Banker Liable for Nondisclosure and Misrepresentation

December 7, 2017
Kristine A. Tidgren

The Iowa Court of Appeals recently affirmed a judgment in favor of a borrower, against his banker, for claims of fraudulent misrepresentation and nondisclosure.

The testimony of three players—the borrower, the banker, and a financially struggling customer—painted three wholly different pictures. In the end, however, a jury believed the borrower, finding that the banker and the financially struggling customer--once a friend of the borrower--had worked together to defraud the borrower. In a December 6, 2017, opinion, the court of appeals agreed that substantial evidence supported the verdict.

The complicated facts are spelled out in detail in the court opinion. In summary, a long-time bank customer (Rohner) ran an HVAC business and struggled to hold onto the 52-acres that remained of a once-larger family farm following several bankruptcies.  Rohner worked with his banker to complete a voluntary foreclosure after convincing a friend (DeShaw) to purchase Rohner’s farm with financing from the bank, secured by a mortgage on DeShaw’s debt-free house.  When the farm debt remained unpaid (even after DeShaw sold the farm) and the bank threatened foreclosure of DeShaw’s house, DeShaw initiated his legal action.

DeShaw testified that he initially delivered the abstract for his debt-free home to the bank because he thought he was buying into Rohner’s HVAC business for whom he had worked as an unpaid intern. He testified that he later agreed to sign loan documents, which he did not read, because he believed he was signing a “temporary three-month deal.” This deal, he explained, would allow the bank to foreclose on Rohner’s farm, transfer the farm to DeShaw, Rohner would make payments on the loan, take bankruptcy to discharge the judgment liens, and have the property transferred back to Rohner.

In fact, DeShaw obtained $153,000 in loans after Rohner discharged around $120,000 in debt in the voluntary foreclosure. Rohner paid the monthly amount due under DeShaw’s loans for several months, but before two years was up, the loans went into default. DeShaw sold the farm for $150,000, but was left with a debt of $30,000. The bank sent DeShaw a default notice on the loan, and DeShaw sued Rohner, the bank, and the banker for fraudulent misrepresentation and the bank and the banker for fraudulent nondisclosure. The bank filed a compulsory counterclaim to foreclose against DeShaw’s house. The court dismissed Rohner from the action based upon his bankruptcy discharge.

The jury returned a verdict in DeShaw’s favor, finding that the bank was not entitled to foreclose on the loan. The jury found that DeShaw’s failure to make payments on the note was excused because it was procured by fraudulent misrepresentation and nondisclosure. On appeal by the bank and the banker, the court of appeals affirmed.

The court found that substantial evidence supported the claim of fraudulent misrepresentation:

  1. Rohner made representations to DeShaw that the bank would foreclose on Rohner’s farm, transfer the farm to DeShaw, Rohner would make payments on the loan, take bankruptcy to discharge the judgments, and have the property transferred back to Rohner.
  2. The banker and the bank aided and abetted Rohner.
  3. The representation was false at the time it was made.
  4. The representation was material.
  5. Rohner knew the representation was false when he made it.
  6. Rohner intended to deceive DeShaw.
  7. DeShaw acted in reliance on the truth of the representation and was justified in relying on the representation.
  8. The representation was a proximate cause of DeShaw’s damages.

In support of its ruling, the court pointed to DeShaw’s testimony that Rohner “had discussed” the plan with “[the banker], and they came up with the idea.” The court also cited evidence that the banker intentionally withheld notices from DeShaw that would have informed him that Rohner had not followed through on his promises.

Likewise, the court found that substantial evidence supported the jury’s finding in favor of DeShaw on his fraudulent nondisclosure claim:

  1. Special circumstances existed which gave rise to a duty of disclosure between DeShaw and the banker on behalf of the bank.
  2. While such relationship existed, the banker knew DeShaw would be signing a mortgage on his homestead.
  3. While such relationship existed, the banker concealed or failed to disclose that DeShaw would be signing a mortgage on his homestead.
  4. The undisclosed information was material to the transaction.
  5. The banker knowingly failed to make the disclosure.
  6. The banker intended to deceive DeShaw by withholding such information.
  7. DeShaw acted in reliance upon the bank’s failure to disclose and was justified in such reliance.
  8. The failure to disclose was a cause of DeShaw’s damage.

The court noted that the banker testified that he discussed the mortgage on DeShaw’s home with DeShaw in detail at the loan closing. DeShaw testified that he did not. The court stated that the jury resolved the issue and had good reasons to discount the banker’s testimony and credit DeShaw’s testimony.

There were no winners in this case. The court entered no money judgment and no award of attorney fees. The judgment in favor of DeShaw prevented the bank from foreclosing on his house. In the end, this case serves to illustrate the high cost of a patchwork solution to a problem customer.  Although the loan documents clearly informed DeShaw that he was mortgaging his house, the jury believed that the banker had failed to make necessary disclosures. The jury believed that the banker had improperly turned to an unsuspecting friend of a high-risk borrower to make his problem go away. In the end, it only made it worse.

The case is Farmers Savings Bank v. DeShaw, No.16-2140 (Dec. 6, 2017).

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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