First Sec. Bank of Utah N.A. v. Banberry Development Corp.

• Citation: 786 P.2d 1326
• Decision Date: 02 January 1990
• Docket Number: 870074,Nos. 870034,s. 870034
• Parties: FIRST SECURITY BANK OF UTAH N.A., and First Security Financial, Plaintiffs and Appellees, v. BANBERRY DEVELOPMENT CORPORATION, a Utah corporation, Eugene L. Kimball, et al., Defendants and Appellants. Eugene L. KIMBALL, Cross-Claimant and Appellant, v. SUMMIT COUNTY TITLE, et al., Cross-Defendants and Appellants.
• Court: Supreme Court of Utah

Page 1326

786 P.2d 1326

FIRST SECURITY BANK OF UTAH N.A., and First Security

Financial, Plaintiffs and Appellees, v. BANBERRY DEVELOPMENT CORPORATION, a Utah corporation, Eugene

L. Kimball, et al., Defendants and Appellants.

Eugene L. KIMBALL, Cross-Claimant and Appellant, v. SUMMIT COUNTY TITLE, et al., Cross-Defendants and Appellants.

Nos. 870034, 870074.

Supreme Court of Utah.

Jan. 2, 1990.

Rehearing Denied Nov. 20, 1989.

Robert S. Campbell, Jr., E. Barney Gesas, Paul T. Moxley, Tracy H. Fowler, Edward M. Garrett, Salt Lake City, for Sidney M. Horman, Banberry Development Corp., and Banberry Crossing.

Clark Waddoups, LeRoy S. Axland, Mark E. Wilkey, Salt Lake City, for Com. Land Title Co.

Malcolm A. Misuraca, James L. Beyers, Santa Rosa, Cal., Craig S. Cook, Merlin R. Lybbert, Michael R. Carlston, Pamela G. Heffernan, Rodney R. Parker, Salt Lake City, for Eugene L. Kimball and Keith E. Garner.

Richard D. Burbidge, Stephen B. Mitchell, Salt Lake City, for Summit County Title Co.

Don Hutchinson, Ronald E. Nehring, Salt Lake City, for Gregory P. Nelson and Victor L. Fowler.

David E. Bean, Layton, for Western Woodlands.

Barney Saunders, Park City, for Don Hutchinson.

Gordon L. Roberts, Randy L. Dryer, Michael L. Larsen, for First Sec. Bank and First Sec. Financial.

HALL, Chief Justice:

Appellants Banberry Development Corporation, Banberry Crossing, Inc. (collectively "Banberry"), and Sidney M. Horman ("Horman") appeal a jury's determination that certain settlement and purchase agreements executed by First Security Bank and First Security Financial (collectively "First Security") and the Horman Family Trust (the "Trust") constituted fraud by appellants against Eugene L. Kimball ("Kimball") and resulted in the extinguishing of real property liens held by First Security. Kimball cross-appeals, seeking attorney fees, costs, and a determination that the court erred in refusing to instruct on the theory of civil conspiracy.

This case is based on complex facts, only pertinent portions of which will be discussed at length. In 1978, Kimball and a partner purchased undeveloped land in Park City, Utah, securing the purchase amount with a note in favor of Murray First Thrift, thereafter First Security. This property ("Prospector Ridge") was later resold to Banberry, with Banberry assuming the existing note and with Kimball accepting a trust deed for the balance of the purchase price subordinate to First Security's trust deed and a subsequently obtained development loan from First Security. Horman was a guarantor of the loan and at one point became a principal officer of Banberry.

During 1982, Banberry was unable to meet its development and financing commitments due to declining property market values. Accordingly, Kimball renounced his subordination agreement on the ground that required personal guaranties were not adequately obtained for the development loan. Kimball also recorded notices of default on his note and trust deed and scheduled a nonjudicial foreclosure sale.

First Security likewise commenced an action to judicially foreclose its trust deeds, and Kimball was later enjoined from pursuing his sale. Banberry and Horman counterclaimed, raising claims involving development projects unrelated to the Prospector Ridge property.

Based upon settlement negotiations conducted in 1984, First Security, Horman, and Banberry (collectively "defendants"), and the Trust entered into three agreements. The first agreement purported to resolve the existing counterclaims; the second restructured loan transactions between First Security and Banberry for unrelated developments, and the third directly involved the Prospector Ridge property and became the basis of this lawsuit. This agreement, entitled "PURCHASE AGREEMENT" was formally entered into by First Security and the Trust. It generally provided that the Trust would assign to First Security a $1.6 million certificate of deposit in consideration for receiving either (1) an option to acquire the First Security trust deeds and notes; (2) assignment of rights against the Commonwealth Title Insurance Company ("Commonwealth"); (3) the Prospector Ridge property, if First Security bid at the foreclosure sale; or (4) proceeds First Security might obtain as an unsuccessful bidder at the sale. Also, First Security was required to continue with the judicial foreclosure action, and the Trust was to receive the interest on the certificate for the first year. The parties agreed to keep the agreements confidential.

Subsequently, Commonwealth and Kimball successfully compelled production of these agreements, and Kimball thereafter alleged that defendants committed fraud against him by keeping the agreements confidential.

This case was tried before a jury in three phases with separate jury instructions and special verdict forms. Under the first special verdict, the jury in part found that (1) Horman was the alter ego of Banberry, but not the alter ego of the Trust at the time the settlement agreements were formed and (2) the purchase agreement and transfer of the $1.6 million certificate by the Horman trust constituted a "payment" by Banberry of the trust deed notes. Under the second special verdict, the jury determined that Banberry and Horman committed fraud against Kimball with respect to the settlement agreements and that Kimball sustained damage thereby. The jury decided in the third special verdict that Banberry and Horman were not liable for punitive damages. Judgment was entered against Banberry and Horman.

The dispositive issue on appeal in relation to the fraud claim is whether a duty existed on the part of defendants to disclose to Kimball the existence and content of the purchase agreement. As we have previously reiterated,

One of the fundamental tenets of the Anglo-American law of fraud is that fraud may be committed by the suppression of the truth ... as well as the suggestion of falsehood....

Silence, in order to be an actionable fraud, must relate to a material matter known to the party and which it is his legal duty to communicate to the other contracting party, whether the duty arises from a relation of trust, from confidence, inequality of condition and knowledge, or other attendant circumstances....

The principle is basic in the law of fraud as it relates to nondisclosure that a charge of fraud is maintainable where a party who knows material facts is under a duty, under the circumstances, to speak and disclose his information, but remains silent....

Although the pertinent inquiry in any case where fraud on the basis of nondisclosure is asserted is whether, upon any particular occasion, it was the duty of the person to speak on pain of being guilty of a fraud by reason of his silence, except in broad terms the law does not attempt to define the occasions when a duty to speak arises. On the contrary, there has been adopted, as a leading principle, the proposition that whether a duty to speak exists is determinable by reference to all the circumstances of the case and by comparing the facts not disclosed with the object and end in view by the contracting parties. The difficulty is not so much in stating the general principles of law, which are pretty well understood, as in applying the law to particular groups of facts.... ¹

Thus, in order to be held liable for fraudulent nondisclosure, there must have been a duty to disclose, ² the burden of establishing which is on the party alleging the fraud ³ and the determination of which is a question of law for the court to decide. ⁴ After it has been determined that a duty exists as a matter of law, the trier of fact resolves the question as to whether the duty was breached in the particular case. ⁵

Notwithstanding the above, the parties herein have neither fully analyzed nor presented significant case law or authority squarely addressing the question before us. Also, our own research reveals a sparsity of law on the subject; and even those courts dealing with somewhat analogous cases are not in agreement in concluding whether a duty exists in situations involving real property and creditor/debtor or mortgagee(s)/mortgagor relations. ⁶ Accordingly we conduct our own analysis of the issue.

As early as 1915, an English treatise on the law relating to actionable nondisclosure noted that there are five classifications of transactions or relations which may give rise to a duty of disclosure. The first classification consists of cases where a party negotiating for a contract is cognizant of facts of which the other party is presumed ignorant and for the disclosure of which one party must rely upon the other to enable it to form a judgment as to the expediency of entering into the contract on the terms proposed. ⁷

The second classification of cases concerns situations where relationships have already been established, whether by express contract or by conduct and circumstances of the parties, which imply a fiduciary bond and a duty on the party in whom confidence is placed to exercise good faith toward the party reposing that confidence while entering into transactions during the continuance of the relationship. The relationships of principal and agent and trustee and beneficiary are generally characteristic of these types of cases. ⁸

Cases outlining the third classification include those relations where it is either presumed in law or proved in fact that one party is in a superior or dominant position and the other in an inferior or servient position. ⁹ These relations include those evolving from domestic relations as well as relations between lawyer and client, doctor and patient, priest and penitent, and such relations of influence and domination as may be proven to exist. ¹⁰

Cases involving a statutory duty of disclosure are included in the fourth type of classification, and to determine the nature and limits of the duty and any possible relief, the express provisions of the statute must be considered....