Opinion ID: 1116419
Heading Depth: 1
Heading Rank: 5

Heading: did the trial court err in allowing instructions p-2 and p-3 and denying the bank's motion for directed verdict, both matters relating to the issue of fraudulent misrepresentation?

Text: In this issue The Bank of Shaw contends that the trial court erred in instructing the jury on the issue of fraudulent misrepresentation, through jury instructions P-2 and P-3, and also erred in denying the Bank's motion for a directed verdict on the issue. Instructions P-2 and P-3 were given to the jury as follows: Instruction P-2 If you find from the clear and convincing evidence in this case that; 1. The Bank of Shaw, by and through its agent, Glenn Sandroni, falsely represented to John Posey that a Deed of Trust on his real estate was necessary in order to apply to SBA for a long term loan of $362,000.00 when the said Glenn Sandroni knew that such loan application was sure to be denied and his real motive was to obtain for the bank additional collateral covering loans and interest in the amount of $157,000.00 existing prior to December 4, 1984; and 2. That said misrepresentation was a material fact which induced John Posey to execute the Deed of Trust; 3. That The Bank of Shaw, by and through its agent, Glenn Sandroni, knew this representation to be false or recklessly disregarded its truth or falsity; and 4. That The Bank of Shaw, by and through its agent, Glenn Sandroni, intended to deceive John Posey by means of this representation; and 5. That John Posey were [sic] ignorant of the falsity of Glenn Sandroni's representation; and 6. That John Posey reasonably relied upon the truth of Glenn Sandroni's representations; and 7. That John Posey was injured as a consequence of his reliance and his execution of the Deed of Trust. Then you should find for the Plaintiff John Posey with respect to the issue of fraud. However, if you believe that the Plaintiffs have failed to prove any one of these elements by clear and convincing evidence, then your verdict shall be for the Defendant. Instruction P-3 If you find from the clear and convincing evidence in this case that 1. The Bank of Shaw by and through its agent Glenn Sandroni falsely represented to John Posey and Danny Watkins that they should process an application with the SBA for a 90% loan when Sandroni had personal knowledge that such 90% guarantee application was sure to be denied and his real motive was to obtain for the bank additional collateral covering loans and interest in the amount of $157,000.00 existing prior to December 4, 1984 and/or that the bank would make the $362,000.00 loan applied for to SBA if the SBA did not; and 2. Such misrepresentation was a material factor in causing the application to be processed by Watkins; and 3. That The Bank of Shaw, by and through its agent Glenn Sandroni, knew the representation concerning the advisability of such application was false or recklessly disregarded its truth or falsity; and 4. That the Bank, through its agent, intended to deceive Watkins and Posey; and 5. That Watkins and Posey were ignorant of the falsity of Sandroni's representation; and 6. Watkins and Posey reasonably relied upon the truth of Sandroni's representation; and 7. Watkins and Posey had a right to rely on this representation; and 8. That Watkins and Posey were damaged as a consequence of such reliance, then you should find for both Watkins and Posey on the issue of fraud. However, if you believe that the Plaintiffs have failed to prove any one of these elements by clear and convincing evidence, then your verdict shall be for the Defendant. The Bank of Shaw claims that these instructions were erroneous because the requisite clear and convincing evidence of each of the elements of fraudulent misrepresentation was not proved. In order to recover on a theory of fraudulent misrepresentation, the plaintiffs must prove, by clear and convincing evidence, the following elements: (1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of the truth; (5) his intent that it should be acted on by the hearer and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; and (9) his consequent and proximate injury. Ezell v. Robbins, 533 So.2d 457 (Miss. 1988); Franklin v. Lovitt Equipment Company, Inc., 420 So.2d 1370, 1373 (Miss. 1982); See also Martin v. Winfield, 455 So.2d 762, 764 (Miss. 1984). If the plaintiffs failed to put on sufficient evidence to create an issue of fact for the jury as to any of the above elements, then the issue of fraud should not have been presented to the jury. The evidence at trial, as discussed below, failed to present the requisite clear and convincing evidence that any fraud on the part of Sandroni was the cause of any injury to Posey and Watkins. Thus, the issue should not have been submitted to the jury. Posey and Watkins claim that Sandroni's fraudulent representations consisted of Sandroni's statements that he (1) would lend the business $125,000.00 over the first year and would consolidate the first-year loans into a long-term note; (2) would lend $362,000 if the SBA loan guarantee was rejected; and (3) would use the second deed of trust on the Posey residence only to improve the SBA loan application. They claimed at trial that, as a proximate consequence of these representations, they suffered combined damages in the amount of $422,700.00 which included: $210,021.90 for all debts owed to The Bank of Shaw $108,806.00 for debts owed to other creditors $2,000.00 for debt owed to the accounting firm which had prepared the SBA applications $20,000.00 for loss of capital which Posey had put into the business $10,000.00 for the value of Posey's truck he had used as security for a loan $16,500.00 for the value of a trailer which he had used as security for a loan $23,750.00 for the loss of one half of the equity in the Posey's residence $28,000.00 for the loss of the cash investment in the business by Watkins Even assuming, for the sake of argument, that Sandroni had made all of the representations which are attributed to him, the evidence is far from clear and convincing that the failure of The Delta Outdoorsman and the resulting financial difficulties of Posey and Watkins were the result of Sandroni's representations. It is obvious that The Delta Outdoorsman was a losing proposition from the beginning. The evidence raised serious doubt that either partner invested any of his own funds in the business and showed that Posey and Watkins were in default on their accounts before they even opened for business. The business never made a profit, even in its best months, despite the fact that Sandroni disbursed a greater amount of funds than Posey and Watkins allege he promised. The Delta Outdoorsman (Posey and Watkins) failed to pay the rent for seven straight months. Having received all of the first-year loans that they asked for, Posey and Watkins were nevertheless unable to show that the business could or ever would be a profitable venture. There were several stores in Cleveland selling essentially the same merchandise and several of those stores, because of greater volume, could sell at significantly lower prices than could The Delta Outdoorsman. At trial, Posey acknowledged that the business could not have generated the $8,000.00 per month which would have been required to service the debt of $362,373.49 and probably could not have generated the $3,000.00 per month required to service the debt of $157,473.49. Given these facts, it is not possible to say that Posey and Watkins proved, by clear and convincing evidence, that the business's failure and their attendant losses were attributable to any fraudulent representations by Sandroni or any actions by the Bank. An examination of the alleged fraudulent representations shows that not only did Posey and Watkins fail to prove they were damaged by any such representations, they also failed to prove other essential elements of fraud by clear and convincing evidence. First, Posey and Watkins claimed that they were damaged by Sandroni's statement, made before they went into business, that he would lend them $125,000.00 and later convert first-year interim loans to a long-term note. Sandroni denied making any promise to lend that amount and any promise of long-term financing. However, the short-term loans were advanced. Prior to any request for converting the debt to long-term debt, there was a failure known to The Bank of Shaw and to the plaintiffs, a failure to pay for inventory, to pay rent, or to conduct The Delta Outdoorsman business in an acceptable business-like manner. This Court will not require a financial institution to lend funds to a failed business in contradiction to good judgment and in detriment to the resources of the Bank, a public institution and a private investment. Even had he made the representations, they both were promises of future conduct which would not undergird recovery unless there were also clear and convincing evidence that the promises were made with a present, undisclosed intention not to perform. Posey and Watkins failed to put on any such proof. Second, Posey and Watkins claimed that their financial woes were the result of Sandroni's telling them that the second deed of trust secured on December 4, 1984, was only for the purpose of improving their SBA application and that if the SBA application were rejected, he would tear up the deed of trust and the Bank would lend them $362,000.00. The alleged representations concerning tearing up the deed and the Bank's lending the $362,000.00 were also promissory in nature and, in order to prevail, Watkins and Posey were obliged to prove, by clear and convincing evidence, an undisclosed intention not to perform. We do not think that they proved such an intention. Even, however, if the representations were made with such an intention, we do not think that Posey and Watkins proved, by clear and convincing evidence, that they had a right to rely on the truth of such representations. Posey and Watkins knew that the business was not paying its suppliers, rent, or debt service. They had been twice turned down by the SBA for a direct loan of $115,000.00 because their financial situation would not warrant a loan in that amount. It seems clear that they knew that the business could not support any further debt and that they could not have reasonably relied on any promise of a loan in more than double the amount of the loan for which they had already been twice refused. If Sandroni had made the promise and had made the loan, it is also clear that, because the business could not have supported any further debt, the eventual outcome would certainly have been the same  the loss of any capital the owners may have invested along with the loss of assets used as collateral for the interim loans. Posey claimed that Sandroni fraudulently induced him and his wife to execute the second deed of trust on their residence to secure the consolidated note of $157,473.49 and that, as a result, Posey lost his portion of the equity in his home. When the Poseys received the rejection from the SBA of their loan guarantee and learned that the Bank would not make a long-term loan, they voluntarily stopped paying the notes due on the first deed of trust and it was the first deed of trust holder, and not the Bank, who foreclosed on the property. Since The Bank of Shaw did not foreclose on their second deed of trust and subsequently released the second deed of trust on the Posey residence, any loss of equity in his residence is not the result of Posey's having given a deed of trust to secure his consolidated note at The Bank of Shaw. In sum, the trial court erred by allowing the issues of negligent and fraudulent misrepresentation to be considered by the jury because the evidence offered by Posey and Watkins was wholly insufficient to support a verdict in their favor. We, therefore, reverse and vacate the jury award in favor of Posey and Watkins in the amount of $240,000.00 and $160,000.00, respectively, and render judgment in favor of The Bank of Shaw. As to the set off awarded by the trial court in favor of The Bank of Shaw on its counterclaim in the amount of $210,020.91, we likewise reverse, vacate, and render judgment in favor of Posey and Watkins. REVERSED AND RENDERED. ROY NOBLE LEE, C.J., and SULLIVAN and BLASS, JJ., concur. DAN M. LEE, P.J., concurs in result only. HAWKINS, P.J., and PRATHER, ROBERTSON and ANDERSON, JJ., not participating.