22. If the woman sues the bank for breach of contract, will the bank's misrepresentation defense likely succeed?

The bank later learned of the woman's true financial condition. The bank refused to honor its promise to lend money to the woman, contending that the parties' contract was voidable at the bank's option because of the woman's misrepresentation.

A woman prepared an accurate statement of her financial condition and submitted it with a loan application to a local bank with which she had done business for many years. Shortly thereafter, the woman's financial condition worsened significantly, but she failed to disclose this fact to the bank. Unaware of the woman's changed financial condition, the bank then agreed to lend money to the woman.

No, because the woman did not make any subsequent affirmative misrepresentations about her financial condition
No, because the woman’s representations were accurate at the time she submitted the loan application to the bank
Yes, because the woman had an obligation to correct her previous representations about her financial condition in order to prevent them from being fraudulent
Yes, because the woman had an obligation to tell the bank about her changed financial condition due to the longstanding relationship of trust and confidence between them

« PreviousSkipNext »

Show clarification Download PDF

Under Restatement (Second) of Contracts § 161 (1981), non-disclosure of a fact is equivalent to a fraudulent assertion if the maker: (i) knows the disclosure is necessary to prevent a previous assertion from being fraudulent; (ii) knows the disclosure would correct a mistake of the other party as to a basic assumption on which the party was making the contract and non-disclosure amount to a failure to act in good faith and in accordance with reasonable standards of fair dealing; (iii) knows the disclosure would correct a mistake as to the contents or effect of a writing; or (iv) is in a relationship of trust and confidence with the other party. If the non-disclosure is fraudulent, the contract will be voidable.

C is correct. Here, the woman's failure to disclose that her financial situation had significantly worsened was material because it would likely negatively impact her ability to repay the bank's loan. Thus, because the woman's original loan application represented her finances differently, she needed to notify the bank to correct their basic assumption that her finances had not worsened.

A is incorrect. Although it is true the woman didn't make any affirmative representations about her financial situation after submitting her original loan application, as stated above, her failure to disclose the change in her finances would constitute a material assertion that would impact whether the bank would grant her loan because it impacts her ability to repay the bank's loan.

B is incorrect. This statement is legally correct. However, as stated above, because the woman's financial situation would impact whether the bank would grant her loan application, she was obligated to notify the bank that her financial situation had changed.

D is incorrect. Although the woman had done business with the bank for many years, no facts suggest the woman had a relationship of trust and confidence with the bank. Thus, this answer choice doesn't address the central issue, which is whether the woman's non-disclosure was fraudulent.

Comments (0)

There are no comments at the moment. If you found an error or think question is incorrect, tell everyone about it

22. If the woman sues the bank for breach of contract, will the bank's misrepresentation defense likely succeed?

Comments (0)

Trial period expired