United Jersey Bank v. Kensey

A-7628-95T5, 1997 WL 784485 (N.J. Super. App. Div. 1997)
  • Opinion Date: December 23, 1997

LOANS; FIDUCIARY DUTY—A borrower purchased three properties from a financially distressed customer of its lender, a bank, and then defaulted on its own loan. The bank failed to reveal that its internal appraisal showed that the properties were worth substantially less than the selling price. Borrowers unsuccessfully argued that the lending bank had a duty to reveal that information and by not doing so had fraudulently induced the borrowers to purchase the properties.

A bank brought a foreclosure action on three properties that a husband and wife purchased from one of the bank’s highly leveraged customers. The couple claimed that the bank fraudulently induced them to enter into the loan in order to substitute healthy debtors in place of its financially ailing customer. The issue was whether the bank had a duty to disclose either an internal appraisal which indicated that the properties were worth substantially less than the purchase price, or information relating to its customer’s precarious financial condition. The Chancery Division entered summary judgment against the husband and wife, concluding there was no fiduciary relationship between them and the bank, and thus no duty on the part of the bank to volunteer information.

The Appellate Division listed three general classes of transactions which impose a duty to disclose. The first is when a fiduciary relationship exists. The second is where either or both parties expressly repose a trust and confidence in the other, or the circumstances and nature of their dealings implies such a trust. The third includes contracts or transactions which are intrinsically fiduciary and call for good faith and full disclosure. The Court then held that not only is there no presumed fiduciary relationship between a bank and its customer, but there is a general presumption that transactions between borrowers and lenders are conducted at arms length, and that the parties act in their own interest. Accordingly, the Court was left to consider whether either or both parties expressly reposed a trust and confidence in the other, or whether the circumstances of their dealings implied such a trust. Section 551 of the Restatement of Torts imposes a duty to disclose facts based on the relationship between parties, the customs of the trade, or other objective circumstances under which one party would reasonably expect disclosure of those facts. The Supreme Court of New Jersey has adopted the Restatement’s position, as have many other courts, using it as a basis to hold banks and other lending institutions liable to their customers for gross acts of misconduct and deceit. Banks have also been liable in special circumstances where it knew or had reason to know that the customer relied on, and placed its trust and confidence in, the bank. The Appellate Court found that many cases involved egregious breaches where the lender actively encouraged the borrower to rely on its advice, yet concealed its self-interest in promoting the transaction. However, many other courts have found no duty on the part of a lender to disclose information it may have concerning the financial viability of a transaction. The Appellate Division affirmed the lower court’s dismissal, finding no special circumstances that required the bank to disclose either its internal appraisal of the properties or information about the customer who sold the properties to the husband and wife. In fact, the bank owed the seller a duty of confidentiality regarding his financial integrity. The Court also could not state that the bank knew or had a reason to know that the husband and wife were placing their trust and confidence in the bank to counsel and inform them. The husband and wife were sophisticated real estate investors and the Court concluded that, “the loss should remain where lack of success in the marketplace has put it.”