Wells Fargo Bank v. Az Laborers ( 2002 )

IN THE SUPREME COURT OF ARIZONA
En Banc
WELLS FARGO BANK, a National ) Supreme Court
Banking Association, ) No. CV-00-0062-PR
)
Plaintiff-Counterdefendant- ) Court of Appeals
Appellee, ) No. 1 CA-CV 99-0184
)
) Maricopa County
v. ) Superior Court
) No. CV 97-06648
ARIZONA LABORERS, TEAMSTERS AND )
CEMENT MASONS LOCAL NO. 395 PENSION )
TRUST FUND; ARIZONA LABORERS, TEAM- )
STERS AND CEMENT MASONS LOCAL NO. )
395 DEFINED CONTRIBUTION PENSION )
TRUST FUND; ARIZONA OPERATING )
ENGINEERS DEFINED BENEFIT PENSION )
TRUST FUND; ARIZONA OPERATING ) O P I N I O N
ENGINEERS DEFINED CONTRIBUTION )
PENSION TRUST FUND; ARIZONA STATE )
CARPENTERS PENSION TRUST FUND; )
ARIZONA STATE CARPENTERS DEFINED )
CONTRIBUTION PENSION TRUST FUND; )
McMORGAN & COMPANY, a California )
corporation, as Managing Agent of )
the Funds, )
)
Defendants-Counterclaimants- )
Appellants. )
______________________________________)
Appeal from the Superior Court of Maricopa County
Honorable Steven D. Sheldon, Judge
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED
_________________________________________________________________
Court of Appeals, Division One
AFFIRMED IN PART; VACATED IN PART
_________________________________________________________________
Lewis and Roca LLP Phoenix
by John P. Frank
Peter Baird
Randy Papetti
Barry Willits
Attorneys for Plaintiff-Counterdefendant-Appellee
Morrison & Hecker L.L.P. Phoenix
by Michael C. Manning
James W. Howard
Monty L. Greek
Attorneys for Defendants-Counterclaimants-Appellants
_________________________________________________________________
J O N E S, Chief Justice
I. Facts and Procedural History
¶1 This controversy arises under a triparty agreement
between First Interstate Bank (“the Bank”),1 various union pension
funds (“the Funds”), and Mercado Developers, a partnership headed
by J. Fife Symington, III (“Symington”). In 1987, the Bank funded
a $2.3 million loan to a separate Symington partnership for a strip
mall development named Alta Mesa Village. The Funds were not
involved in the Alta Mesa transaction. Later the same year,
Symington approached the Bank to request financing for a
construction project in downtown Phoenix called the Mercado Project
(“the Mercado”).2 The Bank determined not to provide permanent
1
During the course of this litigation, First Interstate Bank
was purchased by Wells Fargo Bank and now does business under the
latter name.
2
The borrower was Mercado Developers Limited Partnership, an
Arizona general partnership, of which Symington was one of the
general partners. Symington was also a personal guarantor of both
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financing for the Mercado but offered Symington interim
construction financing if he were able to secure permanent
financing from another lender. The Funds agreed to be that lender.
¶2 The Bank’s obligation to fund the construction loan arose
the moment Symington secured a commitment from the Funds (the
“Permanent Commitment”).3 At the Bank’s request, in May 1988, the
Bank, the Funds, and Symington executed a Triparty Agreement
setting forth the rights and obligations of each party. Among
other things, the Agreement provided that the Bank would fund $10
million for construction of the Mercado, but that no later than
June 30, 1990, the Funds would “take-out” the Bank’s interim loan
with permanent financing.4 After the take-out, Symington would be
obligated to the Funds under the Permanent Commitment. The Funds’
obligation was conditioned on review and approval of Symington’s
the Mercado loan and the Alta Mesa loan. Symington is not a party
to this action.
3
Triparty Agreement § 1.3. “Construction Lender, in reliance
upon the Permanent Commitment, has agreed to lend the sum of
$10,000,000.00 as interim financing (the ‘Construction Loan’)
. . . .”
4
Triparty Agreement § 3.5. “Upon the Take-Out Date, provided
all of the terms, conditions and provisions of the Permanent
Commitment shall have been satisfied, or Permanent Lender shall
have waived satisfaction of such conditions or shall have agreed to
fund the Permanent Loan without complete satisfaction of such
conditions . . . Permanent Lender shall fund the Permanent Loan by
disbursing to Construction Lender the sum necessary to repay the
Construction Loan . . . .”
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financial status.5 The Funds could refuse the loan if contract
conditions were not met or if the Funds were dissatisfied with
Symington’s financial condition. For example, the Funds could
terminate the Permanent Commitment if Symington were to become
insolvent, make an assignment for the benefit of creditors, or fail
to pay debts as they matured.6 In addition, pursuant to the terms
of the Triparty Agreement, the Funds were entitled, on request, to
receive financial information from the Bank on the status of the
5
Permanent Commitment ¶ 28. “FINANCIAL STATEMENTS/CREDIT
REPORTS: Within thirty (30) days following acceptance of this
Commitment letter, Borrower and Borrower’s partners shall provide
Lender with satisfactory and current financial statements and
credit reports (dated not more than six (6) months prior to the
date hereof) demonstrating to Lender’s complete satisfaction the
Borrower’s financial stability and creditworthiness. Borrower and
Borrower’s partners shall provide Lender with updated statements
and reports (dated not more than six (6) months prior to the Loan
Funding Date) . . . .”
6
Permanent Commitment ¶ 29. “FINANCIAL CONDITION: Lender
may terminate this Commitment by written notice to you in the event
that (i) the Borrower, any partner of Borrower, any guarantor of
Borrower’s obligation, or any affiliate of Borrower . . . whose
activities have material effect on the financial capabilities of
Borrower, . . . (collectively referred to in this paragraph as
‘Debtor’) shall make an assignment for the benefit of creditors;
(ii) an application or petition is filed for the appointment of a
custodian, trustee, receiver or agent to take possession of the
real estate or any other property of Debtor; (iii) Debtor is
generally not paying Debtor’s debts as such debts become due; (iv)
Debtor becomes ‘insolvent’ as that term is defined in . . . the
‘Bankruptcy Code’. . .; (v) Debtor shall file a petition with the
bankruptcy court under the Bankruptcy Code, or commence any
proceeding relating to Debtor under any bankruptcy or
reorganization statute or under any arrangement . . . .”
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Mercado construction loan.7 The Bank was not required to volunteer
information to the Funds;8 Symington, however, was expressly
obligated to provide specific financial information to the Funds.
¶3 By early 1989, the Phoenix real estate market began to
experience a catastrophic decline, and Symington’s real estate
endeavors were not immune from the trauma. The loan balance on
Symington’s Alta Mesa development came due in March 1989, and
because of the project’s lackluster performance, Symington was
unable to satisfy the obligation. The loan appeared on the Bank’s
“Watch Report” for the first time in March 1989. The Watch Report
is an internal bank document that monitors problem loans. In
exchange for a fee, the Bank extended the loan until September 1,
1989. The loan was subsequently twice extended: on September 1
and December 1, 1989.9 When the obligation ultimately matured on
7
Triparty Agreement § 2.1. “. . . Construction Lender will
provide Permanent Lender with copies of architect’s certifications,
builder’s certifications, certificates of occupancy issued by any
municipality, lien waivers, and such other documents or information
relating to the Construction Loan as Permanent Lender may
reasonably request, provided that Construction Lender shall have
obtained such items in the normal course of its administration of
the Construction Loan, or can obtain such items without undue
expense . . . .”
8
Triparty Agreement § 5.1. “. . . Construction Lender shall
have no obligation to comply with any of the terms, conditions and
provisions of Permanent Commitment but may, at its election,
satisfy such requirements on behalf of Borrower in any manner not
inconsistent with this Agreement.”
9
The September 1, 1989, loan extension request included a
printout of Symington’s related commitments to the Bank, including
the Mercado loan.
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March 15, 1990, Symington was still unable to pay, and the loan
defaulted at the conclusion of business that day.
¶4 The events that occurred between late 1989 and July 1990,
and the effect of those events on the Funds’ ultimate decision to
fund the Mercado permanent loan are at the core of this lawsuit.
The Funds claim that, during these months, actions were carried out
by Symington and the Bank that were intended to cloak Symington
with a false appearance of financial vigor and to deprive the Funds
of any reason to refuse to fund the Permanent Commitment. The
Bank, of course, was concerned and anxious to obtain repayment of
the $10 million Mercado construction loan. The Bank contends what
it did to ensure the permanent loan was lawful, that by securing
the take-out, it was merely protecting its own interests, that it
was unaware of any fraudulent behavior by Symington, and that in
any event, it had no legal duty to the Funds to inform them of
anything.
¶5 Prior to March 1990, the Bank explored the option of
foreclosing the defaulted Alta Mesa loan, selling the property, and
issuing a deficiency notice to Symington. The Bank discussed this
proposal with Symington and asked him to submit a Business Plan
with recommendations for handling the troubled loan. In response,
on March 16, 1990, one day after the latest Alta Mesa loan
extension expired, Symington aide James Cockerham sent a letter to
the Bank suggesting that the Bank should take a cooperative
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approach to stabilize the Alta Mesa loan because “[f]oreclosure by
FIB [First Interstate Bank] and/or an assignment for the benefit of
creditors could have a detrimental impact to both the Partners and
FIB.” In his deposition, Cockerham acknowledged that one potential
detrimental impact would be to give the Funds a basis on which to
refuse to fund the permanent Mercado loan.
¶6 While Symington was attempting to salvage Alta Mesa, the
June 30, 1990, date on which the Funds were required to retire the
Mercado construction loan drew nearer. On or about May 4, 1990, as
part of his obligation under the Permanent Commitment, Symington
provided a certified financial statement to the Funds, current
through December 31, 1989. According to the Funds, they later
learned that the financial statement was false and included
exaggerated values and omissions, giving Symington a specious
appearance of solvency. Among other things, the financial
statement did not mention the financial troubles afflicting Alta
Mesa, nor did it mention the three extensions on that loan. In
fact, Symington asserted the same personal equity in the Alta Mesa
project that he reported on the statement given the Funds in 1987
to secure the permanent commitment.
¶7 On May 21, 1990, Doug Hawes, the Bank’s Alta Mesa loan
officer, requested approval once again to extend the Alta Mesa
loan, this time through July 1, 1990 -– one day after the Funds
were required to take-out the Bank’s interim loan on Mercado. One
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reason given by Hawes for the requested forbearance was to “[a]llow
time for finalization of the Mercado loan pay-off . . . .” On
May 25, the Bank consented to Hawes’ request and executed, in
Symington’s favor, a forbearance agreement on the Alta Mesa loan
until July 1, 1990.
¶8 Less than two weeks later, on June 7, 1990, Jeff White,
the Bank’s Mercado loan officer, submitted a memo to the Bank’s
Senior Loan Committee detailing Symington’s deteriorated financial
condition and requesting authority to charge off $1.2 million of
the Mercado construction loan that would not be paid by the Funds.10
White’s memo indicated that property values listed on Symington’s
most current financial statements “do not accurately reflect the
current market” and that “[c]ontingent debt also appears not to
have been fully accounted for on his recent statement.” Ward
Wilson, a member of the Senior Loan Committee, testified that the
Bank was concerned about intentional misstatements by Symington.
Before agreeing to accept less than the full $10 million, the Bank
requested an updated financial statement from Symington. In fact,
in an attempt to avoid the $1.2 million shortfall, the Bank
convened a meeting the next day, June 8, 1990, attended by, among
10
The shortfall occurred after the Funds exercised their right
to hold back nearly $1.2 million for tenant improvements and
interest reserves. Symington remained liable to the Bank for the
shortfall, so the Bank asked the Funds for a subordinate third lien
on the Mercado property to secure the shortfall. The Funds agreed
but demanded that Symington extend his personal guarantee to them
for another six years.
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others, Sam Coppersmith, counsel for the Funds. Discussion of the
shortfall was had but the meeting appears to have been unsuccessful
from the Bank’s standpoint.
¶9 At the Bank’s request, Symington resubmitted his
financial statement on June 26, 1990. With minor revisions, this
statement contained the same numbers that appeared on the May 4,
1990 statement. Ward Wilson testified the Bank’s concern was
“heightened” at this point, and when asked whether the Bank knew
Symington had provided the same financial numbers to the Funds,
Jeff White testified that he “would hope so.”
¶10 Evidence also disclosed significant banking
irregularities, allegedly in violation of federal banking
regulations and the established internal procedure within the Bank.
The Funds’ banking expert, Jeffrey Gaia, provided a declaration
that the Bank’s forbearance from enforcement of the Alta Mesa loan
was contrary to prudent banking practice for purposes of securing
the Mercado take-out. Robert Lee Creed, the Bank’s own employee,
testified that a forbearance not accompanied by a credit
authorization request is unusual if, as here, it extends the
maturity of the loan. The Alta Mesa forbearance was not
accompanied by a credit authorization request. In addition, the
Bank failed to report Symington’s false representations to federal
banking officials as required by federal regulations, where the
Bank was admittedly knowledgeable of the false financial statement.
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See 31 C.F.R. ¶ 103.18 (2001).
¶11 Finally, on June 29, 1990, against the background of a
real estate market suffocating from defaulted loans and
foreclosures and with Symington’s financial condition in grave
difficulty, the Funds complied with the terms of the Permanent
Commitment and funded the Mercado loan. Symington defaulted on the
loan in 1992. In 1993, the Funds foreclosed on Mercado and wiped
out the subordinate lien held by the Bank. The Funds obtained
judgment against Symington personally in 1995, after which he filed
for bankruptcy.11
¶12 The Funds later accused the Bank of wrongdoing, and the
Bank filed a complaint seeking a declaratory judgment that it had
complied with and performed all of its contractual obligations.
The Funds counterclaimed, charging the Bank with (1) aiding and
abetting fraud, (2) breach of the implied contractual covenant of
good faith and fair dealing, (3) intentional interference with
contractual relations, (4) fraudulent concealment, and (5) civil
conspiracy. The trial court entered summary judgment for the Bank
on all claims and awarded fees, finding that the Bank owed no
11
On February 16, 2001, U.S. Bankruptcy Court Judge George B.
Nielsen issued an order that Symington’s debt to the Funds will not
be discharged by his declaration of personal bankruptcy. Judge
Nielsen upheld the Funds’ claim that Symington submitted false
financial statements. The judge’s finding preserves Symington’s
liability for the debt. See In re J. Fife Symington, III, B-95-
08397-PHX-GBN; Norwest Bank (Minnesota), N.A. v. J. Fife Symington,
III, Adv. No. 96-523-GBN (February 16, 2001, order).
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fiduciary or contractual duty to the Funds to disclose information
about Symington’s financial condition. The court of appeals
affirmed. The Funds petitioned this court and we granted review.
We have jurisdiction pursuant to Arizona Constitution article VI,
section 5(3).
II. Analysis
A. Summary Judgment Standard
¶13 This court reviews de novo a grant of summary judgment,
views the evidence and reasonable inferences in the light most
favorable to the party opposing the motion, and the inferences must
be construed in favor of that party. Thompson v. Better-Bilt
Aluminum Prod. Co., Inc., 171 Ariz. 550, 558, 832 P.2d 203, 211
(1992).
¶14 Summary judgment is appropriate only if no genuine issues
of material fact exist and the moving party is entitled to judgment
as a matter of law. Ariz. R. Civ. P. Rule 56(c); Orme School v.
Reeves, 166 Ariz. 301, 309, 802 P.2d 1000, 1008 (1990). Thus, in
the case at bar, summary judgment should have been granted on the
Bank’s motion only if the facts produced in support of the Funds’
claims “have so little probative value [given the quantum of
evidence required] . . . that reasonable people could not agree
with the conclusion advanced” by the Funds. Baker v. Stewart Title
& Trust of Phoenix, Inc., 197 Ariz. 535, 540, 5 P.3d 249, 254 ¶15
(App. 2000) (quoting Orme School, 166 Ariz. at 309, 802 P.2d at
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1008). We review the claims presented in the instant case pursuant
to the foregoing standard.
B. The “Duty” Concept
¶15 The Funds assert five distinct tort claims. On page 6 of
the trial court’s final order dated October 13, 1998, awarding
summary judgment to the Bank on all claims, the court reasoned that
no “special relationship” was created that placed an
affirmative duty upon the Bank to disclose its
“suspicions” or “speculations” about Symington’s
financial condition or commercial real estate
“adventures” to a third-party, sophisticated lender which
clearly had potential conflicting financial interests to
the Banks [sic].
The trial court relied on Kesselman v. National Bank of Arizona,
188 Ariz. 419, 937 P.2d 341 (App. 1996).
¶16 The court of appeals followed similar reasoning, finding
that the Bank’s duty to disclose information regarding the Alta
Mesa loan existed only to the extent that the Permanent Commitment
and Triparty Agreement allowed the Funds to obtain that information
by request from Symington and the Bank. The appellate court
resorted to a lack of duty to disclose rationale to affirm summary
judgment on all five of the Funds’ claims, even though it
specifically applied that lack of duty analysis only to the Funds’
allegations on two of the five, fraudulent concealment and
conspiracy.
¶17 We conclude that the lower courts erred. This is a case
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alleging intentional conduct and thus not a duty case in the
traditional sense. It was improper to award summary judgment to
the Bank on that basis.
1. Duty Not Required For Intentional Torts
¶18 All claims alleged by the Funds constitute intentional
torts. Cases relied on by the court of appeals to require a duty
to disclose were either negligence cases or cases of simple
nondisclosure. California Architectural Bldg. Prods. v. Franciscan
Ceramics, Inc., 818 F.2d 1466, 1472 (9th Cir. 1987) (failure to
disclose); Smith v. American Nat’l Bank and Trust Co., 982 F.2d 936(6th Cir. 1992) (nondisclosure); Banco Espanol de Credito v.
Security Pac. Nat’l Bank, 973 F.2d 51, 56 (2d Cir. 1992), cert.
denied, 509 U.S. 903 (1993) (nondisclosure). Although the Funds’
counterclaim included an allegation of nondisclosure, summary
dismissal of that claim was apparently not appealed to the court of
appeals, nor was that claim raised in the Funds’ petition for
review to this court.
¶19 Negligence and nondisclosure claims differ from the
intentional tort claims on review here; each has different elements
and different requirements of proof. For example, numerous
decisions expressly distinguish between mere nondisclosure and
intentional concealment. See United States v. Colton, 231 F.3d
890, 899 (4th Cir. 2000). Unlike simple nondisclosure, a party may
be liable for acts taken to conceal, mislead or otherwise deceive,
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even in the absence of a fiduciary, statutory, or other legal duty
to disclose. Id. at 898; see also W. PAGE KEETON, ET AL., PROSSER AND
KEETON ON TORTS § 106 (5th ed. 1984) (“Prosser V”).
¶20 Moreover, duty, in the traditional sense, is a specific
concept applicable to the law of negligence, not to intentional
torts. See DAN B. DOBBS, THE LAW OF TORTS ch. 3, § 26, pp. 50-51
(2000) (“Intent and negligence are entirely different concepts.”).
One of the basic elements of a negligence cause of action is that
the defendant owed the plaintiff a duty of care. Id. at ch. 6,
§ 114, p. 269. Case law is replete with illustrations of this
basic concept. See Purvis v. Hamwi, 828 F. Supp. 1479, 1483 (D.
Colo. 1993) (“[A] finding of duty is necessary only for
. . . claims in negligence; . . . claims for intentional torts
require no traditional finding of duty . . . .”); see also Almand
v. Benton County, Ark., 145 B.R. 608, 617 (W.D. Ark. 1992) (an
attorney would be liable for negligence only to those to whom he
owed a duty but would be liable for intentional misrepresentation
or fraud to anyone); Taylor v. California State Auto. Ass’n Inter-
Ins. Bureau, 240 Cal. Rptr. 107, 113 (App. 1987) (distinguishing
negligent infliction of emotional distress from intentional
infliction of emotional distress, as the former must be predicated
on the existence of a duty); Waters v. Autuori, 676 A.2d 357, 367
(Conn. 1996) (Berdon, J., dissenting) (“Duty is an element of
negligence, but is not an element of an intentional tort.”), citing
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PROSSER V § 30 (italics in original); Smith v. Calvary Christian
Church, 592 N.W.2d 713, 721 (Mich. App. 1998) (plaintiff need not
prove duty in proving intentional torts), appeal granted, 607
N.W.2d 721 (Mich. 2000), judgment rev’d on other grounds, 614
N.W.2d 590 (Mich. 2000).
¶21 As the Purvis court most appropriately stated, “[I]t
would be anomalous to invoke a lack of a specific duty in
dismissing a complaint for an intentional act . . . . The duty, if
it must be so named, is obviously to refrain from intentional harm
to others. At the level of intent, reference to duty becomes
. . . needlessly academic . . . .” 828 F. Supp. at 1483-84.
2. Kesselman Is Inapposite and Distinguishable
¶22 The primary case relied on by the lower courts,
Kesselman, dealt solely with negligence-based claims that required
a predicate legal duty and is thus not applicable to the
intentional tort claims raised by the Funds. Kesselman, 188 Ariz.
at 419, 937 P.2d at 341. Moreover, Kesselman is distinguishable on
its facts.
¶23 Kesselman involved no intentional tort claims. It held
simply that a bank, under a negligence standard, is under no duty
to private investors to take affirmative measures to avoid loss
caused by check kiting by the bank’s customer, absent a special
relationship between the bank and the investors. Id. at 423-24,
937 P.2d at 345-46.
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¶24 The Kesselman plaintiffs cited several cases in support
of their argument that the bank owed them a duty of disclosure.
The court found these cases unhelpful to the plaintiffs’ argument,
pointing out that the “key distinguishing factor in all of the
cases [where a duty to disclose was found] . . . is that the banks
were directly involved with the third parties in the transactions
that were the subject of litigation. This involvement satisfied
the necessary relationship giving rise to the duty of disclosure.”
Id. at 423, 937 P.2d at 345 (emphasis added). The facts of
Kesselman disclosed no such relationship. In contrast, the
Triparty Agreement, which the Bank insisted upon in the case at
bar, provides clear, direct involvement between the Bank and the
Funds.
¶25 Moreover, while the court in Kesselman expressed no
opinion on whether the bank owed a duty to any regulatory agency to
report irregularities observed in its customer’s account, the court
did recognize, albeit in dictum, that fraudulent practices by a
customer have “a very damaging effect on innocent persons, and a
bank’s failure to put an end to the practice contributes to such
damage.” Id. at 424, 937 P.2d at 346.
¶26 Even if the Funds’ claims were dependent on a duty to
disclose, Kesselman itself cited a Minnesota case that more
accurately contemplates the facts presented here. See Richfield
Bank & Trust Co. v. Sjogren, 244 N.W.2d 648 (Minn. 1976). There,
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the Minnesota Supreme Court recited the rule that generally a party
to a transaction has no duty to disclose material facts to the
other party unless a “special circumstance” exists. Id. at 650.
The court acknowledged that special circumstances are typically
those where there is a fiduciary or confidential relationship, or
where one party has special knowledge of material facts to which
the other party has no access, or where one party has spoken, but
has not said enough to prevent his words from being misleading.
Id.
¶27 The court explained that there were situations beyond
those enumerated which would constitute special circumstances
giving rise to an obligation to disclose. Id. The court held that
one of those “special circumstances” arises when a bank has actual
knowledge of the fraudulent activities of a customer and that if a
bank has actual knowledge of the fraud, it has a concomitant
“affirmative duty to disclos[e] those facts” before it engages in
transactions with the customer which “further[] the fraud.” Id. at
652; see also Barnett Bank of West Florida v. Hooper, 498 So. 2d
923 (Fla. 1986) (special circumstance requiring disclosure may be
found where bank has actual knowledge of fraud being perpetrated).
¶28 Similarly, we have previously held that an escrow agent,
notwithstanding the duty of confidentiality, must disclose
information when the agent “‘knows that a fraud is being
committed.’” Burkons v. Ticor Title Ins. Co., 168 Ariz. 345, 353,
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813 P.2d 710, 718 (1991) (quoting Berry v. McLeod, 124 Ariz. 346,
352, 604 P.2d 610, 616 (1979). Although the agent does not have a
duty to investigate, she must disclose where she has “substantial
evidence” of fraud. Burkons at 355, 813 P.2d at 720.
¶29 In Lombardo v. Albu, 199 Ariz. 97, 100, 14 P.3d 288, 291
¶13 (2000), we held explicitly that a buyer’s agent in a real
estate transaction must disclose to the seller evidence known to
him that is material to buyer’s inability to perform. Here, the
Funds allege and have presented evidence that the Bank knew
Symington was advancing false and misleading financial information,
both to the Bank and to the Funds, regarding his ability to perform
the permanent loan obligations.
¶30 Thus, it was error for the lower courts to dismiss all of
the Funds’ intentional tort claims by citing Kesselman and relying
on the Bank’s alleged lack of duty to make disclosure.
III. The Funds’ Tort Claims
A. Aiding and Abetting Fraud
¶31 Arizona recognizes aiding and abetting as embodied in
Restatement § 876(b), that a person who aids and abets a tortfeasor
is himself liable for the resulting harm to a third person.
Gemstar Ltd. v. Ernst & Young, 183 Ariz. 148, 159, 901 P.2d 1178,
1189 n.7 (App. 1995), vacated on other grounds, 185 Ariz. 493, 917
P.2d 222 (1996); Gomez v. Hensley, 145 Ariz. 176, 178, 700 P.2d
874, 876 (App. 1984); see also RESTATEMENT (SECOND) OF TORTS § 876(b)
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(1977).
¶32 The aiding and abetting claim here was not specifically
addressed in the court of appeals decision, but summary judgment
was affirmed on the basis that the Bank had no duty to disclose
under Kesselman.
¶33 “[A]iding and abetting liability does not require the
existence of, nor does it create, a pre-existing duty of
care . . . . Rather, aiding and abetting liability is based on
proof of a scienter . . . the defendants must know that the conduct
they are aiding and abetting is a tort.” Witzman v. Lehrman,
Lehrman & Flom, 601 N.W.2d 179, 186 (Minn. 1999); Pacific Mut. Life
Ins. Co. v. Ernst & Young & Co., 10 S.W.3d 798, 804 (Tex. App.
2000) (to the extent that duty may be considered a part of the
scienter element of a fraud claim, such duty extends to all persons
the fraud defendant intends or has reason to expect will rely on
its misrepresentations (citing RESTATEMENT (SECOND) OF TORTS § 531)),
judgment rev’d, 51 S.W.3d 573 (Tex. 2001).
¶34 Claims of aiding and abetting tortious conduct require
proof of three elements:
(1) the primary tortfeasor must commit a tort that
causes injury to the plaintiff;
(2) the defendant must know that the primary
tortfeasor’s conduct constitutes a breach of duty;
and
(3) the defendant must substantially assist or
encourage the primary tortfeasor in the achievement
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of the breach.
Gomez, 145 Ariz. at 178, 700 P.2d at 876 (citing RESTATEMENT (SECOND)
OF TORTS § 876(b)).
¶35 The Funds allege that Symington misrepresented material
facts by submitting false financial statements. Such proof, if
introduced by the Funds, will establish primary, tortious conduct
by Symington.
¶36 Because aiding and abetting is a theory of secondary
liability, the party charged with the tort must have knowledge of
the primary violation, and such knowledge may be inferred from the
circumstances. See In re American Continental Corp./Lincoln Sav.
and Loan Sec. Litig., 794 F. Supp. 1424, 1436 (D. Ariz. 1992)
(“American Continental”). Unquestionably, the Bank was aware of
Symington’s duty under the Permanent Commitment to provide accurate
financial information to the Funds. The Triparty Agreement
references the requirements of the Permanent Commitment in several
sections.
¶37 Evidence supporting the inference that the Bank had
knowledge of Symington’s fraud is contained, among other places, in
the financial statements Symington provided to the Bank on May 4
and June 21, 1990. Those statements contained information the Bank
knew was false: (1) Symington overstated the value on Alta Mesa by
$2 million and understated his personal liability on Alta Mesa by
$1 million. The Bank knew Alta Mesa was worth $1 million less as
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a result of an appraisal conducted by the Bank in November 1989,
which reduced the property’s value by one-half;12 (2) Symington
represented $791,000 in “readily marketable securities.” The Bank
knew these securities were actually in spendthrift trusts and thus
inaccessible to creditors; (3) Symington responded “no” to the
question on the financial statement: “Are there any suits,
judgments, tax deficiencies, or other claims pending or in prospect
against you?” (Emphasis added). The Alta Mesa loan had been in
technical default since March 15, 1990, and the Bank obviously knew
it.
¶38 The Funds’ banking expert set forth several aspects of
Symington’s financial statement the Bank knew were false. Jeffery
P. Gaia Declaration at ¶ 44.13 The Bank’s knowledge of Symington’s
12
O. Jeffrey White [former Wells Fargo employee] admitted the
inconsistency between the value of Alta Mesa and the value
represented on Symington’s financial statement in his August 7,
1998 deposition:
Q. From 61, Exhibit 61, it looks like Mr.
Symington has an obligation of about $1
million to the Bank under his guarantee.
A. True.
Q. How does that square with him showing that he
has $250,000 of equity?
A. I believe –
MR. CARDENAS: Objection, asked and answered.
A. I believe I answered that. It doesn’t.
13
Gaia’s declaration was based upon his experience and
expertise as a banker, his personal knowledge of market conditions
and banking practices, his review of certain deposition testimony,
and his review of documents and records of First Interstate Bank
concerning the Alta Mesa and Mercado loans. Gaia has been
professionally employed in the banking industry since 1979. His
experience involved commercial, corporate, and real estate loans,
-21-
false and misleading representations is also reflected in the
Bank’s own memoranda. On June 7, 1990 (23 days before the take-
out), Jeff White’s memo to the Bank’s Senior Loan Committee
requesting authority to charge off the $1.2 million shortfall on
the Mercado loan described Symington’s then-existing financial
condition. A financial statement was provided to the Senior Loan
Committee with White’s memo. The memo demonstrates the Bank’s
knowledge:
Symington’s stated net worth is almost entirely vested in
commercial real estate, indicated market values of which
he has stated do not accurately reflect the current
market. Contingent debt also appears not to have been
fully accounted for on his recent statement. Marketable
securities shown on the statement are held in an
irrevocable family trust of which Symington is the
beneficiary. Trustor is unknown, trustee is Mellon Bank,
and Symington claims that the asset cannot be liquidated
or pledged.
(Emphasis added). White later testified that he determined that
the listed real estate values were inaccurate. Thus, the Bank had
knowledge of these matters.
¶39 When White received Symington’s May 4, 1990 financial
statement, he knew the Funds were also entitled to receive a
financial statement under the terms of the Permanent Commitment.
The Funds produced evidence affirming that the Bank understood the
Funds received the same false financial statements that it did.
White testified:
including experience with workouts for problem loans. See Gaia
Declaration at ¶¶ 2, 4, 6, and 7.
-22-
Did you expect that Mr. Symington would have submitted
the same numbers reflecting his financial conditions to
both First Interstate Bank and to the pension funds?
A: I would hope so, yes.
This statement raises the inference that the Bank knew that fraud
was being committed against the Funds.
¶40 On June 8, 1990, the Senior Loan Committee conditionally
approved White’s requested $1.2 million write-off in his June 7
memo but asked that he obtain an accurate financial statement from
Symington. The Senior Loan Committee was concerned about the
statement, as Ward Wilson, a member of the committee testified:
Q: Given that Mr. Symington had warranted the values
in his financial statement only a month prior to
your consideration of it, did it occur to you that
the inflated values could have been the result of
intentional misstatements by Mr. Symington?
MR. CARDENAS: Objection to characterization with
respect to “inflated values.”
A. I believe that we were concerned about that.
¶41 On June 26, 1990, Symington resubmitted his personal
financial statement dated June 21, 1990, to the Bank. This
statement also failed to provide current market values or disclose
contingent debt. Regarding the securities listed on the financial
statement, Symington produced a letter from the trustee of a trust
of which he was the beneficiary, disclosing that the “readily
marketable securities” listed on his financial statement at a value
of $791,000 were, in fact, not readily marketable but were held in
-23-
trust subject to a spendthrift provision.14 The June 21 financial
statement also included one other change. Symington unilaterally
changed the certification language on the statement from the Bank’s
standard language that the statement was accurate to a statement
that the figures were merely Symington’s “best efforts” to arrive
at accurate figures.
¶42 The Senior Loan Committee found the updated financial
statement just as disconcerting. Ward Wilson testified:
Q. Okay. Upon getting that information, did you feel
as though Mr. Symington had provided accurate and
honest information about the current state of his
financial condition to First Interstate?
MR. CARDENAS: Objection; calls for speculation.
A. Our concern about that was heightened.
¶43 Evidence that the Bank knew Symington had misled the
Funds can also be seen in a letter dated June 25 from Jeff White to
the Senior Loan Committee at the Bank, updating the Committee on
the status of the Mercado loan. White’s letter discusses
“perceived impediments” to the funding of the Permanent Commitment.
White listed the Mercado limited partners as potential impediments.
14
White testified that information regarding the spendthrift
trust did not make the financial statements deceptive and did not
alarm the Bank because it already knew the securities were in a
spendthrift trust, and had known this since at least 1986. White
admitted, however, that nothing on the face of the financial
statement would indicate that the securities were subject to
spendthrift restrictions and that as such, they were not, as
represented, “readily marketable.”
-24-
The limited partners were upset because mathematical errors
relating to the partners’ return on investment calculations were
found after the formation of the partnership. The limited partners
were threatening to exercise their rescission rights and demand
refund of their initial $500,000 investment. Regarding this
situation, White states, “[t]his threat currently prevents
Mercado’s counsel from issuing [the Funds] . . . a ‘clean’ opinion
letter, a condition precedent to closing.” (Emphasis added).
White goes on to explain to the Senior Loan committee
[i]f the limiteds are not satisfied with our
subordination language as proposed, they pose a real
threat to the permanent loan closing. Our paying off the
limiteds, as Symington had earlier proposed, is not
deemed a viable option as it would have the effect of
dissolving the existing borrowing entity, giving the
Permanent Lender [the Funds] a clear out.
¶44 In addition to the threat by the limited partners, White
also described the risk to funding stemming from improvements
undertaken on the Mercado project to prepare it for tenancy by
Arizona State University (“ASU”), which intended to occupy the
space as a downtown campus. White informed the Senior Loan
Committee “Mercado has requested that FIAZ [the Bank] provide
bridge financing for the ASU build-out in an attempt to both keep
the subs working, and to avoid having to disclose the situation to
the Permanent Lender at closing.” (Emphasis added). This
statement is in reference to $600,000 worth of tenant improvements
completed for the ASU space in the Mercado. Despite nearly half of
-25-
the improvements being completed, the Mercado Partnership had not
made any progress payments to the contractors. The Bank was
concerned that the Partnership’s lack of progress payments may have
violated ¶ 29 of the Permanent Commitment by failing to pay debts
as they became due.
¶45 This accumulation of evidence raises the inference that
the Bank knew Symington was engaged in false representations to the
Funds. Accordingly, a jury could find that the Bank’s actions and
internal communications provide evidence of a resolute strategy to
avoid having the Funds learn what it knew about Symington’s
financial situation. A showing of actual and complete knowledge of
the tort is not uniformly necessary to hold a secondary tortfeasor
liable under an aiding and abetting theory. FDIC v. First
Interstate Bank of Des Moines, N.A., 885 F.2d 423 (8th Cir. 1989)
(bank can be held liable for aiding and abetting a customer who
defrauded another bank if bank has a “general awareness” of the
customer’s fraudulent scheme, notwithstanding the fact that the
bank may not have had actual knowledge of the scheme or an intent
to participate in the fraud; general awareness of the fraudulent
scheme can be established though circumstantial evidence). “The
knowledge requirement” can be met, “even though the bank may not
have known of all the details of the primary fraud –- the
misrepresentations, omissions, and other fraudulent practices.”
Aetna Cas. and Sur. Co. v. Leahey Const. Co., Inc., 219 F.3d 519,
-26-
536 (6th Cir. 2000) (“Leahey”) (citing Woods v. Barnett Bank of
Fort Lauderdale, 765 F.2d 1004, 1012 (11th Cir. 1985) (“Woods”)
(internal citations omitted)).
¶46 The third requirement, substantial assistance by an aider
and abettor, can take many forms, but means more than “a little
aid.” In re American Continental, 794 F. Supp. at 1435 (quoting
Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 496
(7th Cir. 1986); see also CPC Int’l Inc. v. McKesson Corp., 514
N.E.2d 116 (N.Y. 1987) (broker aided and abetted primary fraud by
providing false financial information used to present “enhanced
financial picture to others”)). The legal elements of aiding and
abetting a tortfeasor have been explored most comprehensively by
the federal courts in the context of aiding and abetting securities
fraud. See Schatz v. Rosenberg, 943 F.2d 485 (4th Cir. 1991);
Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646 (9th Cir.
1988); Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985); Monsen v.
Consolidated Dressed Beef Co., Inc., 579 F.2d 793 (3d Cir. 1978).
But cf. Central Bank of Denver v. First Interstate Bank of Denver,
511 U.S. 164 (1994) (aiding and abetting liability abolished under
§ 10(b) of the Securities and Exchange Act of 1934, but secondary
actors not completely absolved from liability).
¶47 For example, in Metge, the court stated that “[a]lthough
the facts . . . are unremarkable taken in isolation, we find that
taken together, they present what should have been a jury issue on
-27-
the question of aiding-and-abetting liability.” 762 F.2d at 630.
Metge involved a suit by investors against a lender for aiding and
abetting an issuer of securities who ultimately filed for
bankruptcy. The investors alleged that the lender engaged in a
series of banking strategies to keep a failing securities issuer in
business. In evaluating the record, the court sought to determine
whether the lender knew that the thrift certificates being issued
were worthless and that because of the lender’s involvement, the
financial life of the issuer was prolonged in the lender’s own
interest and at the expense of the certificate holders. The court
noted that, viewed separately, most of the banking transactions
were unremarkable events, but viewed in conjunction with other
evidence, they suggest an unusual pattern of extraordinary attempts
to prolong the issuer’s financial viability to the detriment of the
investors.15 Id. at 626; see also K & S Partnership v. Continental
Bank, N.A., 952 F.2d 971, 979 (8th Cir. 1991).
¶48 Other courts have commented that executing transactions,
even ordinary course transactions, can constitute substantial
15
The court remarked on the favorable relationship between the
lender and the issuer even at a time when the lender knew of the
issuer’s precarious financial position. The court noted that the
evidence suggested that the lender had knowledge of the issuer’s
thrift certificate program and its importance to the issuer’s
ability to repay loans to the lender. Finally, the court noted the
inference created by the fact that by postponing the issuer’s
demise, the lender may have been able to leverage itself into a
more favorable position with the issuer than the investors when the
issuer was prioritizing which debts to pay first. Metge v.
Baehler, 762 F.2d 621, 630 (8th Cir. 1985).
-28-
assistance under some circumstances, such as where there is an
extraordinary economic motivation to aid in the fraud. See
Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983) (broker’s
processing of transactions with knowledge of fraudulent nature was
done to generate commissions); IIT, an Int’l Inv. Trust v.
Cornfeld, 619 F.2d 909, 921-22 (2d Cir. 1980) (defendant performed
challenged transaction knowing it violated client’s policy, with
heightened economic motive to do so).
¶49 There is no doubt that the Bank here had a heightened
economic motive to assist Symington. Not only did the Bank have
the typical motivations of a construction lender, i.e., to ensure
nothing happens to jeopardize permanent funding, but in this case,
the Bank had added incentive to ensure the permanent financing by
virtue of its knowledge of Symington’s much weakened financial
condition. The Bank knew that Symington was the personal guarantor
on the Mercado loan in the event the Funds found reason not to
advance permanent funding. The Bank also knew Symington’s personal
guarantee was becoming less and less valuable in part because the
Bank knew Symington was unable to fulfill his financial obligations
on the Alta Mesa loan.
¶50 In addition, Jeff White’s June 7, 1990 letter to the
Senior Loan Committee evidences the Bank’s knowledge of Symington’s
inability to provide collateral of a value sufficient to cover the
$1.2 million shortfall occasioned by the Funds’ decision to hold
-29-
back part of the $10 million take-out for improvements to the
Mercado. These circumstances heightened the Bank’s motive to aid
and abet in a fraud designed to secure the permanent loan.
¶51 Accordingly, the Funds presented evidence of business
strategies undertaken by the Bank to prolong Symington’s financial
life, raising reasonable inferences that it knew of, and gave
substantial assistance to, Symington’s material misstatements.
Moreover, “if [a] . . . method or transaction is atypical or lacks
business justification, it may be possible to infer the knowledge
necessary for aiding and abetting liability.” Woodward v. Metro
Bank of Dallas, 522 F.2d 84, 97 (5th Cir. 1975); see also Woods at
1012 (for purposes of establishing liability as an aider and
abettor, knowing assistance of a securities violation can be
inferred from atypical business actions).
¶52 Here, as noted, the Funds’ banking expert offered
evidence that the Bank’s forbearance from enforcement of the Alta
Mesa loan was contrary to prudent banking practices for purposes of
securing the Mercado take-out. Gaia Declaration at ¶¶ 37, 39, 40,
43. In addition, the Bank’s own employee testified that a
forbearance not accompanied by a credit authorization request is
unusual if, as here, it extends the maturity of the loan. The Alta
Mesa forbearance was not accompanied by a credit authorization
request.
¶53 The Bank argues that the single act the Funds complain
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about is the forbearance on the Alta Mesa loan. Indeed, the Funds
do complain about the forbearance and argue that the Bank’s
decision to extend rather than foreclose the loan provided
“substantial assistance” to Symington by enabling him to claim
falsely that he met the requirements of the Permanent Commitment.
But it is not solely the forbearance that creates the problem; it
is also the Bank’s failure to report Symington’s false
representations to federal banking officials as required by law,
where it was admittedly knowledgeable of the false financial
statement. See 31 C.F.R. § 103.18 (2001).
¶54 Moreover, substantial assistance does not mean assistance
that is necessary to commit the fraud. Leahey at 537. The test is
whether the assistance makes it “easier” for the violation to
occur, not whether the assistance was necessary. Id. (quoting Camp
v. Dema, 948 F.2d 455, 462 (8th Cir. 1991) (internal quotations
omitted)).
¶55 Finally, the Funds’ claim of aiding and abetting is
further supported by allegations that the Bank, with full knowledge
that Symington’s financial statements were false, convened the June
8, 1990 meeting and communicated directly with the Funds regarding
the Permanent Commitment due on June 30. The Funds were
represented in the meeting by legal counsel, Sam Coppersmith.
Specifically, it appears the Bank called the meeting with
Coppersmith and Symington representatives because the Funds had
-31-
announced their intention to reduce the amount of the permanent
loan by $1.2 million in order to compensate for Mercado tenant
improvements which apparently had been funded by the Bank but were
not a part of the basic construction costs. The Bank desired to
secure the full $10 million take-out, including the $1.2 million,
by exploring, with the Funds, ways to eliminate or otherwise deal
with the shortfall or “gap financing” as it was described. If
successful, the Bank would receive full reimbursement of the $10
million. The meeting would thus have had no purpose without the
presence of the Funds.
¶56 At that time, the Bank knew that Symington was in default
on Alta Mesa. Internal documents regarding the Mercado loan
referenced Alta Mesa as a “related” debt. The Bank also knew that
Symington had submitted false financial statements relative to
Mercado, and that just days earlier the Bank had signed a
forbearance agreement with Symington on Alta Mesa to keep him
financially viable until the day after the permanent loan was due
to be funded. Nevertheless, the Bank, with a clear opportunity to
speak, kept this information from Coppersmith and pressed for
closing the permanent loan at the full $10 million or for an
alternate method of handling the “gap” problem.
¶57 Convening the meeting to discuss the loan and potential
shortfall in these circumstances, without disclosure of the facts,
would justify a reasonable inference that the Bank aided and
-32-
abetted by knowingly assisting Symington’s tortious conduct. If
true, this goes well beyond mere self protection in the midst of a
financial transaction gone sour. In sum, it can be inferred that
had the Funds been made aware of what the Bank knew, the Funds
might well have chosen to withdraw from the obligation under the
Permanent Commitment, and the Bank was fully knowledgeable of that
prospect.
¶58 These facts raise inferences sufficient to take the issue
to the jury under the applicable preponderance standard.16
B. Breach of the Implied Covenant of Good Faith and Fair
Dealing
¶59 Arizona law implies a covenant of good faith and fair
dealing in every contract. Enyart v. Transamerica Ins. Co., 195
16
Aiding and abetting fraud requires proof by a preponderance
of the evidence. York v. InTrust Bank, N.A., 962 P.2d 405, 422
(Kan. 1998) (because jury ruled in favor of defendant on fraud
count which required higher burden of proof does not mean evidence
was insufficient to prove aiding and abetting fraud); State ex rel.
Goettsch v. Diacide Distributors, Inc., 561 N.W.2d 369 (Iowa 1997)
(preponderance of the evidence is the proper standard of proof for
aiding and abetting securities fraud under Iowa law); State, Dep’t
of Finance v. Tenney, 858 P.2d 782 (Idaho App. 1993) (aiding and
abetting securities violation must be proven by preponderance of
the evidence under Idaho law).
Because there is a difference between proving an agreement to
participate in a tortious line of conduct (civil conspiracy) and
proving knowing action that substantially aids tortious conduct
(aiding and abetting), Halberstam v. Welch, 705 F.2d 472, 478 (D.C.
Cir. 1983), we deem the preponderance standard more appropriate for
an aiding and abetting claim.
-33-
Ariz. 71, 985 P.2d 556, ¶14 (1998) (citing Rawlings v. Apodaca, 151
Ariz. 149, 726 P.2d 565 (1986)); see also Wagenseller v. Scottsdale
Mem’l Hosp., 147 Ariz. 370, 383, 710 P.2d 1025, 1038 (1985)). Such
implied terms are as much a part of a contract as are the express
terms. Golder v. Crain, 7 Ariz. App. 207, 437 P.2d 959 (1968).
The implied covenant of good faith and fair dealing prohibits a
party from doing anything to prevent other parties to the contract
from receiving the benefits and entitlements of the agreement. The
duty arises by operation of law but exists by virtue of a
contractual relationship. Rawlings at 153-54, 726 P.2d at 569-70.
¶60 Breach of the implied covenant may provide the basis for
imposing damages. Burkons at 355, 813 P.2d at 720. A party may
bring an action in tort claiming damages for breach of the implied
covenant of good faith, but only where there is a “special
relationship between the parties arising from elements of public
interest, adhesion, and fiduciary responsibility.” Id. at 355, 813
P.2d at 720; see also Wagenseller at 383, 710 P.2d at 1038;
McAlister v. Citibank (Arizona), a Subsidiary of Citicorp, 171
Ariz. 207, 829 P.2d 1253 (App. 1992) (a special relationship must
exist in order to support a tortious breach of the implied covenant
of good faith and fair dealing). The Funds have conceded that they
do not have the required “special relationship” to support a claim
for tortious breach.
¶61 There is a difference, however, in the proof required,
-34-
depending on whether the claim sounds in tort or in contract.
Here, the remedy for breach of the implied covenant is an action
for breach claiming contract damages. Burkons at 355, 813 P.2d at
720. When the remedy for breach of the covenant sounds in
contract, it is not necessary for the complaining party to
establish a special relationship. Firstar Metro. Bank & Trust v.
Federal Deposit Ins. Corp., 964 F. Supp. 1353, 1358 (D. Ariz. 1997)
(“[I]n light of the distinction between tortious and contractual
claims based on the breach of the implied covenant of good faith
and fair dealing, Plaintiff’s assumption that it need not
demonstrate a special relationship is correct.”). The claim
presented in the Funds’ counterclaim alleges breach of contract, a
claim that is thus viable without the special relationship required
for tortious relief.
¶62 The Bank, relying on Kesselman at 421, 937 P.2d at 343,
argues that in the absence of duty, it did not act in bad faith by
failing to disclose Symington’s true financial condition to the
Funds. The lower courts agreed. But, as noted, Kesselman does not
dispose of this claim. Deese v. State Farm Mut. Auto. Ins. Co.,
172 Ariz. 504, 507, 838 P.2d 1265, 1268 (1992) (bad faith is not
proven by showing negligence; the act or omission must be
intended). Moreover, unlike the bank in Kesselman, the Bank here
was directly and contractually involved in the transaction with the
Funds via the Triparty Agreement, an agreement which the Bank
-35-
itself insisted be executed.
¶63 The Triparty Agreement is the lynchpin of the Funds’
claim of bad faith. The “underlying contract provides the basis
for a bad faith action.” Taylor v. State Farm Mut. Auto. Ins. Co.,
185 Ariz. 174, 176, 913 P.2d 1092, 1094 (1996) (citing Noble v.
National American Life Ins. Co., 128 Ariz. 188, 189, 624 P.2d 866,
867 (1981)). Because the terms of the Triparty Agreement do not
require the Bank to volunteer information to the Funds, the Bank
argues that it cannot be liable for bad faith because it did not
breach any provisions of the Triparty Agreement. The Bank relies
too heavily on the literal text. The duty of good faith extends
beyond the written words of the contract.
¶64 A party may breach an express covenant of the contract
without breaching the implied covenant of good faith and fair
dealing. Rawlings at 157-60, 726 P.2d at 573-76. Conversely,
because a party may be injured when the other party to a contract
manipulates bargaining power to its own advantage, a party may
nevertheless breach its duty of good faith without actually
breaching an express covenant in the contract. Deese at 509, 838
P.2d at 1270 (noting that a breach of an express covenant is not “a
necessary prerequisite” for a bad faith claim); Rawlings at 157-60,
726 P.2d at 573-76.
¶65 For example, in Arizona’s Towing Professionals Inc. v.
State, the court of appeals held that a party to a contract could
-36-
not use an express provision in the contract –- in that case, a
“cancellation for convenience” provision -- to thwart
administrative or judicial review of the state’s decisions in
awarding contracts after the bidding process. 196 Ariz. 73, 77,
993 P.2d 1037, 1041 (App. 1999). The court found that if
cancellations for convenience were permissible under these
circumstances, they would effectively eliminate a party’s appeal
rights, which would violate the implied covenant of good faith,
even though the state expressly retained the power to cancel. Id.
at 77, 993 P.2d at 1041. Similarly, Southwest Savings & Loan
Association v. Sunamp Systems, Inc. addressed whether one who
retains express power or discretion under a contract can exercise
that power or discretion in a way that breaches the implied
covenant of good faith. 172 Ariz. 553, 558, 838 P.2d 1314, 1319
(App. 1992). In answering this question, the Sunamp court
favorably cited a California decision, stating that “the duty to
act in good faith does not alter the specific obligations of the
parties under the contract. . . . Acts in accord with the terms of
one’s contract cannot without more be equated with bad faith.” Id.
at 558, 838 P.2d at 1319 (quoting Balfour, Guthrie & Co. v. Gourmet
Farms, 166 Cal. Rptr. 422, 427-28 (App. 1980) (emphasis in
original)).
¶66 Southwest Savings explained that
[m]uch of the mystery of the law of good faith lies in
-37-
the Balfour phrase “without more.” If contracting par-
ties cannot profitably use their contractual powers
without fear that a jury will second-guess them under a
vague standard of good faith, the law will impair the
predictability that an orderly commerce requires.
Id. at 558, 838 P.2d at 1319. Yet, “[i]nstances inevitably arise
where one party exercises discretion retained or unforeclosed under
a contract in such a way as to deny the other a reasonably expected
benefit of the bargain.” Id. The court concluded that the implied
covenant of good faith provides a clear remedy for such abuse. In
reaching its conclusion, the court relied on Professor Steven J.
Burton’s explanation of the duty of good faith:
The good faith performance doctrine may be said to permit
the exercise of discretion for any purpose -– including
ordinary business purposes –- reasonably within the
contemplation of the parties. A contract thus would be
breached by a failure to perform in good faith if a party
uses its discretion for a reason outside the contemplated
range -– a reason beyond the risks assumed by the party
claiming a breach.
Id. at 558-59, 838 P.2d 1319-20 (quoting Breach of Contract and the
Common Law Duty to Perform in Good Faith, 94 HARV. L. REV. 369, 385-
86 (1980) (“Burton”) (footnotes omitted)). Burton’s recitation
fully comports with RESTATEMENT (SECOND) OF CONTRACTS § 205 cmt. a
(1981), which states, “Good faith performance or enforcement of a
contract emphasizes faithfulness to an agreed common purpose and
consistency with the justified expectations of the other party.”
Consistent with Burton and the RESTATEMENT, this court has held in a
variety of contexts that a contracting party may not exercise a
retained contractual power in bad faith. See Rawlings at 153-157,
-38-
726 P.2d at 569-73 (power to adjust claims in an insurance
contract); Wagenseller at 385-86, 710 P.2d at 1040-41 (power to
fire employee at will for a bad cause).
¶67 In the instant case, under the Triparty Agreement the
Bank had no express duty to comply with Symington’s disclosure
obligations under the Permanent Commitment. But, the inquiry for
the Funds’ claim of bad faith does not end with mere recognition
that the written text of the Triparty Agreement may have freed the
Bank from any obligation to inform the Funds of Symington’s
financial condition. The question is whether a jury might
reasonably find that the Bank wrongfully exercised a contractual
power for “a reason beyond the risks” that the Funds assumed in the
Triparty Agreement, or for a reason inconsistent with the Funds’
justified expectations. Burton at 386; Southwest Sav. at 559, 838
P.2d at 1320; RESTATEMENT (SECOND) OF CONTRACTS § 205 cmt. a.
¶68 The Funds contend that, although the Bank was not
obligated to inform the Funds of the collapse of Symington’s
finances, the Bank proceeded in bad faith by knowing that the Funds
would be deprived of knowledge of Symington’s true condition in
reaching the decision to accept or reject the Mercado loan.17
17
Triparty Agreement § 3.9: . . . Permanent Lender will fund
the Permanent Loan on or before such date . . . (ii) if Borrower
has complied with each and every condition of the Permanent
Commitment to the reasonable satisfaction of Permanent Lender, and
(iii) if all submittals and documentation required by Permanent
Lender in order to fund the Permanent Loan have been received in
the Permanent Lender’s office . . . .
-39-
Symington deprived the Funds of this information. There is
evidence the Bank knew of the deprivation and engaged in a
systematic strategy designed to withhold material information from
the Funds and to keep Symington financially alive until after the
take-out deadline, all of which resulted in serious and clearly
anticipated damage to the Funds.
¶69 The key questions are:
(1) were the Bank’s actions inconsistent with what the
Funds justifiably expected under the Triparty Agreement?
(2) did the Bank, by its action or inaction, deprive the
Funds of a primary benefit of the agreement (see
RESTATEMENT (SECOND) OF CONTRACTS § 205 cmt. a. (“Good faith
performance or enforcement of a contract emphasizes
faithfulness to an agreed common purpose and consistency
with the justified expectations of the other party.”))?
(3) was it reasonable for the Funds to assume the Bank
would follow federal banking regulations and report non-
compliant activity (see 31 C.F.R. § 103.18 (bank shall
file with the Treasury Department a report of any
suspicious transaction relevant to a possible violation
of law or regulation))? and
(4) was it reasonable for the Funds to assume, despite
the Bank’s self interest, that the Bank would disclose
its alleged knowledge of Symington’s false financial
statements?
¶70 The foregoing are genuine questions of material fact.
The inferences favorable to the Funds’ claim are sufficient for a
jury’s consideration under the preponderance standard.18
18
Proof of a breach of the implied covenant of good faith and
fair dealing requires a preponderance of the evidence. See
Schwartz v. Farmers Ins. Co. of Ariz., 166 Ariz. 33, 36, 800 P.2d
20, 23 (App. 1990) (plaintiffs must prove breach of duty of good
faith and fair dealing by a preponderance of the evidence); see
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C. Intentional Interference With Contractual Relations
¶71 The Funds claim that by obscuring or concealing
Symington’s collapsing finances, the Bank improperly interfered
with the Funds’ contract right to receive full, accurate
information as a basis on which to reject the Permanent Commitment
on the Mercado loan.
¶72 The interference with contract claim was not separately
addressed by the court of appeals but was swept into the court’s
general reasoning that the bank had no duty to disclose Symington’s
financial status to the Funds.
¶73 Intentional interference with contract is, as its name
suggests, an intentional tort. Snow v. Western Sav. & Loan Ass'n,
152 Ariz. 27, 34, 730 P.2d 204, 211 (1986); see also RESTATEMENT
(SECOND) OF TORTS § 767 cmt. d (1979) (interference with contractual
relations is an intentional tort). In addition, "[t]he duty not to
interfere with the contract of another arises out of law, not
contract." Bar J Bar Cattle Co. Inc. v. Pace, 158 Ariz. 481, 486,
763 P.2d 545, 550 (App. 1988) (emphasis added). We therefore
examine the merits of the Funds’ claim.
¶74 Arizona has long recognized the tort of intentional
also General Acc. Fire & Life Assur. Corp. v. Little, 103 Ariz.
435, 443-44, 443 P.2d 690, 698-99 (1968) (lower court did not err
in refusing to give instruction on clear and convincing burden of
proof for “bad faith” claim; the proper standard was the
preponderance of the evidence).
-41-
interference with contractual relations. See Snow at 33, 730 P.2d
at 211. A prima facie case of intentional interference requires:
(1) existence of a valid contractual relationship, (2) knowledge of
the relationship on the part of the interferor, (3) intentional
interference inducing or causing a breach, (4) resultant damage to
the party whose relationship has been disrupted, and (5) that the
defendant acted improperly. Id.; RESTATEMENT (SECOND) OF TORTS § 766
(1977).
¶75 The first element, the existence of a valid contractual
relationship, is satisfied by the Permanent Commitment between
Symington and the Funds.19
¶76 Second, as party to the Triparty Agreement and
beneficiary of the proceeds under the Permanent Commitment, the
Bank had knowledge of the terms of both contracts. The terms of
the Permanent Commitment are frequently referenced in the Triparty
Agreement, and the Bank insisted Symington secure long-term
financing through the Permanent Commitment before it would agree to
fund the interim construction loan.
19
The Funds assert in their brief that the Bank interfered
with both the Permanent Commitment and the Triparty Agreement. As
a general rule, a party cannot be held liable in tort for
intentional interference with its own contract. Campbell v.
Westdahl, 148 Ariz. 432, 438, 715 P.2d 288, 294 (App. 1985). This
general rule is complicated here by the fact that the Bank, the
Funds, and Symington were parties to a tripartite agreement. We do
not address the question whether a party to a tripartite contract
can be liable in tort for interfering with rights as between the
other parties to the agreement because the Funds can satisfy this
element of the tort by the Permanent Commitment.
-42-
¶77 Third, intent is shown by proving that the interferor
either intended or knew that “[a particular] result was
substantially certain to be produced by its conduct.” Snow at 34,
730 P.2d at 211.
¶78 “There is no technical requirement as to the kind of
conduct that may result in interference with the third party’s
performance of the contract.” RESTATEMENT (SECOND) OF TORTS § 766
cmt. k (1979). In most instances the interference is by
inducement. As the RESTATEMENT explains, the word “inducing” refers
to situations in which A causes B to choose one course of conduct
rather than another. “Whether A causes the choice by persuasion or
by intimidation, B is free to choose the other course if he is
willing to suffer the consequences.” Id., § 766 cmt. h. While the
paradigm case of tortious interference with contract may be that of
a tortfeasor who induces breach by enticing the contracting party
not to perform or by preventing or disabling that party from being
able to perform, the RESTATEMENT emphasizes that liability attaches
to any intentional interference, whether by inducement or
otherwise. Id. (emphasis added). “The essential thing is the
intent to cause the result.” Id.
¶79 Here, Symington breached his contractual obligation to
-43-
the Funds by submitting false financial statements.20 Whether the
Bank intended that its conduct operate to disadvantage the Funds in
order to obtain payment of the Mercado loan under the Permanent
Commitment necessarily requires a jury assessment of the Bank’s
intent. Strategies in which the Bank readily participated, such as
the Alta Mesa loan extensions, the forbearance, and the failure to
report, raise legitimate inferences relating to the Bank’s intent.
Intent is a question for the fact finder. Snow at 34, 730 P.2d at
211. The Bank certainly had reason to believe that false financial
information was going to the Funds, giving rise to the inference
that, by its strategy, the Bank intended to benefit by this conduct
at the expense of the Funds.
¶80 Fourth, the Funds can prove resultant damage if they can
establish that the Mercado loan would not have been funded had they
been given accurate information.
¶81 Fifth, wrongful conduct can be analyzed by considering
seven factors previously advanced by this court:
(a) the nature of the actor’s conduct, (b) the actor’s
motive, (c) the interests of the other with which the
actor’s conduct interferes, (d) the interest sought to be
advanced by the actor, (e) the social interests in pro-
tecting the freedom of action of the actor and the
contractual interests of the other, (f) the proximity or
20
Whether Symington would have breached his contractual
obligations to the Funds without substantial involvement by the
Bank is a question of causation, not intent. Causation is also a
question for the jury. Molever v. Roush, 152 Ariz. 367, 374, 732
P.2d 1105, 1112 (App. 1986) (citing Harmon v. Szrama, 102 Ariz.
343, 429 P.2d 662 (1967)).
-44-
remoteness of the actor’s conduct to the interference,
and (g) the relations between the parties.
Wagenseller at 387, 710 P.2d at 1042 (quoting RESTATEMENT (SECOND) OF
TORTS § 767); see also Bar J Cattle Co. at 484, 763 P.2d at 548.
Factors deserving the most weight are the nature of the actor’s
conduct and the actor’s motive. G.M. Ambulance & Med. Supply Co.,
Inc. v. Canyon State Ambulance, Inc., 153 Ariz. 549, 551, 739 P.2d
203, 205 (App. 1987).
¶82 Conduct specifically in violation of statutory provisions
or contrary to public policy may for that reason make an
interference improper. RESTATEMENT (SECOND) OF TORTS § 767 cmt. c
(1979). The testimony from banking expert Gaia regarding the
Bank’s handling of the Alta Mesa loan is relevant here. Based on
his review of the Alta Mesa loan history, Gaia opined that the
agreement to forbear on the Alta Mesa loan default was inconsistent
with prudent and reasonable banking practices and inconsistent with
the course of action previously prescribed by the loan’s Special
Credits Officer, Doug Hawes. See Gaia Declaration at ¶¶ 37, 39,
40, 43.
¶83 As further relevant evidence, the Funds offered to prove
the Bank’s failure to report Symington’s false financial statements
to the Financial Crimes Enforcement Network of the Department of
Treasury, as mandated by federal banking regulations. See 31
C.F.R. § 103.18 (2001). The regulations require FDIC insured banks
-45-
to file a “Suspicious Activity Report” when they detect a known or
suspected criminal violation of federal law or a suspicious
transaction, such as filing a false financial statement. Id.
White, the Bank’s own loan officer, testified in deposition that he
knew intentional fraudulent submissions of financial statements
would trigger reporting requirements to the FBI. Nevertheless, the
Bank did not report. It claims its conduct was not improper
because it did not know Symington’s financial statements were
false. But inferences of the Bank’s knowledge of false statements
are clearly present.
¶84 The Bank responds with several additional arguments.
First, it argues that, even despite the inconsistencies in the
financial statement, no one at the Bank believed that an event had
occurred under ¶ 29 of the Permanent Commitment regarding
Symington’s financial status that would have given the Funds the
legal right to refuse to honor the Triparty Agreement. The Bank
contends that the provisions under ¶ 29, which include “generally
not paying Debtor’s debts as such debts become due” and “assignment
for the benefit of creditors,” are terms of art from sections of
the U.S. Bankruptcy Code or its state statutory equivalent. See 11
U.S.C.A. § 303(h)(1) (1993); A.R.S. §§ 44-1031 to -1047 (1994 and
Supp. 2001). Because an event which would qualify under the
relevant bankruptcy statutes had not occurred, the Bank contends
nothing happened that would allow the Funds not to comply with the
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Permanent Commitment. This argument is tenuous in light of the
fact that, in other sections of ¶ 29, when the parties intended to
refer to a section of the Bankruptcy Code, it was expressly stated.
Moreover, the Bank knew that despite its loan extensions to
Symington and the Forbearance Agreement, the Alta Mesa loan was
absolutely in default and amounted to clear failure to pay a debt
when due.
¶85 The Bank further argues that under the Triparty Agreement
it was not required to disclose information not requested. The
Bank claims that, under Kesselman, it actually has a duty not to
disclose confidential customer information. See Kesselman at 421,
937 P.2d at 343. If simple nondisclosure were the essence of this
case, the Bank could not be liable, based on the holding in Mac
Enterprises v. Del E. Webb Development Co., 132 Ariz. 331, 336, 645
P.2d 1245, 1250 (App. 1982). But, as discussed, simple
nondisclosure is not the claim the Funds make. The real questions
are the propriety of the Bank’s affirmative decision not to
institute foreclosure proceedings against Alta Mesa, the
forbearance, the failure to report Symington’s false statements to
federal authorities, and whether these intentional actions or
omissions interfered with the Funds’ right to receive from
Symington information material to their decision to fund the
Mercado loan.
¶86 Finally, the Bank argues that even if it knew the
-47-
statements were false, it was acting properly in its own self-
interest by not disclosing Symington’s financial status to the Fund
to protect itself against a $10 million loss. We agree that the
Bank may have been acting in its self-interest and we are cognizant
of the inherent conflict between the parties’ interests created by
the interim loan and Permanent Commitment. But self-interest does
not justify an affirmative strategy to deprive the Funds of
information which the Bank knows is vital to the Funds’ legitimate
expectations under the Permanent Commitment. Further, it is not
justification to interfere knowingly with a contract where the
defendant acts with an improper purpose and seeks to further his
own interests. Community Title Co. v. Roosevelt Fed. Sav. and Loan
Ass’n, 796 S.W.2d 369 (Mo. 1990). Summary judgment on the Funds’
tortious interference with contract claim was improper. Inferences
arising from the evidence are sufficient to go to the jury under
the preponderance standard.21
D. Fraudulent Concealment
21
Intentional interference with contract requires the
preponderance standard. Hi-Ho Tower, Inc. v. Com-Tronics, Inc.,
761 A.2d 1268, 1273-75 (Conn. 2000) (Com-Tronics must prove claim
of tortious interference with contractual relations by a
preponderance of the evidence); Examination Mgmt. Serv., Inc. v.
Kirschbaum, 927 P.2d 686, 697 (Wyo. 1996) (in claim for intentional
interference with contract, defendant has burden of proving
elements by a preponderance of the evidence); see also Collins v.
Collins, 625 So. 2d 786, 791 (Miss. 1993) (elements of tortious
interference need to be proven only by a preponderance of the
evidence).
-48-
¶87 Arizona recognizes the tort of fraudulent concealment:
One party to a transaction who by concealment or other
action intentionally prevents the other from acquiring
material information is subject to the same liability to
the other, for pecuniary loss as though he had stated the
nonexistence of the matter that the other was thus
prevented from discovering.
RESTATEMENT (SECOND) OF TORTS § 550 (1976); see also King v. O’Rielly
Motor Co., 16 Ariz. App. 518, 521, 494 P.2d 718, 721 (1972). Where
failure to disclose a material fact is calculated to induce a false
belief, “the distinction between concealment and affirmative
misrepresentation is tenuous.” Schock v. Jacka, 105 Ariz. 131,
133, 460 P.2d 185, 187 (1969).
¶88 The court of appeals dismissed the Funds’ claim for
fraudulent concealment on the basis that the Bank’s fiduciary and
contractual duty was to Symington and not to the Funds. Both the
court of appeals and the Bank mistakenly cite Frazier v. Southwest
Savings & Loan Association, 134 Ariz. 12, 653 P.2d 362 (App. 1982),
for the proposition that concealment was not proven because there
was no duty to speak.22
22
The confusion surrounding the requisites of fraudulent
concealment results from the fact that there are three distinct
classes of fraud: misrepresentation, concealment, and non-
disclosure. Liability for fraudulent misrepresentation occurs
under § 525 of the RESTATEMENT (SECOND) OF TORTS and lies against “[o]ne
who fraudulently makes a misrepresentation of fact . . . for the
purpose of inducing another to act or to refrain from action
. . . .” In contrast, liability for nondisclosure occurs under
§ 551 of the RESTATEMENT (SECOND) OF TORTS and lies against “[o]ne who
fails to disclose to another a fact . . . if, but only if, he is
under a duty to the other . . . to disclose the matter in
question.” Liability for fraudulent concealment occurs under § 550
-49-
¶89 In Frazier, the court explained that liability for
concealment under § 550 of the RESTATEMENT (SECOND) OF TORTS requires
knowledge of the false information and action by the defendant that
intentionally prevented the plaintiff from finding the truth. 134
Ariz. at 17, 653 P.2d at 367. The Frazier court found concealment
unproven, not because there was no duty to disclose, but because
there was no evidence from which the jury could have found active
concealment.23 Frazier at 17, 653 P.2d at 367.
¶90 The court of appeals has previously referred to a duty
requirement in the context of fraudulent concealment. Dunlap v.
City of Phoenix, 169 Ariz. 63, 69, 817 P.2d 8, 14 (App. 1990). In
Dunlap, the court stated that “[t]o be guilty of fraudulent
concealment, a defendant must have a legal or equitable obligation
to reveal the information.” Dunlap at 69, 817 P.2d at 14. This
statement was dictum however, since the case was decided on statute
of the RESTATEMENT (SECOND) OF TORTS and lies against a “party to a
transaction who by concealment or other action intentionally
prevents the other from acquiring material information.” (Emphasis
added.) As discussed, duty has no relevance in a tort requiring an
intentional act. Concealment necessarily involves an element of
non-disclosure, but it is the intentional act of preventing another
from learning a material fact that is significant, and this act is
always the equivalent of a misrepresentation. RESTATEMENT (SECOND) OF
CONTRACTS § 160 (“Action intended or known to be likely to prevent
another from learning a fact is equivalent to an assertion that the
fact does not exist.”).
23
The opinion does address the concept of duty; however, the
discussion occurred in the context of Frazier’s claims under
RESTATEMENT (SECOND) OF TORTS § 551, “Liability for Nondisclosure” and
RESTATEMENT (SECOND) OF TORTS § 552, “Information Negligently Supplied
for the Guidance of Others.”
-50-
of limitations grounds. Id. at 70, 817 P.2d at 15. Moreover, the
two cases Dunlap relied on for this proposition, Schock v. Jacka
and Van Buren v. Pima Community College District Board, 113 Ariz.
85, 546 P.2d 821 (1976), did not hold fraudulent concealment is
subject to a disclosure duty.
¶91 In Schock, neither the complaint nor the plaintiff’s
opposition to summary judgment articulated any theory of fraudulent
concealment. 105 Ariz. at 133, 460 P.2d at 187. In Van Buren, the
plaintiff raised both fraudulent and negligent failure to disclose.
The court found no fraudulent failure because there was no proof
the statements were false, nor was there proof the defendant knew
of any falsehood. Van Buren at 86, 546 P.2d at 822. The court
correctly dismissed negligent failure because it found no duty.
Id. at 87, 546 P.2d at 823.
¶92 In Arizona, whether a duty to speak exists at all is
determined by reference to all the circumstances of the case.
National Hous. Indus., Inc., v. E.L. Jones Dev. Co., 118 Ariz. 374,
379, 576 P.2d 1374, 1379 (App. 1978) (citing 37 AM. JUR. 2d, Fraud
& Deceit § 146 (1968)). On the issue of duty in a fraudulent
concealment claim, we are persuaded by and affirm the reasoning
articulated by the court of appeals decision in King v. O’Rielly
Motor Co.
¶93 In King, a car buyer sued a car dealer for fraudulently
representing that the car the buyer purchased was “as good as new”
-51-
when in fact the car had been in an accident and, unbeknownst to
the buyer, had been repaired by the dealer. The car dealer argued
that because the buyer’s claim existed under § 551 of the RESTATEMENT
OF TORTS (Liability for Nondisclosure), the dealer could not be
liable to the buyer because the dealer was under no duty to
disclose. The court refused to limit its consideration of the
plaintiff’s claim to § 551, stating “[w]ith these facts in mind we
feel that a consideration of §§ 529 and 550 of RESTATEMENT OF TORTS
. . . is necessary for the determination of the question at hand.”
King at 521, 494 P.2d at 721. The court further stated that, while
“[i]t is often difficult to distinguish misleading representations
and fraudulent concealment from mere nondisclosure and the
classification of the act or acts in question must, of course,
depend on the facts of each case,” it was nevertheless true that
“the facts of this case . . . would be supportive of a finding of
misleading representation as set forth in Restatement § 529 or
fraudulent concealment as set forth in § 550.” King at 521-22, 494
P.2d at 721-22 (emphasis added). An Oregon court advanced similar
reasoning in Paul v. Kelley, 599 P.2d 1236 (Or. App. 1979),
concluding that a duty to disclose is not necessary to prevail on
a fraudulent concealment claim.
¶94 In Paul, the seller of real estate knew, before the
closing, that he was required to install a storm sewer if a
drainage ditch on the property were eliminated. Instead of
-52-
installing the storm sewer, the sellers simply filled the ditch and
sold the property. Buyers of the land sued the sellers when they
learned they had to put in an expensive sewer system. The sellers
defended on the grounds that they had no affirmative duty to
disclose the ditch to the buyers. The court found this argument
meritless, stating:
Such a duty is not necessary. . . . [A]n active
concealment such as the filling in of the ditch alleged
in this case is to be distinguished from a simple
nondisclosure. . . . Plaintiff’s complaint sets forth
facts alleging an active concealment of the drainage
ditch and is sufficient without the assertion of a duty
to speak.
Paul at 1238-39 (emphasis added); see also Caldwell v. Pop’s Homes,
Inc., 634 P.2d 471, 477 (Or. App. 1981) (where fraud is based on a
plan of actual concealment, as opposed to simple nondisclosure, a
duty to speak is not required).
¶95 “[T]he common law clearly distinguishes between
concealment and nondisclosure. The former is characterized by
deceptive acts or contrivances intended to hide information,
mislead, avoid suspicion, or prevent further inquiry into a
material matter. The latter is characterized by mere silence.”
United States v. Colton, 231 F.3d 890, 899 (4th Cir. 2000). “Thus,
fraudulent concealment -– without any misrepresentation or duty to
disclose -- can constitute common law fraud.” Id. at 899.
¶96 The distinction is made even more clear by Prosser’s
description of active concealment as:
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Any words or acts which create a false impression
covering up the truth, or which remove an opportunity
that might otherwise have led to the discovery of a
material fact--as by floating a ship to conceal the
defects in her bottom, sending one who is in search of
information in a direction where it cannot be obtained,
or even a false denial of knowledge by one in possession
of facts--are classed as misrepresentation, no less than
a verbal assurance that the fact is not true.
(Footnotes omitted.) WILLIAM L. PROSSER, HANDBOOK OF THE LAW OF TORTS § 106
at 695 (4th ed. 1971) (“Prosser IV”). Prosser discusses simple
nondisclosure as a separate category, usually requiring a duty to
speak before silence will be actionable. PROSSER IV at 695-99.
¶97 The Funds in the instant case allege the Bank actively
strategized to cover up the pending collapse of Symington’s
financial condition. This allegation fits the definition of
concealment, not nondisclosure. Three evidentiary points are
clear: the “unjustified and imprudent” loan extensions; the
forbearance until one day after the due date for the Mercado take-
out obligation; and the failure to report Symington’s false
statements to federal banking authorities. The record reveals
evidence of internal bank communications and communication between
Symington aides and the Bank. Applying the law, we conclude that
the Funds were not required to establish an affirmative duty to
speak in order to prove fraudulent concealment. Actions by the
Bank which intended to conceal material facts are, if proven,
sufficient.
¶98 In the final analysis, we reach two conclusions as to the
-54-
fraudulent concealment claim: there are reasonable inferences from
which a jury could find (1) the Bank had knowledge of false
information being given the Funds, and (2) the Bank took measures
intended to prevent the Funds from learning the truth. These
inferences are grounded in fact and are sufficient to take the
concealment theory to the jury under the applicable clear and
convincing standard.24
E. Civil Conspiracy to Commit Fraud
¶99 “For a civil conspiracy to occur two or more people must
agree to accomplish an unlawful purpose or to accomplish a lawful
object by unlawful means, causing damages.” Baker v. Stewart Title
& Trust of Phoenix, 197 Ariz. 535, 542, 5 P.3d 249, 256 ¶30 (App.
24
Although courts in other jurisdictions are not in agreement
regarding the standard of proof required for fraudulent
concealment, we follow those requiring clear and convincing
evidence. See Aksomitas v. Aksomitas, 529 A.2d 1314 (Conn. 1987);
Hughes v. Holt, 435 A.2d 687 (Vt. 1981); Haleyville Health Care
Center v. Winston County Hosp. Bd., 678 So. 2d 789 (Ala. 1996);
Webb v. Pomeroy, 655 P.2d 465 (Kan. App. 1982); but see Kracl v.
Loseke, 461 N.W.2d 67, 72 (Neb. 1990) (to maintain an action for
fraudulent concealment, the plaintiff must prove the elements by a
preponderance of the evidence); Hebron Public School Dist. No. 13
of Morton County v. U.S. Gypsum Co., 475 N.W.2d 120, 124 (N.D.
1991) (fraudulent concealment must be established to the
satisfaction of the jury by a fair preponderance of the evidence);
Kopeikin v. Merchants Mortgage and Trust Corp., 679 P.2d 599, 601
(Colo. 1984) (defendant asserts petitioners could not have proven
fraudulent concealment by a preponderance of the evidence).
We adopt the heightened standard for this tort because
fraudulent concealment is essentially the equivalent of fraud by a
misrepresentation. See RESTATEMENT (SECOND) OF TORTS § 550 (1976).
Fraud unquestionably requires clear and convincing evidence. Rice
v. Tissaw, 57 Ariz. 230, 237, 112 P.2d 866, 869 (1941).
-55-
2000) (quoting Rowland v. Union Hills Country Club, 157 Ariz. 301,
306, 757 P.2d 105, 110 (1988)); see also RESTATEMENT (SECOND) OF TORTS
§ 876. “A mere agreement to do a wrong imposes no liability; an
agreement plus a wrongful act may result in liability.” Baker at
542, 5 P.3d at 256 (citations omitted). In short, liability for
civil conspiracy requires that two or more individuals agree and
thereupon accomplish “an underlying tort which the alleged
conspirators agreed to commit.” Id. at 545, 5 P.3d at 259. Here,
the underlying wrong is Symington’s fraud via submission of
fraudulent financial statements to the Funds. The Bank denies any
agreement to defraud.
¶100 Ultimately, the correspondence between Bank agents and
Symington’s aides, coupled with meetings among Symington, his
aides, and bank officials and the ensuing results raise serious
questions about the Bank’s activity. But a claim for civil
conspiracy must include an actual agreement, proven by clear and
convincing evidence,25 and although the Bank’s conduct is
suspicious, evidence of an agreed upon conspiratorial arrangement,
on this record, cannot rise to the clear and convincing level. See
Elliott v. Videan, 164 Ariz. 113, 116, 791 P.2d 639, 642 (App.
1989).
¶101 There is a qualitative difference between proving an
25
Civil conspiracy to commit fraud requires clear and con-
vincing evidence. Elliot v. Videan, 164 Ariz. 113, 116, 791 P.2d
639, 642 (App. 1989).
-56-
agreement to participate in a tort, i.e., a civil conspiracy, and
proving knowing action that substantially aids another to commit a
tort. Halberstam at 478. Even though legitimate fact questions
exist on the Funds’ claims of aiding and abetting, bad faith,
intentional interference, and concealment, it is unreasonable to
infer a conspiratorial agreement. Leahey at 537 (court upheld jury
verdict finding defendant guilty of aiding and abetting fraud but
struck down jury finding that defendant conspired to commit fraud
because it was unreasonable for jury to conclude defendant agreed
to join in the scheme).
¶102 Accordingly, we affirm summary judgment of the Funds’
civil conspiracy claim.
IV. Conclusion
¶103 The Funds correctly emphasize that the case is here in
opposition to the summary judgment entered in the Bank’s favor,
claiming they are entitled to take their case to the jury with all
reasonable inferences to be drawn from the facts. See Anderson v.
Liberty Lobby, Inc., 477 U.S. 242 (1986). The inquiry on a motion
for summary judgment unavoidably asks whether reasonable jurors
could find by the appropriate evidentiary standard that the
plaintiff is entitled to a verdict, i.e., whether there is
“evidence . . . such that a reasonable jury could return a verdict
for the nonmoving party.” Id. at 248. Accordingly, the issue here
is whether the evidence is sufficient to overcome a motion for
-57-
summary judgment. Our evaluation focused exclusively on the five
allegations made in the Funds’ counterclaim, the evidence offered
in support of those allegations, and the arguments made in the
court of appeals and the petition for review to this court.
¶104 In light of the evidence, we hold that summary judgment
was premature as to all claims except the claim of civil
conspiracy. Thus, the court of appeals ruling on civil conspiracy
is affirmed. As to the other claims, the opinion of the court of
appeals is vacated, the judgment of the trial court is reversed,
and this case is remanded to the trial court for proceedings
consistent with this opinion.
¶105 Because of our decision to remand, we also vacate the
existing award of attorneys’ fees to the Bank. Attorneys’ fees, if
any, will be recoverable at the termination of the proceedings in
the trial court.
___________________________________
Charles E. Jones
CONCURRING: Chief Justice
____________________________________
Ruth V. McGregor, Vice Chief Justice
____________________________________
Stanley G. Feldman, Justice
____________________________________
Thomas A. Zlaket, Justice
-58-
M A R T O N E, Justice, concurring in part and dissenting in part.
¶106 I agree with the court that the absence of a duty to
disclose is not fatal to the assertion of intentional tort claims.
This is the issue decided by the court of appeals upon which review
was sought. I would thus remand the case to the court of appeals
for consideration of those issues presented to but not decided by
it. The court instead proceeds to examine the sufficiency of the
evidence in this case as to each of five separate counts. In the
process it sweeps broadly, drawing on decisions from scores of
other courts, to set forth, in dicta, rules for Arizona on issues
not briefed by the parties. See, e.g., ante, at ¶ 58 n.16. To
illustrate, the court concludes that the tort of aiding and
abetting fraud, unlike fraud itself, requires proof only by a
preponderance of the evidence. I would like to have seen this
issue briefed and argued. I should think that if fraud requires
proof by clear and convincing evidence, aiding and abetting fraud
would require the same.
¶107 Rule 23 (i)(3), Ariz. R. Civ. App. P., provides that if
issues were raised in, but not decided by, the court of appeals, we
may consider them or remand to the court of appeals to decide them
in the first instance. Given the fact intensive nature of the
inquiry and the wide range of views expressed nationally on the
torts alleged, it is best to have such issues decided in the court
in which they were raised and briefed. I thus concur in the
-59-
judgment but dissent from the court’s opinion.
Frederick J. Martone, Justice
-60-