Court Opinion

ID: 9514598
Source: CourtListenerOpinion
Date Created: 2023-08-06 22:50:37.88452+00
Date Added: 2024-06-11T09:06:19.150781
License: Public Domain

AMUNDSON, Justice (on reassignment).
[¶ 1.] When Buxcels were looking for a business to buy, First Fidelity Bank encouraged them to purchase a grocery store from its customers, the Fabers. A bank officer told them they could earn “a good living” in the business. Buxcels bought the store, pledging their farm and home as collateral. First Fidelity financed the purchase and prepared the SBA guaranteed loan application. After the store failed, Buxcels learned that First Fidelity knew Fabers had chronic cash flow problems and that the bank had threatened foreclosure. Buxcels brought suit, asserting that First Fidelity misrepresented the condition of the business, breached a fiduciary duty owed to them, and failed to disclose Fabers’ distressed financial condition. The trial court ruled as a matter of law that no fiduciary duty existed and instructed the jury that the bank owed no duty to disclose. On the remaining claims, the jury returned a verdict in favor of First Fidelity. Buxcels appeal, asserting that the bank owed them a fiduciary obligation and had a duty to disclose the previous owners’ lending history. We reverse and remand.
FACTS
[¶ 2.] Clifford and Elaine Buxcel resided on their family farm, northwest of Murdo, South Dakota. In 1990, after enrolling their family farm in the Conservation Reserve Program, they sought ways to make additional income. First Fidelity’s loan officer and realtor, Brian O’Reilly, told them that Dean’s Market, a grocery store located on Main Street in Murdo was for sale. The market was owned by Dean and Betty Faber. While there was no sign or other indication that the market was for sale, O’Reilly indicated that First Fidelity, which is also a real estate agency, had a listing for the market. Buxcels expressed interest. O’Reilly referred Buxcels to First Fidelity’s Senior Vice-President and manager of the Murdo branch, D.J. Mer-tens.
[¶ 3.] Mertens met with Buxcels at the bank to discuss the purchase. Mertens discussed gross sales and receipts of the market’s operation with Buxcels. Later *595meetings followed, during which Buxeels were assured by Mertens and Betty Faber that they could make a “good living” from the store if they “worked hard.” They were also told that Fabers wanted to “retire from the business.” Mertens indicated that he would assist Buxeels and that First Fidelity would finance the purchase of the loan. Mertens provided an acquisition and financing package to Buxeels. The package included an offer and purchase agreement, an appraisal, cash flow, and SBA application, which was previously prepared for prior prospective purchasers. Mertens advised Buxeels to obtain a SBA loan for the purchase of the market. An SBA loan allows First Fidelity to safeguard its risk by guaranteeing repayment of ninety percent of the loan to First Fidelity in the event of default. As a condition of financing, First Fidelity required that Buxeels grant a second mortgage on their 1700-acre farm and homestead. First Fidelity financed both the purchase price ($80,000 plus inventory of approximately $40,000) and the beginning operating expenses.
[¶ 4.] At no time did anyone intimate to Buxeels that Fabers held a loan with First Fidelity. Further, there was never any indication that the store was heavily indebted, that Fabers had a long-term record of poor performance on payments, and that First Fidelity wanted to sell the market, rather than pursuing foreclosure, which would have resulted in piece-by-piece liquidation.
[¶ 5.] Following discussions advising Buxeels to obtain a SBA loan, Mertens gathered the necessary information and prepared the SBA loan application for Buxeels. The application included an internal appraisal of the store, valuing it at $160,000. Mertens also compiled figures for the loan application that showed the store could make money, based on reports from the grocery’s food supplier, Affiliated Foods. Further, the report provides that Fabers were selling the market because they desired to retire. Buxeels signed the application form.
[¶ 6.] Following the purchase of the market, Buxeels eagerly went to work making improvements on the store. They cleaned and reorganized the store, put on a new roof, and improved its overall appearance.
[¶ 7.] Notwithstanding these improvements, within only a few months the busi-. ness was in serious financial trouble. Revenues were inadequate to cover expenses. Over this time, First Fidelity advanced $45,000 in additional loans to Buxeels. Eventually, Buxeels were put on a cash-only basis with their food supplier, Affiliated Foods, and First Fidelity began to return Buxeels’ checks. Buxeels ultimately defaulted on their loan payments.
[¶ 8.] First Fidelity made a demand on the SBA for payment of the ninety-percent guarantee and turned servicing the loan over to the SBA. Upon foreclosure, SBA determined the fair market value of the store to be $41,000. Assuming the bank’s appraised value of $160,000 was accurate, this reflects a $119,000 drop in fair market value of the market in this short period of time.
[¶ 9.] Buxeels sued First Fidelity, claiming that it intentionally failed to disclose the complete and troubled financial history of the market. During discovery, Buxeels obtained Fabers’ personal loan file at First Fidelity and learned that the business had substantial debts which were not being paid.
[¶ 10.] The loan comment sheets indicate the market under Fabers’ operation was severely indebted. In 1978, Fabers borrowed $3,000 to cover cash flow short falls. From April of 1978 to May of 1983, Fabers borrowed an additional $47,000 to cover cash shortfalls. By March of 1986, Fabers were writing checks with insufficient funds and were discussing their cash flow problems with First Fidelity. In April of 1987, Fabers’ borrowing increased to $66,000. By December of 1988, Fabers’ borrowing was in excess of $82,000 and the comment *596sheet states that Mertens “discussed his financial situation and the fact that he was falling behind.” In June of 1988, Mertens met -with Fabers and discussed the note, which was past due and the fact that he “was behind again.” First Fidelity continued with Fabers’ loan, rewriting the loans into one note. As of July 1988, Fabers loan was now up to $104,000. By February of 1991, liquidation of the store’s assets was discussed with Fabers, who indicated they would attempt to sell the business. In February of 1991, Fabers were again forced to borrow more money. During this period of time, First Fidelity started returning checks on the market “because they had run behind.” In March 1991, Fabers injected $17,000 of their own money into the business and First Fidelity agreed to lend another $10,000 to keep the store open.
[¶ 11.] At trial, over Buxcels’ objection, the jury was instructed that First Fidelity had no duty to disclose Fabers’ financial information to Buxcels before the sale of the store, absent subpoena, court order, or the consent of Fabers. Further, the trial court granted First Fidelity’s motion for a directed verdict on Buxcels’ breach of fiduciary duty claim, determining as a matter of law no fiduciary duty was created.
[¶ 12.] Buxcels appeal, claiming the trial court erred in granting a directed verdict in favor of First Fidelity on the breach of fiduciary duty claim and in failing to give an instruction that First Fidelity had no duty to disclose customer loan records.
STANDARD OF REVIEW
[¶ 13.] We review asserted failure to give instructions under the following standard:
On issues supported by competent evidence in the record, the trial court should instruct the jury. The trial court is not required to instruct on issues lacking support in the record. Failure to give a requested instruction that correctly sets forth the law is prejudicial error. Jury instructions are reviewed as a whole and are sufficient if they correctly state the law and inform the jury. Error is not reversible unless it is prejudicial. The burden of demonstrating prejudice in failure to give a proposed instruction is on' the party contending error.
Sundt Corp. v. South Dakota Dep’t. of Transp., 1997 SD 91, ¶ 19, 566 N.W.2d 476, 480 (emphasis added) (citing Kuper v. Lincoln-Union Elec. Co., 1996 SD 145, ¶ 32, 557 N.W.2d 748, 758). We review an order granting a directed verdict under SDCL 15-6-50(a) as a question of law. A directed verdict motion questions the legal sufficiency of the evidence to sustain a verdict against the moving party. On such a motion, the court must determine whether, viewing the evidence most favorable to the nonmoving party, there is any substantial evidence to sustain the action. If reasonable minds might differ, a directed verdict is not appropriate. The trial court’s decisions and rulings on such motions are presumed correct and we will not seek reasons to reverse. Schuldies v. Millar, 1996 SD 120, ¶ 8, 555 N.W.2d 90, 94-95 (citations omitted). The existence and scope of a fiduciary duty are questions of law. High Plains Genetics Research, Inc. v. JK Mill-Iron Ranch, 535 N.W.2d 839, 842 (S.D.1995) (citations omitted). Whether a breach of a fiduciary duty occurred, however, is a question of fact. Id.
DECISION
[¶ 14.] The trial court erred in failing to instruct the jury that First Fidelity had a duty to disclose under the facts of this case. While as a general rule, one party to a transaction has no duty to disclose material facts to the other, “special circumstances” may dictate otherwise. Klein v. First Edina National Bank, 293 Minn. 418, 196 N.W.2d 619, 622 (1972). One example of such a “special circumstance” is:
One who stands in a confidential or fiduciary relation to the other party to a *597transaction must disclose material facts. (Citation omitted.)
Id. A confidential “relationship is not restricted to any particular association of persons. It exists whenever there is trust and confidence, regardless of its origin.” Brandriet v. Norwest Bank, 499 N.W.2d 613, 617 (S.D.1993) (citing Hyde v. Hyde, 78 S.D. 176, 186, 99 N.W.2d 788, 793 (S.D.1959)). “A confidential relationship is generally synonymous with a fiduciary relationship.” Crane v. Centerre Bank of Columbia, 691 S.W.2d 423, 428 (Mo.App.1985) (citation omitted). A “ ‘disparity of business experience and invited confidence’ are a basis for finding such a [fiduciary] relationship.” May v. First Nat’l. Bank of Grand Forks, 427 N.W.2d 285, 290 (1988) (quoting Murphy v. Country House, Inc., 307 Minn. 344, 240 N.W.2d 507, 512 (1976)). Special circumstances exist under the facts of this case, creating a confidential or fiduciary duty on the part of First Fidelity to disclose the true picture of the history of this grocery store business. As it stands, First Fidelity was less than candid with Buxcels by providing projections prepared for the SBA that the store was a viable business when, in fact, the business was in serious financial trouble.
[¶ 15.] The records of First Fidelity regarding Fabers’ loan history show an indebtedness starting at $3,000 on April 12, 1978, which increased to $116,026.05 on May 26, 1992, with a charge off of $22,-000.00 (actual $163,304.97). During this fourteen-year period, First Fidelity’s records disclose that new loans were made to Fabers so that interest would be paid and the unpaid principal would be rewritten into a new note. A note in the bank’s comment sheet on June 16, 1989, states as follows:
We called Dean into the office this date and again discussed his performance on his note and his checking account. We stated that regardless of our efforts to turn his business around, that things have remained the same and he is continuing to go backwards. We then informed him that because of the continued escalation of his debt that we are no longer continued [sic] to finance his business operation and that he should make arrangements to pay the bank in full. After some discussion, it was decided that he would seek refinancing for his current obligations with this Bank with another bank. (Emphasis added.)
Then, on March 1, 1991, after no refinancing had been obtained, the comment sheet states in relevant part:
At this point in time, we have been returning checks on Dean’s market because they have run behind. Most of these checks have been returned back to their suppliers. Over the past couple of weeks, the amount of their outstanding checks has been declining and that there is progress, but to date, the warehouse was going to notify the Fabers that they could no longer supply them with products. In essence, this ivould close their doors and at this point in time, we [bank] would have been involved in a piece by piece liquidation of the business. I did feel that it would not be in the Bank’s best interest at this given point in time to conduct this type of liquidation but to continue to work for a turnkey sale [of] the business to an individual. (Emphasis added.)
[¶ 16.] That individual arrived, namely Clifford and Elaine Buxcel, whose only business experience came from toiling long hours on a’ farming/ranching operation. First Fidelity was generous enough to assist Buxcels in obtaining a $160,000 SBA loan for the purchase of this thriving grocery store. Not surprisingly, within months, Buxcels were having cash flow problems and were subsequently foreclosed upon.
[¶ 17.] From that very first time Mer-tens met with Buxcels at the bank, First Fidelity assumed an active role and was integrally involved in the sale of this gro-*598eery store.1 All of the meetings took place at the bank. At the first meeting, Mer-tens discussed the purchase of the store with Buxcels, providing the store’s gross sales and receipts. Subsequently, Mertens presented to Buxcels an acquisition and financing package, which consisted of an offer and agreement, appraisal, cash flow, and SBA application. First Fidelity then obtained the requisite information and prepared the SBA application and processed the SBA loan for Buxcels. Prior to signing the SBA application, Mertens told Buxcels he thought the business “would work.”
[¶ 18.] Obviously, obtaining an SBA loan was in the best interest of First Fidelity, its directors, and shareholders, considering where the bank was situated with regard to the Fabers’ loan prior to the sale of the store to Buxcels. First Fidelity had written off the Faber loan as a loss, until Buxcels, with the backing of the SBA, bailed them out. Mertens’ testimony at trial reflected the impossibility of realizing a return on the Faber loan prior to the sale to Buxcels.2
[¶ 19.] In Brandriet, 499 N.W.2d at 618, this Court held that a confidential relationship existed between the bank and its customer in the processing of a VA loan. This Court stated:
Brandriets placed their trust and confidence in Norwest to process the VA loan; Norwest officials were supposed to be acting with the Brandriets’ interest in mind. Where such an exchange of trust and action exists, a confidential relationship also exists. Schwartzle v. Dale, 74 SD 467, 471, 54 N.W.2d 361, 363 (1952).
Id. If a confidential and trusting relationship existed in the processing of a VA loan, similarly, it can exist when processing a SBA loan. If a bank is to act with the customer’s interest in mind when processing a VA loan, the same should be the case when processing a SBA loan. Similar to the Brandriets, Buxcels were invited to place their trust and confidence in First Fidelity to process the SBA loan. As a result, a confidential relationship existed between the parties.3
*599[¶ 20.] First Fidelity orchestrated the sale of this grocery store from the very first meeting between Mertens and Bux-cels. Mertens prepared the offer and purchase agreement and appraisal, and provided cash flow information and the SBA application. Buxcels relied upon the appraisal4 provided as to the fair market value of the store and did not negotiate the price. All of the while, First Fidelity failed to inform Buxcels of the loan it held with the Fabers and the interest the bank possessed in regard to the sale of the store. Further, First Fidelity stated the reason for the sale was retirement, when in truth, the store was heavily indebted and would be liquidated unless a buyer could be found. Buxcels clearly placed their trust and confidence in First Fidelity. They relied on Mertens and believed he was representing their interest. Under such circumstances, a duty to disclose arose.
[¶ 21.] In searching for the truth in a jury trial, the jury should have been instructed on the fiduciary duty to disclose. Would a bank, for example, in Pierre, have loaned Buxcels $160,000 to purchase this grocery store business, knowing the store’s dismal financial history? The answer is a resounding “No.” Why? Because it would simply not be in the best interest of a bank’s directors and stockholders. Another bank did not have the vested interest that First Fidelity held in this transaction. First Fidelity knew this ship was going down and they brought Buxcels aboard, along with their other assets (the second mortgage on their 1700-acre farm and homestead), to go down with it.
[¶22.] A review of this record shows what Buxcels actually purchased was a one-way ticket to bankruptcy court. Without a disclosure, First Fidelity was able to reduce their exposure in this business loan from one hundred percent to ten percent, thanks to the SBA.
[¶ 23.] We reverse and remand for a fair trial, allowing the jury to be instructed on the duty to disclose. Presented with the entire picture, the jury can then determine whether the failed business venture was due to Buxcels’ management of the market.
[¶ 24.] MILLER, Chief Justice, concurs.
[¶ 25.] SABERS, Justice, concurs specially.
[¶ 26.] KONENKAMP and GILBERTSON, Justices, dissent.

.Mertens testified at trial:
I had financed grocery stores in the past and I know a little bit about grocery stores and I have a little lingo I start out with: that an operation of a grocery store is awfully hard business; that you order the supplies, you unload them from the truck, you put them on the shelf, and you haul them back out. It's hard work and you have to deal with complaints with the sour milk and, you know, and that.
I also because I've worked with Affiliated Foods, explained to them or told them about the Affiliated Food programs that - that they have available. And I always felt very comfortable with Affiliated's ability to train and to teach people the store business.
And I related back to them some of the stores that I have worked with. One of the stores I financed a guy worked on the streets, you know, for the city of Kennebec and ended up being very successful in the business.
And I also suggested they go over and visit that store in Kennebec. And I also suggested that I understand that Affiliated store in Kadoka is an outstanding store and a high profit store and to go and visit that store.

. Q: When you obtained an SBA loan guarantee the bank has less risk, doesn't it?
A: Yes.
Q: If the loan goes into default you can get 90 [ninety] percent of your money by just making a demand on the SBA, can’t you? A: Yes.
Q: They’re a pretty reliable payer?
A: Yes, they are.
Q: Much more difficult to get that money out of a loan customer at the bank?
A: Yes.
Q: If you would have to try to get the money out of the Fabers it would have been much more difficult?
A: Yes.
Q: You probably wouldn’t have gotten ninety percent of your $180,000?
A: I’ve never had that happen yet.

. The bank’s involvement is clearly set forth in a letter written to James Berry of the Small Business Administration by the bank on behalf of securing a SBA loan for Buxcels. The letter states in part:
The current owners of the store have lost interest in the business and the store needs to be rearranged, plus it needs a good cleaning. ... I do believe with proper management, this store has potential. *599Comparing this letter to bank’s comment sheet, it is no mystery why the Fabers lost interest in the business — bank had ceased lending money and the food supplier had stopped shipments. Further, do these comments reflect a store that has potential? I dare say not. In shepherding this SBA loan application, bank clearly acted on behalf of Buxcels and certainly invited reliance by Buxcels. A duty to disclose arose when this bank negotiated an SBA loan for this prospective buyer of this sunken ship, also known as a grocery store.

. The appraisal done by bank valued the store at $160,000, the appraisal by the SBA following foreclosure, valued the same store at $41,-000.