Cowan Bros., L.L.C. v. American State Bank

• Decision Date: 19 December 2007
• Docket Number: No. 24433.,No. 24427.,24427.,24433.
• Citation: 2007 SD 131,743 N.W.2d 411
• Parties: COWAN BROTHERS, L.L.C.; Tigh Cowan; Tork Cowan; and Treg Cowan, Plaintiffs and Appellants v. AMERICAN STATE BANK, Defendant and Appellee.
• Court: South Dakota Supreme Court

743 N.W.2d 411

2007 SD 131

COWAN BROTHERS, L.L.C.; Tigh Cowan; Tork Cowan; and Treg Cowan, Plaintiffs and Appellants v. AMERICAN STATE BANK, Defendant and Appellee.

No. 24427.

No. 24433.

Supreme Court of South Dakota.

Argued August 28, 2007.

Decided December 19, 2007.

Michael J. Schaffer, Paul H. Linde of Schaffer Law Office, Prof. LLC, Sioux Falls, for plaintiffs and appellants.

J. Crisman Palmer, Jason M. Smiley of Gunderson, Palmer, Goodsell & Nelson, LLP, Rapid City, for defendant and appellee.

GILBERTSON, Chief Justice.

[¶ 1.] In their answer to a foreclosure action, Cowan Brothers, LLC, Tigh Cowan, Tork Cowan, and Treg Cowan (Cowans) initiated a counterclaim against American State Bank (ASB), asserting thirteen causes of action¹ arising out of the parties' lender/borrower relationship. The circuit court granted ASB's motion for summary judgment on five of the causes of actions, one of which was breach of fiduciary duty. However, in the alternative, the circuit court granted ASB's motion for summary judgment on all of Cowans' claims on the basis of illegality and in pari delicto. Cowans now appeal the circuit court's order granting summary judgment on breach of fiduciary duty and the affirmative defenses of illegality and in pari delicto.² We affirm in part, reverse in part, and remand.

FACTS AND PROCEDURAL HISTORY

[¶ 2.] The Cowans began their lending relationship with ASB around 1994. The Cowans were young ranchers attempting to start a successful ranching operation. The Cowans were also family friends of Bill Fischer (Fischer), the President and majority owner of ASB.

[¶ 3.] Early in the relationship, the Cowans cared for Fischer's cattle year-round under a maintenance agreement. Because of the harsh winter of 1996/1997, the Cowans encountered serious financial problems. As a result, they incurred a significant increase in their costs in livestock maintenance fees. When Tigh Cowan approached Fischer about the possibility of renegotiating his personal contract with the Cowans, Fischer refused. Since then, the parties' relationship has grown increasingly hostile. The Cowans contend that ASB has acted maliciously and oppressively towards them. They also contend ASB has broken several promises that precipitated injury to their business reputation as well as its ability to perform.

[¶ 4.] According to Cowans, after the severe winter of 1996/1997, ASB, through Fischer and its loan officer, Steve Kost, told the Cowans that they would be allowed to pay off their unpaid accounts. Cowans contend, however, that in the spring of 1998, ASB reneged on that promise, informing them that their past due accounts payable would not be paid. This resulted in a judgment against the Cowans and damage to the Cowans' business dealings with their other creditors.

[¶ 5.] On December 1, 1998, ASB filed a foreclosure action as well as a Notice of lis pendens, which covered various property of the Cowans located in Hyde County. Despite their increasingly contentious relationship, the parties were able to negotiate a loan agreement for 1999. Pursuant to the 1999 loan agreement and an amended loan agreement in December 2003, Cowans claim ASB agreed to dismiss the foreclosure action and remove the lis pendens, but did neither. This purportedly affected the Cowans' ability to obtain financing and made them "unbankable."

[¶ 6.] Cowans claim that Kost promised to make funds available for Tigh Cowan to pay his health insurance premium. ASB never made the funds available and Tigh lost his health insurance, which he claims he cannot re-obtain because of a pre-existing heart condition.

[¶ 7.] The 1999 loan agreement also included a number of other pertinent clauses. Included among those were clauses releasing both parties from claims arising out of the lending relationship, prohibiting the Cowans from borrowing from any other lender or transferring assets without ASB's permission, and stating that all business income and accounts receivable were to be applied to the loan. Each subsequent year from 2000 to 2003, the Cowans entered into a loan agreement with ASB that was substantially similar to the 1999 agreement.

[¶ 8.] Despite these agreements, beginning in 1998 and extending though the remainder of their lending relationship with ASB, the Cowans maintained a secret bank account known as the "Pony Express" at another bank. The "Pony Express" account money was used to pay a variety of the Cowans' expenses. Cowans contend that the creation of this account was necessitated by ASB's oppressive and malicious conduct that placed the Cowans in a precarious economic position.

[¶ 9.] In 2004, ASB refused to enter into a new loan agreement. Instead, in November of that year, ASB filed a Supplemental Complaint reinstating their foreclosure action, to which the Cowans filed a Separate Answer and Counterclaim. The Cowans' Counterclaim set forth thirteen separate causes of action against ASB as well as a claim for punitive damages.³ After the ASB loan was paid off in June 2005, ASB's Complaint was dismissed. With the dismissal of ASB's Complaint, the parties were recast with the Cowans as the party Plaintiffs and ASB as the party Defendant.

[¶ 10.] On October 2, 2006, ASB filed a motion for summary judgment as to all of the Cowans' claims. The circuit court concluded that although there were genuine issues of material fact surrounding many of the Cowans' claims, no genuine issues of material fact existed as to ASB's affirmative defenses of illegality and in pari delicto, and thus granted ASB's motion for summary judgment on all counts. The court also granted ASB's motion for summary judgment as to the Cowans' claim for breach of fiduciary duty. Cowans appeal.

[¶ 11.] The parties have asserted a number of issues on appeal. Many stem from ASB's notice of review, appealing the circuit court's order that denied the remaining issues of ASB's motion for summary judgment. Because this part of the circuit court's order is not a final judgment and there has been no "express determination by the trial court that there was good cause to appeal," the issue is interlocutory and unappealable. Big Sioux Twp. v. Streeter, 272 N.W.2d 924, 926 n. 1 (S.D. 1978); Brasel v. City of Pierre, 87 S.D. 561, 211 N.W.2d 846, 848 n. 3 (S.D. 1973); see also Nelson v. Menno State Bank of Menno, 53 S.D. 398, 220 N.W. 850 (S.D. 1928); SDCL 15-26A-3(1). Therefore, we have no jurisdiction to adjudicate these issues. The only remaining issues for this Court to consider are:

1. Whether the circuit court erred in concluding that all of the Cowans' claims were barred by the defenses of illegality and in pari delicto.

2. Whether the circuit court erred in determining that ASB was entitled to judgment as a matter of law on the Cowans' claim for breach of fiduciary duty.

STANDARD OF REVIEW

[¶ 12.] The standard of review for evaluating a circuit court's entry of summary judgment has been well established:

In reviewing a grant or a denial of summary judgment under SDCL 15-6-56(c), we determine whether the moving party has demonstrated the absence of any genuine issue of material fact and showed entitlement to judgment on the merits as a matter of law. The evidence must be viewed most favorably to the nonmoving party and reasonable doubts should be resolved against the moving party. The nonmoving party, however, must present specific facts showing that a genuine, material issue for trial exists.

Rumpza v. Donalar Enter., Inc., 1998 SD 79, ¶ 9, 581 N.W.2d 517, 520 (internal citations and quotations omitted).

[¶ 13.] We will affirm the circuit court's ruling on a motion for summary judgment when any basis exists to support its ruling. Westfield Ins. Co., Inc. v. Rowe, 2001 SD 87, ¶ 4, 631 N.W.2d 175, 176 (citing Estate of Juhnke v. Marquardt, 2001 SD 26, ¶ 5, 623 N.W.2d 731, 732). However, summary judgment is not the proper method to dispose of factual questions. Harn v. Cont'l Lumber Co., 506 N.W.2d 91, 94 (S.D.1993) (citations omitted). Only when fact questions are undisputed will issues become questions of law for the court. Id. (citations omitted).

ANALYSIS

[¶ 14.] 1. Whether the circuit court erred in concluding that all of the Cowans' claims were barred by the defenses of illegality and in pari delicto.

A. Illegality

[¶ 15.] ASB contends the Cowans not only materially breached the contract but also committed a crime in the process. They contend that because of these alleged violations of law, Cowans have effectively forfeited any causes of actions stemming from the contractual relationship, even those sounding in tort. We disagree.

[¶ 16.] We begin our analysis by recognizing that this Court will not uphold illegal contracts. Bayer v. Johnson, 400 N.W.2d 884, 886 (S.D.1987) (stating, "Courts do not lend their aid to parties engaged in transactions in violation of law") (quoting Ferguson v. Yunt, 13 S.D. 120, 125, 82 N.W. 509, 510 (1900)). However, if the illegal act is collateral to a lawful contract, this Court has never permitted total absolution of a party's contractual duties. George P. Sexauer & Son v. Watertown Coop. Elevator Ass'n, 76 S.D. 381, 387, 79 N.W.2d 220, 223 (1956) (citations omitted). In this case, ASB and Cowans' relationship began with a lawful financing contract. At some point the continuing relationship was scarred by the alleged illegality of the Cowans in the maintenance of the secret "Pony Express" account. However, the contract itself was never illegal. The alleged illegal acts were only with reference to the Cowans' breach of the contract. Absent the contract, the act of maintaining an account with another bank does not constitute any crime. While the acts may have been illegal, they did not vitiate all responsibilities and obligations each party owed the other. The crimes allegedly committed, 18 USC § 1344⁴ and SDCL 44-1-12,⁵ were enacted to protect banks from fraudulent debtors. The purpose of these statutes is to deter fraudulent...