Richfield Bank & Trust Co. v. Sjogren

• Decision Date: 16 July 1976
• Docket Number: No. 45966,45966
• Citation: 309 Minn. 362,244 N.W.2d 648
• Parties: RICHFIELD BANK AND TRUST COMPANY, Appellant, v. Roger E. SJOGREN, et al., Respondents.
• Court: Minnesota Supreme Court

Page 648

244 N.W.2d 648

309 Minn. 362

RICHFIELD BANK AND TRUST COMPANY, Appellant, v. Roger E. SJOGREN, et al., Respondents.

No. 45966.

Supreme Court of Minnesota.

July 16, 1976.

Syllabus by the Court

1. Where a bank had actual knowledge of the fraudulent activities of one of its depositors, the bank was under an affirmative duty to disclose this knowledge before it engaged in making a loan which furthered the fraud.

2. While it was error for the trial court to instruct the jury as to the effect of its answers to special verdict interrogatories, this error was, under the facts of this case, not so prejudicial as to require a new trial.

Wurst, Bundlie, Carroll & Crouch and Donald R. Bundlie, Minneapolis, for appellant.

Popham, Haik, Schnobrich, Kaufman & Doty and Bruce D. Willis, Minneapolis, Marvin Grundhoefer, Northfield, for respondents.

Heard before SHERAN, C.J., and OTIS, KELLY, MacLAUGHLIN, and SCOTT, JJ., and considered and decided by the court en banc.

MacLAUGHLIN, Justice.

Appellant, Richfield Bank and Trust Company, commenced this action to recover on a promissory note executed by respondents, Roger E. Sjogren and Anna Mae Sjogren. The respondents admitted execution of the note but affirmatively alleged that the transaction was induced by appellant's fraudulent concealment of material information. A jury returned a special verdict in favor of respondents, and this appeal was taken from the denial of the bank's motion for judgment notwithstanding the verdict or a new trial. We affirm.

In April 1972 the respondents purchased a service route and 10 commercial air purification units from a corporation known as National Pollution Eliminators, Inc. Under the terms of the purchase contract, National Pollution would place the purification units in various business establishments and the respondents would collect rents and service the units. Respondents were satisfied with the results of the transaction and decided to expand the business by purchasing more units. David Morton, president of National Pollution, suggested to the respondents that they purchase 50 additional purification units and that the financing for such a purchase could be arranged through Richfield Bank. Respondents decided to make the purchase and on May 26, 1972, they signed a purchase contract. The contract was contingent upon respondents successfully securing a loan to finance the purchase. Immediately after the contract was signed, the respondents met at Richfield Bank with Michael Thompson, a commercial loan officer of Richfield Bank. Respondents were not depositors of Richfield Bank and had had no prior dealings with the bank. Thompson approved a loan of $44,750 to respondents, knowing that the proceeds would go to National Pollution to be used to purchase the 50 air purification units. Respondents executed a 90-day promissory note and gave Richfield Bank a security interest in some real estate and in the 50 air purification units. The respondents did not inquire into the financial condition of National Pollution, nor did Michael Thompson voluntarily disclose information regarding National Pollution's financial condition.

Respondents subsequently discovered that National Pollution was financially insolvent and unable to deliver the 50 purification units. ¹ Concerned about this development, respondent Roger Sjogren met with Thompson who informed him that the 50 units which respondents had purchased were not available and in fact had not been available at the time of the loan on May 26, 1972.

Taking the evidence most favorable to the respondents, the jury could reasonably have found that on May 26, 1972, the date of the loan, the officers of National Pollution knew that they could not fulfill the obligations in the contract with respondents. Supporting this jury finding was testimony (a) that prior to May 26, 1972, National Pollution was placed on a 'cash only' basis by its supplier of component parts; (b) that, because of this fact, the company had virtually ceased production of the units; (c) that the production force had dwindled to 1 or 2 people; and (d) that there were no more than 10 units in inventory on April 1, 1972.

Equally significant for purposes of this appeal is evidence showing that Michael Thompson, the loan officer of Richfield Bank and the only employee of the bank with whom respondents dealt, (a) was the only bank officer who handled National Pollution's account at the Richfield Bank; (b) was listed by National Pollution as its credit reference to such customers as the respondents; (c) had personally loaned National Pollution $7,000 or $8,000 of his own money; (d) had received certain 'fringe' benefits from National Pollution such as traveling at the company's expense and using a Cadillac automobile furnished by the company; and (e) was an active participant in the affairs and decisions of the company, and, indeed, was described by one of the employees of National Pollution as 'calling all the shots' for National Pollution from February or March 1972 onward, and as being involved in 'just about everything that happened on a day-to-day basis in that company.' Based on this evidence the jury found that Michael Thompson knew of the pertinent financial condition of National Pollution at the time of the Sjogren loan and of the actions, concealment, and representations of the officers of National Pollution in the conduct of their business in relation to the Sjogrens.

1. Since the record discloses that respondents did not ask Thompson, the bank's officer, any questions concerning the financial condition of National Pollution, and since Thompson did not volunteer any information about it, the principal issue on this appeal is whether Thompson's failure to voluntarily disclose such information constituted fraud. It is well established that--

'* * * if a party conceals a fact material to the transaction, and peculiarly within his own knowledge, knowing that the other party acts on the presumption that no such fact exists, it is as much a fraud as if the existence of such fact were expressly denied, or the reverse of it expressly stated.' Thomas v. Murphy, 87 Minn. 358, 361, 91 N.W. 1097, 1098 (1902).

See, also, King v. International Lbr. Co., 156 Minn. 494, 195 N.W. 450 (1923).

Before nondisclosure may constitute fraud, however, there must be a suppression of facts which one party is under a legal or equitable obligation to communicate to the other, and which the other party is entitled to have communicated to him. See, generally, 37 Am.Jur.2d, Fraud and Deceit, § 146. In Klein v. First Edina Nat. Bank, 293 Minn. 418, 421, 196 N.W.2d 619, 622 (1972), this court stated:

'As a general rule, one party to a transaction has no duty to disclose material facts to the other. However, Special circumstances may dictate otherwise. For example:

'(a) One who speaks must say enough to prevent his words from misledading the other party. Newell v. Randall, 32 Minn. 171, 19 N.W. 972 (1884).

'(b) 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. Marsh v. Webber, 13 Minn. 109 (109) Gil. 99 (1868).

'(c) One who stands in a confidential or diduciary relation to the other party to a transaction must disclose material facts. See, e.g., Wells-Dickey Trust Co. v. Lien, 164 Minn. 307, 204 N.W. 950 (1925).' (Emphasis supplied.)

Appellant contends that none of the three 'special circumstances' mentioned in Klein is present in the instant case. Indeed, respondents concede that Thompson made no statements which encouraged them at the time of the loan transaction and respondents do not assert that there was any fiduciary relationship between them and appellant. Respondents do argue, however, that the three 'special circumstances' enumerated in the Klein case are merely illustrative of situations where there is a duty to disclose, and that there are other 'special circumstances' which require disclosure.

The determination of whether the facts of this case fall within a category of 'special circumstances' which would justify imposing on the bank the duty to disclose the financial condition of its depositor, National Pollution, is complicated by the principle that a bank is generally under a...