Barnhouse v. Hawkeye State Bank

• Decision Date: 13 May 1987
• Docket Number: No. 86-99,86-99
• Citation: 406 N.W.2d 181
• Parties: 4 UCC Rep.Serv.2d 1304 Tim BARNHOUSE and Aileen Barnhouse, Appellees, v. HAWKEYE STATE BANK, Appellant.
• Court: Iowa Supreme Court

Page 181

406 N.W.2d 181

4 UCC Rep.Serv.2d 1304

Tim BARNHOUSE and Aileen Barnhouse, Appellees, v. HAWKEYE STATE BANK, Appellant.

No. 86-99.

Supreme Court of Iowa.

May 13, 1987.

Charles T. Traw and Thomas Diehl of Leff, Leff, Leff, Haupert & Traw, Iowa City, for appellant.

Thomas D. Hanson and Mark D. Sherinian of Hanson, Bjork & Russell, Des Moines, for appellees.

Considered by REYNOLDSON, C.J., and McGIVERIN, LARSON, LAVORATO, and NEUMAN, JJ.

REYNOLDSON, Chief Justice.

Plaintiffs Tim and Aileen Barnhouse ¹ brought this tort action against defendant Hawkeye State Bank (Hawkeye) of Iowa City, based on its activities surrounding a seizure of Barnhouse's car parts in which Hawkeye held a security interest. Trial court entered judgment on jury verdicts against Hawkeye for $40,000 actual damages and $60,000 punitive damages. The court further granted Barnhouse's claim for declaratory judgment, based on the sale of two items of the collateral without notice to him, and barred Hawkeye from enforcing its preexisting judgments against Barnhouse's personal property, other than the car parts already in its possession. Hawkeye has appealed. We affirm in part, reverse in part, and remand.

September 1977, Barnhouse borrowed $35,000 from Hawkeye to buy the assets and inventory of an auto parts and repair business he intended to operate as Esprit Imports, Inc. To secure this purchase money loan, Barnhouse executed a security agreement granting Hawkeye a security interest in "[a]ll parts, inventory, equipment and accounts receivable" on the business premises, and a second mortgage on his home. For further security the bank took an assignment of Barnhouse's lease on the business premises. The business of "Esprit Imports" later deteriorated and Hawkeye loaned $17,500 in 1978 and $10,000 in 1980 to Tim Barnhouse and his father, Vernon.

By 1981 Esprit Imports was in serious financial trouble and the above loans were in default. Barnhouse was attempting to sell the business and the bank was deferring collection action. Finally, with the Internal Revenue Service seeking to collect unpaid tax obligations against Esprit Imports and Barnhouse, Hawkeye obtained judgments against Tim and Aileen Barnhouse for $17,797.49 and against Tim and Vernon Barnhouse for $30,282.08.

Tim and Aileen Barnhouse left on vacation to Holland on August 8 or 9, 1982. At trial James Schulze, a Hawkeye officer, testified that on August 13, 1982, John McGinnis III, owner of the Esprit premises, told him inventory was being removed from the closed-up business at night. August 14, 1982, the bank, after consultation with its attorney, removed the parts inventory from the Esprit premises. In the removal process two articles were sold to observers and the proceeds credited on the Barnhouse indebtedness.

June 28, 1983, Barnhouse filed this damage action asking for actual and punitive damages for negligence, conversion, and trespass in three separate counts, based on the manner the bank entered the premises, removed the collateral, and stored it. The fourth count sought a declaratory judgment that Hawkeye had waived its right to collect its "deficiency" judgments by selling some of the collateral without notice to Barnhouse, in violation of Iowa Code section 554.9504(3) (1981).

Barnhouse's negligence, conversion, and trespass counts were submitted to the jury. The court submitted three specifications of negligence: (1) breach of the peace, (2) failure to use reasonable care in the custody and preservation of the collateral, and (3) failure to dispose of the collateral in a commercially reasonable manner. The jury found for Hawkeye on the conversion and trespass claims, but on the negligence claim awarded Barnhouse $40,000 in compensatory damages and $60,000 in punitive damages.

After trial the court ruled in favor of Barnhouse on his declaratory judgment claim, and barred Hawkeye from enforcing its preexisting judgments except against the collateral in its possession and against Barnhouse's real estate, upon which the bank held a second mortgage.

In this appeal Hawkeye has raised a number of issues that we address in the divisions that follow.

I. Instruction on measure of compensatory damages.

In instruction number 31 the court informed the jury on the measure of compensatory damages:

The measure of recovery for damages to the plaintiffs' inventory is the difference in reasonable market value immediately before the taking, and the reasonable market value at present, as shown by the evidence, but not exceeding $80,000, this being the amount claimed.

In its exception taken at trial Hawkeye conceded this instruction was "a correct statement of the law," but asserted the "market" in this instance should be further defined as a distressed market "for goods seized by a creditor."

A contention similar to that Hawkeye advances was raised and rejected in Kerr v. Tysseling, 239 N.W. 233, 234 (Iowa 1931) (" '[M]arket value' and 'fair and reasonable market value' ... are ordinary English terms as well understood by everybody acquainted with the language as their synonyms would be."). See also Clapp v. Cass County, 236 N.W.2d 850, 861 n. 2 (N.D.1975).

In its appeal brief Hawkeye seeks to amplify its trial exception by pointing out that two statutes relied on by Barnhouse in his specifications of negligence refer to collateral sold on a "recognized market." See Iowa Code §§ 554.9504(3), 554.9507(2) (1981). Barnhouse's brief responds that the term "recognized market," found in these statutes, is used in the context of when notice to the debtor is required and whether the creditor has acted in a commercially reasonable manner, not in the context of a formula for fixing damages. In its reply brief Hawkeye concedes this point, but finally asserts "trial court abused its discretion in failing to inform the jury that it should consider the evidence showing various markets, decide an applicable or relevant market and then proceed to determine value for the purposes of damages."

Hawkeye's final contention can be inferred from its trial exception to damage instruction 31 only with an imaginative leap. It is true that several experts expressed various opinions of the value of the parts inventory, both in the hands of Barnhouse and later in the possession of Hawkeye. In view of the record in this regard, however, the jurors could not have been misled when they were instructed to determine reasonable market value at the relevant times "as shown by the evidence." We find no trial court error in rejecting Hawkeye's exception to the measure of damage instruction.

II. Punitive damages.

Hawkeye next asserts trial court erred in failing to grant its motion for new trial, grounded on its contention the jury's award of $60,000 in exemplary damages was not supported by substantial evidence and resulted from the passion and prejudice of the jury.

Hawkeye argues the jury rejected Barnhouse's claims grounded on conversion and trespass, and therefore must have rejected the breach-of-peace specification of negligence based on those asserted acts. There remained, Hawkeye contends, only the specifications directed to its conduct in taking possession of and selling items from the parts inventory. While conceding its negligence in this regard may have damaged the collateral, Hawkeye insists there was no substantial evidence of legal malice, bad motives, or an intention to damage Barnhouse. Thus, Hawkeye argues, the punitive damage award should be set aside.

Barnhouse contends the decision to seize the parts inventory and the manner in which it was accomplished demonstrated the required degree of recklessness.

An award of punitive damages is appropriate when a party acts with actual or legal malice. Beeck v. Aquaslide 'N' Dive Corp., 350 N.W.2d 149, 167 (Iowa 1984). Actual malice is shown by such things as personal spite, hatred, or ill will. Legal malice is established by showing wrongful conduct committed with a willful or reckless disregard for the rights of another. See Klooster v. North Iowa State Bank, 404 N.W.2d 564, 572 (Iowa 1987); Beeck, 350 N.W.2d at 167. More than mere negligence must be shown. Cedar Falls Bldg. Center, Inc. v. Vietor, 365 N.W.2d 635, 640 (Iowa App.1985).

Hawkeye suggests that as a matter of public policy and in view of the ongoing legislative debate relating to punitive damages, we in some way should modify our present rule that when reasonable minds could differ on the punitive damage issue it should be submitted to the jury. Although recent legislation not applicable here may have provided limited relief for defendants generally, ² we are not persuaded to make a retroactive rule change while this whole area is undergoing continuing legislative study.

Hawkeye introduced testimony that its officer Schulze was told inventory was being stolen from the Esprit premises and that it seized the parts to protect them in Barnhouse's absence and in order to avoid any defense the guarantor, Vernon Barnhouse, might otherwise raise.

Although this court sitting as a trier of fact might well have reached a different result, there also was evidence from which the jury could have inferred Hawkeye waited until Barnhouse was in Holland to visit relatives and then hastily, and without taking any precautions, decided to seize the parts inventory to head off action by the owner of the premises, who held a substantial judgment for unpaid rent.

Under this record the jury could have found that Hawkeye, in seizing and storing the collateral, made no reasonable attempt to protect the parts inventory. Several expert witnesses opined Hawkeye's manner of seizing and storing the property rendered it virtually worthless. There was compelling evidence that different types of inventory were indiscriminately and hopelessly mixed; heavy pieces of inventory were placed on smaller, more delicate, pieces; no significant attempt was made to keep the inventory in any type of segregated...