Borley Storage and Transfer v. Whitted

Decision Date03 March 2006
Docket NumberNo. S-04-708.,S-04-708.
Citation271 Neb. 84,710 N.W.2d 71
PartiesBORLEY STORAGE AND TRANSFER CO., INC., appellant, v. Warren R. WHITTED, Jr., appellee.
CourtNebraska Supreme Court

John H. Marsh, of Knapp, Fangmeyer, Aschwege, Besse & Marsh, P.C., Kearney, for appellant.

Bradley D. Holbrook, of Jacobsen, Orr, Nelson, Wright & Lindstrom, P.C., Kearney, for appellee.

HENDRY, C.J., WRIGHT, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

STEPHAN, J.

This legal malpractice action is before this court for the second time. In the first appearance, we determined that the district court erred in entering partial summary judgment in favor of the plaintiff and therefore reversed and vacated the judgment and remanded the cause for further proceedings. Borley Storage & Transfer Co. v. Whitted, 265 Neb. 533, 657 N.W.2d 911 (2003). Following remand, the cause was tried to a jury and a verdict was returned in favor of the defendant attorney, Warren R. Whitted, Jr. Borley Storage and Transfer Co., Inc. (Borley Storage), the plaintiff below, appeals from the judgment entered on the verdict. We affirm.

I. BACKGROUND

Borley Storage was a family business operated by Harry Borley and Maxine Borley. On December 10, 1982, Borley Storage entered into an agreement to sell its business to Borley Moving and Storage, Inc. (Borley Moving). Borley Moving was a new entity formed by the longtime manager of Borley Storage, Dennis Bauder, and his wife, Wanda Bauder, who were the sole shareholders of the new corporation. Borley Moving had no assets prior to the sale.

Whitted represented Borley Storage in the seller-financed transaction and prepared all of the documents related to the sale of the business. Pursuant to the terms of the purchase agreement dated December 10, 1982, Borley Moving agreed to pay a purchase price of $250,000, payable in monthly installments and bearing interest at the rate of 12 percent per annum. Payments were to begin on February 1, 1983, and continue through January 1, 1993. The purchase agreement also provided that the Bauders would execute a promissory note for the purchase price. A promissory note dated January 3, 1983, in the amount of $250,000 payable to Borley Storage was executed by Dennis Bauder, by Wanda Bauder, and by Dennis Bauder in his capacity as president of Borley Moving. The note provided that the said parties "jointly and severally" promised to pay the principal amount with interest at 12 percent in 119 monthly installments commencing on February 1, 1983. It further provided that "[i]f the makers' [sic] fail to pay any installment when due, then the entire unpaid principal balance, together with accrued interest, shall at the option of the holder, immediately become due and payable without notice."

Pursuant to the purchase agreement and to provide security for the transaction, Borley Moving granted Borley Storage a security interest in the personal property, rolling stock, and accounts receivable associated with the business. Borley Moving also granted Borley Storage a first deed of trust in certain real property. Whitted prepared and filed a mortgage and a financing statement to perfect the security interests in the personal property and accounts receivable. The financing statement was filed on July 12, 1983. By operation of law, this security interest lapsed on July 12, 1988, 5 years after its filing, because no continuation statement was timely filed.

Borley Moving defaulted on the purchase agreement in 1991, and Borley Storage thereafter attempted to recover by foreclosing on the real estate and recovering the collateral. Borley Moving filed bankruptcy in 1993. The bankruptcy court approved a reorganization plan in 1995, and Borley Storage's claim was valued at $308,000. Approximately $140,000 was secured by the real estate and rolling stock. However, because a second creditor had filed a financing statement with respect to the personal property and Borley Storage failed to file a continuation statement prior to the expiration of the 5-year period, Borley Storage lost its priority with respect to the personal property and accounts receivable. Instead, the second creditor received approximately $64,000 based on its secured interest. Borley Storage never sought recovery from the Bauders on the promissory note.

In this malpractice action, Borley Storage alleged that Whitted negligently failed to file or advise its officers of the need to file the continuation statement necessary to preserve the priority of its security interest in the personal property and accounts receivable associated with the business, thus depriving Borley Storage of security valued at $106,000. Whitted denied that he was negligent, and he alleged as an affirmative defense that Borley Storage failed to mitigate its claimed damages. After trial, a jury entered a verdict in favor of Whitted. Following entry of judgment on the jury verdict and denial of its motion seeking alternative forms of postjudgment relief, Borley Storage perfected this timely appeal. We moved the appeal to our docket on our own motion pursuant to our authority to regulate the caseloads of the appellate courts of this state. See Neb.Rev.Stat. § 24-1106(3) (Reissue 1995).

Additional facts relevant to the analysis are included therein.

II. ASSIGNMENTS OF ERROR

Borley Storage assigns, restated, that the district court erred in (1) instructing the jury that any failure to mitigate damages was a complete bar to its recovery; (2) failing to give certain tendered jury instructions; (3) failing to direct a verdict on the issue of mitigation of damages; (4) instructing the jury that the Bauders were, as a matter of law, personally liable on the promissory note; (5) instructing the jury that the failure to file a continuation statement did not relieve the Bauders of their obligation on the promissory note; (6) overruling its foundational objection to Whitted's testimony regarding his habit or routine with respect to representing sellers of businesses; (7) receiving Dennis Bauder's personal financial statements over objection, and (8) overruling its motion to set aside the verdict or judgment, motion for new trial, and motion for judgment notwithstanding the verdict.

III. STANDARD OF REVIEW

A trial court's decision to admit habit evidence based on opinion under Neb.Rev.Stat. § 27-406 (Reissue 1995) is reviewed for an abuse of discretion. See Hoffart v. Hodge, 9 Neb.App. 161, 609 N.W.2d 397 (2000).

In reviewing a claim of prejudice from instructions given or refused, an appellate court must read the instructions together, and if, taken as a whole, they correctly state the law, are not misleading, and adequately cover the issues supported by the pleadings and evidence, there is no prejudicial error. Pribil v. Koinzan, 266 Neb. 222, 665 N.W.2d 567 (2003); Nauenburg v. Lewis, 265 Neb. 89, 655 N.W.2d 19 (2003).

IV. ANALYSIS
1. COMAKERS' LIABILITY ON PROMISSORY NOTE

Several of the issues presented in this appeal relate to the undisputed fact that Borley Storage did not make a claim against the Bauders on the promissory note which the Bauders executed personally in connection with their purchase of the business. Borley Storage argues that any such claim would have been defeated by an impairment of collateral defense and that, in any event, the Bauders' potential liability on the note was not relevant to Borley Storage's claim against Whitted. Borley Storage thus argues that the district court erred in receiving evidence on and instructing the jury about the promissory note and its relationship to Whitted's mitigation of damages defense.

(a) Impairment of Collateral

Over the objection of Borley Storage, the district court instructed the jury as follows:

The Court has determined that as a matter of law, Dennis Bauder and Wanda Bauder are co-makers of a promissory note and as such they are jointly and serverly [sic] liable to satisfy the indebtedness created by the promissory note.

The Court has futher [sic] determined as a matter of law, that the failure to file the continuation statement, did not relieve Dennis Bauder and Wanda Bauder of this obligation to pay the indebtedness created by the promissory note.

Borley Storage argues that the failure to file a continuation statement preserving its security interest relieved the Bauders of their personal liability on the note. This argument is based upon Neb. U.C.C. § 3-606(1) (Reissue 1980), in effect in Nebraska at the time of the sale, which provided: "The holder discharges any party to the instrument to the extent that without such party's consent the holder ... (b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse."

Generally, this provision of the Uniform Commercial Code has been interpreted to discharge only the obligations of those parties who sign a negotiable instrument in the capacity of a surety. See, generally, Annot., 61 A.L.R. 5th 525 (1998); 21 Shepard's Causes of Action 145, § 23 (1990). This is because § 3-606 is generally regarded as a protection for a surety's right of subrogation. See 61 A.L.R. 5th, supra. However, a minority of jurisdictions take the position that all parties to a negotiable instrument, including nonaccommodating makers and comakers, can avail themselves of the defense of discharge. See, Crimmins v. Lowry, 691 S.W.2d 582 (Tex. 1985); Bishop v. United Missouri Bank of Carthage, 647 S.W.2d 625 (Mo.App.1983); Southwest Florida Production v. Schirow, 388 So.2d 338 (Fla.App.1980); Rushton v. U.M. & M. Credit Corp., 245 Ark. 703, 434 S.W.2d 81 (1968).

Although this court has not specifically addressed this split in authority, we have implicitly followed the majority view that the impairment of collateral defense is not available to the maker or comaker of a promissory note. In Ashland State Bank v. Elkhorn Racquetball, Inc.,...

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