## Facts

- The Humphreys sought a construction loan from Peoples Trust & Savings Bank to build a house, expecting to borrow $35,000 and cover remaining costs from the sale of their prior home.
- A bank officer communicated a verbal commitment for a $35,000 loan at 8.5% interest, repayable over 20 years; the Humphreys began construction and relied on this understanding.
- Months later, the Humphreys signed a promissory note (about $35,482) and mortgage; the note was short-term and contained a demand clause, while also referencing figures based on a 20-year payoff.
- The Humphreys testified the bank did not explain the demand feature or short-term structure, did not discuss variable terms, and provided no separate disclosures beyond the note itself; they believed they had a 20-year fixed-rate loan.
- The Humphreys later executed a renewal note that remained short-term and included a demand feature; they testified the bank again did not explain the terms.
- After the Humphreys, through counsel, asked the bank to conform the loan to the earlier commitment, the bank demanded full payment under the demand clause.
- The Humphreys continued tendering monthly payments consistent with a long-term amortization schedule; the bank retained the checks without crediting them and continued to demand full payment.

## Issues

1. Whether the evidence supported findings that the bank misrepresented or misled the borrowers about material loan terms, including the demand feature and the loan’s duration.
2. Whether the court properly reformed the note and mortgage to reflect a fixed 8.5% long-term loan and to delete the demand clause.
3. Whether punitive damages were permissible and supported by the bank’s conduct.
4. Whether, given the borrowers’ counterclaim and the reformed terms, the bank was entitled to foreclose.

## Decision

- The Court of Appeals of Indiana affirmed the trial court’s judgment in all respects.
- The denial of the bank’s foreclosure complaint was affirmed.
- The borrowers’ recovery on their counterclaim was affirmed, including $1,000 compensatory damages and $40,000 punitive damages.
- The reformation of the loan instruments to fix interest at 8.5% and to delete the demand clause was affirmed.

## Legal Principles

- A lender’s misleading conduct regarding material loan terms, including failing to explain a demand feature inconsistent with prior representations and the borrower’s reasonable understanding, can support tort liability and equitable relief.
- Reformation is an available remedy when written loan documents do not reflect the agreement as reasonably understood and relied upon, particularly where one party induces reliance and the other signs without meaningful explanation of contradictory terms.
- Punitive damages may be awarded under Indiana law when a defendant’s conduct reflects willful, wanton, or reckless disregard of another’s rights; a bank’s opportunistic use of undisclosed terms and related collection conduct can satisfy that standard.
- A foreclosure remedy may be denied where enforcement rests on terms obtained or invoked inequitably and the instruments are properly reformed to conform to the parties’ actual bargain.

## Conclusion

The court upheld damages and equitable reformation against a bank that induced borrowers to proceed on the belief they had a long-term fixed-rate loan, then relied on an undisclosed demand feature to call the loan and foreclose; the demand clause was removed, interest was fixed, and foreclosure was denied.


Peoples Trust & Sav. Bank v. Humphrey, 451 N.E.2d 1104 (Ind. Ct. App. 1983)