Buxcel v. First Fidelity Bank

• Decision Date: 15 September 1999
• Docket Number: No. 20355.,20355.
• Citation: 1999 SD 126,601 N.W.2d 593
• Parties: Clifford BUXCEL and Elaine Buxcel, Plaintiffs and Appellants, v. FIRST FIDELITY BANK, Defendant and Appellee. and Small Business Administration, Defendant.
• Court: South Dakota Supreme Court

601 N.W.2d 593

1999 SD 126

Clifford BUXCEL and Elaine Buxcel, Plaintiffs and Appellants, v. FIRST FIDELITY BANK, Defendant and Appellee. and Small Business Administration, Defendant.

No. 20355.

Supreme Court of South Dakota.

Considered on Briefs October 20, 1998.

Reassigned June 21, 1999.

Decided September 15, 1999.

Rehearing Denied November 22, 1999.

James E. Carlon, Pierre, SD, for plaintiffs and appellants.

Brent A. Wilbur of May, Adam, Gerdes & Thompson, Pierre, SD, for defendant and appellee.

AMUNDSON, Justice (on reassignment).

[¶ 1.] When Buxcels were looking for a business to buy, First Fidelity Bank encouraged them to purchase a grocery store from its customers, the Fabers. A bank officer told them they could earn "a good living" in the business. Buxcels bought the store, pledging their farm and home as collateral. First Fidelity financed the purchase and prepared the SBA guaranteed loan application. After the store failed, Buxcels learned that First Fidelity knew Fabers had chronic cash flow problems and that the bank had threatened foreclosure. Buxcels brought suit, asserting that First Fidelity misrepresented the condition of the business, breached a fiduciary duty owed to them, and failed to disclose Fabers' distressed financial condition. The trial court ruled as a matter of law that no fiduciary duty existed and instructed the jury that the bank owed no duty to disclose. On the remaining claims, the jury returned a verdict in favor of First Fidelity. Buxcels appeal, asserting that the bank owed them a fiduciary obligation and had a duty to disclose the previous owners' lending history. We reverse and remand.

FACTS

[¶ 2.] Clifford and Elaine Buxcel resided on their family farm, northwest of Murdo, South Dakota. In 1990, after enrolling their family farm in the Conservation Reserve Program, they sought ways to make additional income. First Fidelity's loan officer and realtor, Brian O'Reilly, told them that Dean's Market, a grocery store located on Main Street in Murdo was for sale. The market was owned by Dean and Betty Faber. While there was no sign or other indication that the market was for sale, O'Reilly indicated that First Fidelity, which is also a real estate agency, had a listing for the market. Buxcels expressed interest. O'Reilly referred Buxcels to First Fidelity's Senior Vice-President and manager of the Murdo branch, D.J. Mertens.

[¶ 3.] Mertens met with Buxcels at the bank to discuss the purchase. Mertens discussed gross sales and receipts of the market's operation with Buxcels. Later meetings followed, during which Buxcels were assured by Mertens and Betty Faber that they could make a "good living" from the store if they "worked hard." They were also told that Fabers wanted to "retire from the business." Mertens indicated that he would assist Buxcels and that First Fidelity would finance the purchase of the loan. Mertens provided an acquisition and financing package to Buxcels. The package included an offer and purchase agreement, an appraisal, cash flow, and SBA application, which was previously prepared for prior prospective purchasers. Mertens advised Buxcels to obtain a SBA loan for the purchase of the market. An SBA loan allows First Fidelity to safeguard its risk by guaranteeing repayment of ninety percent of the loan to First Fidelity in the event of default. As a condition of financing, First Fidelity required that Buxcels grant a second mortgage on their 1700-acre farm and homestead. First Fidelity financed both the purchase price ($80,000 plus inventory of approximately $40,000) and the beginning operating expenses.

[¶ 4.] At no time did anyone intimate to Buxcels that Fabers held a loan with First Fidelity. Further, there was never any indication that the store was heavily indebted, that Fabers had a long-term record of poor performance on payments, and that First Fidelity wanted to sell the market, rather than pursuing foreclosure, which would have resulted in piece-by-piece liquidation.

[¶ 5.] Following discussions advising Buxcels to obtain a SBA loan, Mertens gathered the necessary information and prepared the SBA loan application for Buxcels. The application included an internal appraisal of the store, valuing it at $160,000. Mertens also compiled figures for the loan application that showed the store could make money, based on reports from the grocery's food supplier, Affiliated Foods. Further, the report provides that Fabers were selling the market because they desired to retire. Buxcels signed the application form.

[¶ 6.] Following the purchase of the market, Buxcels eagerly went to work making improvements on the store. They cleaned and reorganized the store, put on a new roof, and improved its overall appearance.

[¶ 7.] Notwithstanding these improvements, within only a few months the business was in serious financial trouble. Revenues were inadequate to cover expenses. Over this time, First Fidelity advanced $45,000 in additional loans to Buxcels. Eventually, Buxcels were put on a cash-only basis with their food supplier, Affiliated Foods, and First Fidelity began to return Buxcels' checks. Buxcels ultimately defaulted on their loan payments.

[¶ 8.] First Fidelity made a demand on the SBA for payment of the ninety-percent guarantee and turned servicing the loan over to the SBA. Upon foreclosure, SBA determined the fair market value of the store to be $41,000. Assuming the bank's appraised value of $160,000 was accurate, this reflects a $119,000 drop in fair market value of the market in this short period of time.

[¶ 9.] Buxcels sued First Fidelity, claiming that it intentionally failed to disclose the complete and troubled financial history of the market. During discovery, Buxcels obtained Fabers' personal loan file at First Fidelity and learned that the business had substantial debts which were not being paid.

[¶ 10.] The loan comment sheets indicate the market under Fabers' operation was severely indebted. In 1978, Fabers borrowed $3,000 to cover cash flow short falls. From April of 1978 to May of 1983, Fabers borrowed an additional $47,000 to cover cash shortfalls. By March of 1986, Fabers were writing checks with insufficient funds and were discussing their cash flow problems with First Fidelity. In April of 1987, Fabers' borrowing increased to $66,000. By December of 1988, Fabers' borrowing was in excess of $82,000 and the comment sheet states that Mertens "discussed his financial situation and the fact that he was falling behind." In June of 1988, Mertens met with Fabers and discussed the note, which was past due and the fact that he "was behind again." First Fidelity continued with Fabers' loan, rewriting the loans into one note. As of July 1988, Fabers loan was now up to $104,000. By February of 1991, liquidation of the store's assets was discussed with Fabers, who indicated they would attempt to sell the business. In February of 1991, Fabers were again forced to borrow more money. During this period of time, First Fidelity started returning checks on the market "because they had run behind." In March 1991, Fabers injected $17,000 of their own money into the business and First Fidelity agreed to lend another $10,000 to keep the store open.

[¶ 11.] At trial, over Buxcels' objection, the jury was instructed that First Fidelity had no duty to disclose Fabers' financial information to Buxcels before the sale of the store, absent subpoena, court order, or the consent of Fabers. Further, the trial court granted First Fidelity's motion for a directed verdict on Buxcels' breach of fiduciary duty claim, determining as a matter of law no fiduciary duty was created.

[¶ 12.] Buxcels appeal, claiming the trial court erred in granting a directed verdict in favor of First Fidelity on the breach of fiduciary duty claim and in failing to give an instruction that First Fidelity had no duty to disclose customer loan records.

STANDARD OF REVIEW

[¶ 13.] We review asserted failure to give instructions under the following standard:

On issues supported by competent evidence in the record, the trial court should instruct the jury. The trial court is not required to instruct on issues lacking support in the record. Failure to give a requested instruction that correctly sets forth the law is prejudicial error. Jury instructions are reviewed as a whole and are sufficient if they correctly state the law and inform the jury. Error is not reversible unless it is prejudicial. The burden of demonstrating prejudice in failure to give a proposed instruction is on the party contending error.

Sundt Corp. v. South Dakota Dep't. of Transp., 1997 SD 91, ¶ 19, 566 N.W.2d 476, 480 (emphasis added) (citing Kuper v. Lincoln-Union Elec. Co., 1996 SD 145, ¶ 32, 557 N.W.2d 748, 758). We review an order granting a directed verdict under SDCL 15-6-50(a) as a question of law. A directed verdict motion questions the legal sufficiency of the evidence to sustain a verdict against the moving party. On such a motion, the court must determine whether, viewing the evidence most favorable to the nonmoving party, there is any substantial evidence to sustain the action. If reasonable minds might differ, a directed verdict is not appropriate. The trial court's decisions and rulings on such motions are presumed correct and we will not seek reasons to reverse. Schuldies v. Millar, 1996 SD 120, ¶ 8, 555 N.W.2d 90, 94-95 (citations omitted). The existence and scope of a fiduciary duty are questions of law. High Plains Genetics Research, Inc. v. JK Mill-Iron Ranch, 535 N.W.2d 839, 842 (S.D.1995) (citations omitted). Whether a breach of a fiduciary duty occurred, however, is a question of fact. Id.

DECISION

[¶ 14.] The trial court erred in failing to instruct the jury that First Fidelity had a duty to disclose under the facts of this case. While as a general rule, one party to a transaction has no duty to disclose material facts to the other, "special circumstances" may dictate otherwise....