by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

ATTORNEY AND CLIENT; ATTORNEY'S DUTIES TO NON-CLIENTS; DISCLOSURE: Lender's attorney has non-delegable duty to inform counsel for borrower of last minute changes in loan documents, even where borrower has opportunity to review documents at closing and where lender's attorney believes that lender's employees will so notify the borrower. Wright v. Pennamped, 657 N.E.2d 1223 (Ind. App. 1995)

In the loan commitment, the parties had stipulated a prepayment penalty consistent with that of the local Federal Home Loan Bank. The lender's counsel drafted documents that had a considerably easier penalty provision - a flat 1% of the principal amount after one year. Borrower and borrower's counsel reviewed and approved this draft. Then lender's local agent sent the documents to a higher officer in lender's bureaucracy, and that official requested a more onerous prepayment penalty provision - one considerably tougher than the Home Loan Bank's provision. The local agent dutifully forwarded this new language to lender's counsel, who put it into the documents on the day before the closing. Lender's counsel aid to the local agent that someone should notify the borrower of the changes, and the local agent told lender's counsel that he, the local agent, would give the notice. At the time, lender's counsel was aware that borrower's counsel would not be attending the closing, and never took steps to notify borrower's counsel of the changes.

Borrower executed the loan documents the next day in the presence of lender's counsel without reading them. No one provided borrower or borrower's counsel with copies of the documents after the closing. Later, when borrower attempted to prepay, he discovered that the prepayment penalty claimed by lender was $97, 500, rather than $4900, as the "one percent" provision would have established, or $36,000, as the Federal Home Loan Bank formula would have established.

In a suit against lender's counsel for unujust enrichment, fraud, and constructive fraud, the trial court entered summary judgment for lender's counsel after hearing the evidence.

On appeal, held: Reversed, as to the fraud and constructive fraud claims. Affirmed as to unjust enrichment.

The alleged unjust enrichment claim was that the borrower paid the lender's counsel fees in exchange for unsatisfactory work. The court held that there was no basis for a claim against the lawyer here because the borrower satisfied the lender's obligation to its counsel, and thus "enriched" the lender, not the lawyer.

But the more interesting provisions have to do with the fraud and constructive fraud claims. The court reversed and remanded for a new trial on both of these claims. The court noted that there was some evidence supporting the position of the lender's counsel on both claims, but that the matter was one for a jury.

The fraud claim was that the lender's counsel, with fraudulent intent, submitted the documents to borrower for signature representing them to be the documents earlier approved by borrower's counsel. The court held first that the borrower had no responsibility to review the documents again, even though borrower was a sophisticated businessman, because he legitimately could rely on the belief that there had been no change. (Although borrower's counsel did not attend the closing, one would assume the court would have ruled the same as to any such responsibility of borrower's counsel.) Although the court accepted the fact that lender's local agent had indicated that he would notify borrower of the changes, the court stated that a jury, in determining fraudulent intent, still could weigh the other conduct of the lender's counsel in failing to contact the borrower's counsel when he knew that the borrower's counsel would not be at the closing.

The constructive fraud claim in Indiana does not require evidence of fraudulent intent. It appears to be a somewhat mushy "catch all" tort claim having to do with misrepresentations or omissions when injustice has resulted. Lender's counsel relied upon precedent to argue that constructive fraud will not arise where there is no express duty to provide the information in question. Although the court acknowledged that some precedent cases held that a document preparer has no independent duty of care to non-clients (a view not shared by all courts) it held nevertheless that the duty to disclose in this case arises because non-disclosure was likely to cause injury to the borrower.

"The facts as alleged . . . suggest a situation that is so likely to result in injustice that the law will find a fraud despite the absence of fraudulent intent . . . The material alteration of loan documents after the review and approval of those documents by opposing counsel and the presentation of the revised documents for execution with no indication that changes have been made is the sort of conduct which `should be prohibited because it is inherently likely to create an injustice . . . "

The duty to disclose was one specially imposed on the lender's counsel. The court commented that "[c]ourts hold an attorney to a separate and more demanding standard than the attorney's clients." Nevertheless, the court, at the very end of the opinion, suggests that the attorney may have satisfied his duty if he had expressly instructed the local agent to notify the borrower and had a reasonable belief that the agent would do so. There is a subtle distinction between this "delegation" concept and what happened here, where the lender's counsel made no such instruction, but simply drew the conclusion that the agent would notify the lender.

Comment 1: The case is correct, so far as it goes. The court did not have to reach the issue of whether notice to the borrower, rather than to borrower's counsel, would have satisfied the lender's counsel's duty under these circumstances. If prior notice had not been given to the borrower's counsel, one would have to assume that the borrower would not be prepared to respond properly to the changes at the closing. In effect, the lender, by proposing to loan on terms more onerous than those agreed upon, may have been in breach of the agreement to loan, and lender's counsel's behavior in failing to notify borrower's counsel may have resulted in a situation in which the borrower may have waived claims based upon that breach, since borrower undoubtedly was economically committed to take the loan when borrower arrived at the closing.

In short, there should have been no closing. If this resulted in a breach by the lender, then lender's counsel should have so advised lender on the day before the closing. In the editor's view, notification of the borrower would not have been sufficient.

Comment 2: The editor does not claim that the lender's counsel was a bad person, or a cheat. The editor does assert, however, that professionals must have high standards of integrity and must hold one another to these standards. Only professionals, through self policing, can insure that the public receives competent professional services. Otherwise, there is no justification for the profession to exist. Part of that policing is to see to it that malpractice insurance is properly applied to compensate parties injured when the standards are breached. The plaintiffs in this case did obtain the opinion of an expert witness who was a local transactions lawyer. Too few such lawyers are willing to participate in these cases. Shouldn't bar associations be looking more carefully at this issue?

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