Law for Business 10th Edition by James Barnes,Terry Dworkin,Eric Richards

Exercise 3

As a part of its tax preparation service, H R Block offers a program, known as "Rapid Refund," which involves electronic filing of tax returns with the IRS, resulting in quicker refunds than a taxpayer filing a paper return would receive. Block also arranged for Mellon Bank to provide a refund anticipation loan (RAL) program to Block's qualified Rapid Refund customers. Specifically, Block customers who filed their returns electronically and met the lender's eligibility requirements were informed of the availability of loans in the amount of their anticipated refunds from Mellon Bank. If the customer was interested in the loan, Block would simultaneously transmit the taxpayer's income tax return information to the IRS and Mellon Bank. Within a few days of the transmittal, the taxpayer, if approved, would receive a check in the amount of the loan minus a bank transaction fee. The taxpayer could also elect to have Block's tax preparation and electronic filing fees withheld by the lender from the RAL check so that the taxpayer would not have to advance any money. When the taxpayer's actual tax refund was ready, usually within a matter of weeks, the IRS would deposit the refund check into an account at Mellon Bank to repay the loan. In exchange for the RAL, the taxpayer paid to Mellon a flat rate finance charge of $29.00 or $35.00. Block did not disclose to its RAL customers that it received a payment from Mellon Bank for each loan and shared in the profits of the RALs in other ways, or that the taxpayer's endorsement on the back of the loan proceeds check constituted a signature on a loan agreement on the reverse side of the check. Sandra Basile, one of Block's RAL customers, filed an action against Block, claiming that Block breached its fiduciary duty to her by failing to disclose that the refund anticipation payment was a loan and that Block had a financial interest in arranging the program. Did an agency relationship exist between H R Block and its customers?