Jacques v. First National Bank

488 A.2d 210, 62 Md. App. 54

• Court: Court of Special Appeals of Maryland
• Decided: June 28, 1985
• Docket: 439, September Term. 1984
• Status: Published

Opinions

KARWACKI, Judge.

At the conclusion of all trial proceedings in a suit for damages, Robert Anthony Jacques and Margaret Ann Jacques, his wife, the appellants/cross-appellees (hereinafter “the Jacques”) and The First National Bank of Maryland, the appellee/cross-appellant (hereinafter “First National”) have appealed from the judgment of the Circuit Court for Montgomery County entered on a jury verdict in favor of the Jacques against First National in the amount of $10,-000. First National contends that the trial court erred in failing to grant its motion for a directed verdict in its favor, and the Jacques contend that their damages were improperly limited by an erroneous jury instruction. Since we shall hold that First National’s motion for a directed verdict should have been granted, we will not reach the Jacques’ contention.

The dispute between the parties had its genesis on July 30, 1980 when the Jacques entered into a contract with Mr. and Mrs. Michael Clarke to buy a residence located at 629 Aster Boulevard, Rockville, Maryland, for $147,000. At the insistence of the sellers, an addendum was inserted in the standard realtor’s contract of sale which provided:

Purchaser [the Jacques] agrees to increase the down payment to whatever amount is necessary to qualify for a mortgage loan____

In the event lender approval is not obtained, this contract automatically will be null and void, and any deposit will be refunded in full. Should lender’s approval be obtained, this contingency automatically shall be removed.

The Jacques’ declaration revealed that the above language was added to the contract of sale in order to appease the sellers’ concern that the contract would fall through if the Jacques could not find sufficient financing. The sellers’ fears were grounded in the fact that a previous contract-buyer of their property had been unable to qualify for mortgage financing and had been unable to perform his undertaking.

The day following execution of the contract of sale, Mr. Jacques, an attorney in Rockville, Maryland, and his wife applied to First National for a residential mortgage loan in the amount of $112,000. They paid a $144 fee at the time of their application in order to cover the cost of an appraisal and a credit report. On August 11, the bank sent a letter to the Jacques which stated in relevant part:

The First National Bank of Maryland is pleased to have received your application for processing a Mortgage Loan. The required $144.00 fee for the appraisal and credit report to initiate processing does not constitute approval of your loan.

The current rate for a loan of this type is 11 — Vs%. This rate will hold for settlement for ninety (90) days from date the application is received in this office. At time of approval, the Bank will issue a commitment with a fixed interest rate, which will be binding upon written acknowledgement and acceptance. At the present time, processing and approval for this loan is approximately four weeks.

Thereafter, First National proceeded to collect the supporting documentation for the Jacques’ loan. After First National received most of the supporting financial data, one of its mortgage officers determined that the Jacques’ monthly income was insufficient for them to meet the payments on a $112,000 mortgage. Accordingly, the bank informed the Jacques that the highest amount the bank would lend them was $74,000 at 1178%, assuming that the Jacques could sell or rent their present residence. Prior to the Jacques’ acceptance of this offer, the bank learned that the Jacques’ home required renovation before it could be rented or sold and, therefore, decided that the bank would only loan $41,400 at the same interest rate.

Due to the fact that the bank would not lend the full amount requested, it informed Mr. Jacques of his right to seek alternative financing and provided Mr. Jacques with the documentation necessary for him to present a complete loan file to another institution. The Jacques then went to Metropolitan Federal Savings and Loan Association and obtained a commitment for a $100,000 mortgage, but at an interest rate two percent higher than that offered by First National.

Because of the limited amount of financing offered by First National and the higher interest rate demanded by Metropolitan, the Jacques then concluded that their purchase of the Aster Boulevard property was not quite the bargain they expected. Consequently, they then requested First National to refuse to loan them any money whatsoever so that they might attempt to utilize the financing contingency in their contract with the Clarkes and avoid their obligations under the contract altogether. First National refused to do so and, instead, sent the Jacques a commitment letter for a $41,400 loan at 1178%.

Notwithstanding the availability of the alternative financing from Metropolitan, the Jacques elected to accept First National’s offer on September 16, 1983. They borrowed money from friends and relatives and used their extensive stock holdings to secure a personal loan of $50,000 in order to make up the difference between the mortgage loan and the price of the house.

Following the settlement on their purchase of the property, the Jacques filed a five count declaration against First National for (I) malicious interference with contractual relations, (II) breach of fidelity, (III) negligence, (IV) gross negligence, and (V) “prima facie” tort. The trial court directed a verdict against the Jacques after they presented their case on the- count for breach of fidelity (Count II). The Jacques entered a voluntary dismissal on the count for “prima facie tort” (Count V). The remaining counts were submitted to the jury. The jury rendered a verdict for First National with regard to gross negligence and malicious interference with contractual relations (Counts I and IV) but returned a verdict in favor of the Jacques in the amount of $10,000 on the negligence count (Count III). Consequently, our review of the proceedings below will be limited to a determination of whether this jury verdict based on First National’s negligence is supported by legally sufficient evidence.

For purposes of this appeal, we will presume that the jury-had sufficient facts from which it could be determined that First National failed to exercise reasonable care in the processing of the Jacques’ loan application.¹ Furthermore, we will presume that the Jacques proved that $10,000 in damages were proximately caused by First National’s conduct. Consequently, the issue on which we focus is whether First National owed a duty to the Jacques to exercise reasonable care while processing the Jacques’ application prior to the parties entering into a contractual relationship since, “in the absence of ... a duty, there can be no recovery in tort.” Wilmington Trust Co. v. Clark, 289 Md. 313, 327, 424 A.2d 744 (1981) (husband owed no duty to ex-wife not to commit suicide and thereby reduce ex-wife’s total alimony and support payments); Peroti v. Williams, 258 Md. 663, 669, 267 A.2d 114 (1970) (even if the negligence of the defendant as a matter of law exists, there is no liability unless the defendant breaches a duty to protect the plaintiff from injury); Carlotta v. T.R. Stark & Assoc., 57 Md.App. 467, 470 A.2d 838 (1984) (land surveyor owed no duty to the adjoining landowners of his employer to use due care in surveying employer’s land); Furr v. Spring Grove State Hospital, 53 Md.App. 474, 454 A.2d 414 (1983) (psychiatrist owed no duty to public at large to properly diagnose a dangerous patient); Fisher v. O’Connor’s, Inc., 53 Md.App. 338, 452 A.2d 1313 (1982) (bar owner owed no duty to intoxicated patron to refrain from selling him additional liquor); 2 Harper and James, Law of Torts 1015 (1956).

“Duty” in a negligence case has been defined as “an obligation, to which the law will give recognition and effect, to conform to a particular standard of conduct toward another.” Prosser and Keeton, The Law of Torts 356 (5th ed. 1984). In the typical negligence action, “There is usually no occasion to discuss the question of duty because plaintiff is obviously within the scope of any test that is likely to be adopted.” Harper & James, supra, at 1018. Nevertheless, the case sub judice is not a usual or obvious case. The Jacques have requested that this Court recognize a duty which has never before been recognized in Maryland; a duty which would run in direct conflict with the long established right of a person to refuse to do business with others, for nearly any reason or for no reason at all.

In McCarter v. Chamber of Commerce, 126 Md. 131, 136, 94 A. 541 (1915) the Court of Appeals, quoting from Cooley on Torts 278, stated: “It is a part of every man’s legal rights, that he be left at liberty to refuse business relations with any person whomsoever, whether the refusal rests upon reason, or is the result of whim, caprice, prejudice or malice.” See also Reeves v. State, 447 U.S. 429, 438-39, 100 S.Ct. 2271, 2278, 65 L.Ed.2d 244 (1980). This principle was succinctly summarized in the first Restatement of Torts § 762 (1939):²

One who causes intended or unintended harm to another merely by refusing to enter into a business relation with the other or to continue a business relation terminable at his will is not liable for that harm if the refusal is not

(a) a breach of the actor’s duty to the other arising from the nature of the actor’s business or from a legislative enactment, or

(b) a means of accomplishing an illegal effect on competition, or

(c) part of a concerted refusal by a combination of persons of which he is a member.

The comment to § 762 states:

The rule stated in this Section rests upon fundamental assumptions in free business enterprise. Each business enterprise must be free to select its business relations in its own interest. Since it is always subject to actual or potential competition, it must choose well or suffer death. In the struggle of each enterprise for maximum returns, maximum supply is presumably assured. Denial of this privilege to select business relations would interfere, it is thought, with an important factor in the competitive process and might defeat its aim.

The privilege stated in this Section exists regardless of the actor’s motive for refusing to enter business relations with the other and even though the sole motive is a desire to harm the other.

This Topic deals primarily with refusals to deal in the course of marketing goods or services. However, other situations are also within the scope of the rule stated in this Section. Thus the rule applies to refusals between manufacturer and distributor, between distributor and consumer, between lender and borrower, employer and employee, newspaper and advertiser, or between persons seeking any other business transaction. The rule also applies to a refusal by either party (emphasis added).

The rule delineated in § 762 has been reaffirmed by the Maryland Court of Appeals in two relatively recent cases. In Cunningham v. A.S. Abell Co., 264 Md. 649, 288 A.2d 157 (1972), The Court of Appeals refused to reverse the trial court’s judgment n.o.v. for the defendant. There the defendant allegedly refused to continue a contract “at will” under which the plaintiff was employed to deliver defendant’s newspapers to subscribers. The Court applying § 762 stated that: “regardless of motive one who causes intended or unintended harm to another merely by refusing to continue a business relationship terminable at will is not liable for that harm.” Id. at 658, 288 A.2d 157. In Grempler v. Multiple List. Bureau, 258 Md. 419, 429, 266 A.2d 1 (1970) the Court assumed the applicability of § 762 and held that a real estate multiple listing bureau did not fall within any exception to § 762 when it refused to accept the membership of the plaintiff real estate brokerage. Although Cunningham and Grempler dealt with, allegations of intentionally caused harm, we believe that, a fortiori, the rule apd reasoning of § 762 and those cases should apply to a negligence action.

Subsections (a)-(c) of § 762 recognize several limitations on a person’s freedom to select those with whom he will enter into contractual relations. In short, these limitations are founded upon the law dealing with public utilities, common carriers, civil rights, antitrust violations, malicious interference with contractual relations and conspiracy to interfere with contractual relations. The Jacques have not urged the applicability of any of these limitations except to argue that a residential mortgage lender ought to be treated like a public utility. Prosser & Keeton summarized the public utility exception as follows:

Public Utility Services and Other Services Required by Law. There are, however, a few situations in which failure to perform a contract may amount to a tort. One notable instance is the survival of the old tort duty to serve all comers which arose as to common callings before the idea of contract had developed. Under modern law this duty to serve exists only as to public officers, common carriers, innkeepers, public warehousemen, and public utilities, who become liable in tort for nonperformance of their contracts, or even for refusal to enter into a contract at all. No such obligation rests today upon ordinary citizens engaged in other activities; and in the absence of legislation a physician, a restaurant or a racetrack will not be liable for turning people away, for any reason or none. This is subject to the qualification that civil rights statutes, prohibiting under criminal penalty discrimination against any person on the ground of race or color, are commonly interpreted as intended to provide a tort action as a remedy.³

We find no support in the case law or in reason to treat privately owned mortgage lenders the same as public utilities. Although they are highly regulated, mortgage lenders have never been granted a monopoly and, in fact, are subject to intense competition. We therefore decline to impose a duty upon the lenders of residential mortgage money to use due care in evaluating an application for a mortgage loan. Whether the application is granted and the amount which the lender is willing to risk on the applicant are matters which heretofore have been beyond judicial scrutiny, absent some violation of the applicant’s constitutionally guaranteed civil rights. We are not persuaded that such a rule should be judicially abrogated.

Our review of the decisions of our sister jurisdictions supports the propriety of our holding. In Wagner v. Benson, 101 Cal.App.3d 27, 161 Cal.Rptr. 516 (1980) the California Court of Appeal held that a bank does not owe a duty to exercise care in approving an application for a loan. Therefore, the borrowers could not recover from the bank for their own bad business deal which the bank did not prevent by carelessly not refusing to lend the money. In Washington Steel Corp. v. TW Corporation, 602 F.2d 594 (1979) the Third Circuit Court of Appeals held that a bank had no duty to refrain from loaning money which would be used to acquire one of the bank’s other customers in a hostile tender offer. Although factually distinguishable from the case sub judice, Washington Steel Corp. strongly suggests that the imposition of additional duties upon banks is a legislative, not judicial, task. In John Deere v. Short, 378 S.W.2d 496, 502-03 (1964), a farm equipment dealer sued the equipment manufacturer for damages arising out of the manufacturer’s failure to extend various loans the dealer expected when it opened for business. The Supreme Court of Missouri held that a manufacturer had no non-eontraetual duty to make the loans to the dealer since their relationship was purely contractual. In Farabee-Treadwell Co. v. Union & Planters ’ Bank, 135 Tenn. 208, 186 S.W. 92 (1916) a bank refused to make a loan to a depositor and, in fact, ordered the depositor to close its account with the bank. The Tennessee Supreme Court held that the bank owed no duty in tort to extend a loan or to continue an account with a customer. Any relief for the customer would arise out of a contractual duty or not at all.

In their brief, the Jacques rely heavily upon First Federal S. & L. v. Caudle, 425 So.2d 1050 (Ala.1983) in which the Supreme Court of Alabama upheld a jury verdict in favor of two loan applicants against a bank. Caudle, however, is distinguishable from the case at hand and has recently been given a narrow interpretation by the deciding court in Brasher v. First Alabama Real Estate, Fin., 447 So.2d 682 (Ala.1984). In Caudle, the defendant bank had agreed to process a Federal Housing Administration loan for the appellants. The bank was to receive a one percent loan origination fee for making the loan in addition to receiving the benefit of making a government subsidized loan at the prevailing mortgage interest rate. The court held that, although the bank was under no duty to help procure the F.H.A. loan, once it voluntarily agreed to assist the Caudles, it was required to act with due care. In that case, the bank negligently and mistakenly informed the Caudles that their loan had been approved.

In the instant case, First National never agreed to lend the Jacques more than $41,000 for 30 years at 1178% interest rate. Whether it used good business judgment in failing to do so is a question for which it may have to answer in the competitive market in which it does business. In our view, however, it was under no obligation to conform its business judgment to any recognized standard of care.

JUDGMENT AGAINST THE FIRST NATIONAL BANK OF MARYLAND, APPELLEE AND CROSS-APPELLANT, REVERSED;

APPELLANTS AND CROSS-APPELLEES TO PAY COSTS.

1 . The Jacques’ theory of negligence was that First National failed to properly apply the guidelines for determining an applicant’s "available income” that are usually and customarily applied by home mortgage lenders intending to resell those mortgages on the secondary mortgage market; specifically, the guidelines promulgated by the Federal Home Loan Mortgage Corporation, a/k/a "Freddie Mac."

2 . The Restatement (Second) of Torts did not include § 762 or any similar provision. However, the Reporter for the Restatement (Second) specifically explained that:

The rules relating to liability for harm caused by unfair trade practices [including § 762) ] developed doctrinally from established principles in the law of Torts, and for this reason the decision was made that it was appropriate to include these legal areas in the Restatement of Torts____ In the more than 40 years since that decision was initially made, the influence of Tort law has continued to decrease, so that it is now largely of historical interest and the law of Unfair Competition and Trade Regulation is no more dependent upon Tort law than it is on many other general fields of the law and upon broad statutory developments, particularly at the federal level. The Council formally reached the decision that these chapters no longer belong in the Restatement of Torts, and they are omitted from this Second Restatement.

Therefore, the omission of § 762 in the Second Restatement is not an indication that the law has changed but is merely an indication that the law once called business torts is no longer deemed suitable for inclusion in a restatement of torts.

3 . Prosser & Keeton, supra at 662 (footnotes omitted). See also Silbert v. Ramsey, 301 Md. 96, 482 A.2d 147 (1984) (affirming the right a race track to exclude a potential patron on the basis of a prior criminal conviction — and reaffirming the long-standing common law right of a proprietor to exclude potential patrons without reason so long as the exclusion is not based on race, creed, color or national origin).