Economic Crisis of 2010: Banker Beware

Economic crisis almost always  results in regulatory change. This was the lesson learned from the Thrift debacle if the early 1990s.  Further we the banking industry has experienced an over-abundance of regulatory change as a result of the current economic crisis.  But what is often overlooked is the effect economic crisis has on the common law.  We are a common law country.  Regulations come and go and often at the whim of the politics of the day.  But the common law lasts forever – or so it may seem.

Since October 30, 2009 the present economic crisis has left an indelible mark on the common law of Iowa and nowhere is its effect more profound than on the banking industry.

Remember these names:  Spreitzer,  Kaczinski and Van Sickle for they are the case names that some say will live in infamy.

Spreizter v Hawkeye State Bank 775 N.W.2d 573 (Iowa, 2009) effectively destroyed the heretofore impregnable wall of the contractual written integration clause.  You know the clause.  It says something like this: ‘ anything we said to induce you to sign this agreement can’t be used against us.’  Once a signed agreement containing an integration clause appeared one’s reliance on previous  oral inducements was considered to be unjustified.  No more.  With Spreitzer the court must look beyond the clause and consider whether one was actually justified in relying on the inducements even in the fact of the clause.  If properly plead and discovered it will be a factual issue for a judge or jury to decide.    But that’s not all.  The Court went further and decided to eliminate proximate cause and replace it with the Restatement (Third) of Torts concept of “scope of liability”.

Thompson v Kaczinski 774 N.W.2d 829 (Iowa, 2009) made good on the Spreitzer promise and fully adopted the Restatement (Third) of Torts scope of liability increased risk theory of causation.  As you will remember from Torts I the doctrine of foreseeability as it concerns causation was always limited by the doctrine of remoteness.  Remoteness was the judicial tool used to control or limit what could otherwise be a very wide scope of forseeability.  That’s now gone.  What is or is not within the scope of liability for increased risk is within the province of the fact finder.  To prove the point we visit the last of the three cases: Van Sickle.

Van Sickle Const. v Wachovia (IA Sup.Ct. No. 07-1602, June 25, 2010) abrogated the centuries old rule prohibiting recovery of economic loss in tort based claims.  It was thought that economic loss was the sole province of the law of contract.  Not so anymore.  Van Sickle abrogated the rule for negligent and fraudulent misrepresentation/omission claims.   Because almost all misrepresentation claims stem from pre-contractual statements which resulted in a contractual relationship we have now created a tort claim for almost every breach of contract claim which results in the expansion of the traditional contract damages from that which was within the contemplation of the parties, to the extremely broad scope of liability increased risk scope  per the Restatement (Third) of Torts.

Nowhere is the change in common law more pronounced than in the banking industry.  With the scope of damages greatly enhanced by VanSickle, pre-contractual statements  made by lenders will now lead  to claims for negligent and fraudulent misrepresentation, the contractual integration clause to the contrary notwithstanding.

The cases can be downloaded by clicking on the above links.