First Nat. Bank of Minneapolis v. Kehn Ranch, Inc.

Citation394 N.W.2d 709,2 UCCRep.Serv.2d 399
Decision Date01 October 1986
Docket NumberNos. 15041,s. 15041
Parties2 UCC Rep.Serv.2d 399 FIRST NATIONAL BANK OF MINNEAPOLIS, Plaintiff and Appellant, v. KEHN RANCH, INC., Ed Kehn, Maxine Kehn (deceased), Clark Kehn, Bonnie L. Kehn, and Collateral Control Corporation, a Delaware Corporation, Defendants, and Touche Ross & Co., a partnership, Defendant and Appellee, and KEHN RANCH, INC., Ed Kehn, Maxine Kehn (deceased), Clark Kehn, Bonnie L. Kehn, and Collateral Control Corporation, a Delaware Corporation, Third-Party Plaintiffs, v. MILBANK MUTUAL INSURANCE COMPANY, a South Dakota Insurance Company, Third-Party Defendants. FIRST NATIONAL BANK OF MINNEAPOLIS, Plaintiff and Appellee, v. KEHN RANCH, INC., Ed Kehn, Maxine Kehn (deceased), Clark Kehn, Bonnie L. Kehn, and Collateral Control Corporation, a Delaware Corporation, Defendants and Appellants, and Touche Ross & Co., a partnership, Defendant, and KEHN RANCH, INC., Ed Kehn, Maxine Kehn (deceased), Clark Kehn, Bonnie L. Kehn, and Collateral Control Corporation, a Delaware Corporation, Third-Party Plaintiffs and Appellants, v. MILBANK MUTUAL INSURANCE COMPANY, a South Dakota Insurance Company, Third-Party Defendants and Appellee. FIRST NATIONAL BANK OF MINNEAPOLIS, Plaintiff and Appellee, v. KEHN RANCH, INC., Ed Kehn, Maxine Kehn (deceased), Clark Kehn, Bonnie L. Kehn and Collateral Control Corporation, a Delaware Corporation, Defendants, and Touche Ross & Co., a partnership, Defendants, and KEHN RANCH, INC., Ed Kehn, Maxine Kehn (deceased), Clark Kehn, Bonnie L. Kehn, and Collateral Control Corporation, a Delaware Corporation, Third-Party Plaintiffs and Appellants. v. MILBANK MUTUAL INSURANCE COMPANY, a South Dakota Insurance Company, Third-Party Defendants and Appellee. to 15043.
CourtSupreme Court of South Dakota

Edward M. Glennon, Richard Ihrig, and Laurence R. Waldoch of Lindquist & Vennum, Minneapolis, Minn., for First Nat. Bank of Minneapolis; Robert C. Riter of Riter, Mayer, Hofer & Riter, Pierre, on the brief.

Kehn Ranch, Inc., Ed Kehn, Bonnie L. Kehn, and Clark Kehn, pro se.

Craig W. Gagnon, Darwin J. Lookingbill and Michael J. Bleck of Oppenheimer, Wolff, Foster, Shepard & Donnelly, Minneapolis, Minn., and Charles M. Thompson of May, Adam, Gerdes & Thompson, Pierre, for Touche Ross & Co.

Joe A. Walters, David Kantor, Donald S. Arbour, Robert A. Brunig and Margaret Van Volkenburg of O'Connor & Hannan, Minneapolis, Minn., and James P. Hurley and Mark F. Marshall of Bangs, McCullen, Butler, Foye & Simmons, Rapid City, for Collateral Control Corp.

Lawrence T. Hoffman, Richard B. Allyn and Sandra L. Wallace of Robins, Zelle, Larson & Kaplan, Minneapolis, Minn., and Duncan, Olinger, Srstka, Lovald & Robbennolt, Pierre, for Milbank Ins. Co.

FOSHEIM, Justice.

Appeals # 15041, # 15042, and # 15043 raise issues which stem from a common factual setting and were litigated in a single trial. # 15041 is the appeal of First National Bank of Minneapolis (Bank) from a dismissal of its suit against Touche Ross and Company (Touche Ross). # 15042 is the appeal of Kehn Ranch, Inc. (Kehn Ranch or the Ranch) and members of the Kehn family from judgments based on the jury verdicts in favor of Bank and Milbank Mutual Insurance Co. (Milbank). # 15043 is the appeal of Collateral Control Corp. (Collateral Control) from the dismissal of its suit against Milbank.

Although these appeals were not formally consolidated, they were argued together before this court. In the interest of clarity and to avoid repetition of facts, they are reviewed and resolved in this single decision. We affirm in part, reverse in part, and remand.

FACTS

Kehn Ranch is a South Dakota corporation owned by Clark Kehn, Bonnie Kehn, and Edwin Kehn (the Kehns). The Ranch conducted a cattle ranching operation on 15,000 acres in Gregory County and other leased land in South Dakota counties. In March of 1978, Bank approved a $5,000,000 seasonal line of credit for the Ranch. The loan was secured by the cattle, feed, crops, and equipment of the Ranch; Bank also received the personal guarantees of the Kehns. As required by the loan agreement, the Ranch retained Touche Ross, a certified public accounting firm, to audit the Ranch's financial statements, and Collateral Control, a Minnesota company, to provide a field warehousing operation. Milbank insured the Ranch under a policy which covered the Ranch against cattle theft.

Kehn Ranch records reveal that the Ranch owned more than 7,000 head of cattle at the time of the loan. According to other records, the Ranch purchased approximately 10,300 cattle and sold approximately 7,100 head during 1978; in addition, numerous calves were born. Financial statements audited by Touche Ross, dated September 30, 1978, show the Ranch then owned over 15,000 head of cattle.

In 1979, Bank extended further credit to the Ranch, and the Ranch's total indebtedness late that year exceeded $9,500,000. According to its internal records, the Ranch owned over 21,000 head of cattle as of July 6, 1979. Financial statements audited by Touche Ross showed the Ranch owning approximately 20,000 head of cattle as of September 30, 1979.

In January of 1980, Bank requested that Collateral Control conduct an inventory of the Ranch. That inventory revealed about 4,000 head of cattle. According to Bank, Kehn Ranch should have then owned 16,000. Because of this 12,000 head shortfall, Bank demanded payment of all loans, took control of the Ranch, and sold the existing collateral. Shortly after Bank's discovery of the shortage, the Kehns notified Milbank of the loss and claimed the cattle had been stolen. Milbank denied the theft claim.

Early in 1982, Bank sued the Ranch and the individual Kehns for fraud and on the promissory notes and personal guarantees. Bank also sued Touche Ross and Collateral Control, alleging negligence and fraud. The Ranch and Collateral Control sued Milbank on the insurance contract, joining the insurer as a third-party defendant. Kehn Ranch filed for bankruptcy shortly after Bank initiated its suit, but in June of 1982, the Kehns entered into a stipulation with Bank requesting the bankruptcy court to lift the automatic stay of state court proceedings. The stay was lifted and the case went to trial.

The jury returned verdicts for Bank and against Kehn Ranch and the individual Kehns in the amount of $7,222,530 each. An additional $100,000 punitive damages were assessed against Clark Kehn. The trial court added an award to Bank of $6,244,245.10 in interest on the unpaid promissory notes and $252,502.03 in interest from the date of the verdict to the date of the judgment. In addition, the trial court awarded costs of $204,007.38 and attorney's fees of $1,000,000 to Bank and against the Ranch, Clark Kehn, and Bonnie Kehn. The jury awarded the Ranch $300,000 for Bank's failure to liquidate the collateral in a commercially reasonable manner. The trial court offset this award to the Ranch against the amount awarded to Bank.

The jury, finding no theft of the missing cattle, determined that Kehn Ranch and Collateral Control should receive nothing from Milbank. The trial court thereafter dismissed their suit as frivolous. On Milbank's motion, the trial court ordered the Kehns, the Ranch, and Collateral Control to pay Milbank $500,000 in attorney's fees and $40,686.77 in costs.

In Bank's suit against Touche Ross, the jury returned a verdict finding that Touche Ross negligently caused damage to Bank. However, the jury determined that Bank should receive no damages from Touche Ross.

APPEAL # 15042
I.

The first issue raised by the Kehns in appeal # 15042 is whether Bank should be barred from obtaining a deficiency judgment due to its failure to give notice to the Kehns of the sale of collateral. Two days after Bank took control of the Kehn Ranch, the Kehns signed a document granting Bank the right to take possession of, and sell, all the cattle, feed, and other personal property of the Kehns in which Bank had a security interest. In the same document, the Kehns waived their right to receive prior notice of any sale of collateral by Bank. Bank proceeded to sell the cattle at auction, but did not notify the Kehns of the sale. After the collateral was sold, Bank initiated this lawsuit to recover the deficiency. Bank's failure to give notice to the Kehns became an issue at trial. The jury found that Bank had failed to give reasonable notice of the sale of collateral to the Kehns. Despite this finding, the jury awarded Bank the deficiency judgment of $7,220,530 (excluding interest), as above stated. The Kehns maintain that Bank's failure to give notice should bar the award of this deficiency judgment. We disagree.

Article 9 of the UCC authorizes a creditor to create a security interest in the personal property of the debtor. SDCL ch. 57A-9. SDCL 57A-9-504 states that after a default by the debtor, the secured party may sell or dispose of the collateral in any commercially reasonable manner. The creditor must send notice to the debtor of the sale of collateral unless the collateral is perishable, threatens to decline speedily in value, or is of a type customarily sold on a recognized market. SDCL 57A-9-504(3). Bank argues that a cattle auction is a sale on a recognized market, thereby eliminating the requirement that notice be sent to the Kehns.

Under the UCC, a recognized market is one in which sales involve many items so similar that individual differences are non-existent or immaterial, where haggling and competitive bidding are not primary factors in each sale, and where prices paid in actual sales of comparable property are currently available by quotation. Norton v. National Bank of Commerce of Pine Bluff, 240 Ark. 143, 398 S.W.2d 538 (1966); 1st Charter Lease Co. v. McAl, Inc., 679 P.2d 114 (Colo.Ct.App.1984). Clearly, the New York Stock Exchange and the bond and commodity markets are recognized markets under the UCC. Fletcher v. Cobuzzi, 499 F.Supp. 694 (W.D.Pa.1...

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