First Nat. Bank and Trust Co. of Racine v. Notte, 78-604

CourtUnited States State Supreme Court of Wisconsin
Citation97 Wis.2d 207,293 N.W.2d 530
Docket NumberNo. 78-604,78-604
PartiesFIRST NATIONAL BANK AND TRUST COMPANY OF RACINE, Plaintiff-Respondent and Cross-Appellant-Petitioner, v. Robert NOTTE, Defendant-Appellant and Cross-Respondent.
Decision Date27 June 1980

Matthew H. Quinn, Racine (argued), for First National Bank and Trust Co.; Lincoln K. Murphy, Hand & Quinn, S. C., Racine, on brief.

James A. Pitts and Rex Capwell, Racine (argued), Capwell, Berthelsen, Nolden & Casanova, Ltd., Racine, on brief, for defendant-appellant and cross-respondent.

Boardman, Suhr, Curry & Field, Madison, amicus curiae, for Wisconsin Bankers Association.

DAY, Justice.

The First National Bank and Trust Company of Racine (First National) brought this action against Robert Notte to recover the balance owing on a "Consumer Installment Note and Chattel Security Agreement" in the amount of $16,372.85 plus interest and costs. Mr. Notte acted as a gratuitous co-signer for the principal debtor, Pauline McCloud, who defaulted on the obligation and later filed a petition in bankruptcy.

The question presented for review is under what circumstances will a contractual surety obligation be rendered voidable based on the material misrepresentation or non-disclosure of a creditor. We conclude that the creditor has a duty to make disclosure to a proposed surety if the creditor knows of facts that materially increase the risk beyond that which the creditor has reason to believe the surety intends to assume, and the creditor has reason to believe that the surety does not know these facts and the creditor has a reasonable opportunity to communicate them to the surety. Failure to disclose under these circumstances will be a defense to the surety obligation. We also conclude that if a party to a contract is induced to manifest his assent to the contract by a means of a fraudulent or material misrepresentation by another party to the contract, the contract is voidable if the recipient justifiably relies on the misrepresentation. Because the case was submitted to the jury on an improper theory of law, we remand the case for a new trial.


Pauline McCloud, the principal debtor on the note, owned and operated a beauty salon business. Prior to the loan in controversy here, she had taken out seventeen loans with First National since 1958. All of these loans were paid within the end term of the contract. Only two of the 273 payments made to the bank in that time period required a second notice.

The developments leading up to the issuance of the defaulted loan in controversy here began in 1974. In February of that year, Ms. McCloud applied for a loan of $41,000 from First National to remodel and equip the "Tartan Room," one of her hairstyling establishments. In March that loan application was denied. Then in November, 1974 and again in April, 1975, loans were made by First National in the amount of $2,500 and $3,000 respectively for the purpose of remodeling and buying fixtures for the Tartan Room. Both of these loans were secured by the cash surrender value of life insurance owned by Ms. McCloud.

In May, 1975, Pauline McCloud spoke with the vice-president in charge of lending at First National, Till A. Bruett. Mr. Bruett had been involved in the lending decision as to the prior three loan applications discussed above. He testified at the trial that Ms. McCloud told him that another bank in town would loan her "thirty some odd thousand dollars" to remodel the Tartan Room and she requested another $13,000 from First National so that she could purchase fixtures. First National agreed to make the loan on the condition that she provide the bank with a third mortgage on real estate that she owned on Douglas Avenue, a lien on the fixtures, and a suitable co-signer. The documents formalizing the contract were prepared by First National and were dated May 21, 1975. Ms. McCloud picked up the documents from the bank and nothing was heard from her until early June when she talked to Mr. Bruett and told him that the other bank would loan her $29,000 but they would require a third mortgage on the Douglas Avenue property. After Mr. Bruett discussed this change of circumstances with the president of the bank, it was "decided that based on Bob Notte's credit record and reputation" they would go ahead with the loan without the third mortgage. 1

Sometime later, Mr. Notte called Mr. Bruett to inquire about Pauline McCloud's credit record with the bank. Mr. Bruett stated that Ms. McCloud's credit record with the bank was good and that she had always paid her loans. After talking with Mr. Bruett, Mr. Notte signed the note and the explanation of the co-signer obligation.

Problems arose immediately. Ms. McCloud was late with the first payment. She then made a couple of more payments and then all payments ceased. Mr. Notte made payments for a number of months and then he too ceased making them after consulting with his attorney.

The loan agreement which Mr. Notte signed stated that the bank was lending Pauline McCloud, $15,500 with an additional $565 fee added for insurance. The interest to be charged was computed at a rate of 10.76 percent. The total charge including interest over the term of the agreement was $20,913. The agreement also stated that there would be a lien on real estate and a security interest taken in all furniture, fixtures, and equipment in the Tartan Room. Further, a box was checked designating that the loan proceeds were to be used primarily for personal, family or household purposes. Also, unknown to Mr. Notte, and not on the face of the loan agreement, was the fact that First National disbursed only $12,916.67 directly to Ms. McCloud. The remaining balance of the principal was used to pay off the indebtedness remaining on Ms. McCloud's prior loan of $2,500 from First National. When the trustee in bankruptcy abandoned the property to the bank, an auction of the fixtures and equipment was held. After expenses, $250 was realized for application to the balance due on the loan.

Mr. Notte had dealt with First National in securing two short term loans for himself in late 1973 and early 1974. He secured the first loan through Mr. Bruett.

The trial court, over the objection of Mr. Notte, submitted the case to the jury on theories of negligent and intentional misrepresentation. The jury was also instructed on comparative negligence and in the special verdict the jury determined First National to be thirty-three percent negligent and Mr. Notte sixty-seven percent negligent. After hearing the post trial motions, including a motion for a new trial, a verdict was entered in favor of First National in the amount of $10,305.82, this amount representing sixty-seven percent of the outstanding debt. A notice of appeal and cross-appeal were duly filed by the parties. The court of appeals in an unpublished per curiam opinion 2 reversed the trial court, holding that strict liability would be imposed for First National's misrepresentations and that Mr. Notte was therefore entitled to rescission of the transaction.

The confusion apparent in this case originates from the lower courts' and the parties' treatment of the issues raised in a framework based on traditional tort concepts of misrepresentation. Such treatment, however, is not appropriate. This is a suit to recover on a contract. The defense raised in the pleading is one to the contract. We therefore, look to principles of contract and suretyship law in framing the issues and formulating a mode of analysis.


Mr. Notte raised by answer various affirmative defenses in the alternative including, that he was discharged from his contractual obligation because of material alterations or changes in the loan agreement; that the securities which were listed in the loan agreement, were released without his consent; that the fixtures and other equipment were negligently or irregularly sold; and finally that he should be discharged of his obligation as a co-signer based on the fraud, collusion, false representations, and material misrepresentations of First National.

From the defendant's answer it is apparent that he was attempting to avoid liability on the contract; not assert a claim for damages based on tort principles. When the underlying question is one of the right to recover on a contract or the defenses thereto, any discussion of comparison of negligence between the parties is inappropriate. If Mr. Notte alleged by way of counterclaim, damages resulting from misrepresentations which induced him to enter the underlying contractual relationship, a different question would arise. The introductory note to the Restatement (Second) of Contracts, Chapter 13 at 1 (Tent. Draft No. 11, 1976), dealing with misrepresentation discusses the interrelationship between contract and tort actions for misrepresentation. It is noted that avoidance is primarily dealt with in the contract action, while an affirmative claim for liability may lie for misrepresentation under the law of torts. Although the requirements for establishing misrepresentation sufficient to avoid a contract and the rules for establishing tort liability parallel each other closely, there are differences. 3 Because there is an affirmative liability for damages in a tort action, while a defense alleging that a contract is void or voidable for misrepresentation or non-disclosure does not itself result in a damage award, the requirements imposed by contract law are in some instances less stringent. This Court has previously recognized this distinction in Whipp v. Iverson, 43 Wis.2d 166, 171, 168 N.W.2d 201 (1969), where it was observed that when law and equity were separate systems, rescission was granted in cases of honest misrepresentation where no affirmative action for damages would lie. Even when damages are recoverable in a contract action as part of the remedy, the damages awarded are limited to those reasonably within...

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