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Second National Bank v. First National Bank1
This case involves three parties:
1. A customer, Paul Gerry, who went to a bank and established a relationship after
which (about one year later), the customer was allowed to open a revolving credit
line with the bank,
2. The bank, First National Bank, that granted the revolving line of credit to Gerry,
and
3. A secondary, participating bank, Second National Bank that signed a participation
contract with First National to pick up $2 million of a $20 million loan.
The case involves the following facts:
1. On October 6, 2010, Gerry approached the bank and negotiated a $20 million
revolving line of credit. Shortly thereafter, First National became concerned
about the loan because it learned (according to the bank after the fact) that Gerry
was being investigated in Massachusetts for Medicaid fraud at one of Gerry’s
nursing homes. The investigation may actually have been underway at the time of
the loan’s closing.
2. Second National Bank claims to have had no knowledge of the investigation and
stated that First National did not disclose the facts before the closing. First
National disputes that claim. Based on the difference of interpretation, Second
National attempted to terminate its participation contract with First National, sued
that Bank, and asked for a return of the $2 million. Second National states in its
pleadings that even if First National did not know about the investigation when
1 This case is based on the facts of Banco Totta e Acores v. Fleet National Bank, 768 F. Supp. 943, July 3,
1991.
Second National agreed to participate in the loan, Second National justifiably
relied on First National’s assessments of Gerry’s creditworthiness and suffered
pecuniary loss as a result.
Legal Issues
Second National’s complaint has four counts.
1. Second National claims First National breached its “duty of disclosure” by
failing to disclose material information. First National counterclaims that
Second National was able to do an independent assessment of the
creditworthiness of Gerry before agreeing to participate. The court dismissed
this count immediately having discovered that Second National had signed a
document acknowledging its right to do an independent assessment of Gerry’s
creditworthiness.
2. Second National charges First National with intentional misrepresentation. In
its ruling, the court cited Rusch Factors, Inc. v. Levin. In that case the judge
allowed an action to go forward against an accountant for negligent
preparation of financial statements. In the Rusch decision, the court stated:
“One who, in the course of his business, profession or employment, or in a
transaction in which he has a pecuniary interest, supplies false information for
the guidance of others in their business transactions, is subject to liability for
pecuniary loss caused to them by their justifiable reliance upon the
information, if he fails to exercise reasonable care or competence in obtaining
or communicating the information.” The court in the Gerry matter elaborated
by stating that the tort of intentional misrepresentation, or, in common law
parlance, deceit, is well established in the law. The court when on to cite the
requirements that a plaintiff must prove to sustain such a charge.
3. Second National charged that First National willfully and wantonly breached
its duty of care and good faith by making material misrepresentations and
omissions. The fraud claim was treated the same as count number 2 –
intentional misrepresentation.
4. Second National claims that First National has been unjustly enriched as a
result of its refusal to refund to Second National the money the latter
contributed to the Gerry loan. The court withheld judgment on this matter
pending the outcome of its deliberations on counts one through three.
This cases discusses knowledge, disclosure, and reliance of one expert on another expert.
Ethical Issues
First National granted credit to Gerry and sold a participation loan to Second National
Bank. First National later revealed that Gerry was under investigation at the time of loan
closing for Medicare fraud. One of the ethical issue is legal versus moral honesty. An
ethical issue is the morality of blame. When two equally sophisticated investors rely on
one another, who bears fault? Is each investor required to do own work? What is the level
of fiduciary care required between equally sophisticated investors?
Questions
1. Discuss the requirements that a plaintiff must prove to sustain a charge of
intentional misrepresentation or fraud. Use the chapter discussion about
liability to third parties to develop your answer.
Rusch Factors v. Levin, Restatement of Torts (552) expands legal liability exposure to
negligence to foreseen third parties to whom the accountant supplies the work. Although
no privity relationship, the accountant knew that the party would rely on the financial
statements for a specified transaction. Rosenblum v. Adler expands the liability for
negligence to foreseeable third parties; this is anyone who could reasonably be expected
2. Given the limited facts of the case, do you think the court should have
found for Second National in any one or more of the counts? Why or why
not? Would your answer to question be any different if there was no clear
cut indication that Second National had a right to do an independent
assessment of the financial condition of Gerry prior to becoming a
participating lender? Why or why not?
On one hand one can argue that another bank as equally sophisticated as the first bank
does not need the same fiduciary duty as a common man. However, there is a real estate
standard of if you know you must tell. If Second National can prove that First National
3. In the court ruling, the judge cited another case in Massachusetts as
guiding the Second National decision. In the other case, plaintiffs/sellers
sued defendants/buyers for failing to make the final payment on a note
for the purchase of a delicatessen. The buyers asserted a counterclaim,
alleging that they had been induced to buy the operation by false and
material misrepresentations made to them by the sellers concerning the
delicatessen’s past revenues. Before the sale, the buyers had examined
the tax returns of the business and expressed concern over the low profits,
but they had been reassured by the sellers’ verbal representations that in
reality the business was much more profitable than indicated by the
records. Consequently, the buyers agreed to the sale. Given the facts of
this second case, discuss how you think the judge in that case might apply
the facts in deciding the first case – Second National v. First National?
That is, what might the judge have looked for in deciding the buyers’
counterclaim that could be the determining factor in the ruling?
Generally written evidence is given more weight in law. The key issue is fiduciary duty
that applies between professional and less sophisticated client who must, or might, trust
the professional. It is trust that allows harm and the deli buyers might be amateurs thus
