Opinion ID: 459044
Heading Depth: 2
Heading Rank: 1

Heading: The Bank's Duty to its Customer

Text: 7 Merrill Lynch's theory of recovery is based on the common-law tort of deceit. It alleged and sought to prove that FNB deliberately failed to inform Merrill Lynch that over one million dollars in bad checks had been returned from Worthen and were to be charged to Merrill Lynch's account. It sought to prove that a previous, established course of dealing existed between Merrill Lynch and FNB by which FNB consistently informed Merrill Lynch of large-item returns when they were received, and that Merrill Lynch justifiably relied on the bank's so informing it. Merrill Lynch alleged that FNB deliberately chose to delay informing it of these large return items so that the bank could protect its own assets by collecting on other checks which had been drawn on Merrill Lynch by its customer, Comex. 8 At trial FNB relied mainly on the theory that FNB had no duty to Merrill Lynch or other financial institutions to discover the existence of a check-kiting scheme and then surrender the benefit of its diligence by disclosing the kite before acting to protect itself. 9 FNB also sought to prove that Merrill Lynch was negligent in allowing its customer Comex to inflate the value of its Ready Assets Trust balance by giving immediate credit on Comex deposits, and that Merrill Lynch was in an equal or better position to discover the scheme but had exempted Comex from its in-house kite-detection routines. FNB's reliance on what is essentially a contributory-negligence defense is misplaced, for the central question in this case is not whether FNB or Merrill Lynch had a duty to the other to discover and disclose the check-kiting scheme as such. Rather, Merrill Lynch alleged, and FNB failed to refute, that FNB departed from its established course of dealing with Merrill Lynch in order to shift the ultimate loss to Merrill Lynch. Since FNB did not attempt to prove that Merrill Lynch was negligent in relying on FNB's policy of prompt notification when large charge-back items came in, the question of contributory negligence is irrelevant to the outcome of this case. 3 10 First National Bank does not object to the District Court's instructions on the elements of deceit, 4 which essentially follow Arkansas law. The Arkansas Supreme Court in Beam v. Monsanto Co., 259 Ark. 253, 264, 532 S.W.2d 175, 180-81 (1976), adopted Dean Prosser's five-element definition of the tort of deceit, as follows: 11 1. A false representation made by the defendant. In the ordinary case this representation must be one of fact. 12 2. Knowledge or belief on the part of the defendant that the representation is false--or, what is regarded as equivalent, that he has not a sufficient basis of information to make it. This element is often given the technical name of 'scienter.' 13 3. An intention to induce the plaintiff to act or refrain from action in reliance upon the misrepresentation. 14 4. Justifiable reliance upon the misrepresentation on the part of the plaintiff, in taking action or refraining from it. 15 5. Damage to the plaintiff, resulting from such reliance. 16 W. Prosser, Law of Torts 685-86 (4th ed. 1971). See also MFA Mut. Ins. Co. v. Keller, 274 Ark. 281, 623 S.W.2d 841 (1981); Storthz v. Commercial Nat. Bank, 276 Ark. 10, 631 S.W.2d 613 (1982). Neither does the bank challenge the instruction on misrepresentation by failure to act. 5 When a fact is peculiarly within the knowledge of one party and of such a nature that the other party is justified in assuming the existence of that fact, then there is a duty to disclose the fact. Bridges v. United Savings Association, 246 Ark. 221, 228, 438 S.W.2d 303, 306 (1969). Justifiable reliance of this sort may arise through the course of dealing between the bank and its customer. See City National Bank v. McCann, 193 Ark. 967, 972-73, 106 S.W.2d 195, 199 (1937). The duty to speak may be based on special circumstances, such as a confidential relationship, in which one party knows that another is relying on a misrepresentation to his detriment. Berkeley Pump Co. v. Reed-Joseph Land Co., 279 Ark. 384, 397, 653 S.W.2d 128, 134 (1983). The relationship inducing reliance need not be a fiduciary one in a strict sense; the surrounding circumstances may reveal reliance even though the parties are not in a confidential relationship. Camp v. First Fed'l Savings & Loan, 12 Ark.App. 150, 154, 671 S.W.2d 213, 216 (1984). 17 To all this FNB does not object. Instead, it relies on case law which addresses the duty of a bank to disclose a check kite to another bank. See, e.g., Mid-Cal Nat'l Bank v. Federal Reserve Bank of San Francisco, 590 F.2d 761 (9th Cir.1979); Citizen's National Bank v. First National Bank, 347 So.2d 964 (Miss.1977). While these cases may correctly state the law as to dealings between banks when both have equal opportunity to discover a check-kiting scheme, they do not stand for the proposition that a bank may act unilaterally to shift the resulting loss onto a depositor who is relying on the bank's policy of giving prompt notice of checks to be charged back to its account. The District Court correctly ruled that FNB, if it had committed itself to a course of dealing with its customer, was not entitled to depart from that course of dealing in order to take advantage of superior knowledge.