Caseflicks

Texas Supreme Court • 1992

Federal Land Bank Ass'n of Tyler v. Sloane

825 S.W.2d 439

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Takeaway

In short, this case recognizes negligent misrepresentation by a lender despite the statute of frauds, but confines common-law recovery to pecuniary reliance losses—not mental anguish or the expected benefits of an unfunded transaction.

Background

William, Lettie, and Robert Sloane sought a $141,000 loan from the Federal Land Bank Association of Tyler to construct new chicken houses. Pilgrim's Pride had indicated it would contract with them to raise broiler chickens if the houses were built to its specifications. During the loan process, the bank's loan officer told the Sloanes that the board had approved the loan and that they could proceed with site-preparation work. When the Sloanes' contractor asked whether construction should begin despite the loan's pending status, the officer reportedly said there was no reason not to continue.

Relying on those statements, the Sloanes demolished an old chicken house and spent about $9,000 on further site preparation. The bank later denied the loan, citing undisclosed debts and a new car liability. The Sloanes could not obtain alternate financing and lost the opportunity to build the houses and obtain the Pilgrim's Pride arrangement.

A jury found that the bank negligently misrepresented that the loan had been approved, that the Sloanes justifiably relied on the representation, and that their reliance caused pecuniary loss. It awarded monetary damages, lost profits, and $15,000 for mental anguish. The trial court entered judgment including prejudgment interest. The court of appeals held that the statute of frauds did not bar the tort claim, affirmed mental-anguish damages, but reversed the lost-profits award and certain other expenditures for insufficient evidence. The Texas Supreme Court affirmed except as to mental anguish, which it disallowed.

Issues

Issue #1

Whether the statute of frauds barred the Sloanes' negligent-misrepresentation claim because the alleged representation concerned a loan secured by real property.

Holding

No. The statute of frauds did not bar this negligent-misrepresentation claim.

Reasoning

The statute of frauds makes specified contracts unenforceable unless they are in writing. But the Sloanes did not allege that the bank made an oral loan agreement and then breached it. Their claim instead rested on the opposite premise: the bank never agreed to make the loan, but negligently represented that it had already approved one.

The Sloanes sought reliance damages for expenses incurred after the bank's alleged misinformation, not contract damages for the bank's failure to fund the loan. Although a plaintiff may not relabel a contract claim as negligent misrepresentation to evade the statute of frauds, this claim did not seek to enforce an unwritten agreement and therefore fell outside the statute's bar.

Issue #2

What standard governs a common-law negligent-misrepresentation claim based on information supplied by a lender in a loan transaction.

Holding

Texas adopts Restatement (Second) of Torts section 552 as the governing standard.

Reasoning

A person who supplies information in the course of business, or in a transaction in which that person has a pecuniary interest, has a duty to use reasonable care and competence in obtaining or communicating that information when it is supplied for others' business guidance.

Under section 552, liability requires a false representation, made in the course of business or a transaction involving the defendant's pecuniary interest; a failure to exercise reasonable care or competence in obtaining or communicating the information; and pecuniary loss caused by the plaintiff's justifiable reliance. The jury findings substantially tracked these elements, and the bank did not challenge the sufficiency of the evidence supporting liability.

Issue #3

Whether mental-anguish damages are recoverable for common-law negligent misrepresentation.

Holding

No. Recovery for common-law negligent misrepresentation is limited to pecuniary loss.

Reasoning

The Court applied Restatement (Second) of Torts section 552B, which limits damages for negligent misrepresentation to pecuniary losses legally caused by the misrepresentation. The Restatement's limitation reflects both the comparatively lower level of fault involved in negligence and the need to keep liability proportional to the risk created by inaccurate business information.

The Court treated negligent misrepresentation as essentially a commercial tort and found no persuasive trend away from the Restatement's pecuniary-loss rule. It therefore declined to extend recovery to mental anguish, while expressly limiting its holding to common-law negligent-misrepresentation actions rather than statutory causes of action.

Issue #4

Whether the Sloanes could recover anticipated profits from their prospective Pilgrim's Pride arrangement as negligent-misrepresentation damages.

Holding

No. The lost profits were impermissible benefit-of-the-bargain damages rather than recoverable reliance losses.

Reasoning

Section 552B permits losses suffered as a consequence of reliance, but it does not permit recovery of the benefit of a contract with the defendant. The Sloanes' anticipated profits depended on receiving loan funds from the bank, building acceptable chicken houses, and then entering the proposed Pilgrim's Pride arrangement.

Because the bank never made the loan, awarding profits from the Pilgrim's Pride relationship would effectively give the Sloanes the benefit of the unfunded loan transaction. The Court held that this was beyond the scope of negligent-misrepresentation damages and therefore did not reach the court of appeals' separate conclusion that the profits had not been proved with sufficient certainty.

Dissents

Justice Mauzy

Reasoning

Justice Mauzy agreed that the statute of frauds did not protect the bank from liability for negligent misrepresentation. He disagreed, however, with the majority's categorical rule that lost profits can never be recovered in such an action and would have affirmed the jury's lost-profits award.

In his view, the distinction between negligent and fraudulent misrepresentation was too artificial on these facts. Texas courts had described negligent misrepresentation as a form of remedial fraud, and the bank controlled the information concerning the loan application's status and was presumed to know the relevant facts.

Because the Sloanes changed their position in reliance on the bank's assurances, Justice Mauzy would have permitted benefit-of-the-bargain damages measured by the profits they would have earned under the Pilgrim's Pride contract. He reasoned that the bank's conduct justified placing the Sloanes in the position they would have occupied had its representation been true.