Corn Exchange Bank v. Tri-State Livestock Auction Co., Inc.

• Decision Date: 22 May 1985
• Docket Number: TRI-STATE,14441 and 14443,Nos. 14366,s. 14366
• Citation: 368 N.W.2d 596
• Parties: 41 UCC Rep.Serv. 845 CORN EXCHANGE BANK, Plaintiff and Appellee, v.LIVESTOCK AUCTION CO., INC., Defendant and Appellant, and Elkton Livestock, Inc.; Sirloin, Inc.; and David Mulso, Defendants.
• Court: South Dakota Supreme Court

Page 596

368 N.W.2d 596

41 UCC Rep.Serv. 845

CORN EXCHANGE BANK, Plaintiff and Appellee, v. TRI-STATE LIVESTOCK AUCTION CO., INC., Defendant and Appellant and Elkton Livestock, Inc.; Sirloin, Inc.; and David Mulso Defendants.

Nos. 14366, 14441 and 14443.

Supreme Court of South Dakota.

Argued Sept. 12, 1984.

Decided May 22, 1985.

Michael F. Pieplow of Davenport, Evans, Hurwitz & Smith, Sioux Falls, for plaintiff and appellee.

George A. Bangs of Bangs, McCullen, Butler, Foye & Simmons, Rapid City, for defendant and appellant.

KONENKAMP, Circuit Judge.

This appeal arises from a civil action brought by appellee, Corn Exchange Bank (Bank), to recover the amount of three checks drawn on the account of appellant, Tri-State Livestock Auction Co., Inc. (Tri-State). Bank claimed that it was a holder in due course of the checks. After a four day trial, the jury returned a verdict in favor of Bank.

The checks in question, drawn on the Northwestern State Bank of Orange City, Iowa (Northwestern) and totaling $1.2 million, were payable to Elkton Livestock, Inc. (Elkton) as payment for the purchase of cattle by Tri-State. Tri-State had entered into an arrangement with Elkton in which Tri-State would pay advances to Elkton for cattle to be delivered to Tri-State for sale at auction. To facilitate this endeavor, Tri-State's owner gave Elkton's purchasing agent and his wife a checkbook with authority to write these advances on Tri-State's account and deposit them to Elkton's account at Bank to cover its purchases of livestock to be delivered to Tri-State by auction day. After each auction, Tri-State would pay Elkton the remainder of the agreed upon sale price which fluctuated depending upon the price the livestock brought.

Over a short period of time 17 checks were written without incident, totaling five million dollars. The arrangement worked well until Tri-State's bankers began to put pressure on the owner, Mr. Den Herder, to discontinue the practice of paying advances--which it borrowed--on livestock not yet delivered to Tri-State. The deal finally collapsed when Elkton arranged for the purchase and delivery of more cattle than Tri-State anticipated that it could sell.

Fearing that the advance checks being written by Elkton's purchasing agent on Tri-State's account were far in excess of what the agent needed to buy the usual amount of cattle, Den Herder notified his bank, Northwestern, that the three checks in question were not to be honored. However, these checks had already been deposited in and honored by the Bank, and when it was notified by Northwestern that they would not be honored by Tri-State, the Bank had by that time paid out $1,012,850.59.

At the trial, there were a number of factual disputes surrounding the relationship between the owners and agents of Elkton and the Bank and concerning whether or not the Bank had earlier notice of dishonor than it claimed, all of which, it was argued, bore on the question of whether Corn Exchange Bank was a good faith holder in due course. Except as otherwise stated herein, we deem these matters to have been resolved by the jury's verdict. The issues that remain for our consideration relate to the trial court's discovery rulings and the legal sufficiency of the instructions.

Tri-State first argues that the trial court erred in denying it discovery of the financial arrangements between the Bank and two of the defendants, which may have led to the disclosure of a secret settlement agreement between these parties. We agree.

Pursuant to an alleged agreement, the terms of which were not disclosed to the court or opposing counsel, the Bank--by amending its Complaint--dismissed its claims against the owner of Elkton, Wesley Van Dyke. According to Tri-State's appellate lawyers, proof of this agreement exists in written form which they uncovered after the trial during administrative proceedings unrelated to this action. The Bank's counsel does not deny that there was an agreement, but insists that it was a common redemption agreement between the Bank and its debtor (Van Dyke) negotiated at arm's length and dealing with matters separate from this litigation.

Prior to and during the trial, counsel for Tri-State moved to force the disclosure of the financial arrangements between the Bank, Elkton and Van Dyke. The Bank resisted these requests. In denying disclosure, the trial court reasoned that the requested information was irrelevant, since such arrangements would have taken place after the dishonored checks were negotiated. However, the lawyers for the Bank, Elkton and Van Dyke did not tell the trial judge that there was a written settlement agreement between them. Tri-State argues that the alleged agreement would have been exposed if this motion had been granted.

When it was uncovered five months after the trial, Tri-State's counsel moved to supplement the record with the agreement. The trial court denied the motion and we upheld this decision. Hence, the agreement itself and even the fact of its existence are not properly before us at this time. However, because the question of whether there was a clandestine settlement between some of the litigants is important to the fair resolution of this case, we will assume for the sake of argument, subject to the circuit court's review on remand, that some agreement occurred between the Bank and Van Dyke which resulted in the dismissal of the claims against him. The question then becomes, should agreements between some, but not all, litigants be disclosed to the court and the non-agreeing parties, upon proper request by a non-agreeing party? We hold that they should.

It is noted that although Van Dyke personally was no longer in the suit, the Bank called him as an "adverse" witness and he remained in the courtroom as the representative of Elkton. Inexplicably, Elkton, although it was insolvent, remained in the case to ostensibly defend itself. Van Dyke's testimony did not contradict the Bank's position and in closing argument Elkton's counsel, who also represented Van Dyke, conceded that the Bank had made its case against both his client and Tri-State. We will not speculate whether such concession was the result of an agreement. The significance, if any, of these matters will be left to the trial judge's determination on remand.

Tri-State asserts that the settlement between the Bank and Van Dyke was a "Mary Carter" or "Gallagher" agreement. Agreements such as these derive their names from the cases of Booth v. Mary Carter Paint Co., 202 So.2d 8 (Fla.App.1967), and City of Tucson v. Gallagher, 108 Ariz. 140, 493 P.2d 1197 (1972). Although these agreements vary considerably depending on the factual circumstances, three features are found in all of them: (1) The agreeing defendant remains a party and continues his defense of the suit. However, his liability is limited by the agreement with the liability sometimes decreasing when the liability of the non-agreeing parties increases. (2) The agreement is secret. (3) The agreeing defendant guarantees that the plaintiff will receive a certain amount, even if a verdict is not rendered against the defendant or the verdict is less than the amount specified in the agreement. See General Motors Corp. v. Lahocki, 286 Md. 714, 410 A.2d 1039 (1980), and the citations therein. It is the secrecy of these agreements that is most often condemned. See, e.g., Daniel v. Penrod Drilling Co., 393 F.Supp. 1056 (E.D.La.1975). A number of courts have held that these agreements are discoverable and a trial court's failure to require disclosure and subsequent admission into evidence can be prejudicial error. Cox v. Kelsey-Hayes Co., 594 P.2d 354 (Okla.1978); Mustang Equipment, Inc. v. Welch, 115 Ariz. 206, 564 P.2d 895 (1977); and Kuhns v. Fenton, 288 So.2d 253 (Fla.1973). The reason for requiring disclosure of such agreements is clear:

The search for the truth, in order to give justice to the litigants, is the primary duty of the courts. Secret agreements between plaintiffs and one or more of several multiple defendants can tend to mislead judges and juries, and border on collusion.

Ward v. Ochoa, 284 So.2d 385, 387 (Fla.1973).

Although we have not had occasion to deal with the question of discovery of settlement agreements, we have previously held that under certain circumstances the jury should be made aware of settlements between some of the parties. Degen v. Bayman, 86 S.D. 598, 200 N.W.2d 134 (1972). Otherwise, the jury "[n]ot knowing the motive for the evaporation of adversary vigor" between some of the litigants may become misled or confused. Degen, 86 S.D. at 608, 200 N.W.2d at 139. A party's financial interest in litigation, derived from an agreement with some of the other litigants, is a proper subject for cross-examination and proof. Cox at 358; General Motors Corp. v. Simmons, 558 S.W.2d 855 (Tex.1977).

But without prior disclosure the trial court never arrives at the question of whether the agreement should be revealed to the jury. It is obvious, therefore, that discovery of such agreements is imperative. Furthermore, it cannot be left to counsel for one of the agreeing parties to determine if an agreement is the kind that should be given to the jury and thus is discoverable. Any agreement between some, but not all, of the litigants should be disclosed upon the request of any party in accordance with our rules of procedure, whether or not the agreement is a "Mary Carter" agreement. Then, if requested, the trial court can determine if the agreement should be made known to the jury.

In determining whether the jury should know of the agreement, the following criteria should be used. If an agreeing defendant stands to gain financially from a...