From Casetext: Smarter Legal Research

Richfield Bank and Trust Co. v. Sjogren

Supreme Court of Minnesota
Jul 16, 1976
309 Minn. 362 (Minn. 1976)

Summary

holding omission of facts can support misrepresentation claim if there is a legal duty to disclose

Summary of this case from Williams v. Heins, Mills Olson, PLC

Opinion

No. 45966.

July 16, 1976.

Fraud — action to recover on note — loan made to further fraud — duty of bank to disclose fraud.

1. Where a bank had actual knowledge of the fraudulent activities of one of its depositors, the bank was under an affirmative duty to disclose this knowledge before it engaged in making a loan which furthered the fraud.

Trial — special verdict — instructions on effect of answers — propriety.

2. While it was error for the trial court to instruct the jury as to the effect of its answers to special verdict interrogatories, this error was, under the facts of this case, not so prejudicial as to require a new trial.

Action in the Rice County District Court to recover on a promissory note executed by defendants, Roger E. Sjogren and Anna Mae Sjogren. The case was tried before Urban J. Steimann, Judge, and a jury, and on the basis of a special verdict, the court ordered judgment for defendants. Plaintiff appealed from an order denying its alternative motion for judgment notwithstanding the verdict or for a new trial. Affirmed.

Wurst, Bundlie, Carroll Crouch and Donald R. Bundlie, for appellant.

Popham, Haik, Schnobrich, Kaufman Doty and Bruce D. Willis, for respondents.

Heard before Sheran, C. J., and Otis, Kelly, MacLaughlin, and Scott, JJ., and considered and decided by the court en banc.


Appellant, Richfield Bank and Trust Company, commenced this action to recover on a promissory note executed by respondents, Roger E. Sjogren and Anna Mae Sjogren. The respondents admitted execution of the note but affirmatively alleged that the transaction was induced by appellant's fraudulent concealment of material information. A jury returned a special verdict in favor of respondents, and this appeal was taken from the denial of the bank's motion for judgment notwithstanding the verdict or a new trial. We affirm.

In April 1972 the respondents purchased a service route and 10 commercial air purification units from a corporation known as National Pollution Eliminators, Inc. Under the terms of the purchase contract, National Pollution would place the purification units in various business establishments and the respondents would collect rents and service the units. Respondents were satisfied with the results of the transaction and decided to expand the business by purchasing more units. David Morton, president of National Pollution, suggested to the respondents that they purchase 50 additional purification units and that the financing for such a purchase could be arranged through Richfield Bank. Respondents decided to make the purchase and on May 26, 1972, they signed a purchase contract. The contract was contingent upon respondents successfully securing a loan to finance the purchase. Immediately after the contract was signed, the respondents met at Richfield Bank with Michael Thompson, a commercial loan officer of Richfield Bank. Respondents were not depositors of Richfield Bank and had had no prior dealings with the bank. Thompson approved a loan of $44,750 to respondents, knowing that the proceeds would go to National Pollution to be used to purchase the 50 air purification units. Respondents executed a 90-day promissory note and gave Richfield Bank a security interest in some real estate and in the 50 air purification units. The respondents did not inquire into the financial condition of National Pollution, nor did Michael Thompson voluntarily disclose information regarding National Pollution's financial condition.

Respondents subsequently discovered that National Pollution was financially insolvent and unable to deliver the 50 purification units. Concerned about this development, respondent Roger Sjogren met with Thompson who informed him that the 50 units which respondents had purchased were not available and in fact had not been available at the time of the loan on May 26, 1972.

National Pollution went out of business in August 1972.

Taking the evidence most favorable to the respondents, the jury could reasonably have found that on May 26, 1972, the date of the loan, the officers of National Pollution knew that they could not fulfill the obligations in the contract with respondents. Supporting this jury finding was testimony (a) that prior to May 26, 1972, National Pollution was placed on a "cash only" basis by its supplier of component parts; (b) that, because of this fact, the company had virtually ceased production of the units; (c) that the production force had dwindled to 1 or 2 people; and (d) that there were no more than 10 units in inventory on April 1, 1972.

Equally significant for purposes of this appeal is evidence showing that Michael Thompson, the loan officer of Richfield Bank and the only employee of the bank with whom respondents dealt, (a) was the only bank officer who handled National Pollution's account at the Richfield Bank; (b) was listed by National Pollution as its credit reference to such customers as the respondents; (c) had personally loaned National Pollution $7,000 or $8,000 of his own money; (d) had received certain "fringe" benefits from National Pollution such as traveling at the company's expense and using a Cadillac automobile furnished by the company; and (e) was an active participant in the affairs and decisions of the company, and, indeed, was described by one of the employees of National Pollution as "calling all the shots" for National Pollution from February or March 1972 onward, and as being involved in "just about everything that happened on a day-to-day basis in that company." Based on this evidence the jury found that Michael Thompson knew of the pertinent financial condition of National Pollution at the time of the Sjogren loan and of the actions, concealment, and representations of the officers of National Pollution in the conduct of their business in relation to the Sjogrens.

1. Since the record discloses that respondents did not ask Thompson, the bank's officer, any questions concerning the financial condition of National Pollution, and since Thompson did not volunteer any information about it, the principal issue on this appeal is whether Thompson's failure to voluntarily disclose such information constituted fraud. It is well established that —

"* * * if a party conceals a fact material to the transaction, and peculiarly within his own knowledge, knowing that the other party acts on the presumption that no such fact exists, it is as much a fraud as if the existence of such fact were expressly denied, or the reverse of it expressly stated." Thomas v. Murphy, 87 Minn. 358, 361, 91 N.W. 1097, 1098 (1902).

See, also, King v. International Lbr. Co. 156 Minn. 494, 195 N.W. 450 (1923).

Before nondisclosure may constitute fraud, however, there must be a suppression of facts which one party is under a legal or equitable obligation to communicate to the other, and which the other party is entitled to have communicated to him. See, generally, 37 Am.Jur.2d, Fraud and Deceit, § 146. In Klein v. First Edina Nat. Bank, 293 Minn. 418, 421, 196 N.W.2d 619, 622 (1972), this court stated:

"As a general rule, one party to a transaction has no duty to disclose material facts to the other. However, special circumstances may dictate otherwise. For example:

"(a) One who speaks must say enough to prevent his words from misleading the other party. Newell v. Randall, 32 Minn. 171, 19 N.W. 972 (1884).

"(b) One who has special knowledge of material facts to which the other party does not have access may have a duty to disclose these facts to the other party. [Marsh] v. Webber, 13 Minn. 99 (109) (1868).

"(c) One who stands in a confidential or fiduciary relation to the other party to a transaction must disclose material facts. See, e. g., Wells-Dickey Trust Co. v. Lien, 164 Minn. 307, 204 N.W. 950 (1925)." (Emphasis supplied.)

Appellant contends that none of the three "special circumstances" mentioned in Klein is present in the instant case. Indeed, respondents concede that Thompson made no statements which encouraged them at the time of the loan transaction and respondents do not assert that there was any fiduciary relationship between them and appellant. Respondents do argue, however, that the three "special circumstances" enumerated in the Klein case are merely illustrative of situations where there is a duty to disclose, and that there are other "special circumstances" which require disclosure.

The determination of whether the facts of this case fall within a category of "special circumstances" which would justify imposing on the bank the duty to disclose the financial condition of its depositor, National Pollution, is complicated by the principle that a bank is generally under a duty not to disclose the financial condition of its depositors. See, Peterson v. Idaho First Nat. Bank, 83 Idaho 578, 367 P.2d 284, 92 A.L.R. 2d 891 (1961); Milohnich v. First Nat. Bank of Miami Springs, 224 So.2d 759 (Fla.App. 1969) and Cunningham v. Merchants' Nat. Bank, 4 F.2d 25 (1 Cir.), certiorari denied, 268 U.S. 691, 45 S.Ct. 511, 69 L. ed. 1160 (1925).

In the Peterson, Milohnich, and Cunningham decisions, however, the banks did not have actual knowledge of any fraudulent activities. For example, the court in Cunningham stated (4 F.2d 30):

"* * * Banks are not immune from human selfishness, and it is quite probable that this bank was anxious to get as large a deposit as possible. But we cannot find, from the record, that it used undue means to obtain a large deposit, or that its officers have been guilty of perjury when they say that they did not know of Ponzi's insolvency and did not believe him to be a bankrupt. It is easy to attack banks after a depositor has proved to be a swindler; but, as we have said, this bank must be judged from the evidence it had before it at the time of the transaction."

The clear implication is that if the bank actually knew that its depositor was insolvent and engaged in fraudulent activity at the time of the transaction, then it would have been under a duty to disclose this fact, since, as the court noted (4 F.2d 29):

"* * * There is a moral duty of banks to the community in which they do business to use reasonable care in seeing that their depositors are not committing a fraud upon the public."

Thus, the instant case can be distinguished from those cases holding that a bank may not disclose the financial condition of its depositors if it can be shown that Richfield Bank had actual knowledge of the fraudulent activities of its depositor, National Pollution.

In determining whether Richfield Bank had actual knowledge of fraudulent activity, it should be noted that knowledge of insolvency is not necessarily equivalent to knowledge of fraud. It is well settled that an insolvent purchaser, buying on credit, is not bound to disclose his financial condition to the seller if he has a reasonable expectation of being able to pay for the goods. 37 Am.Jur.2d, Fraud and Deceit, § 171. If, on the other hand, a party is so insolvent that he has no reasonable expectation of fulfilling his contract obligations, then it is fraud for that party to fail to disclose his insolvency before entering the contract. We recognized this distinction in Forsythe v. First State Bank of Mentor, 185 Minn. 255, 258, 241 N.W. 66, 67 (1932), when we stated: "The cases make a distinction between known irretrievable insolvency and where there is insolvency accompanied by reasonable hopes that by continuing the business fortune may be retrieved."

Applying this principle to the instant case, the determinative question is whether Richfield Bank, through its loan officer, Michael Thompson, actually knew that National Pollution was so irretrievably insolvent that it had no reasonable expectation of fulfilling its obligations under the contract with respondents. If Richfield Bank knew only that National Pollution was insolvent, as opposed to irretrievably insolvent, it would not have actual knowledge of fraud and thus would not be under a duty to disclose the financial condition of its depositor to respondents.

The jury specifically found (1) that National Pollution's officers knew that they could not fulfill their contractual obligation to respondents; and (2) that Michael Thompson knew of the pertinent financial condition of National Pollution and of the actions, concealment, and representations of the officers of National Pollution in the conduct of their business in relation to the respondents. These findings are adequately supported by the record, which included substantial evidence as set forth herein, clearly demonstrating Thompson's extensive personal participation in and intimate knowledge of the affairs of National Pollution. Based on this evidence, the conclusion that Thompson actually knew that National Pollution had no reasonable expectation of fulfilling its contractual obligations is compelling.

Under the facts of this case Thompson's knowledge may clearly be imputed to the Richfield Bank. State Bank of Morton v. Adams, 142 Minn. 63,170 N.W. 925 (1919).

Therefore, we hold that under the unique and narrow "special circumstances" of this case, in which the bank had actual knowledge of the fraudulent activities of one of its depositors, it had an affirmative duty to disclose those facts to the respondents before it engaged in making the loan to respondents which furthered the fraud.

We recognize, as stated herein, that disclosing facts concerning a depositor may, under some circumstances, constitute a breach of the bank's duty to its depositors not to disclose confidential information. In circumstances in which that may be the case, the bank should simply refuse to make the loan. A bank should not undertake any duty to a new customer when to do so involves either furtherance of fraud or breach of its duty to an existing customer.

2. The trial court, in instructing the jury, informed it of the effect of its special verdict answers on the outcome of the case. Rules of Civil Procedure, Rule 49.01, as amended on January 5, 1973, and in effect at the time of the trial in this case, prohibits the trial court from instructing the jury as to the effect of its special verdict answers in a case of this type. While counsel for both parties, and the court, were apparently unaware of the rule, counsel for Richfield Bank, without making reference to the rule itself, objected on the ground that instructions to the jury as to the effect of their answers was "not necessary and could be prejudicial."

Rules of Civil Procedure, Rule 49.01, reads, in pertinent part, as follows: "(1) * * * Except as provided in Rule 49.01(2), neither the court nor counsel shall inform the jury of the effect of its answers on the outcome of the case.
"(2) In actions involving Minn. St. 1971, Sec. 604.01, the court shall inform the jury of the effect of its answers to the percentage of negligence question and shall permit counsel to comment thereon, unless the court is of the opinion that doubtful or unresolved questions of law, or complex issues of law or fact are involved, which may render such instruction or comment erroneous, misleading or confusing to the jury."

Because the evidence overwhelmingly supports the jury's answers to the interrogatories submitted to it, we find that, while it was clearly error to instruct as to the effect of the answers, it was not so prejudicial as to require a new trial. See, Rules of Civil Procedure, Rule 61.

Affirmed.


Summaries of

Richfield Bank and Trust Co. v. Sjogren

Supreme Court of Minnesota
Jul 16, 1976
309 Minn. 362 (Minn. 1976)

holding omission of facts can support misrepresentation claim if there is a legal duty to disclose

Summary of this case from Williams v. Heins, Mills Olson, PLC

finding that an omission may be the basis for a fraud claim where there is "suppression of facts which one party is under a legal or equitable obligation to communicate to the other, and which the other party is entitled to have communicated to him"

Summary of this case from 4brava, LLC v. Sachs

concluding that a bank that had actual knowledge that one of its depositors was irretrievably insolvent and thus engaging in fraud by entering into a contract with the plaintiff had a duty to disclose the depositor's insolvency to the plaintiff

Summary of this case from Graphic Commc'ns Local 1 B Health & Welfare Fund v. CVS Caremark Corp.

concluding that bank had duty to disclose only under "unique and narrow special circumstances" when bank had actual knowledge of depositors' fraudulent activity

Summary of this case from Central Bank v. Rowe Construction

stating that a party to a transaction has a duty to disclose information to prevent his words from misleading the other party

Summary of this case from Meecorp Capital Markets, LLC v. Oliver

requiring allegations of "actual knowledge of fraudulent activity," not exclusive knowledge of certain facts

Summary of this case from Grady v. Progressive Direct Ins. Co.

In Sjogren, the Minnesota Supreme Court found that a party can have a viable claim based on an omission where partial disclosure would lead to a false impression, where one party has special knowledge of material facts, and where there is a fiduciary relationship. 244 N.W.2d at 650.

Summary of this case from 4brava, LLC v. Sachs

In Richfield Bank and Boubelik, the actual knowledge of fraud was peculiarly in the possession of the depository bank because the depository bank had access to the depositor's account information that showed irretrievable insolvency.

Summary of this case from American Bank of St. Paul v. TD Bank, N.A.

noting that material facts must be disclosed only when "peculiarly" within a parties knowledge

Summary of this case from American Bank of St. Paul v. TD Bank, N.A.

In Sjogren, unlike the prior cases, the lending bank did not make any affirmative misrepresentation of the financial condition of the borrower from the party asserting a lender liability claim.

Summary of this case from Cara Corp. v. Continental Bank (In re Cara Corp.)

In Richfield Bank Trust, for example, we held that a bank that through its loan officer had knowledge of a depositor's irretrievable insolvency had a duty to disclose that fact to the respondent prior to lending money to that respondent to purchase goods from the depositor.

Summary of this case from Witzman v. Lehrman, Lehrman & Flom

In Richfield Bank Trust Co., the bank's actual knowledge of the manufacturer's fraudulent activity indeed was derived from its knowledge that the company was so irretrievably insolvent that it could not meet its obligations.

Summary of this case from Boubelik v. Liberty State Bank

In Richfield Bank Trust Co., this court elaborated on the special circumstances in which parties have a duty to disclose information, holding that where a "bank had actual knowledge of the fraudulent activities of one of its depositors, it had an affirmative duty to disclose those facts to the [borrower] before it engaged in making the loan to the [borrower] which furthered the fraud."

Summary of this case from Boubelik v. Liberty State Bank

In Richfield Bank Trust Co., this court noted that disclosing facts concerning a depositor may, under some circumstances, constitute a breach of the bank's duty to its customers not to disclose confidential information.

Summary of this case from Boubelik v. Liberty State Bank

In Richfield Bank Trust Co., we found an exception to the general rule that a bank has no duty to disclose a customer's financial condition.

Summary of this case from Boubelik v. Liberty State Bank

In Richfield Bank Trust, we held that it was fraud for a bank to not disclose to a borrower that a bank depositor with whom the borrower was dealing was insolvent and was engaging in fraudulent business practices when the bank had actual knowledge of the fraudulent activities.

Summary of this case from L H Airco, Inc. v. Rapistan Corp.

In Richfield Bank Trust Co. v. Sjogren, 309 Minn. 362, 244 N.W.2d 648 (1976), liability for failure to disclose facts material to a transaction was found, but a comparison of that case with the present one shows how far short the present case falls from meeting the applicable test.

Summary of this case from Barnett Bank of West Florida v. Hooper

observing that "if a party conceals a fact material to the transaction, and peculiarly within his own knowledge, knowing that the other party acts on the presumption that no such fact exists, it is as much a fraud as if the existence of such facts were expressly denied"

Summary of this case from Mainstreet Bank v. Gisch

In Richfield, the supreme court upheld a jury verdict barring a bank from recovering on its promissory note based on a fraudulent-concealment theory.

Summary of this case from PEOPLES NATIONAL BANK OF MORA v. BWHC, LLC

In Richfield Bank, the Sjogrens obtained a business loan from the Richfield Bank for the purpose of purchasing 50 air-purification units from National Pollution Eliminators, Inc. 309 Minn. at 364, 244 N.W.2d at 649.

Summary of this case from Swann v. Regions Bank

In Richfield Bank Trust Co. v. Sjogren, 309 Minn. 362, 244 N.W.2d 648, 649 (1976), on which the Lenders also rely, the bank approved a loan to the Sjogrens, secured by an interest in real estate and fifty air purification units.

Summary of this case from Kesselman v. National Bank of Arizona

In Richfield Bank Trust Co. v. Sjogren, 309 Minn. 362, 244 N.W.2d 648 (1976), there was apparently no contention that a fiduciary relationship existed.

Summary of this case from Marsh v. National Bank of Commerce

In Richfield Bank Trust Co. v. Sjogren, 309 Minn. 362, 244 N.W.2d 648 (1976), for example, the court found that a bank employee fraudulently failed to disclose a depositor's financial condition to a party obtaining a loan from the bank to purchase goods from the financially-troubled depositor.

Summary of this case from State Bank of Hamburg v. Stoeckmann

In Sjogren, the Minnesota Supreme Court held that where a bank approves a loan application for a borrower and has actual knowledge that one of its depositors is insolvent and engaged in fraudulent activity, it has an affirmative duty to disclose those facts to the borrower before making the loan.

Summary of this case from Shea v. H.S. Pickrell Co., Inc.

In Richfield Bank and Trust Co. v. Sjogren, 309 Minn. 362, 244 N.W.2d 648 (1976) our supreme court noted that nondisclosure may at times constitute fraud.

Summary of this case from Simonsen v. BTH Properties
Case details for

Richfield Bank and Trust Co. v. Sjogren

Case Details

Full title:RICHFIELD BANK AND TRUST COMPANY v. ROGER E. SJOGREN AND ANOTHER

Court:Supreme Court of Minnesota

Date published: Jul 16, 1976

Citations

309 Minn. 362 (Minn. 1976)
244 N.W.2d 648

Citing Cases

Boubelik v. Liberty State Bank

Rather, plaintiffs assert that the examples in Klein are not exclusive and that caselaw has established other…

Swann v. Regions Bank

We find no evidence indicating that Regions Bank intended to bestow a direct, as opposed to an incidental,…