Citizens Bank v. C & H Const. & Paving Co., Inc.

• Decision Date: 06 July 1976
• Docket Number: No. 2161,2161
• Parties: CITIZENS BANK, a state banking corporation, Plaintiff-Appellant and Cross-Appellee, v. C & H CONSTRUCTION & PAVING CO., INC., a New Mexico Corporation, C. R. Davis and Alice J. Davis, his wife, Paul D. Wood and Wanda Wood, his wife, Defendants-Appellees, v. FIDELITY NATIONAL BANK, a national banking corporation, Intervenor-Appellee and Cross-Appellant, v. James C. DAVIS, Third Party Defendant-Appellee.
• Court: Court of Appeals of New Mexico

Page 796

552 P.2d 796

89 N.M. 360

CITIZENS BANK, a state banking corporation, Plaintiff-Appellant and Cross-Appellee, v. C & H CONSTRUCTION & PAVING CO., INC., a New Mexico

Corporation, C. R. Davis and Alice J. Davis, his wife, Paul D. Wood and Wanda Wood, his wife, Defendants-Appellees, v. FIDELITY NATIONAL BANK, a national banking corporation, Intervenor-Appellee and Cross-Appellant, v. James C. DAVIS, Third Party Defendant-Appellee.

No. 2161.

Court of Appeals of New Mexico.

July 6, 1976.

Rehearing Denied July 20, 1976.

Certiorari Denied Aug. 4, 1976.

Jay R. Gentry Ortiz, Knight, Sullivan, Villella & Skarsgard, P.A., Albuquerque, Montgomery, Federici, Andrews, Hannaha & Buell, Santa Fe, for appellant Citizens Bank.

Thomas H. Horn, Horn & Schowers, Albuquerque, for appellee C & H Constr., C. R. Davis, Alice J. Davis and for third party defendant-appellee James C. Davis.

Charles N. Glass, Threet, Threet, Glass, King & Maxwell, Albuquerque, for intervenor-appellee and cross-appellant Fidelity National Bank.

OPINION

SUTIN, Judge.

Judgments were entered in the trial court, from which appeals were taken, as follows:

(1) On a counterclaim against the Citizens Bank, C. R. Davis and Alice Davis were awarded $79,998.04 compensatory damages and $20,000.00 punitive damages, and on the cross claim of James C. Davis, he was awarded $200,000.00 compensatory damages and $50,000.00 punitive damages. These judgments are based upon fraudulent conduct of Citizens Bank committed against C & H Construction & Paving Co., Inc. (C & H) in which the Davises were officers and managers, and as a direct result of which, the Davises were damaged. Citizens Bank appealed these judgments. We affirm.

(2) Citizens Bank was awarded a priority over Fidelity National Bank to all sums obtained from accounts receivable by the receiver of C & H, to the extent of $58,398.04, together with an attorney fee of $5,000.00. Fidelity National Bank and the Davises appeal this final order. We reverse as to the issue of priority.

A. Facts Most Favorable to Davis Judgments.

The Davises' judgments arose out of a borrower-lender relationship between C & H and the Citizens Bank.

All of the corporate shares of C & H were owned by Founders Investments. All of the shares of Founders Investments were owned by C. R. Davis' mother, with C. R. Davis and James C. Davis acting as officers and managers of C & H. On November 1, 1972, James C. Davis executed an unsecured promissory note on behalf of C & H to Citizens Bank in the sum of $40,000.00.

On December 28, 1972, a meeting took place between C. R. Davis, E. M. Wilson, Chairman of the Board of Citizens Bank, and James W. Arrott, Jr., Vice-President and manager of the real estate loan department of the bank. As a result of this meeting, Arrott falsely represented to C. R. Davis, in two respects with intent to injure him and the C & H corporation: (1) that a security interest agreement enterede into on the same date between C & H and the Citizens Bank would apply only to a C & H promissory note dated December 28, 1972, and executed the same day. It was that a security interest agreement entered in the history of C & H loan transactions with Citizens Bank. This note was satisfied. (2) That a financing statement, executed by C & H, which assigned accounts receivable then due or to become due, with reference to the security interest agreement, would not be filed of record. C. R. Davis relied on these false representations and executed the security interest agreement, the financing statement, and on January 29, 1973, a continuing guaranty of the payment of any C & H indebtedness.

James C. Davis did not have knowledge of these false representations. But the bank knew that James C. Davis executed promissory notes to the bank for money loaned to C & H; that he was an officer and manager of C & H; that he was the son of C. R. Davis and operated C & H business; that he knew of the history of loans made to C & H by the bank on unsecured notes only; that no security interest agreement was outstanding. It may be inferred from the history and circumstances of this relationship that the bank knew that C & H might obtain secured loans from other lending institutions which would affect the security of its own loans to C & H and that C. R. Davis or James C. Davis, or both, might be guarantors of the secured loans.

On January 2, 1973, Citizens Bank, without the knowledge or consent of C & H, C. R. Davis or James C. Davis, fraudulently filed for record the financial statement executed on December 28, 1972 by C. R. Davis on behalf of C & H.

On March 1, 1973, two months later, James C. Davis, without knowledge of Citizens Bank's fraudulent conduct, executed a continuing guaranty in which he guaranteed to the Fidelity Bank, intervenor, the payment of any indebtedness of C & H. On March 8, 1973, he also executed, on behalf of C & H, a security interest agreement to Fidelity Bank to secure an indebtedness.

On January 11, 1974, Citizens Bank filed its verified complaint against C & H, C. R. Davis and Alice J. Davis on an unsecured promissory note. It also sought enforcement of the security interest agreement of December 28, 1972 which was fraudulently used in these proceedings. By reason of this security interest agreement Citizens Bank obtained (1) the appointment of a receiver to collect the accounts receivable of C & H, (2) possession of the accounts receivable, and (3) a preliminary injunction against C & H to prevent collection of its accounts receivable. These proceedings caused C & H to immediately fold up and cease to do business.

Fidelity Bank intervened, and recovered judgment against C & H, and C. R. Davis, Alice Davis and James Davis on their guaranties of $193,641.43 plus interest and attorney fees. It also sought to establish a priority over the accounts receivable of C & H. James C. Davis also suffered other damages by reason of C & H's demise. He had expected C & H to pay this note out of the operation of its business. He was of the opinion that, by dismembering C & H, Citizens Bank prevented C & H from paying the debts guaranteed by him.

B. Fraud was a proper issue in this case.

Citizens Bank contends that fraud was not a proper issue in this case. We disagree.

In the original counterclaim, the Davises claimed that Citizens Bank was negligent in collecting accounts receivable of C & H, and was negligent in seeking appointment of a corporate receiver. The Davises sought punitive damages. This negligent claim was subsequently withdrawn.

After Citizens Bank rested its case, it alerted the court that the Davises would attempt to introduce parol evidence which would directly contradict and conflict with the written expressions of a security agreement executed by C. R. Davis on December 28, 1972. Davis claimed that fraudulent representations were an exception to the parol evidence rule.

The trial court asked Citizens Bank whether it was aware that the Davises were proceeding on the basis of fraud. After extensive argument the trial court found that under all the facts and circumstances of this case, the Davises had brought to the attention of the court and the bank's attorneys that the Davises were proceeding on the basis of fraud.

At this midway point in the trial, the Davises did not seek an amendment of their claim for relief from that a negligence to one of fraud. Citizens Bank did not consent to this change of position. Nevertheless, Citizens Bank did not seek a continuance or any other kind of relief from this emergence of fraud. It had witnesses present who testified against the Davises' claims of fraud. It was neither surprised nor prejudiced by the ruling of the court.

The Davises then put on their testimony to establish a defense to Citizens Bank's claim and to prove their counterclaims based on fraud. Citizens Bank admitted, during presentation of Davises' cases, that Davises' counterclaims were based on fraud.

After judgment was entered, the Davises, pursuant to Rule 15(b) of the Rules of Civil Procedure, moved for an amendment of the pleadings to conform to the evidence on both actual and constructive fraud. The motion was granted.

Rule 15(b) has an extensive history in New Mexico. Quotation of the rule, a statement of its purpose and effect, and the citation of authority are unnecessary to support Davises' motion and the order granting the motion. Fraud, both actual and constructive, were proper issues in this case.

C. Davises had a claim for relief.

Citizens Bank contends that the Davises' judgments should be reversed because the injury was to the corporation and not to the individual Davises; that an individual shareholder or officer cannot maintain an action to recover personal damages for wrongs committed against a corporation.

The Davises, however, claim personal damages by reason of the fraudulent acts of Citizens Bank. They have a claim for relief if that claim is supported by substantial evidence.

Citizens Bank does not contend on appeal that C. R. Davis failed to establish fraud in the transaction that occurred on December 28, 1972, which fraud resulted in damages as a result thereof. It simply contends that James C. Davis and Alice Davis cannot recover because they did not rely on the false representations made by Citizens Bank.

D. C. R. Davis and Alice Davis Judgment Affirmed.

The judgment awarded to C. R. Davis and Alice Davis is based upon fraudulent representations of Citizens Bank made directly to C. R. Davis which resulted in damages to C. R. Davis growing out of the bank's fraudulent conduct. This judgment was not attacked on appeal. It is affirmed.

The judgment in favor of C. R. Davis and Alice Davis was a single judgment; Alice Davis did not recover a judgment separate from that of her husband. Affirmance of her judgment does not affect Citizens Bank. The Alice Davis judgment is affirmed.

E. James C. Davis Judgment Affirmed.

Citizens Bank moved for a directed...