Chittenden Trust Co. v. Marshall

• Decision Date: 07 February 1986
• Docket Number: No. 83-079,83-079
• Citation: 146 Vt. 543,507 A.2d 965
• Court: Vermont Supreme Court
• Parties: , 42 UCC Rep.Serv. 1791 CHITTENDEN TRUST COMPANY v. Milo R. MARSHALL and Emma Marshall.

Page 965

507 A.2d 965

146 Vt. 543, 42 UCC Rep.Serv. 1791

CHITTENDEN TRUST COMPANY v. Milo R. MARSHALL and Emma Marshall.

No. 83-079.

Supreme Court of Vermont.

Feb. 7, 1986.

Thomas F. Heilmann, P.C., Burlington, for plaintiff-appellant.

Robert J. Kurrle and Michael Carver, Montpelier, for defendants-appellees.

Before HILL, UNDERWOOD, PECK and GIBSON, JJ., and KEYSER, J. (Ret.), Specially Assigned.

GIBSON, Justice.

Plaintiff Chittenden Trust Company (the bank) appeals a judgment, after jury trial, awarding defendants $8,974.54 for conversion, $150,000 for malicious prosecution, and $12,500 in punitive damages. Defendants cross appeal the court's denial of their motion for a new trial on their claim for intentional infliction of emotional distress, following judgment for the bank on this claim. We reverse the monetary judgments and affirm the court's denial of the motion for new trial on the claim for intentional infliction of emotional distress.

In 1972, Milo Marshall and two other individuals formed a corporation known as The Palisades, Inc. (Palisades), which purchased land in Moretown and Waterbury, Vermont. In 1977, Milo Marshall sold his interest in Palisades to two new stockholders, receiving in return cash plus a $35,000 note, secured by a mortgage. He subsequently used the note and mortgage as collateral to secure a $30,000 loan from the bank to himself and his wife. ¹

On September 25, 1979, the bank brought suit against defendants Milo and Emma Marshall (Marshalls), seeking to recover the balance due on the allegedly delinquent note. The bank's suit alleged that the Marshalls had unreasonably refused to increase their collateral after being requested to do so, justifying the bank's calling of the note. The Marshalls contend their collateral was more than adequate and the bank's action was thus unjustified.

While the suit was pending, the bank assigned its interest in the $30,000 demand note and collateral to Palisades, in return for payment of the $30,000 note in full by Palisades. Thereafter, the bank abandoned its claim against the Marshalls, informally notifying them to this effect through the discovery process some 18 months later. Trial went forward solely on the Marshalls' counterclaims, which sought recovery against the bank in three counts: (1) conversion of the collateral; (2) malicious prosecution; and (3) intentional infliction of emotional distress. ²

I. Conversion

At trial, the court, sua sponte, ³ instructed the jury that the bank was liable as a matter of law for conversion in the amount of $8,974.54, because the bank had not given the Marshalls prior notice of the assignment or shown the court that it was legally entitled to assign the collateral while the lawsuit was pending. The court explained to the jury that,

While ordinarily a bank may assign a loan package, it may not validly do so while disputes over the loan are pending, unless notice to the bank's debtor, herein the Marshalls, is given and the litigation is properly terminated as to the bank, or steps are taken to substitute the assignee, herein Palisades, as the party plaintiff before the assignment is made.

This ruling was erroneous.

The Marshalls contend, and the trial court mistakenly concluded, that the bank's assignment constituted a sale of the collateral within the meaning of Article 9 of the Uniform Commercial Code, requiring compliance with certain statutory procedures regarding the disposition of collateral after default. ⁴ We cannot agree.

Because the collateral had been pledged to the bank--that is, perfected by the bank's possession of it as the secured party--the bank was in a position comparable to that of a secured party who has taken possession on default. 9A V.S.A. § 9-501(1). Upon a default by the Marshalls, 9A V.S.A. § 9-504 would permit the bank to sell, lease, or otherwise dispose of the collateral, transferring to a purchaser for value all of the Marshalls' rights therein and discharging their security interest thereunder. The bank's delivery of the collateral as part of the loan-package assignment was not, however, a sale or "disposition" of the collateral within the meaning of Article 9. As § 9-504(4) makes clear, such a disposition of collateral would satisfy the debtor's obligations under the agreement itself and discharge the security interest, and the good faith purchaser would take free of underlying rights and interests. 9A V.S.A. § 9-504(4). While this may be what third-party defendant Palisades subjectively hoped or believed the transfer to have accomplished, the assignment documents clearly indicate otherwise. ⁵

At common law, and implicitly under the Uniform Commercial Code, a creditor may assign its rights and transfer possession of collateral without the knowledge or consent of the debtor, as long as the debtor's right to redeem upon payment of the debt is not impaired. McRae v. Vogler, 272 Or. 230, 234, 536 P.2d 509, 511 (1975) (citing ORS 79.2070(2)(e)); see 9A V.S.A. § 9-207(2)(e) (unless otherwise agreed, secured party may repledge collateral upon terms which do not impair debtor's right to redeem). Further, a secured party's rights are cumulative. 9A V.S.A. § 9-501(1). They include the rights given in the security agreement, as limited by 9A V.S.A. § 9-501(3). ⁶

The security agreement in this case expressly gave the bank the right to assign the note. Upon assignment of the note, the bank was required to deliver the pledged collateral underlying the secured note. Van Diest Supply Co. v. Adrian State Bank, 305 N.W.2d 342, 346 (Minn.1981) ("collateral security for a debt is an incident of the debt"); Island Pond National Bank v. Lacroix, 104 Vt. 282, 294, 158 A. 684, 690 (1932) (security follows debt wherever assigned).

When the collateral is in the possession of the secured party, as here, the secured party must comply with the requirements of 9A V.S.A. § 9-207. See McRae, supra, 272 Or. at 233, 536 P.2d at 510 (identical requirement in Oregon). 9A V.S.A. § 9-207 states, in pertinent part, that:

(1) A secured party must use reasonable care in the custody and preservation of collateral in his possession....

(2) Unless otherwise agreed, when collateral is in the secured party's possession ... (e) the secured party may repledge the collateral upon terms which do not impair the debtor's right to redeem it.

Whether the delivery constituted a breach of the bank's legal duty to exercise reasonable care in the custody and preservation of the collateral under 9A V.S.A. § 9-207(1), or an impairment of the Marshalls' right to redeem as contemplated under 9A V.S.A. § 9-207(2)(e), were questions of fact that should have been submitted for jury determination. See Grace v. Sterling, Grace & Co., 30 A.D.2d 61, 63-64, 289 N.Y.S.2d 632, 637-38 (1968) (repledgee liable to pledgor for breach of duty of reasonable care in protecting and preserving collateral); McRae, supra, 272 Or. at 233-34, 536 P.2d at 510-11 (secured party, acting without knowledge or consent of debtor in transferring security interest and collateral to third-party subject to debtor's right to redeem, held not liable to debtor for conversion). The court's unsought directed verdict constituted a conclusive finding that the bank had breached its duty, and thus erroneously deprived the bank of its right to receive a jury determination of this issue.

II. Malicious Prosecution

To recover for malicious prosecution, a claimant must show that the opposing party had instituted a proceeding against him without probable cause, with malice, and that the proceeding had terminated in the claimant's favor. Anello v. Vinci, 142 Vt. 583, 586-87, 458 A.2d 1117, 1119 (1983); Restatement (Second) of Torts § 674 (1977). In addition, the claimant must show that he suffered damages as a result of the prior proceeding. Condosta v. Grussing, 144 Vt. 454, 458, 479 A.2d 149, 151 (1984).

We note that claims of malicious prosecution are not favored in the law. This is because "[t]hey have an undesirable tendency to unduly discourage citizens from seeking redress in the courts." Anello, supra, 142 Vt. at 587, 458 A.2d at 1120 (citation omitted). Thus, this Court has stated that "verdicts in this type of action should be viewed more critically than verdicts in other tort actions." Id.

The court below instructed the jury that malicious prosecution is a suit (1) that is brought without probable cause to believe, at the time suit was brought, that there were proper grounds to prevail; (2) that is filed maliciously; and (3) that proximately causes certain damages which were reasonably forseeable. The instructions, however, omitted the essential element that the jury must find that the prior proceedings had terminated favorably to the claimants. This was error requiring reversal.

Where there is no factual dispute on the issue, the question of a favorable termination may be ruled on by the court as a matter of law; but where there is a dispute, it is for the jury to determine the circumstances under which the prior proceedings were terminated. Restatement (Second) of Torts § 681B (1977).

Here, the parties do not dispute the fact of the suit's termination, but they do dispute in whose favor it was terminated. The bank contends that because it received full satisfaction for its claims by virtue of the assignment to Palisades in January 1980, its voluntary abandonment of its complaint thereafter was a termination in its favor. ⁷ The Marshalls, on the other hand, contend that the nunc pro tunc dismissal with prejudice by the court constitutes a termination in their favor. ⁸

We conclude that the court's failure to submit this issue to the jury was error. Had the issue been properly presented to them, the jury might reasonably have found that the bank's claim was dismissed or abandoned, not for absence of probable cause at the inception of the lawsuit, but because the claim had been satisfied through the assignment of the note to...