SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-7628-95T5
UNITED JERSEY BANK and S.H.
MORTGAGE ACQUISITION, L.L.C.,
Plaintiffs-Respondents,
v.
KENNETH R. KENSEY and MICHELLE
KENSEY, husband and wife,
Defendants-Appellants,
and
ANNE W. ALSTER, BANK HAPOALIM
and JEFFERSON BANK,
Defendants.
___________________________________
Argued November 19, 1997 - Decided December 23, 1997
Before Judges Baime, Brochin and Braithwaite.
On appeal from Superior Court of New Jersey,
Chancery Division, Cape May County.
Paul Mainardi argued the cause for appellants
(Brown & Connery, attorneys; Mr. Mainardi and Joseph A.
Zechman, on the brief).
Christine D. Petruzzell argued the cause for
respondent United Jersey Bank (Wilentz, Goldman &
Spitzer, attorneys; Ms. Petruzzell and Jonathan P.
Falk, of counsel and on the brief).
Cory Mitchell Gray argued the cause for respondent
S.H. Mortgage Acquisition (Solomon and Weinberg,
attorneys; Mr. Gray and Deborah A. Silodor, of
counsel and on the brief).
The opinion of the court was delivered by
BAIME, P.J.A.D.
Plaintiff United Jersey Bank (UJB) and its assignee S.H.
Mortgage Acquisition, L.L.C. (S.H. Mortgage) brought this action
to foreclose mortgages on three properties owned by defendants
Kenneth and Michelle Kensey. The genesis of this litigation was
defendants' purchase of several properties from Gerald Katzoff, a
bank customer. Katzoff had suffered severe financial losses and
was attempting to reduce the substantial debt he owed UJB.
Defendants contended that UJB fraudulently induced them to enter
into the loan transaction in order to substitute a healthy debtor
in the place of the financially ailing Katzoff. The principal
question presented below, and now raised here, was whether UJB
had a duty to disclose an internal appraisal which indicated that
the properties were worth substantially less than the selling
price and mortgage amounts, as well as information relating to
Katzoff's precarious financial condition. Although defendants
were highly experienced commercial real estate investors and were
urged by the bank to perform a due diligence investigation of the
subject properties because of the conflicting interests of lender
and borrower, they engaged in no independent inquiry concerning
the value of the properties. The Chancery Division entered
summary judgment against defendants striking their defenses and
dismissing their counterclaims. Defendants appeal. We affirm.
Although this appeal is from a summary judgment, the record is voluminous. The material facts are not in dispute. While Kenneth Kensey is a physician, he is also a highly sophisticated
businessman. Indeed, shortly before the transaction that is at
issue here, Kensey started a company, the Kensey-Nash
Corporation, to develop and manufacture medical devices. The
company ultimately received the financial backing of Baxter
Corporation and Johnson & Johnson, and obtained substantial
licensing agreements with Cordis and American Home Products.
Kensey initially served as the corporation's chief executive
officer in charge of finance, but later became chairman of the
board. In 1995, the company completed a major public stock
offering. Furthermore, the record indicates Kensey had
substantial experience in real estate, investing in residential,
commercial, and agricultural properties. Many of these ventures
were financed by banks. Kensey also owned a real estate company,
several restaurants and a shopping center that he had developed
and leased.
In 1992, defendants purchased a summer home in Stone Harbor
from Katzoff. A real estate broker, Jack Binder, introduced
Kensey to Katzoff. Binder told Kensey that Katzoff was in the
process of liquidating his assets and was selling a "mansion,"
but that the transaction had to be completed "quietly." Binder
directed Kensey to UJB for financing, stressing that Katzoff "was
in trouble with the bank and that the bank would bend over
backwards . . . to help [Katzoff] liquidate the property."
Binder was accurate in his assessment of Katzoff's financial
difficulties. Katzoff was a substantial investor in real estate
and owned numerous properties, including personal residences,
apartment buildings and hotels. Several of these properties were
financed by UJB. Katzoff owed UJB substantial amounts.
Depending on how the collateral was valued, UJB's security ranged
from an excess of $199,568 over Katzoff's net debt to a deficit
of $1,350,432. Katzoff owed other banks approximately
$6,500,000. Before selling his house to the Kenseys, Katzoff had
successfully extricated himself from over $50,000,000 in
contingent liabilities, representing approximately ninety percent
of his defaulted loans. Coleman Donaldson, an account officer
for UJB, was intent on reducing Katzoff's debt further by
encouraging him to liquidate many of his other properties.
UJB was thus willing to finance the entire 1.2 million
dollar purchase price of Katzoff's house. On October 1, 1992,
defendants executed a note in the amount of $800,000 which was to
mature in three years. Defendants had the option to extend the
note an additional two years. The note listed as security a
mortgage on the Stone Harbor residence, which defendants executed
on the same day as the closing. The note was also secured by a
second mortgage on another residence owned by defendants.
Defendants also gave Katzoff a $400,000 second mortgage on the
summer home which was then assigned to UJB.
Katzoff owned other properties in Stone Harbor. These
included two commercial properties and two miniature golf
courses. The golf courses were situated on the rooftops of two
condominium buildings. Resolution Trust Company (RTC) held liens
on each of these properties, and at some point threatened to take
some unspecified action to recover the underlying debts owed by
Katzoff. On December 11, 1992, Donaldson prepared loan offering
documents proposing that UJB lend Katzoff $1,200,000 to satisfy
Katzoff's debt to RTC. Although unclear from the record, it
appears that UJB's objective in financing the loan was to free
the properties from any existing liens so that the properties
could be sold by Katzoff. The proceeds would then be used to
further reduce Katzoff's debt to UJB. The mortgage loan offering
documents indicated that the golf courses generated a net income
of $147,414 before debt service, and were valued in excess of
$1,000,000.
After this transaction, the bank had the golf courses valued
by an independent appraiser pursuant to UJB's internal policy.
The appraisal, which is dated July 27, 1993, estimated the
aggregate value of the golf courses at $600,000. The income
capitalization approach yielded a value of $634,000, using an
11.3" capitalization rate, while the sales comparison approach
yielded a value of $567,400. Donaldson apparently accepted the
appraisal, but questioned whether the appraiser was correct in
deducting "entrepreneurial profit" from net operating income.
At some point, Kensey was contacted to determine whether he
was interested in buying the golf courses. The other two
commercial properties had already been been purchased by other
investors. Donaldson was unable to say who initiated those
discussions. Kensey was unsure whether it was Katzoff or
Donaldson who first suggested that he purchase the golf courses.
In any event, Kensey visited the properties and engaged in
discussions with both Katzoff and Donaldson. Kensey testified
that he wished "to develop a close relationship with [Donaldson]
in order to make other deals." Kensey recounted that he pursued
Donaldson and "asked [him] many times for a list of other
properties that the bank held . . . ." As phrased by Kensey in
his deposition testimony, from the beginning he "tried to develop
[a] relationship with the bank to maybe do some deals . . . on
properties [with which the bank] had trouble . . . ."
Kensey knew that Katzoff's financial condition was
deteriorating. He was aware of the fact that Katzoff had
defaulted on his loans and that UJB had "take[n] back" several of
his properties. Moreover, Kensey distrusted Katzoff because
Katzoff had misrepresented the condition of the Stone Harbor
residence and had taken various fixtures prior to the sale.
In his negotiations concerning the golf courses, Kensey
never asked for any documents. He nevertheless received from
Katzoff or Katzoff's employees the income and expense figures
which listed $40,653 in expenses and net income of $107,014.
Based upon information he had received from an appraiser with
whom he was acquainted, Kensey believed that a "rough" estimate
of a commercial property's value could be derived from
multiplying the property's net income by ten. Kensey engaged in
several discussions with Donaldson relating to the net income
figure that had been given to him by Katzoff. Donaldson
indicated his belief that the properties were "undermanaged" and
perhaps could "do much better." However, Kensey testified that
Donaldson was "very noncommittal," emphasizing that the golf
courses were "cash businesses" and the income figures could not
be "substantiat[ed]." Kensey also discussed the project with a
"financial banker" he knew who questioned whether the golf
courses could generate the income that had been represented by
Katzoff. We digress to note, however, that the independent
appraiser retained by UJB had apparently used the same income
figures as those conveyed to Kensey by Katzoff in arriving at his
estimate of the value of the properties. Moreover, no evidence
was presented indicating that the income figures were inflated.
Kensey never hired an appraiser. Although Kensey knew that
UJB had an appraisal of the properties, he never requested it or
engaged in any discussion pertaining to the subject. According
to Kensey, he assumed that banking laws made it illegal for a
lending institution to lend more than one hundred percent of the
value of the property financed.
The transaction contained two main components. Kensey was
to purchase both golf courses for a purchase price of $1,430,000,
and he was not to infuse "any cash . . . into the deal." It is
clear that Donaldson was a major participant in the negotiations
between Katzoff and Kensey respecting the sale of the golf
courses. It is not at all clear, however, who made the final
determination as to the purchase price, or whether Donaldson
could veto Katzoff's acceptance of any proffered offer. On
December 6, 1993, UJB gave defendants a commitment letter for the
$1,430,000 golf course loan. The loan was to be made on a full
recourse basis, would mature on October 1, 1998, and would accrue
interest according to a base rate that varied periodically by
formula. The Kenseys were to agree to "cross-collateralize" and
"cross-default" the notes and mortgages for the new $1,430,000
golf course loan and the $800,000 Stone Harbor residence loan.
The commitment letter recited Kensey's representation that
he "conducted [his] own thorough `due diligence' . . .
investigation" of the properties. The letter advised Kensey to
obtain separate counsel. In bold-face type, the letter warned
that "THE INTERESTS OF BORROWER AND LENDER ARE OR MAY BE
DIFFERENT AND MAY CONFLICT." Kensey signed the commitment letter
on the day of the closing, December 29, 1993. On that day,
defendants, who were represented by counsel, executed a
$1,430,000 golf course purchase money mortgage, and an agreement
modifying the $800,000 mortgage on the Stone Harbor residence to
include cross-collateral and cross-default provisions.
Defendants received the loan proceeds the next day. Of the
$1,430,000 advanced, defendants used $280,000 to satisfy the
discounted amount of the second mortgage on the Stone Harbor
mansion that had been assigned to UJB. The remaining $1,150,000
was used by defendants to purchase the golf courses.
Following the transaction, UJB retained a different
appraiser who estimated the value of the summer house at
$1,270,000. Another appraiser gave an estimated value of
$350,000 for the golf courses. A sales comparison approach
indicated a value of $400,000 while an income approach indicated
a value of $320,000 using a 15" capitalization rate. The
appraisal noted that the golf courses were assessed for property
tax purposes at $559,700, and that their "pro rata share of the
greater condominium land assessments" was $779,200, for a total
of $1,338,900.
In December 1994, Kensey stopped making payments on the
Stone Harbor home loan. Several months later, UJB sought a rent
receiver for the golf courses based upon defendants' default on
both loans. S.H. Mortgage subsequently purchased both notes and
mortgages.
The Chancery Division granted plaintiffs' motion for summary
judgment, concluding that UJB owed no duty to disclose
information indicating that the golf course properties were worth
less than the selling price and the mortgage amount. In reaching
this conclusion, the court emphasized that there was no fiduciary
relationship between the parties and thus no duty on the part of
the bank to volunteer information that was readily accessible to
Kensey, a sophisticated businessman with broad experience in the
field of real estate investment.
Defendants' claim of fraud rests upon several interrelated strands. They argue UJB was bound to inform them that Donaldson was assisting Katzoff in "working out" his debt at the time they were negotiating financing for the purchase of the golf course properties. They further assert that UJB was obliged to disclose
the appraisal which indicated that the properties were worth
significantly less than the purchase price and the mortgage
amount. Defendants argue that they were fraudulently induced to
enter the transaction by reason of UJB's failure to disclose this
information. These contentions raise novel and far-reaching
issues concerning a bank's relationship with its customers.
Every fraud in its most fundamental conception consists of
"the obtaining of an undue advantage by means of some act or
omission that is unconscientious or a violation of good faith."
Jewish Center of Sussex County v. Whale,
86 N.J. 619, 624 (1981)
(citing 3 J. Pomeroy, A Treatise on Equity Jurisprudence 421 (5th
ed. 1941)). Legal fraud consists of "a material representation
of a presently existing or past fact, made with knowledge of its
falsity and with the intention that the other party rely [on the
misstatement], resulting in reliance by that party to his
detriment." Ibid. (citing Foont-Freedenfeld Corp. v. Electro-Protective Corp.,
126 N.J. Super. 254, 257 (App. Div. 1973),
aff'd,
64 N.J. 197 (1974)). The elements of scienter, i.e.,
knowledge of the falsity and an intention to obtain an advantage
by deceit, "are not essential if [the] plaintiff seeks to prove
that a misrepresentation constituted only equitable fraud." Id.
at 625 (citing Equitable Life Assurance Soc'y of the United
States v. New Horizons, Inc.,
28 N.J. 307, 314 (1958) ("Scienter
is not an essential element of equitable fraud.")); 3 J. Pomeroy,
A Treatise on Equity Jurisprudence at 486-88.
Silence in the face of a duty to disclose may constitute a
fraudulent concealment. See Strawn v. Canuso,
140 N.J. 43, 56
(1995) (quoting Weintraub v. Krobatsch,
64 N.J. 445, 449 (1974)).
The question of whether a duty exists is a matter of law. Carter
Lincoln-Mercury, Inc. v. Emar Group, Inc.,
135 N.J. 182, 194
(1994) (quoting Wang v. Allstate Ins. Co.,
125 N.J. 2, 15
(1991)). The question is one of fairness and policy that
"involves identifying, weighing, and balancing several factors -
the relationship of the parties, the nature of the attendant
risk, the opportunity and ability to exercise care, and the
public interest in the proposed solution." Hopkins v. Fox & Lazo
Realtors,
132 N.J. 426, 439 (1993) (citing Goldberg v. Housing
Auth.,
38 N.J. 578, 583 (1962)).
There are three general classes of transactions in which a
duty to disclose arises. Berman v. Gurwicz,
189 N.J. Super. 89,
93 (Ch. Div. 1981), aff'd,
189 N.J. Super. 49 (App. Div.),
certif. denied,
94 N.J. 549 (1983). The first involves fiduciary
relationships such as principal and agent or attorney and client.
Ibid. The second embraces situations in which "`either one or
each of the parties, in entering . . . [the] transaction,
expressly reposes . . . a trust and confidence in the other . . .
or [because of the] circumstances of the case, the nature of
their dealings, or their position towards each other, such a
trust and confidence . . . is necessarily implied.'" Id. at 93-94 (quoting 3 J. Pomeroy, A Treatise on Equity Jurisprudence at
552-54). The third includes contracts or transactions which in
their essential nature, are "intrinsically fiduciary," and
"necessarily call[] for perfect good faith and full disclosure,
without regard to any particular intention of the parties." Id.
at 94 (quoting 3 J. Pomeroy, A Treatise on Equity Jurisprudence
at 552-54).
Within this analytical framework, we have said that there is
no presumed fiduciary relationship between a bank and its
customer. Globe Motor Car Co. v. First Fidelity Bank, N.A.,
273 N.J. Super. 388, 393 (Law Div. 1993), aff'd,
291 N.J. Super. 428
(App. Div.), certif. denied,
147 N.J. 263 (1996). See also Klemm
v. Labor Co-Operative Nat'l Bank of Paterson,
117 N.J.L. 284, 287
(E. & A. 1936). The virtually unanimous rule is that creditor-debtor relationships rarely give rise to a fiduciary duty. See
Paradise Hotel Corp. v. Bank of Nova Scotia,
842 F.2d 47, 53 (3d
Cir. 1988); Aaron Ferer & Sons, Ltd. v. Chase Manhattan Bank,
N.A.,
731 F.2d 112, 122 (2d Cir. 1984); Weinberger v. Kendrick,
698 F.2d 61, 78-79 (2d Cir. 1982), cert. denied,
464 U.S. 818,
104 S.Ct. 77,
78 L.Ed.2d 89 (1983); Barnett Bank of West Florida
v. Hooper,
498 So.2d 923, 925 (Fla. 1986); see also Peterson v.
Idaho First Nat'l Bank,
83 Idaho 578,
367 P.2d 284 (1961);
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 (1972); Frame v. Boatmen's Bank of Concord Village,
824 S.W.2d 491 (Mo. Ct. App. 1992); Pigg v. Robertson,
549 S.W.2d 597 (Mo. Ct. App. 1977); Solicitor for the Affairs of His
Majesty's Treasury v. Bankers Trust Co.,
304 N.Y. 282,
107 N.E.2d 448 (1952); Thigpen v. Locke,
363 S.W.2d 247 (Tex. 1962); Tokarz
v. Frontier Fed. Sav. & Loan Ass'n,
33 Wash. App. 456,
656 P.2d 1089 (Wash. Ct. App. 1982); Cecil J. Hunt, II, The Price of
Trust: An Examination of Fiduciary Duty and the Lender-Borrower
Relationship, 29 Wake Forest L. Rev. 719 (1994); Edward L.
Raymond, Annotation, Bank Liability Under State Law for
Disclosing Financial Information Concerning Depositor or
Customer,
81 A.L.R.4th 377 (1990); Annotation, 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 (1976 & Supp. 1996); cf. National Westminster Bank of N.J.
v. Lomker,
277 N.J. Super. 491, 495-96 (App. Div. 1994), certif.
denied,
142 N.J. 454 (1995); Roth v. First Nat'l State Bank of
N.J.,
169 N.J. Super. 280, 284-85 (App. Div.), certif. denied,
81 N.J. 338 (1979). "Fiduciary relationships implied in law are
premised upon the specific factual situation surrounding the
transaction and the relationship of the parties." Capital Bank
v. MVB, Inc.,
644 So.2d 515, 518 (Fla. Dist. Ct. App. 1994)
(citing Denison State Bank v. Madeira,
230 Kan. 684,
640 P.2d 1235 (1982)), review denied,
659 So.2d 1086 (Fla. 1995).
As aptly noted by the Court of Appeals for the Third
Circuit, it "`would be anomalous to require a lender to act as a
fiduciary for interests on the opposite side of the negotiating
table,'" because their respective positions are essentially
adversarial. Paradise Hotel Corp. v. Bank of Nova Scotia, 842
F.
2d at 53 (quoting Weinberger v. Kendrick, 698 F.
2d at 79). Cf.
Gross v. Grimaldi,
64 N.J. Super. 457, 462 (App. Div. 1960),
certif. denied,
34 N.J. 469 (1961). There is, therefore, a
general presumption that the "relationship between lenders and
borrowers is conducted at arms-length, and the parties are each
acting in their own interest." Temp-Way Corp. v. Continental
Bank,
139 B.R. 299, 318 (E.D. Pa.) (citing Frowen v. Blank,
493 Pa. 137, ___,
425 A.2d 412, 416 (1981)), aff'd,
981 F.2d 1248 (3d
Cir. 1992). We see no sound basis to depart from these
principles here. Succinctly stated, this case involves neither a
"fiduciary relation[ship]" nor a transaction that is
"intrinsically fiduciary." Berman v. Gurwicz, 189 N.J. Super. at
94 (quoting 3 J. Pomeroy, A Treatise on Equity Jurisprudence at
552-54).
We thus focus upon the second category of cases to which we
referred previously - those situations in which one of the
parties "expressly reposes a trust or confidence in the other" or
because of the circumstances, "such a trust or confidence is
. . . necessarily implied." Id. at 93-94 (quoting 3 J. Pomeroy,
A Treatise on Equity Jurisprudence at 552-54). See, e.g., Dale
v. Jennings,
90 Fla. 234, 244,
107 So. 175, 179 (1925); Capital
Bank v. MVB, Inc., 644 So.
2d at 518. We recognize the growing
trend to impose a duty to disclose in many circumstances in which
silence historically sufficed. See Chiarella v. United States,
445 U.S. 222, 248,
100 S.Ct. 1108, 1124,
63 L.Ed.2d 348, 369
(1990) (Blackmun, J., dissenting); Capital Bank v. MVB, Inc.,
644 So.2d 515; First Nat'l Bank in Lenox v. Brown,
181 N.W.2d 178
(Iowa 1970); Trans-Global Alloy Ltd. v. First Nat'l Bank of
Jefferson Parish,
583 So.2d 443 (La. 1991); Tokarz v. Frontier
Fed. Sav. & Loan Ass'n,
33 Wash. App. 456,
656 P.2d 1089 (1982).
This trend is reflected in the Restatement (Second) of Torts §
551 (1977 & Supp. 1997). Subsection (1) sets out the traditional
rule requiring disclosure of a fact which the individual knows
may justifiably induce another to act, or refrain from acting, in
a business transaction only if the individual is under a duty to
disclose the matter. Subsection (2) sets out the conditions
under which an individual has a duty to disclose certain
information. Subsection 2(e) imposes a duty upon a party to
disclose to another "facts basic to the transaction, if he knows
that the other is about to enter into it under a mistake . . .
and that the other, because of the relationship between them, the
customs of the trade or other objective circumstances, would
reasonably expect a disclosure of those facts." Comment "l" to
§ 551, subsection (2), recognizes the difficulty in determining
or identifying the factors that would give rise to an expectation
of disclosure. The comment observes that the situation
envisioned is one in which the advantage taken of the plaintiff's
ignorance is "so shocking to the ethical sense of the community,
and is so extreme and unfair, as to amount to a form of swindling
. . . ." Our Supreme Court has adopted that interpretation of
the Restatement. Strawn v. Canuso, 140 N.J. at 60-61.
The position adopted in the Restatement is reflected in a
lengthening line of decisions holding banks and other lending
institutions liable to their customers for gross acts of
misconduct and deceit, or, where "special circumstances `may'
exist where `the bank knows or has reason to know that the
customer is placing his trust and confidence in the bank and
relying on the bank [so] to counsel and inform him.'" Parker v.
Columbia Bank,
91 Md. App. 346, 369,
604 A.2d 521, 532-33 (Md.
Ct. App.) (quoting Klein v. First Edina Nat'l Bank,
293 Minn 418, 422,
196 N.W.2d 619, 623 (1972)). Although these decisions
are difficult to categorize, the common thread running through
them is that the lender encouraged the borrower to repose special
trust or confidence in its advice, thereby inducing the
borrower's reliance. See Cecil J. Hunt, II, The Price of Trust:
An Examination of Fiduciary Duty and the Lender-Borrower
Relationship, 29 Wake Forest L. Rev. at 739-78. Three examples
suffice.
In Barnett Bank of West Florida v. Hooper,
498 So.2d 923
(Fla. 1986), the plaintiff, a customer of the bank, was told by
the bank's loan officer, that Hosner Investments, another of the
bank's customers, was financially sound and had passed Internal
Revenue Service scrutiny. Id. at 924. The loan officer
encouraged the plaintiff to borrow $90,000 from the bank and
place it with Hosner as a tax shelter investment. At the time of
the negotiations, the bank knew that Hosner was involved in a
"check kiting" scheme and that its checking account was
substantially overdrawn. When Hosner deposited the plaintiff's
check representing the loan proceeds, the bank applied the amount
to "zero out the Hosner account." Ibid. While "reluctant to
formulate a rule of disclosure . . . at tension with the general
[principle of confidentiality]," the Supreme Court of Florida
found the existence of "special circumstances" that required the
bank to apprise the plaintiff of Hosner's perfidious scheme. Id.
at 925. The Court reasoned that "where a bank having actual
knowledge of fraud being perpetrated upon a customer, enters into
a transaction with that customer in furtherance of the fraud," it
could be held liable for the resulting loss. Ibid.
In another Florida case, Capital Bank v. MVB, Inc.,
644 So.2d 515, Capital Bank, through its loan officer, engineered
MVB's purchase of manufacturing equipment from Tellason Products,
Inc., one of the bank's customers on the verge of bankruptcy.
The bank loaned MVB the amount necessary to make the purchase.
Id. at 519. The manufacturing equipment purchased by MVB turned
out to be defective, ultimately causing substantial losses to
MVB. Id. at 518. Thereafter, MVB sued the bank, alleging fraud
and breach of fiduciary duty. The court found that Capital Bank
owed a fiduciary duty to MVB. It based its holding on the fact
that the bank continuously promised and pressured MVB to enter
into transactions with Tellason. Ibid. At one point, a bank
loan officer coaxed MVB to "[d]o it for us . . . . [Y]ou are
part of [the] Capital Bank family. You help the bank, we are
going to help you." Id. at 519. To convince MVB to continue to
purchase Tellason's equipment, the loan officer showed MVB a
"ballpark" appraisal, an appraisal that was factually inaccurate
and completely inflated Tellason's net worth. Ibid. In finding
that a fiduciary relationship existed, the court stated that
"special circumstances transformed this lender/borrower
relationship into a fiduciary one." Id. at 520 (citing Tokarz v.
Frontier Fed. Sav. & Loan Ass'n, 656 P.
2d at 1089). It found
that the loan officer's actions advising, reassuring and urging
MVB to purchase Tellason's assets expressly invited MVB's
reliance on the bank as its "financial advisor." Ibid.
In Central States Stamping Co. v. Terminal Equipment Co.,
Inc.,
727 F.2d 1405 (6th Cir. 1984), the plaintiff was engaged in
negotiations to purchase machinery from a customer of the bank.
Upon inquiry, the bank assured the plaintiff that, although the
customer was somewhat undercapitalized, it had "maintain[ed]" its
financial commitments. Id. at 1407. In fact, the customer was
heavily indebted to the bank, which had assumed a supervisory
role over its day-to-day management. Immediately after the
plaintiff made a substantial payment to the customer, the
equipment company went out of business. The payment was used by
the bank to reduce the defunct customer's debt. Ibid. Citing
the Restatement, the Court of Appeals for the Sixth Circuit held
that the bank was guilty of fraudulent concealment. Id. at 1408.
The court reasoned that once the bank undertook to advise the
plaintiff with respect to the bank customer's financial condition
it "had a duty to disclose information in [its] possession which
would reasonably be considered material to the decision [it] knew
[the plaintiff] was in the process of making." Id. at 1409.
These cases all involved egregious breaches of the lender's
duty of good faith and fair dealing. In each of these cases, the bank actively encouraged the plaintiff to rely upon its advice and concealed its self-interest in promoting the transaction involved. In blunt terms, the banks acted no better than common swindlers. In less egregious circumstances, however, the courts have found no duty on the part of lenders to disclose information they may have concerning the financial viability of the transactions the borrowers were about to enter. See, e.g., Chrysler Credit Corp. v. First Nat'l Bank & Trust Co. of Washington, 746 F.2d 200, 207 (3d Cir. 1984); Cogan v. Triad Am. Energy, 944 F.Supp. 1325, 1329-30 (S.D. Tex. 1996); Folsom v. Continental Ill. Nat'l Bank & Trust Co. of Chicago, 633 F.Supp. 178, 186 (N.D. Ill. 1986) (citing Restatement (Second) of Torts, § 551); Kesselman v. National Bank of Arizona, 188 Ariz. 419, ___, 937 P.2d 341, 345 (Ariz. Ct. App. 1996); Frazier v. Southwest Sav. & Loan Ass'n, 134 Ariz. 12, 18, 653 P.2d 362, 368 (Ariz. Ct. App. 1982); Moore v. Bank of Fitzgerald, 225 Ga. App. 122, 125-26, 483 S.E.2d 135, 139 (Ga. Ct. App. 1997); Northern Trust Co. v. VIII South Mich. Assocs., 276 Ill. App.3d 355, 363-64, 657 N.E.2d 1095, 1102 (Ill. App. Ct. 1995); Commercial Nat'l Bank in Shreveport v. Audubon Meadow Partnership, 566 So.2d 1136, 1139 (La. Ct. App. 1990); First NH Banks Granite State v. Scarborough, 615 A.2d 248 (Me. 1992); Boubelik v. Liberty State Bank, 553 N.W.2d 393, 397-98 (Minn. 1996); Klein v. First Edina Nat'l Bank, 293 Minn. 418, 421, 196 N.W.2d 619, 622 (1972); Blon v. Bank One, Akron, 35 Ohio St.3d 98, 101-02, 519 N.E.2d 363,
367-68 (1988); Zammitt v. Society Nat'l Bank,
115 Ohio App.3d 543, 555-57,
685 N.E.2d 850, 858-60 (Ohio Ct. App. 1996) (citing
Restatement (Second) of Torts, § 551); United States Nat'l Bank
of Oregon v. Fought,
291 Or. 201, 219-21,
630 P.2d 337, 348-49
(1981); Burwell v. South Carolina Nat'l Bank,
288 S.C. 34, 41,
340 S.E.2d 786, 790 (1986); Tokarz v. Frontier Fed. Sav. & Loan
Ass'n,
33 Wash. App. 456, 459-60,
656 P.2d 1089, 1092-93 (1982).
We find no special circumstances in this case that required
the bank to disclose: (1) Donaldson was assisting Katzoff in
"working out" his substantial debt, or (2) the bank had an
appraisal indicating that the golf course properties were worth
less than the purchase price and the mortgage amount. The fact
that Donaldson was attempting to reduce Katzoff's debt was
obvious and well known to Kensey. Kensey had been told by Binder
that Katzoff had significant financial problems and was
attempting to reduce his debt by liquidating his assets. Binder
steered Kensey to UJB, accurately predicting that the bank would
be strongly inclined to provide financing for the purchase of
Katzoff's house and other assets. UJB's interest in
accomplishing that goal was apparent on its face. The bank owed
no duty to disclose Katzoff's precarious financial condition. To
the contrary, our decisions and those of other jurisdictions
recognize that a bank owes an obligation of confidentiality in
respect of the financial integrity of a depositor or customer.
See National Westminster Bank of N.J. v. Lomker,
277 N.J. Super. 491, 495-96 (App. Div. 1994), certif. denied,
142 N.J. 454
(1995); Roth v. First Nat'l State Bank of N.J.,
169 N.J. Super. 280, 284 (App. Div.), certif. denied,
81 N.J. 338 (1979); see
also Milohnich v. First Nat'l Bank of Miami Springs,
224 So.2d 759 (Fla. Dist. Ct. App. 1969); Tokarz v. Frontier Fed. Sav. &
Loan Ass'n, 33 Wash. App. at 459, 656 P.
2d at 1092; State v.
McCray,
15 Wash. App. 810,
551 P.2d 1376 (1976); Annotation,
Bank's Duty to Customer or Depositor Not to Disclose Information
As to His Financial Condition,
92 A.L.R.2d 900 (1963).
We also conclude that UJB owed no duty to supply Kensey with
its internal appraisal of the golf properties. The law "imposes
no duty on banks to disclose to the borrower the manner in which
the lender internally analyzes and underwrites a loan." Northern
Trust Co. v. VIII South Mich. Assocs.,
276 Ill. App.3d 355, 364,
657 N.E.2d 1095, 1102 (Ill. App. Ct. 1995). It has been said,
albeit in a related context, that a financial institution, acting
within its conventional role as a lender of money, owes no duty
of care to the borrower when preparing an appraisal of the
borrower's collateral. Nymark v. Heart Fed. Sav. & Loan Ass'n,
231 Cal. App.3d 1089, 1096-97,
283 Cal. Rptr. 53, 56-57 (Cal. Ct.
App. 1991).
While we have found no reported New Jersey opinion dealing
with the precise issue presented, the Texas Court of Appeals
recently sustained a summary judgment on facts similar to those
presented here. In Berry v. First National Bank of Olney,
894 S.W.2d 558 (Tex. App. 1995), the Berrys contacted the bank
seeking a loan for the purchase of motel property. The bank had
a mortgage on the property and desired that it be sold to a
financially healthy party. In response to the Berrys' inquiries,
the bank's loan officer told them that the purchase price was "a
good deal." Id. at 560. At the time this statement was made,
the bank had in its file an appraisal indicating that the
property was worth substantially less than the purchase price.
Ibid. Following the sale of the property, the Berrys brought
suit to rescind the mortgage, claiming that the bank had a duty
to disclose the appraisal. The lower court granted summary
judgment, and the Court of Appeals affirmed. In its decision,
the court found no special relationship between the Berrys and
the bank that would require disclosure of the internal appraisal.
Id. at 560.
We, of course, recognize that Berry, although factually
similar, is not directly on point. However, the essential
principle we derive from that decision is that a bank generally
owes no duty to disclose an internal appraisal to a prospective
borrower. Here, for example, the appraisal was done for UJB's
benefit, not for the benefit of the borrower. It is axiomatic
that estimating the value of commercial property is a difficult
task, a task which is dependent upon numerous factors. Where, as
here, the underlying information is readily accessible to the
borrower, we perceive no sound basis to impose on the bank the
duty to investigate the value of the property and supply that
information to the borrower. Viewing the facts in a light most
favorable to defendants, we cannot fairly say that UJB "[knew] or
ha[d] reason to know that [Kensey was] placing his trust and
confidence in [UJB] to counsel and inform." Parker v. Columbia
Bank, 91 Md. App. at 369, 604 A.
2d at 532-33.
Defendants contend that UJB violated its internal policy on
setting loan to value ratios, as well as federal supervisory
regulations on the subject. They assert that UJB owed the duty
to apprise them of this violation. Our examination of the bank's
loan policy manual does not support defendants' claim.See footnote 1 The
manual states that the ratio of loan value to market value for
commercial mortgages "should be" eighty percent, which was lower
than the eighty-five percent supervisory limit imposed by federal
regulations. However, the manual states that the ratio is
"necessarily a guideline and [is] flexible." The federal
guidelines are also not written in stone. The guidelines
specifically state that "provision should be made for the
consideration of loan requests from creditworthy borrowers whose
credit needs do not fit within the institution's general lending
policy." 12 C.F.R. Pt. 365, App. A (1997). The guidelines note
that "[a]n institution may provide for prudently underwritten
exceptions to its lending policies, including loan to value
limits." Ibid. We add that both UJB's internal lending policy
and the federal guidelines provide for the aggregation of cross-collateralized property. Because the mortgages cover both the
Stone Harbor residence and the golf courses, it is at least
arguable that there was no deviation from UJB's policy and the
guidelines.See footnote 2 This is so because the value of the Stone Harbor
residence, according to a later appraisal, far exceeded the
$800,000 mortgage that was initially placed on the property. We
need not dwell on this point. As we noted earlier, UJB was under
no duty to disclose the manner in which it internally analyzed
and underwrote the loan. Northern Trust Co. v. VIII South Mich.
Assocs., 276 Ill. App.
3d at 364, 657 N.E.
2d at 1102.
We discern no basis to impose liability on UJB. To be sure,
banks are not popular institutions. Only bankers and bank
robbers love banks. But, we perceive no sound reason to impose
upon a bank the responsibility to supply a potential borrower
with its estimate of the value of the subject property, at least
where, as here, the borrower has the ability to make that
determination. The principal factors shaping the duty to
disclose "have been the difference in bargaining power" between
the parties "and the difference in access to information."
Strawn v. Canuso, 140 N.J. at 59. Neither factor is present in
this case. Defendants were not neophytes to real estate
transactions. They saw advantage and profit in Katzoff's failing
financial condition. The Kenseys gambled and lost. The loss
should remain where lack of success in the marketplace has put
it.
We briefly address defendants' remaining claims. They assert that UJB should be equitably estopped from pursuing foreclosure because the bank was guilty of "unclean hands." Defendants also contend that the mortgages should not be enforced because there was a failure of consideration, and because the underlying transaction was unconscionable and violated public policy. These arguments do not require extended discussion. R. 2:11-3(e)(1)(E). However defendants' claims are phrased, they all rest upon the underlying thesis that UJB violated its duty of disclosure. We find no breach of that duty, and thus the result is the same regardless of how defendants' arguments are couched.
Defendants contend that the Law Division erred in denying their motion to amend the complaint to include a claim under the Consumer Fraud Act. We find no abuse of discretion. Of course, we recognize that motions for leave to amend should be liberally granted. G & W, Inc. v. East Rutherford Bor., 280 N.J. Super. 507, 516-17 (App. Div. 1995); City Check Cashing, Inc. v. National State Bank, 244 N.J. Super. 304, 308 (App. Div.), certif. denied, 122 N.J. 389 (1990); Brower v. Gonnella, 222 N.J. Super. 75, 80-81 (App. Div. 1987). Leave to amend should be freely given even if the ultimate merits of the amendment are uncertain. G & W, Inc. v. East Rutherford Bor., 280 N.J. Super. at 516; Pressler, Current N.J. Court Rules, comment on R. 4:9-1 (1997). Here, however, defendants' motion was untimely, and the proffered claim under the Consumer Fraud Act was wholly dependent upon whether UJB violated a duty of disclosure. See Strawn v. Canuso, 140 N.J. at 61. Although "an omission of a material fact that violates a specific regulation promulgated under the Act can be sufficiently deceptive to invoke the Act's sanctions without proof of intent," Chattin v. Cape May Greene, Inc., 124 N.J. 520, 525 (1991) (Stein, J., concurring), the record is barren of any evidence supporting such a claim. We thus sustain the Law Division's denial of defendants' motion.
Defendants' final argument is that the Law Division erred by denying their motion for further discovery from S.H. Mortgage. The discovery requested, however, had no bearing on the central issue presented, i.e., whether UJB breached a duty of disclosure.
Accordingly, the summary judgment is affirmed. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520 (1995).
Footnote: 1Although not cited by the parties, we note for the sake of completeness that New Jersey has adopted substantially similar guidelines respecting loan to market value ratios. See N.J.S.A. 17:9A-65D; N.J.A.C. 3:10-1.1 to -4.1. We are satisfied that UJB's policy manual fully complies with the regulations. Footnote: 2New Jersey guidelines also allow banks to exceed the eighty-percent limit through cross-collateralization. The regulations provide that banks are "authorized to make mortgage loans in excess of the [80%] ratio between apparaised value and amount of a loan . . . provided that the amount of such excess is secured by other collateral having a value . . . at least equal to the amount of the excess." N.J.A.C. 3:10-3.1.