Chadron Energy Corp. v. First Nat. Bank of Omaha

• Decision Date: 17 January 1986
• Docket Number: No. 84-553,84-553
• Citation: 379 N.W.2d 742,221 Neb. 590
• Parties: , 42 UCC Rep.Serv. 1519 CHADRON ENERGY CORPORATION, a Nebraska Corporation, Appellant and Cross- Appellee, Gordon C. Shaffer, Jr., and Marian Shaffer, Appellees, Leslie Kleman, Appellee and Cross-Appellant, v. FIRST NATIONAL BANK OF OMAHA, a National Bank, Appellee and Cross-Appellant.
• Court: Nebraska Supreme Court

Page 742

379 N.W.2d 742

221 Neb. 590, 42 UCC Rep.Serv. 1519

CHADRON ENERGY CORPORATION, a Nebraska Corporation, Appellant and Cross- Appellee, Gordon C. Shaffer, Jr., and Marian Shaffer, Appellees, Leslie Kleman, Appellee and Cross-Appellant, v. FIRST NATIONAL BANK OF OMAHA, a National Bank, Appellee and Cross-Appellant.

No. 84-553.

Supreme Court of Nebraska.

Jan. 17, 1986.

Syllabus by the Court

1. Actions: Pleadings. The fact that a petition may have initially sought equitable relief is not binding. A petition in equity may be changed by amendment into an action at law, or vice versa, and it may be amended to seek redress in the form of damages as well as equitable relief.

2. Uniform Commercial Code: Sales: Security Interests: Judgments: Damages. Not only does Neb.U.C.C. § 9-504(3) (Reissue 1980) and the requirement that a security interest must be sold in a commercially reasonable manner affect the right of a creditor to obtain a deficiency judgment but, likewise, the failure to sell a security interest in a commercially reasonable manner affords to a debtor the right to sue for damages for any surplus which the debtor does not realize by reason of the creditor's having failed to dispose of the property in a commercially reasonable manner.

3. Uniform Commercial Code: Sales: Security Interests: Damages. Even though a sale may produce a surplus, if in fact a sale in a commercially reasonable manner would have produced a larger surplus, the failure of the debtor to sell the security in a commercially reasonable manner has caused the debtor damages which the debtor has a right to recover in a proper action.

4. Uniform Commercial Code: Security Interests. The fact that collateral may be transferred voluntarily or involuntarily as provided by Neb.U.C.C. § 9-311 (Reissue 1980) does not destroy or adversely affect a prior perfected security interest.

5. Uniform Commercial Code: Security Interests. In order for a novation to occur, the existing liability must be completely extinguished and a new one substituted in its place.

6. Uniform Commercial Code: Security Interests: Words and Phrases. A security interest is defined as an interest in property which secures payment of performance of an obligation. If the underlying obligation ceases to exist, so does the interest securing it.

7. Uniform Commercial Code: Property: Security Interests: Conversion. Where property is subject to a security interest, an exercise of dominion or control over the property which is inconsistent with the rights of the secured party constitutes, as to him, a conversion of the property, and there may be conversion of the property by a secured party where his acts are in defiance of the rights of others in the property.

8. Uniform Commercial Code: Security Interests: Conversion: Damages. The measure of damages for conversion is the market value of the converted property at the time of the conversion.

W. Scott Davis, of Marti, Dalton, Bruckner, O'Gara & Keating, P.C., Lincoln, for appellant.

Alan E. Peterson, of Cline, Williams, Wright, Johnson & Oldfather, and Douglas F. Duchek, Lincoln, for appellees Shaffer.

Michael O. Johanns and Lavern R. Holdeman, of Peterson Nelson Johanns Morris & Holdeman, Lincoln, for appellee Kleman.

James B. Cavanagh, of Erickson & Sederstrom, P.C., Omaha, for appellee bank.

KRIVOSHA, C.J., and BOSLAUGH, CAPORALE, SHANAHAN, and GRANT, JJ., and COLWELL, D.J., Retired.

KRIVOSHA, Chief Justice.

The appellant, Chadron Energy Corporation (Chadron Energy), owner of the stock of First National Bank of Chadron (First National-Chadron), a national bank corporation, appeals from an order entered by the district court for Douglas County, Nebraska, finding that Chadron Energy is not entitled to recover damages from the First National Bank of Omaha (First National-Omaha), though First National-Omaha allegedly failed to sell the stock of First National-Chadron in a commercially reasonable manner as required by Neb.U.C.C. § 9-504(3) (Reissue 1980). The basis for the district court's ruling was that because the stock sold for more than Chadron Energy owed to First National-Omaha, no deficiency was created, and, therefore, the issue as to whether the stock was sold in a commercially reasonable manner was moot. First National-Omaha has further cross-appealed, maintaining that the judgment entered by the district court in favor of three former stockholders of First National-Chadron, Gordon C. Shaffer, Jr., Marian Shaffer, and Leslie G. Kleman, was in error. That judgment was based upon a finding by the district court that First National-Omaha had converted stock held by First National-Omaha as bailee for the Shaffers and Kleman. Shaffers and Kleman claimed an interest in the stock as security for a debt owed to them by the group that had purchased Shaffers' and Kleman's bank stock in First National-Chadron.

The record contains evidence concerning a host of transactions both directly and indirectly involved in the issues before this court. We have, however, attempted to isolate those facts which are relevant to the issues presented to us on appeal and will, therefore, not consider certain evidence found in the record but not relevant to the issues presented.

In March of 1979 the First National Bank of Chadron was a national bank corporation with its principal place of business in Chadron, Nebraska. At that time there were issued and outstanding 2,000 shares of capital stock in First National-Chadron, of which the appellees Gordon C. Shaffer, Jr., and his wife, Marian Shaffer, held 1,185 shares and the appellee Leslie G. Kleman held 630 shares. The remaining shares were held by other stockholders whose interests are not involved in this appeal. On March 6, 1979, six individuals represented by George Wulf (the Wulf Group) entered into a stock purchase agreement with the Shaffers and Kleman. The sale price for the stock was $5 million, part of which was to be paid to the Shaffers and Kleman in cash at the time of the closing and the balance to be represented by notes from the Wulf Group and secured by the stock in First National-Chadron. In order to obtain the necessary cash to make the downpayment, the Wulf Group borrowed $2.1 million from First National-Omaha. Shaffers then received $860,000 in cash and notes totaling $2,102,500, and Kleman received $1,180,000 in cash and notes totaling $395,000. Both the loan from First National-Omaha and the notes given to the Shaffers and Kleman were to be secured by the stock in First National-Chadron. By agreement among all parties, First National-Omaha was designated as the senior lienholder and Shaffers and Kleman as junior lienholders. Individual notes executed by the members of the Wulf Group to First National-Omaha were due in 1 year, at which time First National-Omaha was to be paid in full, thereby causing the lien of the Shaffers and Kleman to become a first security interest in the stock. The stock was physically delivered to First National-Omaha, which assured the Shaffers and Kleman in writing that "[w]e will not release such collateral from our possession until you have notified us that your security interest has been released or discharged." First National-Omaha received six individual stock certificates, each issued in the name of one of the six members of the Wulf Group.

Later in 1979, the individuals in the Wulf Group formed a corporation under the name of First of Chadron Bank Corporation, and on or about January 30, 1980, received the approval of the Federal Reserve Bank of Kansas City to become a one-bank holding company and to acquire the capital stock of First National-Chadron. The holding company's name was later changed to Chadron Energy Corporation.

Beginning in March of 1980, when the notes of the Wulf Group to First National-Omaha became due, and continuing throughout the summer of 1980, both First National of Omaha and the Shaffers and Kleman granted the Wulf Group various extensions on the loans, which were not being paid regularly. Finally, a public offering of the holding company stock in Chadron Energy was conducted during the summer of 1980. The purpose of this transaction was to acquire sufficient funds from the public offering to allow Chadron Energy to purchase the First National-Chadron bank stock from the Wulf Group. The Wulf Group, in turn, would pay off their debts to First National-Omaha and Shaffers and Kleman and recover the stock being held as collateral. Unfortunately, the public offering did not even produce sufficient funds to pay off the debt to First National-Omaha, and other arrangements had to be made to complete the sale of the stock from the Wulf Group to Chadron Energy.

Even after giving First National-Omaha the proceeds of the public offering, the Wulf Group did not succeed in totally reducing their $2.1 million debt to First National-Omaha. The Wulf Group thus sought to have Chadron Energy assume their loans with First National-Omaha by rewriting them in the amount of $660,000, in the name of the holding company, and then discharging the individual debts of the Wulf Group. First National-Omaha was agreeable to this arrangement but insisted that, before the transaction could be completed, both the Shaffers and Kleman would have to consent to the transference of the stock from the names of the six individuals in the Wulf Group to the holding company. The plan was that once all of this was accomplished, the single stock certificate in the name of the holding company would then be returned to First National-Omaha, which would continue to hold the certificate in its possession as security for its loan and as security for the debt due the Shaffers and Kleman.

Shaffers and Kleman, however, refused to sign the consent forms, and although there was some testimony that an assumption agreement was executed by Chadron Energy to First National-Omaha, no such executed assumption agreement was ever produced. Instead, it...