Kesselman v. National Bank of Arizona

• Decision Date: 22 October 1996
• Docket Number: CA-CV,No. 1,1
• Citation: 937 P.2d 341,188 Ariz. 419
• Parties: , 31 UCC Rep.Serv.2d 21 Stanley KESSELMAN, as Trustee of the Gilbert & Sullivan Mortgage Company, Inc. Profit Sharing Plan; ArMA Membership Benefits, Inc., as Custodian, FBO Daniel N. Karsh, M.D. IRA Rollover; ArMA Membership Benefits, Inc., as Custodian, FBO Thomas E. Newman, M.D. IRA Rollover; Martin Rosenthal, as Trustee of the Martin G. Rosenthal, M.D., P.C. Profit Sharing Plan; and Phyllis Reuss, as Trustee Of The Phyllis S. Reuss, M.D., P.C. Employees' Retirement Plan, and as Trustee of the Phyllis S. Reuss, M.D. Family Trust, Plaintiffs-Appellants, v. THE NATIONAL BANK OF ARIZONA, a National banking institution, Defendant-Appellee. 95-0551.
• Court: Arizona Court of Appeals

Page 341

937 P.2d 341

188 Ariz. 419, 31 UCC Rep.Serv.2d 21

Stanley KESSELMAN, as Trustee of the Gilbert & Sullivan Mortgage Company, Inc. Profit Sharing Plan; ArMA Membership Benefits, Inc., as Custodian, FBO Daniel N. Karsh, M.D. IRA Rollover; ArMA Membership Benefits, Inc., as Custodian, FBO Thomas E. Newman, M.D. IRA Rollover; Martin Rosenthal, as Trustee of the Martin G. Rosenthal, M.D., P.C. Profit Sharing Plan; and Phyllis Reuss, as Trustee Of The Phyllis S. Reuss, M.D., P.C. Employees' Retirement Plan, and as Trustee of the Phyllis S. Reuss, M.D. Family Trust, Plaintiffs-Appellants, v. THE NATIONAL BANK OF ARIZONA, a National banking institution, Defendant-Appellee.

No. 1 CA-CV 95-0551.

Court of Appeals of Arizona Division 1, Department C.

Oct. 22, 1996.

Review Denied May 20, 1997. ^*

[188 Ariz. 420] Galbut & Conant by Martin R. Galbut and Paul A. Conant, Phoenix, for Plaintiffs-Appellants.

Snell & Wilmer by Lonnie J. Williams, Jr. and Lisa M. Coulter, Phoenix, for Defendants-Appellees.

OPINION

KLEINSCHMIDT, Judge.

The plaintiffs, a group of private investors to whom we will refer as "the Lenders," appeal an order granting summary judgment against them in favor of National Bank of Arizona. The issue is whether a bank has a duty to disclose information about its customer's account to persons--in this case to the Lenders--with whom the customer does business. We hold that the Bank does not have such a duty, and we affirm the order granting the motion for summary judgment against the investors.

We consider the facts in the light most favorable to the parties opposing summary judgment. Indian Village Shopping Ctr. Inv. Co. v. Kroger Co., 175 Ariz. 122, 854 P.2d 155 (App.1993). In 1993, Buddy Wood, a principal of Lucido-Wood Development Company, Inc., sought financing from National Bank of Arizona for a real estate project known as Castle Rock Condominium Development. Sandy Murphy, a loan officer at National Bank, informed Wood that the Bank would not finance the project but referred him to several mortgage lenders that might be interested in doing so, one of which was Gilbert & Sullivan Mortgage Company, Inc.

Wood contacted Gilbert & Sullivan, which is owned and operated by Scott Claypool. After meeting with Wood, Claypool contacted Murphy at National Bank to thank her for the referral and to inquire about Lucido-Wood's credit history. Murphy told Claypool that National Bank had done a little checking on one connection and that it had "checked out." Gilbert & Sullivan then assembled the Lenders to provide financing for the Castle Rock project. Claypool had periodic contact with Murphy regarding Gilbert & Sullivan's financing and on one occasion sought her opinion about Lucido-Wood's construction budget.

Eventually, the Lenders loaned $311,740 to Lucido-Wood. This loan closed in August 1993. A second loan of $210,060 was scheduled to close in October 1993, but never did. Escrow services for both loans were handled by Charter Title Agency, Inc. Claypool directed Charter Title to deposit the proceeds from these two loans at National Bank, apparently as a token of appreciation for the referral.

Charter Title maintained numerous accounts at National Bank, including its main escrow account. It was Charter Title's procedure to hold customers' money in its main account until it was time to disburse the funds.

As early as April 1993, National Bank suspected Charter Title of kiting checks. Check kiting is "[t]he wrongful practice of taking advantage of ... the time that elapses between the deposit of a check in one bank and its collection at another ... [A check kiter] uses funds which are not his by drawing checks against deposits which have not yet cleared through the banks...." He writes a check against a bank account which has insufficient funds to cover it, hoping that before it is presented the necessary funds will have been deposited. See BLACK'S LAW DICTIONARY 871 (6th ed. 1990).

From January to October 1993, Charter Title had twenty-one overdrafts in one account at National Bank totalling more than $7.3 million. The Bank did nothing to stop the kiting, but in October 1993, the Arizona State Banking Department froze all of Charter Title's assets, including its accounts at National Bank. As a result, most of the proceeds from the Lenders' first two loans were unavailable to Lucido-Wood. The Lenders provided a third loan to Lucido-Wood in the amount of $174,323.18 so that the real estate project could continue. After the third loan was extended, Lucido-Wood filed for bankruptcy and defaulted on the loans, claiming that the receivership undermined the project.

The receiver eventually released to the Lenders the principal of their loans. The Lenders claim their losses include lost interest, collateral litigation expenses, attorney's fees, foreclosure fees on the Castle Rock project and lost opportunity costs. The Lenders sued to recover total losses of over $440,000. The Bank successfully moved for summary judgment.

The trial court concluded that National Bank owed no duty to disclose irregularities detected in a fiduciary account to third-party beneficiaries. Summary judgment is appropriate if the court correctly decided that National Bank owed no duty to disclose, as negligence actions may be maintained only if there is a breach of a duty recognized by law. Markowitz v. Arizona Parks Bd., 146 Ariz. 352, 354, 706 P.2d 364, 366 (1985). The question of duty is properly determined by the court as a matter of law. Id.

Generally, banks have a duty to their "customers not to disclose the customers' financial conditions to third parties." R.A. Peck, Inc. v. Liberty Fed. Sav. Bank, 108 N.M. 84, 766 P.2d 928, 933 (App.1988). A bank has no duty to third parties to disclose information about a customer's account. See Eubanks v. F.D.I.C., 977 F.2d 166, 170 n. 3 (5th Cir.1992) ("banks ordinarily owe no duty, fiduciary or otherwise, to third person"); Cumis Ins. Soc., Inc. v. Windsor Bank & Trust Co., 736 F.Supp. 1226 (D.Conn.1990) (bank did not owe duty to another bank to disclose a check kiting scheme the first bank had discovered); E.F. Hutton Mortg. Corp. v. Equitable Bank, N.A., 678 F.Supp. 567 (D.Md.1988) (bank had no duty to inform third party of its suspicions of fraud by its customer, as there was no contractual or fiduciary relationship requiring disclosure); Guidry v. Bank of LaPlace, 661 So.2d 1052, 1059 (La.App.1995) (bank was "clearly under no duty to disclose information about its customer to a non-customer"); Glass v. Berkshire Development, 612 So.2d 749 (La.App.1992) ("a bank owes no duty to a third person with whom" the bank's depositor "does business"); Citizens State Bank, Enderlin v. Schlagel, 478 N.W.2d 364 (N.D.1991) ("Ordinarily, a bank has no affirmative duty to disclose a customer's financial condition."); First Nat'l Bank and Trust Co. v. Brakken, 468 N.W.2d 633, 637 (N.D.1991) ("a bank generally has no affirmative duty to disclose a customer's financial condition to anyone").

Despite this general principle, the Lenders argue that National Bank owed them a duty to take affirmative measures to avoid any loss to them caused by Charter Title's check kiting. The Lenders analogize the Bank's duty to that of a tavern owner who serves liquor to an intoxicated patron. See Ontiveros v. Borak, 136 Ariz. 500, 667 P.2d 200 (1983). They argue that just as a tavern owner owes a duty to third parties whom the patron may injure while driving drunk, the Bank owes a duty to third parties who may foreseeably be harmed by a depositor's check kiting. In making this argument, the Lenders correctly state that the appropriate focus is always on the relationship between the parties, and the obligations arising out of that relationship. See Ontiveros, 136 Ariz. at 508, 667 P.2d at 208; Maurer v. Cerkvenik-Anderson Travel, Inc., 181 Ariz. 294, 890 P.2d 69 (1994).

The Lenders do not restrict their argument to the Ontiveros analogy. They also cite cases that discuss the duty of banks to disclose the status of a customer's account. They rely most heavily on Peck. 108 N.M. 84, 766 P.2d 928. In Peck, the court determined that a bank had a duty to disclose information about its customer to a third party. After examining a number of other cases, the court articulated a test to determine when such a duty arises. It held that three relationships between a third party and a bank will give rise to the duty: " '1. Where there is a previous definite fiduciary relation between the parties[;] 2. Where it appears one or each of the parties to the contract expressly reposes a trust and confidence in the other[;] 3. Where the contract or transaction is intrinsically fiduciary and calls for perfect good faith.' " Id. at 89, 766 P.2d at 933 (quoting Macon County Livestock Mkt., Inc. v. Kentucky State Bank, Inc., 724 S.W.2d 343, 349 (Tenn.App.1986)). The court in Peck then explained that the presence of one of these relationships was only a threshold to the existence of a duty. The court stated that due to the competing interest of customer confidentiality, special circumstances must be shown in order for the duty to arise. The court discussed four circumstances:

[1.] One who speaks must say enough to prevent his words from misleading the other party.

[2.] One who has special knowledge of material facts to which the other party does not have access may have a duty to disclose these facts to the other party.

[3.] One who stands in a confidential or fiduciary relation to the other party to a transaction must disclose material facts.

... [4. One who has] actual knowledge that its customer is committing fraud [must disclose financial information].

Id. at 90, 766 P.2d at 934.

The facts in Peck were as follows. The third party who brought the claim had agreed to build a ski lodge and restaurant for the bank's customer. Id. at 87, 766 P.2d at 931. The bank's president assured the third party that a loan for the project had...