Takeaways from Badger Capital, LLC v. Chambers Bank of North Arkansas

The Eighth Circuit recently clarified the duty banks owe to investors to disclose information regarding a bank's involvement in an investment offering. In Badger Capital, LLC v. Chambers Bank of North Arkansas an investment company sent an offer to potential investors to purchase shares in a real estate development in Florida. The project was to be funded in part by a loan from the Chambers bank, and in part by shares sold to investors. The investment letter provided that Chambers would hold investor funds in escrow until the sale on the real estate closed. Aside from this letter, however, the investors had no further contact with Chambers. The real estate market subsequently turned sour, and Chambers ultimately had to foreclose on the property in Florida. The investors then sued Chambers and asserted that Chambers had a duty to disclose that: 1) not all of the investment shares had been sold before closing; 2) the investment company had obtained a loan from a separate bank in order to pay the closing fees on the real estate deal; and 3) one of Chambers' employees secured an equity interest in the property without making any cash investment, although he did provide a personal guarantee on the loan from Chambers. The Eighth Circuit, looking to Arkansas law, determined that Chambers did not have a duty to disclose any information to the investors. Under state law, a bank has a duty to disclose only where 'special circumstances' exist. Those circumstances did not exist in this case because 'there was ‘no evidence' indicating that the Bank [Chambers] entered into an oral or written escrow agreement, or had ever seen the [the investment letter] or subscription agreement prior to closing the loan with the [investment company].' The investors never entered into an oral or written agreement with Chambers providing that Chambers would serve as the escrow agent. Thus, Chambers did not owe a special duty to the investors, nor did the investors create duty for Chambers when they sent checks to Chambers. The court explained that merely sending checks is not enough. The investors had to condition the deposit of their checks on Chambers acting as an escrow agent, which they did not. As a result, Chambers was not an escrow agent, and there was no special duty to disclose any information.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.