Ashland State Bank v. Elkhorn Racquetball, Inc.

• Decision Date: 22 July 1994
• Docket Number: No. S-92-784,S-92-784
• Citation: 246 Neb. 411,520 N.W.2d 189
• Parties: , 24 UCC Rep.Serv.2d 968 ASHLAND STATE BANK, a Nebraska Banking Corporation, Appellee and Cross-Appellant, v. ELKHORN RACQUETBALL, INC., a Nebraska corporation, Appellee and Cross-Appellee, and Kenneth Opstein, Appellant and Cross-Appellee.
• Court: Nebraska Supreme Court

Page 189

520 N.W.2d 189

246 Neb. 411, 24 UCC Rep.Serv.2d 968

ASHLAND STATE BANK, a Nebraska Banking Corporation, Appellee and Cross-Appellant, v. ELKHORN RACQUETBALL, INC., a Nebraska corporation, Appellee and Cross-Appellee, and Kenneth Opstein, Appellant and Cross-Appellee.

No. S-92-784.

Supreme Court of Nebraska.

July 22, 1994.

Syllabus by the Court

1. Judgments: Appeal and Error. In a bench trial of a law action, the trial court's factual findings have the effect of a jury verdict and will not be set aside on appeal unless they are clearly wrong.

2. Judgments: Appeal and Error. In reviewing a judgment awarded in a bench trial, the appellate court does not reweigh the evidence but considers the judgment in a light most favorable to the successful party and resolves evidentiary conflicts in favor of the successful party, who is entitled to every reasonable inference deducible from the evidence.

3. Trial: Witnesses. In a bench trial of a law action, the court, as the trier of fact, is the sole judge of the credibility of the witnesses and the weight to be given their testimony.

4. Contracts: Intent. The intent of the parties is determinative of whether a party is an accommodation maker or the principal obligor of an instrument.

5. Trial: Appeal and Error. An issue not presented to or passed on by the trial court is not appropriate for consideration on appeal.

6. Pleadings: Appeal and Error. An appellate court is obligated to dispose of cases on the basis of the theory presented by the pleadings on which the case was tried.

7. Debtors and Creditors: Interest. In the absence of a contract or statute, compensation in the form of compound interest is not allowed to be computed upon a debt.

Patrick M. Flood and Edith T. Peebles, of Zweiback, Hotz & Lamberty, P.C., Omaha, for appellant.

Dean J. Sitzmann, of Steier, Rogers & Pistillo, P.C., Omaha, for appellee Ashland State Bank.

HASTINGS, C.J., and BOSLAUGH, WHITE, CAPORALE, FAHRNBRUCH, LANPHIER, and WRIGHT, JJ.

WRIGHT, Justice.

Ashland State Bank (Bank) sued Elkhorn Racquetball, Inc. (Elkhorn), and Kenneth Opstein to recover on a promissory note. The district court for Douglas County entered judgment against Elkhorn and Opstein for the principal balance due plus simple interest, a total of $138,261.94, plus costs. Opstein appeals; the Bank cross-appeals.

SCOPE OF REVIEW

In a bench trial of a law action, the trial court's factual findings have the effect of a jury verdict and will not be set aside on appeal unless they are clearly wrong. Gibb v. Strickland, 245 Neb. 325, 513 N.W.2d 274 (1994).

FACTS

In 1977, Harry Farnham built a racquet club in Elkhorn, Nebraska. In 1982, Opstein purchased the racquet club from Farnham, giving him the promissory note in question as a part of the purchase price. Farnham testified that the note was drawn so that Opstein would be personally responsible for the obligation and so that Farnham would be able to look to Opstein personally for payment.

The racquet club was transferred to a limited partnership, 99 percent of which was owned by Opstein, for the beginning of the tax year 1983. Upon instructions from Opstein's accountant, Farnham formed a subchapter S corporation for the racquet club in 1987. Opstein carried the losses relating to the racquet club to offset income on his personal income tax returns.

The promissory note at issue indicates that it was part of a number of transactions. On December 20, 1982, Farnham made a notation on the note which extended the due date from November 15, 1983, to November 15 In an entry dated December 21, 1982, the note recites: "In consideration of Seventy-two thousand & five hundred dollars, ($72,500) undersigned sells, assigns, & transfers the above note to Frank Bemis, with recourse. / s/ Harry J. Farnham." Farnham testified that he transferred the note to Bemis with notice to Opstein and that Opstein did not object.

1985. Farnham testified that he notified Opstein of the extension and that Opstein did not object.

Thereafter, Farnham repaid Bemis, and Bemis made a "paid in full" notation on the note and reassigned the note to Farnham. On the reverse side of the second page of the note is the entry: "In consideration of payment of $84,000.00 ($75,000.00 principal and $9,000.00 interest) by Harry J. Farnham to undersigned as of 11/15/84, the above note is reassigned and transferred to Harry J. Farnham as of said date. / s/ Frank Bemis."

The next entry recites: "Harry J. Farnham acknowledges receipt from Elkhorn Racquet Club, Inc. of the sum of $9,000.00 in full payment of interest on above note for period of 11/15/82 to 11/15/83. / s/ Harry J. Farnham."

Farnham then made this notation on March 1, 1984:

For and in consideration of the sum of Seventy-five Thousand Dollars ($75,000.00) received from Ashland State Bank, Ashland, Nebraska, the undersigned, Harry J. Farnham, hereby assigns with recourse this note and all proceeds hereunder to the Ashland State Bank, as collateral security for a Promissory Note in like amount dated March 1, 1984. / s/ Harry J. Farnham.

The Bank had loaned Farnham $75,000, taking the note as collateral. Farnham testified that at the time he assigned the note to the Bank, the note was not overdue and had not been dishonored, he was not aware of any defenses by any person, and he had not informed anyone at the Bank of any alleged setoffs or defenses. At the time of the assignment to the Bank, Farnham had other loans with the Bank which were current.

Farnham later defaulted on his loan obligations to the Bank and filed bankruptcy. The Bank initiated a replevin action against Elkhorn. Opstein then personally executed a "Stipulation for Payment," which was filed with the trial court on August 28, 1989, and thereafter, he personally made two payments of $2,500 to the Bank.

The stipulation was approved by Opstein as to form and content and provided for full payment of the note either at a date certain or when a judgment which was the subject of an appeal pending before this court was affirmed. In its petition, the Bank contended that the action pending before the Supreme Court was "sustained" November 9, 1989, and that the note became immediately due and payable. The Bank demanded payment, but Opstein and Elkhorn refused, and suit was commenced against Opstein and Elkhorn on March 2, 1990.

The Bank alleged that on November 15, 1982, Elkhorn, Opstein, and Farnham executed and delivered to Farnham, in his individual capacity, a promissory note in the amount of $75,000 with interest accruing at 12 percent per annum. The Bank alleged that on March 1, 1984, Farnham assigned to the Bank all his rights in the promissory note, including all rights in the personal property described in the security interest, and that the Bank remained the holder and owner of the note in question.

Opstein asserted various defenses to the action, inter alia, that the Bank was not the owner of the note, that Farnham did not have an interest in the note which he could assign, and that Opstein had been discharged from liability on the note. Further, Opstein alleged that the Bank was not a holder in due course, that Elkhorn was not indebted to Farnham, that the note was fraudulently obtained by a fiduciary and was unenforceable, and that Opstein was entitled to a setoff against the Bank in excess of $1 million.

The trial court found that Opstein was a principal obligor or maker on the note and that the Bank took the note as a holder in due course and was entitled to a judgment against Elkhorn and Opstein for the principal balance due plus simple interest as provided in the note.

ASSIGNMENTS OF ERROR

Opstein assigns as error the trial court's finding that he was a principal obligor or maker on the note and that the Bank was a holder in due course. He alleges that the court erred in failing to allow the Bank's claim to be offset by sums Opstein asserts were owed to him by Farnham and in failing to find that Opstein was discharged from liability on the note. The Bank cross-appeals, claiming that the court erred in holding that the interest on the note was simple interest.

ANALYSIS

In our review of a bench trial in a law action, the trial court's factual findings have the effect of a jury verdict and will not be set aside on appeal unless they are clearly wrong. Gibb v. Strickland, 245 Neb. 325, 513 N.W.2d 274 (1994). In reviewing a judgment awarded in a bench trial, the appellate court does not reweigh the evidence but considers the judgment in a light most favorable to the successful party and resolves evidentiary conflicts in favor of the successful party, who is entitled to every reasonable inference deducible from the evidence. Florist Supply of Omaha v. Prochaska, 244 Neb. 776, 509 N.W.2d 209 (1993).

Since Opstein claims that the trial court erred in finding that the Bank was a holder in due course, we examine the Bank's status in that regard. We first note that the applicable law, the Uniform Commercial Code (U.C.C.), has been amended and recodified since the issuance of the note. Changes in the law became effective in 1991 and 1992. The action here was commenced in March 1990. We have held that statutes covering substantive matters in effect at the time of the transaction govern, not later enacted statutes. Norwest Bank Neb. v. Bowers, 246 Neb. 83, 516 N.W.2d 623 (1994); Schall v. Anderson's Implement, 240 Neb. 658, 484 N.W.2d 86 (1992). Therefore, the U.C.C. provisions appearing in the 1980 reissue apply in this case.

Neb.U.C.C. § 3-302(1) (Reissue 1980) provided: "A holder in due course is a holder who takes the instrument (a) for value; and (b) in good faith; and (c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person." Accord John Deere Co. v. Boelus State Bank, 233 Neb. 818, 448 N.W.2d 163 (1989). A holder is a person who is in possession of an instrument drawn, issued, or endorsed...