Tokarz v. Frontier Federal Sav. and Loan Ass'n
| Decision Date | 23 December 1982 |
| Docket Number | No. 4793-III-8,4793-III-8 |
| Parties | Richard D. TOKARZ and Judy L. Tokarz, husband and wife, Appellants, v. FRONTIER FEDERAL SAVINGS AND LOAN ASSOCIATION, a Washington savings and loan association; and Ronald L. Hue and Jane Doe Hue, husband and wife, Respondents. |
| Court | Washington Court of Appeals |
Rembert Ryals, Critchlow & Williams, Richland, for appellants.
James K. Hayner, Minnick & Hayner, Walla Walla, for respondents.
Richard and Judy Tokarz (Tokarz) appeal from a summary judgment dismissing their suit against the defendant bank for breach of fiduciary duty and warranty fraud, and violation of the Consumer Protection Act.
On April 23, 1977, Tokarz contracted with John Post, a builder and contractor, to have him construct a home on plaintiffs' property. In July 1977, Tokarz obtained financing from defendant Frontier Federal Savings and Loan (Frontier) whereby Frontier agreed to lend $66,400 1 to Tokarz, secured by a deed of trust.
Previously, Frontier had made loans for five homes built by Post.
One month later, in August 1977, a routine credit report by Frontier revealed five liens on homes being constructed by Post. Frontier decided in December 1977 to discontinue lending money to Post because of the liens "and the evident problems that had arisen". Frontier made advances on the Tokarz loan between October 19, 1977, and November 15, 1977. Eventually, due to delays and dissatisfaction with the work, Tokarz ordered Post off the job and work ceased March 14, 1978. 2
Tokarz sued Frontier, alleging it knew or should have known of Post's financial problems, his inability to perform other contracts in which Frontier was the lender, his incurring of liens which favored suppliers and subcontractors and his delay in progress or completion. Tokarz further alleges that Frontier's failure to disclose this material information resulted in an additional cost of completion of $26,000, plus the expense of defending lien claim foreclosure actions against his property. The trial court granted Frontier's motion for summary judgment.
Tokarz' first theory of recovery is breach of fiduciary duty. As a general rule, the relationship between a bank and a depositor or customer does not ordinarily impose a fiduciary duty of disclosure upon the bank. They deal at arm's length. Pigg v. Robertson, 549 S.W.2d 597, 600 (Mo.Ct.App.1977); Richfield Bank & Trust Co. v. Sjogren, 309 Minn. 362, 244 N.W.2d 648 (1976); Klein v. First Edina Nat'l Bank, 293 Minn. 418, 196 N.W.2d 619, 70 A.L.R.3d 1337, 1342 (1972); Annot., Existence of Fiduciary Relationship between Bank and Depositor or Customer so as to Impose Special Duty of Disclosure upon Bank, 70 A.L.R.3d 1344, 1347 (1976). However, "special circumstances" may dictate otherwise: one who speaks must say enough to prevent his words from misleading the other party; 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; and one who stands in a confidential or fiduciary relation to the other party to a transaction must disclose material facts. Klein v. First Edina Nat'l Bank, supra. Present-day commercial transactions are not, as in past generations, primarily for cash; rather, modern banking practices involve a highly complicated structure of credit and other complexities which often thrust a bank into the role of an adviser, thereby creating a relationship of trust and confidence which may result in a fiduciary duty upon the bank to disclose facts when dealing with the customer. Stewart v. Phoenix Nat'l Bank, 49 Ariz. 34, 64 P.2d 101, 106 (1937). See also Hutson v. Wenatchee Fed. Sav. & Loan Ass'n, 22 Wash.App. 91, 588 P.2d 1192 (1978).
The determination of this case is further complicated by the general rule that a bank is under a duty not to disclose the financial condition of its customers. Milohnich v. First Nat'l Bank of Miami Springs, 224 So.2d 759 (Fla.Dist.Ct.App.1969); Peterson v. Idaho First Nat'l Bank, 83 Idaho 578, 367 P.2d 284, 92 A.L.R.2d 891 (1961); Richfield Bank & Trust Co. v. Sjogren, supra. See also State v. McCray, 15 Wash.App. 810, 817, 551 P.2d 1376 (1976), citing Annot., Bank's Duty to Customer or Depositor not to Disclose Information as to his Financial Condition, 92 A.L.R.2d 900 (1963). Post was a borrowing customer of Frontier. Frontier contends it therefore had a legal duty not to disclose financial information about Mr. Post to Tokarz by virtue of the Fair Credit Reporting Act, 15 U.S.C. §§ 1681-1681t, and the Financial Privacy Act, 12 U.S.C. §§ 3401-22. The federal legislation is inapplicable since the former act applies only to "consumer reporting agencies" and Frontier does not fit within the definition and the latter applies only to access by a "government authority", and neither party is a government authority. Thus, we must weigh the bank's duty not to disclose information about a customer against the duty to disclose which may arise under special circumstances.
Several Washington cases have discussed the duty to disclose. In Hutson, plaintiff borrower sued defendant savings and loan association for breach of implied contract and negligence based on the defendant's failure to procure credit life insurance on her deceased husband to protect their loan. The issue was whether a savings and loan association had a duty to define "mortgage insurance". The court stated that a savings and loan association may be a quasi-fiduciary in its relationship with a borrower where a borrower with less knowledge, experience and judgment relies upon the association's superior business acumen and experience and the association knew the borrower was so relying. In reversing a judgment for the bank, the court held:
While the lender's duty is not that of a fiduciary, we hold that, under the circumstances of this case, it was a jury question whether the lender had a duty to define any ambiguous or specialized terms which might mislead unknowledgeable and uncounseled customers, members of the lay public who rely on the lender's advice. The relationship between such parties involves more trust and confidence than is true of ordinary arm's length dealing, even though the lender legitimately profits from the transaction.
(Italics ours.) Hutson, 22 Wash.App. at 105, 588 P.2d 1192. Hutson is limited to its facts. There, the savings and loan association provided its customers with the "extra service" of arranging credit life insurance. It gave advice and the plaintiff rightfully relied on it; therefore, the association may have had a duty to more fully disclose the nature of the insurance plaintiff was purchasing. It was for the jury to decide what statements plaintiff made and whether they were misleading. Hutson, at 104, 588 P.2d 1192.
Similarly, in Burien Motors, Inc. v. Balch, 9 Wash.App. 573, 513 P.2d 582 (1973), which involved a real estate broker's duty to disclose certain facts to his client, the court stated at pages 576-77, 513 P.2d 582:
An independent contractor, such as a bank, attorney, business advisor, or even a broker, conducts an independent business. That fact does not mean that he may not come under a duty to disclose material facts when he assumes a relationship of trust and confidence to another. Such persons are treated as falling within the category of agents. Restatement (Second) of Agency § 14 N, at 80 (1958).
(Italics ours.) Thus, the court affirmed the trial court's rescission of a lease on the ground the real estate broker violated a duty to disclose or at least inform plaintiff as to his lack of knowledge of the zoning status concerning which he had given advice and prepared legal documents.
Here, it must be determined whether there was a special relationship between the plaintiff borrower and defendant bank such as to create a duty to disclose to Tokarz the financial instability of the builder/contractor. No Washington case has addressed this precise issue. Other jurisdictions have considered similar issues, particularly the duty of a lender to exercise reasonable care to detect construction defects. See Annot., Financing Agency's Liability to Purchaser of New Home or Structure for Consequences of Construction Defects, 39 A.L.R.3d 247 (1971).
Close to the instant case is Mortgage Assocs., Inc. v. Monona Shores, Inc., 47 Wis.2d 171, 177 N.W.2d 340 (1970), where lien contractors sought priority in a mortgage foreclosure action brought by plaintiff mortgagee. The court rejected the lien claimant's argument that the mortgagee owed a duty to disclose that the loan was in default, stating at 349-50:
In the ordinary case of a first mortgage and subcontracts, there exists no duty on the part of the mortgagee to disclose pending or threatening defaults to contractors.
... we do not believe Associates had a duty to insure the financial stability of the venture to the subcontractors. Although one must wonder how an experienced lender of money could loan money on the Monona project, there is no evidence Associates was negligent in making this loan or responsible for the collapse of the project. Public policy does not command that financial institutions must insure construction projects.
We find none of the special circumstances which may impose a fiduciary duty. Cf. Hutson v. Wenatchee Fed. Sav. & Loan Ass'n, supra. There is no allegation or evidence that Frontier (1) took on any extra services on behalf of Tokarz other than furnishing the money for construction of a home; (2) received any greater economic benefit from the transaction other than the normal mortgage; (3) exercised extensive control over the construction; or (4) was asked by Tokarz if there were any lien actions pending. In fact, section 2, paragraphs 2 and 7 of the contractual agreement 3 between the parties specifically limited Frontier's participation and liability. The parties did...
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Table of Cases
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