APPEAL FROM A JUDGMENT OF THE UNITED STATES DISTRICT COURT OF THE VIRGIN ISLANDS DIVISION OF ST. CROIX: AT CHRISTIANSTED (V.I.D.C. Civil No. 75-681)
Before: VAN DUSEN, WEIS and GARTH, Circuit Judges
This appeal involves the liability of two accommodation endorsers of a note rendered otherwise valueless by its maker's default and subsequent disappearance from his Virgin Islands home. The district court held that fraud by the holder-bank*fn1 and unlawful conduct by one of its directors sufficed to discharge the endorsers from their obligation as sureties. We reverse.
Prior to November 1972, Peoples Bank of the Virgin Islands ("Bank") had loaned $6,000 to Jose Figueroa. Figueroa, apparently in shaky financial condition, encountered difficulty in meeting his payments. He therefore sought a second loan in the amount of $10,000 to consolidate his debts and to provide additional capital for his insurance business. The Bank refused to make the new loan unless Figueroa obtained endorsers, who by their endorsements on the note would become liable in the event Figueroa defaulted. Figueroa procured two acceptable endorsers - Monserrate Garcia and Wook Suh ("endorsers", or "appellees"). The Bank, on November 29, 1972, thereupon granted the $10,000 loan, taking Figueroa's note in that sum with the two endorsements. After satisfying by set-off Figueroa's outstanding indebtedness and his overdrafts, the Bank credited the remaining monies to Figueroa's business account. Figueroa made a few payments on the note, the last one of which was received by the Bank on July 10, 1973. He has been in default since then, and has now apparently fled the Virgin Islands.
After Figueroa's default and flight, the Bank turned to the endorsers for repayment. They refused to honor the endorsement agreement, thus sparking the instant litigation in the United States District Court of the Virgin Islands. The district court entered a default judgment against Figueroa, but discharged Garcia and Suh from their endorsement obligation.*fn2
The district court rested its decision on two grounds. First, the court held that the Bank had failed to reveal material information about Figueroa's financial condition to the endorsers. Second, the court held that a Bank director who was Figueroa's business partner violated Virgin Islands law in connection with Figueroa's loan. The court thus permitted the endorsers to escape liability. We conclude that neither ground justified the result reached by the district court.
At the outset, we accept the district court judge's finding that:
the defendants Monserrate Garcia and Wook Suh did not ask for any financial statements of the person, Figueroa, for whom they were going to guarantee the loan nor did they inquire of the Bank regarding the financial situation of Jose Figueroa.
In light of this finding, we cannot credit the endorsers' argument th&t but for the Bank's nondisclosures and misrepresentations, they would not have fortified Figueroa's loan application with their own credit.
Put simply, the Bank's potential customer for the $10,000 loan, Figueroa, was obviously a credit risk. It was for this reason that the Bank declined a further extension of credit unless satisfactory endorsements to the note were obtained.*fn2a While often security for a questionable credit risk is provided by collateral, here the parties agreed that, in the event of default, the Bank would have recourse against solvent individuals - the appellee/endorsers - whose resources would secre the loan. The raison d'etre for an endorsement arrangement such as this one is precisely the fact of which Garcia and Suh now complain they were ignorant, i.e., that the maker's financial condition was such that the Bank considered him, standing alone, to be a poor credit risk. For the endorsers to contend that the Bank did not affirmatively offer financial information about Figueroa, or his account, and that they should therefore be released from their obligations as sureties, would be no different than a purchaser of goods at a fire sale demanding a refund because his goods are smoked-damaged. An endorsement agreement removes bank resistance to an extension of its credit by transferring any loss upon default to the endorsers. Almost by definition, where financially responsible endorsers are required as a condition for the granting of a loan to the maker, the risk that the maker will default is not insubstantial.
Here, the Bank played no role in procuring the two endorsers.*fn3 The facts found by the district court are clear that the endorsers were not induced by the Bank to guarantee Figueroa's note. Moreover, at no time did they ever question or seek information from the Bank regarding Figueroa's financial condition.*fn4 We have been shown no authority by the appellees, and we know of none, which establishes a duty upon the Bank to offer or disclose information concerning a customer's account. Indeed, the Bank could hardly have volunteered financial information (or even acceded to an unauthorized request from prospective endorsers to disclose such data) without breaching duties of confidentiality and privacy in its dealings with its customers. See Peterson v. Idaho First National Bank, 83 Idaho 578, 367 P.2d 284 (1961); Annot., 92 A.L.R. 2d 891 (1963); 10 Am. Jur. 2d, Banks § 332 (1963); see also First National Bank v. Brown, 181 N.W. 2d 178, 183 (Iowa 1970) (recognizing the duty of confidentiality but holding for the endorser where the withheld information was of public record).*fn5 While we need not and do not reach the question of the ...