According to an opinion from the U.S. Court of Appeals for the Eighth Circuit, lenders should be mindful of the information they convey to current and former distressed clients, as well as to third parties that may deal with those distressed entities.
In Dahlgren v. First National Bank of Holdrege, 14 cattle investors and corn producers that were fattening cattle and storing grain at a feedlot owned and controlled by the Damrow Cattle Company (“DCC”) filed suit against DCC’s bank, First National Bank of Holdredge (the “Bank”). 533 F.3d 681 (8th Cir. 2008). The plaintiffs alleged violations of the Racketeering Influenced and Corrupt Organizations Act (“RICO”), as well as fraudulent and negligent misrepresentation claims under state law.
The plaintiffs claimed that the Bank misled the plaintiffs into continuing to do business with DCC by concealing DCC’s financial weakness to protect the Bank’s interests as a creditor of DCC. Following a jury trial, judgment was entered against the Bank on all counts and the Bank appealed.
In reversing the district court’s ruling on the RICO claims, the Eighth Circuit found no RICO claim could stand where plaintiffs had failed to demonstrate that “the Bank exercised some degree of control over the operation or management of DCC’s affairs.” Id. at 690. Although the court noted that “[w}hile it is certainly true that a major creditor of a corporation can have substantial persuasive power and some legal authority over a [borrowing customer’s] management, alone, such power is not equivalent to having the power to conduct or participate directly or indirectly in the conduct in the affairs of those corporations.” Id., citing Dongelewicz v. PNC Bank Nat’l Ass’n, 104 Fed App. 811, 817-18 (3rd Cir. 2004).
Because (a) direct participation or conduct in a corporation’s affairs is a necessary predicate to a RICO claim, and (b) the court was unaware of any case in which a bank or financial services company was held to have conducted the affairs of a RICO enterprise that was an unrelated customer of the bank, the court held the plaintiffs had failed to demonstrate that the Bank directed the operations or management of DCC. As such, the judgment in favor of plaintiffs on the RICO claims was reversed.
The Bank, however, did not fare as well against the plaintiffs’ state law claims. Applying Nebraska law, the Eighth Circuit considered plaintiffs’ allegations that the Bank had made fraudulent or negligent misrepresentations, and had fraudulently concealed certain known material facts in its communications with the plaintiffs. Because each plaintiff’s claims centered on different facts, the court examined each plaintiff’s circumstances individually.
Although the facts applicable to the plaintiffs varied somewhat, the Eighth Circuit generally found the Bank liable in situations in which a plaintiff specifically asked Bank officers or employees about DCC’s financial viability, and where the Bank’s agents, despite having ample evidence to the contrary, replied that “everything [was] fine” or that DCC was “okay.” If a plaintiff reasonably relied on these statements and suffered damages as a result, the court held that the plaintiff could recover its damages from the Bank. In sum, the Eighth Circuit affirmed awards in excess of $350,000 against the Bank and in favor of certain of the plaintiffs.
The appeals court, however, also overturned certain awards granted by the jury to plaintiffs on their state law claims. Again, although the facts of each plaintiff’s circumstances were unique, general principles regarding liability emerged. The Eighth Circuit denied recovery to plaintiffs when: (a) they could allege only that the Bank’s agents made statements of present intent about actions they intended to take or statements of personal opinion; (b) the statements made by the Bank’s agents were too remote in time to plaintiff’s much later, loss-inducing transactions for plaintiff’s reliance thereupon to be reasonable, and/or (c) the representations made to plaintiffs were not made with the intent of providing business guidance to the plaintiffs and/or with the intent that plaintiffs would rely on the same.
In these circumstances, the court held the statements made by the Bank did not constitute a tort under Nebraska law.
In short, the Bank’s success on appeal resulted in significantly diminished liabilities with respect to the RICO claims and certain of the state law claims. Even so, the Eighth Circuit’s award in excess of $350,000 as a result of the remaining state law claims easily could have been avoided had the Bank cautioned its employees and agents to avoid making statements and representations to third parties, and/or other customers, regarding the financial viability of a customer or client.
As explained in the Dahlgren case, these statements can expose an institution to financial liability in the event that a third party relies on such statements and suffers damages as a result. Institutions generally should caution their employees and agents from making statements as to the financial viability or fitness of other entities, especially when those employees have reason to believe that the third parties may rely on such statements or may construe the statements as business guidance.