Wright v. Pennamped
1995 WL 655469, 657 N.E.2d 1223, 1995 Ind. App. LEXIS 1404 (1995)
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Rule of Law:
An attorney drafting loan documents on behalf of a lender has a duty to disclose any material, last-minute changes to the borrower or the borrower's counsel, and the failure to do so may constitute actual or constructive fraud.
Facts:
- Donald H. Wright, a real estate developer, sought to refinance an apartment complex and accepted a financing proposal from SCI Financial Corporation.
- The proposal specified a prepayment penalty consistent with the Federal Home Loan Bank formula.
- SCI retained attorney Bruce M. Pennamped to draft the loan documents. Pennamped sent a draft to Wright's attorney, Richard L. Brown, which contained a simple one percent prepayment penalty.
- Brown reviewed this draft with Wright, and they both approved its form and substance. Brown then informed Pennamped he would be unable to attend the closing.
- The day before closing, after Brown's approval, the funding bank directed Pennamped to change the prepayment penalty to a much more complex and costly formula.
- Pennamped revised the documents but did not inform Brown of the changes. He told his client to inform Wright but did not confirm this was done.
- Wright attended the closing alone, believing the documents were the same ones his attorney had approved, and signed them without re-reading them.
- A year later, Wright discovered the revised prepayment penalty when he tried to pay off the loan, which cost him approximately $92,500 more than the penalty in the draft he and his attorney had approved.
Procedural Posture:
- Donald H. Wright filed a complaint for damages against Bruce M. Pennamped and his law firm (among others) in an Indiana state trial court.
- The complaint alleged several counts, including actual fraud and constructive fraud.
- Pennamped and his firm filed a motion for summary judgment, arguing there was no evidence of fraudulent intent and no duty owed to Wright.
- The trial court granted the motion for summary judgment, finding that an essential element (intent to deceive) was missing and that no contractual duty existed.
- The trial court entered a final judgment in favor of Pennamped and his firm.
- Wright (Appellant) appealed the trial court's grant of summary judgment to the Court of Appeals of Indiana, an intermediate appellate court.
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Issue:
Does an attorney for a lender commit actual or constructive fraud by failing to disclose material, last-minute changes to loan documents to the borrower or the borrower's counsel before closing, after the borrower's counsel has already reviewed and approved a prior draft?
Opinions:
Majority - Sharpnack, Chief Judge
Yes, an attorney may commit actual or constructive fraud under these circumstances. By undertaking the task of drafting and distributing documents for review, an attorney assumes a duty to disclose any subsequent material changes to the other party. Pennamped's silence at closing, when he knew the documents had been altered after Wright's attorney had approved them, constituted an implied representation that the documents were unchanged. Wright's reliance on this representation was reasonable, as he was entitled to trust that an opposing counsel would not make undisclosed changes. The issue of fraudulent intent is a question of fact for a jury, but the conduct itself is so likely to create injustice that it can also support a claim for constructive fraud, which does not require proof of intent to deceive.
Analysis:
This case establishes that an attorney's duty of disclosure can extend to an opposing party in a transactional setting, even absent an attorney-client relationship. It holds that a drafting attorney who solicits review and approval from opposing counsel cannot remain silent about subsequent material alterations, creating a potential basis for fraud liability. This precedent heightens the professional responsibility of transactional lawyers, reinforcing the principle that pre-closing review of documents would be meaningless if parties could not rely on the final version conforming to the approved draft. The decision underscores that lawyers cannot simply delegate their duty of disclosure to a client and escape liability if the client fails to act.
