Jacques v. First National Bank

McAULIFFE, Judge. This appeal presents the issue of whether a bank that has agreed to process an application for a loan owes to its customer a duty of reasonable care in the processing and determination of that application. We hold that under the particular facts of this case the bank is properly charged with that duty. The bank customers, Robert and Margaret Jacques (“the Jacques”), sued The First National Bank of Maryland (“the Bank”) alleging that the Bank failed to properly evaluate their qualifications for a home mortgage loan.

The Jacques’ complaint was in five counts, claiming malicious interference with the right of contract, breach of fidelity, negligence, gross negligence, and “prima facie” tort. I This dispute began with a residential sales contract executed on July 30, 1980 between Michael and Kathleen Clarke as sellers and the Jacques as purchasers. The purchase price fixed by the contract was $142,000.00. The Jacques were to pay $30,000.00 cash, referred to by the parties as a down payment, and obtain the balance of the purchase price through outside financing.

The printed ⁵²⁹ form of the contract required that the Jacques secure the balance of $112,000.00 through a conventional deed of trust, due in thirty years and bearing interest at the rate of 12-74 % per annum. The contract was expressly contingent upon the Jacques ability to obtain this financing. By a handwritten addendum, however, the parties agreed to the following significant modification of the financing and contingency provisions: Purchaser agrees to increase the down payment to whatever amount is necessary to qualify for a mortgage loan. The addendum also provided for an acceptable alternative financing rate of ll-7/8% with payment of two points 1 by the purchasers.

Shortly after the execution of the contract, the Jacques submitted their application to the Bank seeking a loan in accordance with the terms of the contract. A copy of the contract, including the addendum, was submitted with the application. On August 11, the Bank sent a letter to the Jacques stating: The First National Bank of Maryland is pleased to have received your application for processing a Mortgage Loan. The required $144.00 fee for the appraisal and credit report to initiate processing does not constitute approval of your loan.

The current rate for a loan of this type is 11-h%. This rate will hold for settlement for ninety (90) days from date the application is received in this office. At time of approval, the Bank will issue a commitment with a fixed interest rate, which will be binding upon written acknowledgement and acceptance. At the present time, the processing and approval for this loan is approximately four weeks. ⁵³⁰ On September 1, a bank officer contacted the Jacques and informed them they "qualified only for a loan of $74,000.00.

Subsequently, the Bank informed the Jacques that it had erred in its original determination of eligibility, and that in fact, under the Bank’s guidelines, the Jacques qualified for a loan of no more than $41,400.00. The Jacques vigorously protested this determination, but to no avail. They then requested that the Bank issue an outright refusal of their loan application. The Bank declined this request, explaining that the application, read in light of the contract, was for the maximum loan for which the applicants would qualify, and the Bank had determined that the Jacques qualified for a loan of $41,400.00.

The Jacques promptly attempted to obtain financing from another lending institution, Metropolitan Federal Savings and Loan Association. On the strength of the same information that had been provided the Bank, Metropolitan issued its commitment for a thirty-year loan in the amount of $100,000.00. However, because interest rates had dramatically escalated shortly after the Jacques had submitted their original application to the Bank, the proposed rate of interest on the Metropolitan loan was 13-7/s%. Concluding that the additional two percent interest would cost them more than $50,000.00 over the life of the loan, and because their contract did not require them to accept financing that exceeded 12-V4% interest, the Jacques did not accept the Metropolitan loan.

Instead, they proceeded to settlement with the Bank’s $41,400.00 loan, securing personal loans from relatives and a short term personal loan of $50,000.00 from the Bank. In order to obtain the personal loan from the Bank, the Jacques were required to pledge their personal stock portfolio as security and to pay 15% interest on that loan. On January 28, 1982, the Jacques filed suit against the Bank. Following six days of trial, the case was submitted to the jury on the claims of malicious interference with ⁵³¹ contract, gross negligence, and negligence. 2 The jury returned a verdict in favor of the Bank on the claims of malicious interference with contract and gross negligence, but found in favor of the Jacques on the negligence count and awarded them $10,000.00 compensatory damages.

The Jacques appealed, contending the trial judge had erred in instructing the jury concerning the plaintiffs’ duty to minimize their damages. 3 The Bank cross-appealed, arguing that as a matter of law it owed no duty to the Jacques in the processing of the loan application, and therefore its motion for a directed verdict should have been granted. The Court of Special Appeals reversed the trial court, holding that the Bank had no duty to use due care in evaluating the Jacques’ application for a loan. Jacques v. First National Bank, 62 Md.App. 54 , 488 A.2d 210 (1985). We granted certiorari to determine whether a bank does owe a duty to its customer under the circumstances presented by this case.

We reverse. II To establish a cause of action in negligence a plaintiff must prove the existence of four elements: a duty owed to him (or to a class of which he is a part), a breach of that duty, a legally cognizable causal relationship between the breach of duty and the harm suffered, and damages. Cramer v. Housing Opportunities Comm’n, 304 Md. 705, 712 , 501 A.2d 35 (1985); Scott v. Watson, 278 Md. 160, 165 , ⁵³² 359 A.2d 548 (1976); Peroti v. Williams, 258 Md. 663, 669 , 267 A.2d 114 (1970). Absent a duty of care there can be no liability in negligence.

Ashburn v. Anne Arundel County, 306 Md. 617, 627 , 510 A.2d 1078 (1986); Read Drug & Chem. Co. of Balto. City v. Colwill Constr. Co., 250 Md. 406 , 243 A.2d 548 (1968); Leonard v. Lee, 191 Md. 426 , 62 A.2d 259 (1948); Pennsylvania R. Co. v. State, 188 Md. 646 , 53 A.2d 562 (1947); W. Va.

Central R. Co. v. Fuller, 96 Md. 652, 666 , 54 A. 669 (1903). See also Inmi-Etti v. Aluisi, 63 Md.App. 293 , 492 A.2d 917 (1985). The duty element in a negligence action is “an obligation to which the law will give effect and recognition to conform to a particular standard of conduct toward another.” J. Dooley, Modern Tort Law, § 3.03, at 18-19 (1982, 1985 Cum.Supp.). The history of the concept of duty is traced in Prosser and Keeton on The Law of Torts, § 53, at 357 (1984): [W]hen negligence began to take form as a separate basis of tort liability, the courts developed the idea of duty, as a matter of some specific relation between the plaintiff and the defendant, without which there could be no liability.

We owe this to three English cases, decided between 1837 and 1842. [Winterbottom v. Wright, 10 M. & W. 109, 152 Eng.Rep. 402 (1842); Langridge v. Levy, 2 M. & W. 519, 150 Eng.Rep. 863 (1836), aff'd, 4 M. & W. 337, 150 Eng.Rep. 1458 (1838); Vaughan v. Menlove, 3 Bing.N.C. 468, 132 Eng.Rep. 490 (1837).] The rule which developed out of them was that no action could be founded upon the breach of a duty owed only to some person other than the plaintiff. He must bring himself within the scope of a definite legal obligation, so that it might be regarded as personal to him. “Negligence in the air, so to speak, will not do.” The statement that there is or is not a duty begs the essential question—whether the plaintiffs interests are entitled to legal protection against the defendant’s conduct. It is therefore not surprising to find that the ⁵³³ problem of duty is as broad as the whole law of negligence, and that no universal test for it ever has been formulated. It is a shorthand statement of a conclusion, rather than an aid to analysis in itself.

Yet it is embedded far too firmly in our law to be discarded, and no satisfactory substitute for it, by which the defendant’s responsibility may be limited, has been devised. But it should be recognized that “duty” is ... an expression of the sum total of those considerations of policy which lead the law to say that the plaintiff is entitled to protection. (Footnotes omitted.) Similarly, in 3 F. Harper, F. James, & 0. Gray, The Law of Torts, § 18.1, at 652 (2d ed. 1986), the development of the concept of duty in relation to negligence is set forth: The law of negligence started from the notion that negligence was one way to fail in the performance of a determinable legal duty, so that the courts came quite naturally to look on negligence as the correlative of a duty not to harm plaintiff in the manner of which he was complaining.

This duty might arise from the public nature of defendant’s calling, from his holding of a public office, from bailment, from prescription or custom, or from his control of a dangerous thing. It might also arise from private contract. It appeared “as a sort of parasitic obligation in connection with an actual contract or obligation.” Later the common law concept of negligence was extended to make persons liable for damages from the negligent performance of their own projects and undertakings, quite apart from calling, office, contract, or the like. And in time negligence came to be thought of as an independent ground of liability.

But the habit of thought which more or less unconsciously made negligence correlative to an antecedent duty to use care persisted ____ (Footnotes omitted.) The duty with which we are here concerned is a duty imposed by law as a matter of sound policy, for the violation of which a person may be held to respond in damages in tort. This duty is conveniently, if not lyrically, referred ⁵³⁴ to as a “tort duty,” A tort duty does not always coexist with a moral duty. Prosser and Keeton, supra, § 56, at 375. Neither must a duty imposed by statute necessarily create a tort duty.

Merrell Dow Pharmaceuticals v. Thompson, — U.S. -, 106 S.Ct. 3229 , 92 L.Ed.2d 650 (1986); Cort v. Ash, 422 U.S. 66 , 95 S.Ct. 2080 , 45 L.Ed.2d 26 (1975); Murphy v. Baltimore Gas & Elec., 290 Md. 186 , 428 A.2d 459 (1981). Nor does a duty assumed or implied in contract by that fact alone become a tort duty. The mere negligent breach of a contract, absent a duty or obligation imposed by law independent of that arising out of the contract itself, is not enough to sustain an action sounding in tort. Heckrotte v. Riddle, 224 Md. 591, 595 , 168 A.2d 879 (1961).

Still, while every contractual duty does not also impose a tort duty, [w]here a contractual relationship exists between persons and at the same time a duty is imposed by or arises out of the circumstances surrounding or attending the transaction, the breach of such duty is a tort and the injured party may have his remedy by an action on the case, or he may waive the tort and sue for the breach of the contract. Slacum v. Trust Co., 163 Md. 350, 352-53 , 163 A. 119 (1932) (quoting 26 R.C.L. 986). In determining whether a tort duty should be recognized in a particular context, two major considerations are: the nature of the harm likely to result from a failure to exercise due care, and the relationship that exists between the parties. Where the failure to exercise due care creates a risk of economic loss only, courts have generally required an intimate nexus between the parties as a condition to the imposition of tort liability. 4 This intimate nexus is satisfied ⁵³⁵ by contractual privity or its equivalent.

By contrast, where the risk created is one of personal injury, no such direct relationship need be shown, and the principal determinant of duty becomes foreseeability. MacPherson v. Buick Motor Co., 217 N.Y. 382 , 111 N.E. 1050 (1916). See also Henley v. Prince George’s County, 305 Md. 320 , 503 A.2d 1333 (1986) and Scott v. Watson, 278 Md. 160 , 359 A.2d 548 (1976). Because the harm likely to result from negligent processing of a loan application is limited to economic loss, we examine carefully the relationship that existed between these parties. [T]ort obligations of conduct are imposed by reason of the relation in which the parties stand toward one another; and in determining that relation, the law will often take into account what has been agreed between them, either to increase the actor’s responsibility or to lessen it, so that the tort duty finally fixed may coincide with that set by a contract, and for its breach either a contract or a tort action will lie.

Prosser and Keeton, supra, § 1, at 5. Two early leading decisions considering claims of the existence of tort duties in economic loss cases illustrate the importance of the nature of the legal relationship existing between the parties. In Glanzer v. Shepard, 233 N.Y. 236 , 135 N.E. 275 (1922), the Court of Appeals of New York held that a public weigher of beans was liable to the buyer of the beans for negligence in the weighing, notwithstanding that the weigher had been engaged and paid only by the seller. The New York court, speaking through Judge Cardozo, held that the buyer, although having no contract with the weigh-er, was the known and intended beneficiary of the contract ⁵³⁶ between the seller and the weigher, and therefore a .beneficiary of the duty owed by the weigher.

The court further concluded that as a public weigher holding itself out as skilled and careful in its calling, the defendant’s “assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed” thereby. Id. at 276 . Given the nature of the contract and the relation between the parties, the duty was one imposed by law as well as assumed by contract. In Ultramares Corporation v. Touche, 255 N.Y. 170 , 174 N.E. 441 (1931), the same court held that public accountants who carelessly prepared and certified a balance sheet for a corporation could not be held liable in negligence to a factor who made loans to the corporation in reliance upon the balance sheet.

While noting that the accountants were generally on notice that the balance sheet was likely to be relied upon by others, the court distinguished this case from Glanzer on the basis that there ,.was no “contractual relation, or even one approaching it, at the root of any duty that was owing from the defendants ... to the indeterminate class of persons who ... might deal with the [corporation] in reliance on the audit.” Ultramares, supra, at 446 . In the absence of the intimate nexus found in Glanzer , the Ultramares court concluded that the accountants might be liable to the factor for deceit, but not for negligence alone. [I]f there has been neither reckless misstatement nor insincere profession of an opinion, but only honest blunder, the ensuing liability for negligence is one that is bounded by the contract, and is to be enforced between the parties by whom the contract has been made. Id. at 448. Significant in both of these cases is the fact that the court had no difficulty in finding that the actors under each contract owed a tort duty of due care to the parties with whom they had contractual privity or its legal equivalent.

See Ultramares, supra, 174 N.E. at 444 ; Glanzer, supra, 135 N.E. at 275 . ⁵³⁷ We discern from our review of the development of the law of tort duty that an inverse correlation exists between the nature of the risk on one hand, and the relationship of the parties on the other. As the magnitude of the risk increases, the requirement of privity is relaxed—thus justifying the imposition of a duty in favor of a large class of persons where the risk is of death or personal injury. Conversely, as the magnitude of the risk decreases, a closer relationship between the parties must be shown to support a tort duty. Therefore, if the risk created by negligent conduct is no greater than one of economic loss, generally no tort duty will be found absent a showing of privity or its equivalent.

Ill In the present case there is no claim that the Jacques were strangers to the transaction. Instead, the Bank contends that there was no contract, and therefore no legal relationship between it and the Jacques at the time of the Bank’s alleged negligence. We disagree. The Bank made at least two express promises to the Jacques.

It agreed first to process their loan application and second to “lock in” the interest rate of 11-78% for a period of ninety days. If these promises were supported by a valid consideration they were enforceable. We conclude they were. First, we observe that the Bank agreed to process the loan application only if the Jacques paid the sum of $144.00 for the appraisal and credit report.

The Bank contends that it received no consideration as a result of this payment because it passed on the money to others. We are not persuaded by this argument, for it is basic contract law that consideration supporting a promise “may be given to a promisor or to some other person” and it “may be given by the promisee or by some other person.” Queen City v. Independent, 230 Md. 387, 392 , 187 A.2d 459 (1963) (citing Humbird v. Humbird, 162 Md. 582, 586 , 160 A. 623 (1932)). Additionally, we conclude that this initial agreement to process the loan application was intended to, and did, result ⁵³⁸ in a business advantage to the Bank. In the competitive business of seeking out borrowers for the purpose of making loans that would bring a profit to it, the Bank offered an inducement in the form of a guaranteed interest rate for ninety days.

When the Jacques accepted that offer by paying the required fee and submitting the loan application documents, the Bank obtained a business advantage and potential benefits sufficient