Connecticut Nat. Bank v. Douglas

• Decision Date: 07 April 1992
• Docket Number: No. 14423,14423
• Citation: 221 Conn. 530,606 A.2d 684
• Parties: , 17 UCC Rep.Serv.2d 999 CONNECTICUT NATIONAL BANK v. Judith C. DOUGLAS et al.
• Court: Connecticut Supreme Court

Page 684

606 A.2d 684

221 Conn. 530, 17 UCC Rep.Serv.2d 999

CONNECTICUT NATIONAL BANK v. Judith C. DOUGLAS et al.

No. 14423.

Supreme Court of Connecticut.

Argued Feb. 11, 1992.

Decided April 7, 1992.

John E. LeMoult, Darien, for appellant (defendant Jerald L. Nelson).

Theodore C. Killiam, with whom, on the brief, was David Brown, Meriden, for appellee (plaintiff).

Before PETERS, C.J., and CALLAHAN, COVELLO, BORDEN and BERDON, JJ.

PETERS, Chief Justice.

The principal issue in this appeal is the scope of a secured lender's obligation to participate in workout arrangements relating to the disposition of secured collateral in the hands of the debtor. The plaintiff, Connecticut National Bank (bank) brought an action against the defendants, Judith C. Douglas, Jerald L. Nelson (Nelson), Sidney A. Staunton, Robert Zbell and Robert M. Paradis, as guarantors of the unpaid debt of Jefferson Pine, Inc. (Jefferson Pine). The trial court rendered judgments in favor of the bank, either by default or by stipulation, against all the defendants except Nelson. The bank's action against Nelson was tried to a jury. In that trial, the trial court directed a verdict for the bank against Nelson in the amount of $632,288.92 after Nelson rested his case at the close of the presentation of the bank's evidence. Nelson appealed to the Appellate Court from the judgment of the trial court, and we transferred the appeal to this court pursuant to Practice Book § 4023.

The facts concerning the commercial arrangements between the parties are undisputed. On March 11, 1987, the bank agreed to lend $550,000 to Jefferson Pine, which was in the business of manufacturing and selling consumer furniture. To memorialize and secure this loan, Jefferson Pine signed a loan and security agreement that gave the bank a security interest in Jefferson Pine's inventory, equipment and other collateral. Contemporaneously, Jefferson Pine executed two instruments with respect to the underlying debt payable to the bank, a term note in the principal amount of $300,000 and a demand grid note for a line of credit in the amount of $250,000. The bank continues to be the holder of these notes.

As a part of the loan negotiations, Nelson and the other individual defendants agreed to assure the payment of Jefferson Pine's obligations to the bank. Each manifested his or her obligation as guarantor: by a guaranty contained in the security and loan agreement; by an endorsement on the face of the two promissory notes; and by a separate guaranty agreement. No question has been raised about the validity of the defendants' signatures or about their knowing assent to these three forms of guaranty. Each of the guarantors was involved in Jefferson Pine's business. Nelson was then its chief operating officer and its principal shareholder.

Jefferson Pine encountered difficulties in meeting its financial obligations. On April 28, 1988, in order to continue to operate its business and to pay off its debts, it submitted to the bank a proposal for a workout plan, which the bank rejected. The details of that plan have not, however, been presented to this court. Nelson's pleadings allege that the plan contemplated that, under certain unspecified conditions, the Phoenix Northeast Corporation might advance new funds to Jefferson Pine. On May 2, 1988, shortly after the bank's rejection of the plan, Jefferson Pine ceased doing business and eleven days thereafter it invoked the protection of the federal bankruptcy laws. It first filed a voluntary petition for protection from creditors under chapter 11 of the Bankruptcy Code. After another unsuccessful attempt at a workout plan, the bankruptcy filing was converted into a liquidation proceeding under chapter 7 of the Bankruptcy Code and the assets of Jefferson Pine were sold. The bank received a partial payment and then initiated the present action to recover the remainder of the unpaid indebtedness from the defendants.

The dispute between the parties on this appeal does not directly challenge the trial proceedings that led to the verdict in the bank's favor. Nelson maintains instead that he is entitled to a new trial because two of the trial court's procedural rulings improperly limited the scope of the issues that he was able to present at trial. He contends that the trial court incorrectly (1) granted the bank's motion to strike his first, second and third special defenses, and (2) denied his request for leave to file an amended pleading. We are unpersuaded by either claim.

I

The bank filed its motion to strike in response to Nelson's second revised and amended answer, special defenses, counterclaim and cross complaint. It asked the trial court to strike the first six of Nelson's special defenses, ¹ his counterclaim and the second count of his cross complaint. Granting the bank's motion in part, the trial court struck Nelson's first, second, third and sixth special defenses and counts four and five of his counterclaim. ² Nelson contends that the trial court should not have struck its first, second and third special defenses. ³ We disagree.

All three special defenses focused on the same factual allegations of misconduct. In each, Nelson alleged that the bank had unjustly impaired the inventory of Jefferson Pine by its refusal: (1) to implement Jefferson Pine's workout plans; (2) to authorize disposal of the inventory; and (3) to take possession of the inventory and thereafter to dispose of it in accordance with its statutory obligations under article 9 of the Uniform Commercial Code. Nelson alleged that "the aforesaid actions of the [bank] concerning the disposition of Jefferson Pine Inc.'s inventory" caused the Phoenix Northeast Corporation not to advance any funds to Jefferson Pine and caused the value of the inventory to diminish substantially. As a result of this alleged misconduct, Nelson claimed that his guaranty had been rescinded, in the first special defense because the bank had failed to act in a commercially reasonable manner in violation of General Statutes § 42a-9-507 (1), ⁴ in the second special defense because the bank had impaired the value of the inventory in violation of General Statutes § 42a-3-606 (1)(b), ⁵ and in the third special defense because the bank had impaired the value of the inventory in violation of his common law rights as guarantor.

In its ruling on the bank's motion to strike, the trial court recognized its obligation to take the facts to be those alleged in the special defenses and to construe the defenses in the manner most favorable to sustaining their legal sufficiency. Warner v. Konover, 210 Conn. 150, 152, 553 A.2d 1138 (1989); Michaud v. Wawruck, 209 Conn. 407, 408, 551 A.2d 738 (1988); Amodio v. Cunningham, 182 Conn. 80, 82, 438 A.2d 6 (1980). Even viewed from this generous perspective, the special defenses are notable for what they do not allege. Nelson has not asserted that the bank impaired Jefferson Pine's own authority to sell its inventory in the ordinary course of its business; see General Statutes § 42a-9-307 and § 42a-9-306 (1) and (2). ⁶ Nelson has likewise not claimed that the loan and security agreement between the bank and Jefferson Pine imposed upon the bank any special responsibility for, or control over, the inventory held for sale by Jefferson Pine. Finally, Nelson has not alleged that the negotiations with the Phoenix Northeast Corporation contemplated a subordinated indebtedness within the exclusion of section 5.2 of the loan and security agreement. ⁷ Nelson's allegations come down to the proposition that the bank had wrongfully failed to renegotiate in good faith the restrictions in the loan and security agreement that limited the bank's obligations to continue to fund Jefferson Pine's operations and that imposed constraints on Jefferson Pine's use of its cash, accounts and inventory. ⁸

A

The linchpin of Nelson's argument to sustain his first special defense is that the bank constructively took possession of Jefferson Pine's inventory when it failed to agree to the conditions of the plan that would have given Jefferson Pine access to new funding from the Phoenix Northeast Corporation. This contention has two flaws, one procedural and one substantive.

As a procedural matter, the factual allegations on which Nelson relies expressly complain of the bank's refusal "to take possession." As the bank has noted, it is inconsistent simultaneously to charge the bank with having refused to take possession and with having taken constructive possession. Hoard v. Sears, Roebuck & Co., 122 Conn. 185, 191-92, 188 A. 269 (1936); 1 E. Stephenson, Connecticut Civil Procedure (1970) § 128(c), pp. 528-30. After the motion to strike had been granted, Nelson would have been free to amend his pleadings to substitute an allegation of constructive possession, but he did not do so.

As a substantive matter, the bank's alleged failure to agree to a workout plan does not, without more, constitute the taking of constructive possession of Jefferson Pine's inventory. ⁹ Nelson's claim must be measured against a definition of what constitutes constructive possession. Under our penal code, we have held that a person is in constructive possession who knowingly has the power and the intent to exercise dominion or control over personal property. "The essence of exercising control is not the manifestation of an act of control but instead it is the act of being in a position of control coupled with the requisite mental intent. In our criminal statutes involving possession, this control must be exercised intentionally and with knowledge of the character of the controlled object." State v. Hill, 201 Conn. 505, 516, 523 A.2d 1252 (1986); see also State v. Somerville, 214 Conn. 378, 390, 572 A.2d 944 (1990); State v. Reddick, 207 Conn. 323, 328, 541 A.2d 1209 (1988); State v. Alfonso, 195 Conn. 624, 633, 490 A.2d 75 (1985); State v. Ober, 24 Conn.App. 347, 351, 588 A.2d 1080, cert. denied, 219...