In SCC Acquisitions Inc. v. Central Pacific Bank (207 Cal.App.4th 859, Cal.App. 4 Dist., June 25, 2012), a California Court of Appeal considered whether a trial court’s instructions to a jury concerning an internal bank memorandum and a term sheet was a prejudicial error. In a case where a borrower alleged fraud by a lending bank, the court found that the instructions were proper because the bank’s statements in the documents could not be construed as creating a promise to extend the loan or a legal duty to notify the borrower of its decision not to extend the loan.
In August 2005, Fillmore Sun LLC (“Fillmore”) borrowed $7.3 million from Central Pacific Bank (“Bank”) to purchase property and pay costs related to the development of the property. SCC Acquisitions (“SCC”) was a guarantor on the loan. Under the terms of the loan, the bank could extend the maturity date but “the granting of such extension, however, is not intended to imply any agreement for any other or further extension of the Maturity Date.”
The loan maturity date was extended five times, the final extension extending the maturity date from October 26, 2007 to April 26, 2008. A late January 2008 internal bank memorandum noted that if a decision was made to not renew the loan, the borrower should be notified of the decision at that time. In March 2008, the bank sent Fillmore a term sheet for a possible restructuring of the loan, which explained that it was “for discussion purposes only, is subject to Bank approval and should not be construed as a commitment to lend.” By the April maturity date, Fillmore was in default on the loan. In July 2008, the bank sold the Fillmore loan and other loans to Gray 1 CPB, LLC (“Gray 1”).
Gray 1 then filed suit for non-payment against SCC and was awarded judgment. SCC cross-complained against the Bank alleging fraud on the grounds that the bank, after repeated extensions, led Fillmore and SCC to believe that it would continue to extend the loan as a matter of course. The jury found in favor of the bank.
SCC appealed alleging the trial court prejudicially erred in its instructions to the jury.
The court reviewed two of the trial court’s instructions to the jury regarding the internal bank memorandum and the term sheet. First, referring to statements from the bank that stated it would notify the borrower by a certain date if it decided not to extend the loan, the instructions provided: “You are instructed that such statements in the credit memoranda by themselves do not create a legal duty on the part of the Bank to do so.”
The court stated that the duty to speak may arise in four ways: It may be imposed by statute or other prescriptive law, it may be voluntarily assumed by contractual undertaking, it may arise as an incident of a relationship between the parties, and it may arise as a result of other conduct by the defendant that makes it wrongful to remain silent. In this case, appellants argued that a duty to disclose arose based on representations by the bank in the term sheet and that the failure to disclose its decision not to renew the loan materially qualified the terms in the term sheet. The court found no duty existed, explaining that a duty does not arise on “an internal policy decision to give notice the bank was not otherwise required to give.” The court ruled that instruction was not in error.
The second jury instruction stated that the March 2008 term sheet: “does not, by itself, (1) constitute a binding commitment to extend the loan on the terms stated therein or (2) constitute a representation or promise to extend the loan on the terms stated therein on which a claim of fraud or false promise can be based.” The court found that the term sheet plainly stated that it was not a commitment, representation or promise to renew the loan, and therefore the term sheet itself could not be deemed a misrepresentation. The jury instruction merely restated the plain terms included in the term sheet and was not in error.
Because the trial court did not err in instructing the jury, the judgment was affirmed.
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