Lester A. Barrer v. Women's National Bank
1985 U.S. App. LEXIS 29508, 761 F.2d 752, 245 U.S. App. D.C. 349 (1985)
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Rule of Law:
A contract may be rescinded for an innocent material misrepresentation, but only if the party seeking rescission proves five elements: (1) an assertion not in accord with the facts, (2) that was material, (3) was justifiably relied upon, (4) was actually relied upon, and (5) caused detriment.
Facts:
- Due to unpaid corporate employment taxes, the IRS held a tax sale of Lester A. Barrer's personal home, which was purchased by Edward L. Curtis, Jr.
- Barrer had a 120-day period to redeem the home by paying the purchaser approximately $17,400, with a deadline of October 22, 1981.
- On October 21, 1981, Barrer submitted a loan application to Women's National Bank (WNB) to secure funds for the redemption.
- In his application and discussion with bank president Emily Womack, Barrer stated he 'thought' he was two months behind on his mortgage (he was six months behind) and did not disclose that foreclosure proceedings had begun, among other alleged omissions about his liabilities.
- On October 22, WNB approved the loan and issued Barrer a cashier's check for $17,400 without running a credit report.
- Barrer delivered the endorsed check to the IRS to redeem his home.
- Later that day, Curtis, the tax sale purchaser, contacted WNB and informed them of Barrer's true financial situation, including the mortgage arrears and foreclosure.
- Based on this new information, WNB stopped payment on the cashier's check, causing the redemption to fail and Barrer to lose ownership of his home.
Procedural Posture:
- Lester A. Barrer sued Women's National Bank in U.S. District Court for damages resulting from the rescission of a loan agreement.
- The case was referred to a magistrate for pretrial proceedings.
- The Bank filed a motion for summary judgment, arguing it was entitled to rescind the contract due to Barrer's misrepresentations.
- The magistrate granted summary judgment in favor of the Bank.
- Barrer, as appellant, appealed the magistrate's decision to the U.S. Court of Appeals for the D.C. Circuit; the Bank is the appellee.
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Issue:
Do a borrower's alleged innocent misrepresentations on a loan application justify the lender's rescission of the contract as a matter of law, where there are unresolved factual disputes regarding the nature of the statements and the lender's reliance?
Opinions:
Majority - Edwards
No. A contract cannot be rescinded as a matter of law based on innocent misrepresentation where there are genuine issues of material fact regarding the necessary elements of the claim. To justify rescission for innocent misrepresentation under District of Columbia law, a party must prove that the other party made an assertion (1) that was not in accord with the facts, (2) that was material, (3) that was relied upon, (4) justifiably, and (5) to the relying party's detriment. The magistrate below erred by only considering the first two elements and by resolving disputed facts in favor of the Bank. For example, there are factual questions as to whether Barrer's statements were assertions of fact or opinion (e.g., 'I thought I was two months behind'), whether he knew about the foreclosure proceedings, and whether his other disclosures were adequate. Furthermore, a jury could find that the Bank's reliance was not actual or justifiable, given its failure to conduct a basic credit check and its apparent motivation of sympathy, suggesting the alleged misrepresentations may not have been the true inducement for the loan.
Analysis:
This case clarifies the comprehensive, five-part test required to rescind a contract for innocent material misrepresentation in the District of Columbia. The court's decision emphasizes that rescission is not an automatic remedy for any factual inaccuracy in contract negotiations; the reliance on the misstatement must be actual, justifiable, and detrimental. By reversing summary judgment, the court underscores that elements like a party's state of mind (knowledge) and a lender's actual inducement for making a loan are questions of fact for a jury. This precedent serves as a caution to parties, particularly sophisticated actors like banks, that they cannot ignore their own due diligence and later use minor, innocently made misstatements to void a contract that has become undesirable.
