering this question in the negative, the Supreme Court reversed a 2004 Court of Appeals decision that had taken a more expansive view of employer and bank liability. The Supreme Court addressed two questions in particular that affect all employers and banks in Ohio.

Can an employer be liable for the wrongful acts of an employee committed outside the scope of employment?

The Ohio Supreme Court held, without dissent, that for an employer to be liable for the tortious act of an employee, the employee must be acting within the scope of her employment when she commits the tortious act. This result may sound commonplace, but the Court of Appeals below had adopted a broad exception to this general rule. The exception, which is set forth in Section 219(2)(d) of the Restatement (2d) of Agency, would have made Ohio employers liable for the wrongful acts of their employees, even where the employee acted outside the scope of her employment, if the employee was "aided in accomplishing" the wrongful act by virtue of the employment relationship.

Merely being aided by her employment status is not enough. The Supreme Court expressly rejected the Restatement exception, holding that the employee must commit the wrongful act within the scope of her employment in order to make the employer vicariously liable (regardless whether she was aided in the commission of her misconduct by the trappings of her employment).

As a result of the Groob court's ruling on respondeat superior liability, Ohio employers need not be concerned (as many were by the prior ruling of the Court of Appeals) that they will be held legally liable for the wrongful acts of employees committed outside the scope of employment, in cases where they were aided in their misconduct by the badges of authenticity provided by their employment.

Does a bank owe fiduciary duties to prospective borrowers?

On this question, the Supreme Court was narrowly divided. In a 4-3 vote, the Groob majority held that a bank dealing at arm's length with a prospective borrower does not owe a fiduciary duty to the prospective borrower unless special circumstances exist to establish a fiduciary relationship. This ruling follows prior Ohio cases characterizing the relationship between a lender and a borrower as one conducted at "arm's length." The arm's length principle is codified in Ohio Revised Code Section 1109.15(D), which states, "Unless otherwise expressly agreed in writing, the relationship between a bank and its obligor, with respect to any extension of credit, is that of a creditor and a debtor, and creates no fiduciary duty or other relationship between the parties."

Following the arm's length principle, the Supreme Court majority held that the Court of Appeals erred when it found that a fiduciary relationship was created whenever a prospective borrower provides confidential information to a bank loan officer.

While banks may have sound business reasons, or even other legal reasons, to protect the confidentiality of information provided by their prospective and actual customers, based on the Groob decision, banks in Ohio need not be concerned that their arm's length relationships with prospective borrowers will be construed as fiduciary relationships, absent special circumstances. Although the Court did not define the term "special circumstances," it must mean something more than the ordinary circumstances that surround typical credit relationships.