MINNESOTA SUPREME COURT ESTABLISHESLIMITATIONS ON LENDER LIABILITY
By Stephanie A. Ball

Lenders are oftentimes custodians of confidential financial information regarding their customers. Lenders owe a duty to their customers to keep such information confidential. Under certain circumstances, a lender may also owe a competing duty to a third party customer to disclose confidential information of another customer. How does a lender decide when disclosure is required? In a recent (1996) Minnesota Supreme Court decision, Boubelik v. Liberty State Bank, the Court empathized with the lender faced with the dilemma of determining when disclosure is required and clarified the standard for determining when disclosure is appropriate.

In Boubelik v. Liberty State Bank, the Court analyzed a bank's duty to disclose confidential customer information to third-party customers who were contemplating a loan with the bank for the purpose of buying a business. The seller of the business was an individual who was both a business and personal customer of the bank. The seller defaulted on his obligations to the bank and filed for bankruptcy protection. The bank's third-party customers claimed the bank had a duty to disclose to them the financial condition of the seller that ultimately filed for bankruptcy protection.

The Supreme Court held that a bank has a duty to disclose to a third party customer the financial condition of a customer only where it has actual knowledge of the irretrievable insolvency of a customer. The condition of irretrievable insolvency is defined as whether a party has no reasonable expectation of fulfilling its obligations. Mere insolvency or a "precarious financial condition" is not sufficient to impose a duty to disclose. In attempting to establish a clear standard for lenders, the Minnesota Supreme Court formulated the "irretrievably insolvent" standard of disclosure in light of the following factors:

• It is important for banks to have a clear understanding of any duty to disclose, especially in light of the countervailing duty not to disclose their customers' confidential information. Minn. Stat. ¤¤ 51A.11, Subd. 1, imposes a duty of confidential ity on banks: "[T]he books and records pertaining to the accounts, loans . . . of depositors, borrowers or stockholders shall otherwise be kept confidential . . ." Id.
• The Minnesota Supreme Court previously recognized that where a bank has actual knowledge of the fraudulent activities of one of its depositors, it has an affirmative duty to disclose those facts to a potential borrower before it makes a loan to the borrower which furthers the fraud. In Boubelik, the court concluded that actual knowledge of irretrievable insolvency is akin to actual knowledge of fraudulent activities.

The Boubelik decision is good news for lenders for several reasons. First, the Supreme Court has attempted to establish a clear duty to disclose. It has imposed a duty to disclose to a potential borrower of the bank the financial condition of another customer only where a customer's financial condition meets the definition of irretrievable insolvency. Second, the Minnesota Supreme Court emphasized that the duty to disclose must be evaluated in light of the day-to-day operations and function of a bank. For example, the court suggested the bank would not have a duty to investigate beyond its normal inquiry into a customer's financial condition. Finally, the Supreme Court recognized a bank's need to have a clear standard given its countervailing duty not to disclose.

The Supreme Court attempted to establish a clear standard for banks in determining when disclosure is required. However, the standard might not be so clear for every loan. The necessityof disclosure should be evaluated in light of the specific facts of a loan.

In addition to the Supreme Court's formulation of a standard intended to provide lenders with more guidance concerning the duty to disclose confidential financial information regarding a customer, the Boubelik decision limited a lender's exposure under Minnesota's Consumer Fraud Act.

Minnesota's Consumer Fraud Act allows a party who establishes a violation of the act to recover its attorneys' fees and costs for violation of the Act. The Act prohibits use of fraud, with the intent that others rely upon such fraud, in connection with the sale of any merchandise. Services fall within the scope of the definition of merchandise. The Supreme Court concluded that bank loans are not services within the meaning of the Act, relying upon the actual language of the statute, the rulings of other jurisdictions concerning similar consumer fraud statutes and the Court's view of public policy underlying Minnesota's Consumer Fraud Act. The Minnesota Supreme Court recognized that public policy not only includes protection for consumers who enter certain transactions in an unequal bargaining position, but it also includes "the freedom for sophisticated parties to borrow and to invest monies subject to certain risks."

The Court in Boubelik did not indicate whether its ruling regarding the inapplicability of Minnesota's Consumer Fraud Act applies to all bank loans or just commercial bank loans, such as those involved in the Boubelik decision. The Boubelik ruling may be limited in its application to commercial bank loans.

The Court's ruling that commercial bank loans do not fall within the scope of Minnesota's Consumer Fraud Act is also good news for lenders. In the event a lender becomes involved in litigation arising out of commercial bank loans, the lender's liability for attorney's fees and costs under the Act is limited.