Daily Development for Thursday, April 18, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

A report of one aspect of this case appeared as yesterday's DD. Here are two more aspects reported as separate items.

LENDER LIABILITY; FRAUDULENT MISREPRESENTATION; REMEDIES: Plaintiff must elect between claim for fraudulent misrepresentation and fraudulent inducement, and conseqences can be significant.

Sallee v. Fort Knox National Bank, 2002 Fed. App. 0128p (6th Cir. 4/15/02)

The facts of this case are set forth in another entry under this same heading (the DD for 4/17/02)

Here we will discuss the court's holding on the question of the plaintiff's remedy. The trial court concluded that the plaintiff had to elect between the theory of fraudulent misrepresentation and fraudulent inducement.

Both were available, of course, since the allegation (which the jury accepted) was that the Bank had misrepresented the value of the property by disclosing only part of the information it had concerning the value of the property, and in doing so it successfully induced the Sallees to borrow the money to acquire the laundromat.

The court indicated that the remedy for fraudulent inducement is rescission (together with incidental damages). This would have involved paying back the money to the lender, without interest, and a release of the mortgage. They then would have been entitled to sue for consequential damages for the inducement to borrow the money and to purchase of the laundromat.

The Sallees who were forced to make this election early in the litigation, when they were defending against the Bank on a receivership claim, apparently concluded that they could not or did not wish to disgorge the money that they had borrowed, so they elected a suit for fraudulent misrepresentation, which, the court concludes, involved affirming the loan agreement and a suit for damages based upon the misrepresentation as to the value of the laundromat.

The court concluded that the measure of damages was the difference between the value of the laundromat at the time of Sallee's purchase and the amount that the bank represented it to be worth. The court criticized the trial courts reliance upon the sheriff's sale four years after the purchase to determine the value at time of purchase. Rather, the court credited another appraiser's estimate of that value. This led to a reduction in the damages payable of over $100,000.

Another element of the trial court's award had to do with injury done to Sallees' retirement portfolio as a consequence of its undertaking the loan. This injury consisted in part of a loss of the tax exempt status of the portfolio. Also, there is the fact that the Sallees were forced to sell a portion of the portfolio to pay off various debts owed to Bank, and thus lost the appreciation in value of that stock. The court concluded that both these claims sounded as a fraudulent inducement claims. Since Sallees, by refusing to elect fraudulent inducement, affirmed the loan, the fact that the requirements of the loan caused them potential loss is not an element of damages.

Judge Batchelder, part of the three judge panel, concurred in the result but wrote a special opinion on this issue. Refining the analysis, Judge Batchelder disputes that Sallees were properly forced to choose between theories of fraudulent misrepresentation and fraudulent inducement. Rather, she asserts, the appropriate distinction, as to each element of loss, is the choice between affirmation and rescission. The two remedies are inconsistent, but, she notes the theories of liability are not. Judge Batchelder notes that sometimes fraudulent misrepresentation can occur without fraudulent inducement, but that in this case both torts occurred.

If the editor reads her comments properly, she contends that Sallees might have elected to rescind that aspect of the transaction by which they transferred stock in exchange for reduction in the debt. Presumably, if the stock had then gone up, they might have been entitled to the lost appreciation of that stock. But, since the Sallees did not pay back the debt amounts represented by the application of the stock, they were not entitled later to make a claim for the lost appreciation.

Comment: Judge Batchelder makes an interesting point. It may be possible to "split" the various aspects of the transaction. What puzzles the editor is that clearly the lower court was confused about the characterization and propriety of its requirements to elect, and consequently it seems a little tough on the Sallees to expect them to have guessed that some kind of " selective rescission" was in fact available to them at the time of the trial court's ruling.

LENDER LIABILITY; FIDUCIARY RELATIONSHIP: Fiduciary relationship does not arise out of simple trust and reliance of borrower as to lender, but such reliance must be the product of circumstances, such as a long term relationship of trust and confidence, that make the reliance predictable and logical.

Sallee v. Fort Knox National Bank, 2002 Fed. App. 0128p (6th Cir. 4/15/02)

The facts of this case are set forth in another entry under this same heading (the DD for 4/17/02).

The trial court had found that a fraudulent misrepresentation case existed in part because the Bank, in giving advice to Sallees which it knew that Sallees were relying upon in making their business decisions, established a fiduciary relationship imposing broader disclosure duties.

The court conceded that Sallees might have naively relied upon the bank, despite the fact that Sallees knew that Bank was in fact in an adversarial position with them as its lender and, in fact that Bank had an interest in financing the sale of the laundromat by its long term customer.

But there was no long term relationship between Bank and Sallees. In fact, Sallees had earlier refinanced a loan it received from Bank for the convenience store acquisition when it got a better deal from another lender. Sallees only returned to Bank when they used up their good will and credit with that other lender.

Citing numerous other authorities, the court posited the rule as follows:

"[A]dvice given by a creditor to a debtor in a commercial context in which the parties deal at arm's length, each protecting his or her respective interests, is insufficient to creat a fiduciary relationship. "

The court characterized Worth Sallee's trust and confidence in Bank's lending officers as "unreasonable" and "naive," particularly in light of his knowledge of Bank's relationship with his sellers, the Bramletts.

Of course, the appeals court then goes on to hold that, even without a fiduciary relationship, Sallees ought to be permitted to demonstrate that they reasonably relied upon the implications of Bank's statement concerning the appraisal - that the Bank's information was that the value of the property was $750,000. Because Bank had abundant, undisclosed evidence that this was not the value, the statement was fraudulent.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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