Opinion ID: 2144843
Heading Depth: 1
Heading Rank: 5

Heading: silent fraud

Text: Defendants also raise the affirmative defense of silent fraud. They point out that during the negotiations leading up to the closing USF&G had flatly stated that all of the enumerated bond requirements had to be satisfied, or at least agreed to, prior to the issuance of the labor and material and the performance bonds. They claim that plaintiff's agents saw or should have seen that defendants would rely on plaintiff's insisting on these conditions, because defendants showed they were very concerned with their potential liability and were looking to the other indemnitors sharing any indemnification with defendants. The defendants therefore argue that plaintiff had a duty to inform them of the reduction in the bond requirements. In addition, since Montie and Neubacher repeatedly assured defendants that they were the only parties who had not signed the indemnity agreement, the two agents had a duty to inform defendants of the misstatement when they discovered that many of the bond requirements had not been satisfied. It is generally recognized that [f]raud may be consummated by suppression of facts and of the truth, as well as by open false assertions, Fred Macey Co v Macey, 143 Mich 138, 153; 106 NW 722 (1906), since a suppression of the truth may amount to a suggestion of falsehood. Stewart v Wyoming Cattle Ranche Co, 128 US 383, 388; 9 S Ct 101; 32 L Ed 439 (1888). In order for the suppression of information to constitute silent fraud there must be a legal or equitable duty of disclosure. See 37 Am Jur 2d, Fraud and Deceit, § 146. In its original findings of November 4, 1977 the trial judge summarily dismissed defendants' silent fraud claim, holding that there was no duty on the part of the plaintiff to make a disclosure of the waivers [of the remaining bond requirements], they [sic] having no knowledge of the effect the original statements of Montie's had on the defendants' decision. (Emphasis added.) On motion for reconsideration the trial court explained its ruling. It is true that some of the conditions originally called for were not met. If any misrepresentation occurred, it was through a statement that they had been. As I indicated in the finding, the proofs satisfy me: 1. The statement of what would be required in order to issue the bond was true when made. 2. It was not made in an attempt to induce the defendants to act, although in their minds it was in fact an inducement. 3. The plaintiff neither knew nor had any reason to believe that defendants' actions were governed at all by its own requirements. 4. When the changes took place, there was no duty on the part of the plaintiff to speak. At that time and throughout, the defendants had conveyed two objections to the plaintiff  one that their wives should not be required to sign the indemnity agreement, to which the plaintiff acceded; two, that there be a list of priorities among the indemnitors, which request was denied. Not knowing and not having reason to believe, that the defendants looked to the other conditions as `running' to them, the plaintiff's silence cannot, in my judgment, be construed to have been breach of a duty to speak. (Emphasis added.) Thus the trial court concluded that plaintiff had no duty to notify defendants of the modification of the bond requirements because it found that USF&G did not know, nor reasonably should have known, that defendants were relying on the representations that all of the bond requirements had been satisfied. We find this premise to be clearly erroneous. In the instant case the trial court specifically found that Montie and Neubacher were agents of USF&G. Therefore if the agents knew, or reasonably should have known, that defendants were relying on all the bond requirements being completed that knowledge is imputed to the principal, USF&G. Seavey, Law of Agency (West, 1964), § 97, p 174. See 1 Restatement Agency, 2d, § 272, p 591. We hold that the trial court was clearly in error in finding that plaintiff did not know, nor reasonably should have known, of defendants' reliance. Defendants had discussed with both agents their concern over their potential liability under the indemnity agreement and were openly attempting to limit this liability by 1) making sure that all of the proposed indemnitors had signed the indemnity agreement and that the Jackson Bank had subordinated its security interest in Kwaske Brothers' assets; 2) attempting to establish a priority of collections clause; and 3) eliminating the requirement that their wives sign the indemnity agreement. Therefore we find that Montie and Neubacher, as professional insurance agents experienced in the drafting and execution of indemnity agreements, knew, or reasonably should have known, that defendants were relying on the representations that all the bond requirements had been satisfied. See Part III, supra. Once this determination has been made it logically follows that the agents had a duty to disclose that all the bond requirements had not been met. [O]ne who remains silent when fair dealing requires him to speak may be guilty of fraudulent concealment. Nowicki v Podgorski, 359 Mich 18, 32; 101 NW2d 371 (1960). It is the general rule that a party to a business transaction is under an obligation to exercise reasonable care to disclose to the other party, before the transaction is consummated, any subsequently acquired information which he recognizes as rendering untrue, or misleading, previous representations which, when made, were true or believed to be true. Strand v Librascope, Inc, 197 F Supp 743, 754 (ED Mich, 1961). See Wolfe v A E Kusterer & Co, 269 Mich 424; 257 NW 729 (1934). Accord, 3 Restatement Torts, 2d, § 551(2)(c), p 119. When Montie and Neubacher discovered that their representations concerning the bond requirements were inaccurate, and because they knew that defendants were very concerned with whether all of the other parties had signed the indemnity agreement, the insurance agents had a duty to clearly inform defendants of the new situation. This duty may have been satisfied by the delivery of the USF&G letter to defendants on March 28, 1972 insofar as the letter put defendants on notice that certain parties listed in the bond requirements had not signed the indemnity agreement as of February 4, 1972, the date the letter was written. In other words, the USF&G letter notified defendants that the December 1971 representations were not true when made. However, it is far from clear whether the letter was intended to, or actually did, alter defendants' reasonable understanding of plaintiff's previous and continual assurances that all of the bond requirements had been satisfied since the letter was delivered almost two months after it was written and called for the delivery of the remaining indemnity agreements at an early date. (See Part V, infra.) Since neither the trial nor appellate court reviewed the issue of whether the duty to notify was satisfied and since this issue was not briefed by the parties, we reverse only the finding that there was no duty to inform and remand to the trial court for further consideration not inconsistent with this opinion. We note, however, that whether or not there was a satisfaction of the duty is closely aligned with the question of whether or not there was an effective misrepresentation, which is discussed next.