## Facts

- GMAC financed a car dealership’s new-vehicle inventory under a wholesale security agreement giving GMAC a security interest in vehicles/proceeds, requiring prompt payment for cash sales, and allowing GMAC setoff against retail contracts it held.
- For liquidity, GMAC allowed the dealership to draw retail sight drafts on GMAC; GMAC monitored dealer risk using questionnaires sent to the dealer’s bank and other creditors.
- The dealer’s principal bank also financed the dealer (including a major capital loan) and the owner personally; by early 1979 the bank’s credit exposure was near its legal lending limit.
- In repeated questionnaire responses and communications, the bank represented that the dealership had no NSF checks or recent overdrafts, maintained low-to-medium five-figure account balances, and was current on loans.
- Those statements were materially inaccurate: the dealership’s account had substantial negative balances and its loan status had been renegotiated to avoid default.
- In late October 1979, the bank assured GMAC that returned checks to GMAC would be made good by November 1, but starting October 30 the bank refused to honor dealership checks payable to GMAC totaling about $313,078.88.
- Relying on the bank’s assurances, GMAC continued honoring sight drafts from October 30 to November 6 totaling about $113,235.95; the dealership soon failed.
- After a bench trial, the district court found the bank committed fraud and awarded GMAC $426,315.83; the bank appealed challenging liability, reliance, proximate cause, and damages.

## Issues

1. Whether the bank’s written responses and oral assurances about the dealership’s financial condition constituted actionable fraud under Illinois law.
2. Whether GMAC, a sophisticated commercial lender with other sources of information, justifiably relied on the bank’s representations.
3. Whether the misrepresentations proximately caused GMAC’s losses and, if so, what damages were recoverable as reliance-based fraud damages.

## Decision

- The Seventh Circuit affirmed the finding of fraud liability under Illinois law.
- The court held GMAC’s reliance was justifiable despite its sophistication and partial independent monitoring.
- The court held proximate cause was satisfied for incremental losses tied to GMAC’s reliance (continued honoring of drafts and delayed protective actions).
- The court reduced the damages award because fraud damages must be limited to losses actually caused by reliance, not all losses associated with the dealership’s collapse.

## Legal Principles

- Illinois common-law fraud requires: (1) a false statement of material fact, (2) knowledge of falsity or reckless disregard, (3) intent to induce reliance, (4) justifiable reliance, and (5) damages proximately caused by that reliance.
- A bank that provides credit information to another lender may be liable for fraud when it makes materially false statements about a mutual borrower’s financial condition.
- Commercial sophistication and access to other information do not categorically defeat reliance; justifiability turns on the context and the specificity of the misstatements.
- Fraud damages are limited to losses proximately caused by reliance on the misrepresentation, rather than the full set of losses attributable to the borrower’s eventual failure.

## Conclusion

The court held the bank liable for fraud for materially false credit information and assurances given to another lender, found the lender’s reliance reasonable in context, and limited recovery to reliance-based losses that were proximately caused by the misrepresentations.


General Motors Acceptance Corp. v. Central Nat’l Bank of Mattoon, 773 F.2d 771 (7th Cir. 1985)