Boubelik v. Liberty State Bank

• Citation: 553 N.W.2d 393
• Decision Date: 29 August 1996
• Docket Number: No. C3-94-1136,C3-94-1136
• Parties: Henry F. BOUBELIK, et al., Respondents, v. LIBERTY STATE BANK, Petitioner, Appellant.
• Court: Supreme Court of Minnesota (US)

Page 393

553 N.W.2d 393

Henry F. BOUBELIK, et al., Respondents, v. LIBERTY STATE BANK, Petitioner, Appellant.

No. C3-94-1136.

Supreme Court of Minnesota.

Aug. 29, 1996.

Rehearing Denied Oct. 10, 1996.

Syllabus by the Court

Plaintiffs failed to show that bank had actual knowledge that bank's third-party customer was irretrievably insolvent; therefore, the bank had no duty to disclose knowledge of third-party customer's financial condition to plaintiffs who were contemplating a loan transaction with the bank involving the bank's third-party customer.

A bank loan is not a "service" within the meaning of Minnesota's Consumer Fraud Act.

Brenner & Glassman, Ltd., Louis W. Brenner, Sr., Michael J. Orme, Minneapolis, for Appellant.

Jacobson, Harwood, Bennett & Erickson, P.A., Steven S. Hoge, Minneapolis, for Respondents.

John S. Jackson, Vice President and General Counsel, Michael P. Carlson, Associate Counsel, Minneapolis, for MN Bankers Ass'n.

Hubert H. Humphrey, III, Attorney General, James P. Jacobson, Assistant Attorney General, St. Paul, for State of Minnesota.

Smith & Tollefson, Stephen J. Smith, Mark J. Rohrick, Owatonna, for MN Trial Lawyers Ass'n.

Heard, considered and decided by the court en banc.

OPINION

ANDERSON, Justice.

Plaintiffs William Baker and Henry Boubelik obtained a loan from Liberty State Bank for the purpose of investing in Lindsay's Bar, a bar and restaurant to be owned and operated by Joseph Baker, William's brother. Plaintiffs' loan from Liberty was secured by collateral pledged by plaintiffs and equipment to be used for Lindsay's Bar. Lindsay's Bar never opened. Joseph Baker, who was both a business and personal customer of Liberty, defaulted on his obligations to Liberty and filed for bankruptcy protection. Plaintiffs defaulted on their loan obligations and Liberty sought to sell stock pledged as collateral. Plaintiffs sued Liberty, seeking to enjoin the sale of the stock and to recover damages on the grounds that Liberty had actual knowledge of Joseph Baker's fraudulent activities and therefore had a duty to disclose those fraudulent activities to plaintiffs. Plaintiffs also alleged that the loan of money by Liberty was governed by the Minnesota Consumer Fraud Act, Minn.Stat. § 325F.68-.70 (1994), and that Liberty had violated the Act.

The district court ruled that as a matter of law the Consumer Fraud Act did not apply to the plaintiffs' loan. The jury found that Joseph Baker committed fraud on the plaintiffs, that Liberty knew or had reason to know of the fraud, that Liberty failed to inform plaintiffs of the fraud, and that plaintiffs were damaged in the amount of $123,431.83. Liberty appealed, and the Minnesota Court of Appeals affirmed the jury verdict, but reversed the district court, holding that bank loans fall within the ambit of the Consumer Fraud Act. Boubelik v. Liberty State Bank, 527 N.W.2d 589, 593 (Minn.App.1995). We reverse.

Plaintiff Henry Boubelik was employed by National Car Rental for over 25 years, and in 1990 was its senior vice president of sales and marketing, a position he held until early 1992. While Boubelik was at National, he became acquainted with plaintiff William Baker when Baker began working for him in 1987. Baker is an attorney who, prior to his employment by National Car Rental, worked for a Minneapolis law firm. In early 1990, Boubelik and William Baker were seeking ways to diversify their respective investments. At that time, William Baker's brother Joseph was involved in the ownership of restaurants and nightclubs in the Minneapolis area, including establishments known as the Uptown Bar, William's Pub, and Champps. Joseph Baker suggested to his brother William that plaintiffs invest in his newest venture, a bar and restaurant called Lindsay's Bar.

In order for plaintiffs to invest in Lindsay's Bar, they needed to arrange financing. Joseph Baker suggested that plaintiffs contact John Wittek, a loan officer at Liberty State Bank. In January 1990, William Baker wrote to Wittek seeking to begin discussions about a loan. Between January and the April 12 loan closing, Wittek met separately with Joseph Baker and William Baker on a number of occasions to discuss the financing for Lindsay's Bar. Wittek met with Boubelik on at least one occasion, April 3, 1990.

To understand plaintiffs' action against Liberty, it is necessary to know the nature and extent of Joseph Baker's dealings with both Liberty and Norwest Bank. Since 1987, Joseph Baker conducted both his business and his personal banking with Liberty, and most of his business dealings at Liberty were with Wittek. As of January 1990, Joseph Baker had a $150,000 line of credit at Liberty for a venture called Old Library Restaurants. At that time, Liberty was concerned that no payment of principal had been made on this line of credit for over one year. In May 1990, Joseph Baker refinanced his home to pay down the Old Library Restaurants' line of credit by $50,000.

In February 1990, Joseph Baker formed Apopka Corporation for the purpose of acquiring and holding the assets of Lindsay's Bar. In March 1990, Liberty extended a $250,000 line of credit to Apopka for Lindsay's Bar and another bar known as William's Pub. This line of credit was secured by accounts receivable, inventory and equipment, the personal guaranty of Joseph Baker, and the personal guaranty of William and Joseph Baker's uncle. On March 9, 1990, $18,900.68 from Apopka's line of credit was used to pay Old Library Restaurants' overdrafts at Liberty. Joseph Baker also had an outstanding loan of approximately $70,000 with Norwest, which loan was secured by equipment to be used for Lindsay's Bar. On March 13, 1990, $35,000 of the Apopka line of credit was used to pay down Joseph Baker's debt to Norwest. After plaintiffs' loan with Liberty was closed, Liberty continued to advance funds to Apopka. In June and July 1990, Liberty made six additional advances to Apopka in the total amount of $60,422.78.

The financing plan proposed by Joseph Baker to the plaintiffs for Lindsay's Bar included Apopka's $250,000 line of credit at Liberty; the equipment on Lindsay's premises, in which Norwest then held a security interest; a $50,000 line of credit at Norwest; and an additional sum of $50,000-$75,000 to be invested by plaintiffs. William Baker testified that plaintiffs were comfortable with personally guaranteeing the Norwest loan if they could get control of the Lindsay's Bar equipment. Joseph Baker told William Baker that Apopka owned the equipment, that Norwest had a security interest in the equipment, and that it was necessary to pay Norwest $35,000 in order for Norwest to subordinate its security interest in the equipment to Liberty's security interest. Plaintiffs testified that they believed that the $35,000 to be paid to Norwest would be paid from Joseph Baker's personal funds. William Baker admitted that he did not ask Joseph Baker how Joseph Baker was going to obtain the funds to pay Norwest. As previously noted, Joseph Baker used $35,000 from Apopka's line of credit at Liberty, rather than his own funds, to make the payment to Norwest. Believing that the equipment would be available to secure Norwest's loan, plaintiffs agreed to personally guarantee the Norwest debt, and did so on March 8, 1990. ¹

Plaintiffs originally planned to obtain a $100,000 loan from Liberty and were to pay interest quarterly, with a $20,000 principal payment due every year for five years, beginning with the year after the loan was made. As collateral for the loan, Boubelik provided 1,333 shares of Household International, Inc. common stock and William Baker pledged his interest in two real estate limited partnerships.

On April 11, 1990, plaintiffs signed a "Declaration of Loan Purpose," which included the statement that the loan funds are for "general business investment purposes." On the same date, Wittek made a note in the bank file that the purpose of the loan "was to enter in various restaurant operations with William Baker's brother who has the expertise in this area." Wittek testified that he knew that plaintiffs wanted the loan proceeds to be used for working capital for the Lindsay's Bar and William's Pub ventures. Wittek also testified that he knew that Joseph Baker planned to use some of the funds from the loan to cover Old Library Restaurants' overdrafts and to pay off the promissory note of Old Library Restaurants. Wittek did not tell plaintiffs that the funds were going to be used in this way. Wittek also did not tell plaintiffs that Norwest had subordinated its security interest in the Lindsay's Bar equipment to Liberty's security interest in the equipment.

Prior to closing the loan, plaintiffs made no investigation of Joseph Baker's business ventures or financial condition. Plaintiffs did not ask to see Joseph Baker's books, tax returns, or financial statements, talk to his accountant, obtain a credit report or other credit references, or ask whether any amount had already been drawn on Apopka's $250,000 line of credit at Liberty. Boubelik testified that he assumed that William Baker was knowledgeable about Joseph Baker's businesses. Joseph Baker later admitted that during the loan discussions his financial condition was poor. He also admitted that he did not disclose his financial condition to plaintiffs, nor did he disclose his agreement to attempt to use part of the loan proceeds to "pay current" some of his debt at Liberty.

The loan was closed on April 12, 1990. Because William Baker's collateral was not immediately available to secure the loan, only $75,000 of the proposed $100,000 was disbursed at closing. There was no written agreement among Joseph Baker and plaintiffs as to how the $75,000 loan proceeds were to be spent, and no note was signed by Joseph Baker to plaintiffs. Plaintiffs never asked Joseph Baker how he was going to spend the money. When asked about the lack of documentation regarding the $75,000 given to ...