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Knapp v American General Finance Inc.

    Brief Fact Summary. Consumers entered into certain loan agreements with a company.  The consumers gave the company a security interest in certain property to secure the loans and bought insurance to cover that property.  The consumers were very uneducated and certain of the terms in the agreement were one sided. 

    Synopsis of Rule of Law. One main rule cannot extracted from this case.  See the held section for various rules.

    Facts. The Plaintiffs, Mr. & Mrs. Knapp (the "Plaintiffs"), wished to borrow $1000 dollars from the Defendant, American General Home Equity, Inc. (the "Defendant").  Mr. Knapp telephoned the Defendant, gave them certain information and was told that the Plaintiffs' loan was approved.  On November 26, 1997, the Plaintiffs visited the Defendant's office to sign various documents documenting a $1038.83 loan at an annual percentage rate of 30.99%.  Mrs. Knapp is illiterate and Mr. Knapp cannot see without his glasses, which he was not wearing when he signed these documents.  Mr. Knapp also only has an eighth grade education.  Mr. Knapp told one of the Defendant's employees he could not see the documents, and Mrs. Knapp told another employee she could not read.  The Defendants also were allegedly given a security interest in certain of the Plaintiffs' property.  The Plaintiffs were under the impression that they had to have insurance for their property the loan was secured by.  The Plaintiffs executed various documents concerning insurance.  This security interest was evidenced by various documents. The Plaintiffs made the requisite loan payments for only 5 months, fell behind, and the Defendant sought to repossess the property.

    Issue. Did the Plaintiffs have a valid fraud action against the Defendants?
    •    Is the agreement unconscionable?
    •    Did the Defendants breach a fiduciary duty?
    •    Did the Defendants breach the duty of good faith and fair dealing?

    Held. West Virginia's fraud statute requires "(1) that the act claimed to be fraudulent was the act of the defendant or induced by him; (2) that it was material and false; that plaintiff relied on it and was justified under the circumstances in relying on it; and (3) that he was damaged because he relied on it." Generally, "absent fraud or other wrongful conduct, one who signs or accepts a written instrument will normally be bound in accordance with its written terms and cannot disaffirm the contract simply by contending that he failed to read the contract or understand its contents".  Further, if someone signs a contract, but cannot read it they have an obligation to have someone read it to them.  An exception exists if it "can be shown that the other party deceived the person who could not read the contract as to its contents."  Relying on the Plaintiffs' assertions that they could not read the documents, the court refused to grant summary judgement.
    •    The court recognized "[t]he principle of unconscionability is one of the prevention of oppression and unfair surprise and not the disturbance of reasonable allocation of risks or reasonable advantage because of superior bargaining power or position."  It continued, "[a] determination of unconscionability must focus on the relative positions of the parties, the adequacy of the bargaining position, and the existence of meaningful alternatives available to the plaintiffs."  Still further the court observed, "[g]ross inadequacy in bargaining power may exist where consumers are totally ignorant of the implications of what they are signing or where the parties involved in the transaction include a national corporate lender on one side and unsophisticated, uneducated consumers on the other." The court determined that the testimony did not "demonstrate indisputably these consumers, one illiterate and the other with an eighth-grade education, were sophisticated consumers, able to hold their own in bargaining with loan company representatives."  The court also discounted the Defendants argument that the loan document included all disclosures required by law.
    •    The court recognized that a fiduciary duty is " '[a] duty to act for someone else's benefit, while subordinating one's personal interests to that of the other person.' "  It exists "whenever a trust, continuous or temporary, is specially reposed in the skill or integrity of another."  Further, generally "a fiduciary relationship is established only when it is shown that the confidence reposed by one person was actually accepted by the other, and merely reposing confidence in another may not, of itself, create the relationship."  The court determined the Defendant did not owe the Plaintiff a fiduciary duty. 
    •    According to case law and the Uniform Commercial Code ("UCC"), an implied covenant of good faith and fair dealing exists in every contract.  The court concluded that there was "a genuine issue of material fact whether Defendants had a valid security interest in the property they undertook to repossess and, thus, a further question whether Defendants breached the duty of good faith and fair dealing."

    Discussion. This case offers an interesting discussion of fraud, unconscionability, breach of a fiduciary duty and the breach of the duty of good faith and fair dealing.


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