Farmers Co-op. Elevator, Inc., Duncombe v. State Bank

• Decision Date: 17 December 1975
• Docket Number: No. 2--57117,2--57117
• Citation: 236 N.W.2d 674
• Parties: 18 UCC Rep.Serv. 607 FARMERS COOPERATIVE ELEVATOR, INC., DUNCOMBE, Iowa, Appellant, v. The STATE BANK, Appellee.
• Court: Iowa Supreme Court

Page 674

236 N.W.2d 674

18 UCC Rep.Serv. 607

FARMERS COOPERATIVE ELEVATOR, INC., DUNCOMBE, Iowa, Appellant, v. The STATE BANK, Appellee.

No. 2--57117.

Supreme Court of Iowa.

Dec. 17, 1975.

Johnson, Burnquist, Erb, Latham & Gibb, Fort Dodge, for appellant.

McCarville, Bennett, Beisser, Ferguson & Wilke, Fort Dodge, for appellee.

Heard by MOORE, C.J., and MASON, RAWLINGS, UHLENHOPP and HARRIS, JJ.

UHLENHOPP, Justice.

This appeal turns on the sufficiency of the evidence to generate fact issues on wrongful dishonor of checks and tortious interference with prospective business advantage.

Farmers Cooperative Elevator of Duncombe, Iowa, sought compensatory and punitive damages from The State Bank of Fort Dodge, Iowa, for wrongful dishonor of checks drawn by the Elevator on its account with the Bank, see § 554.4402 of the Uniform Commercial Code, and for tortious interference by the Bank with the Elevator's prospective business advantage. See Restatement, Torts 2d, § 766A (Tent.Draft 14). A jury awarded the Elevator compensatory and punitive damages on both claims. On the Bank's motion, the trial court granted the Bank judgment notwithstanding the verdict. The Elevator appealed.

The Elevator had been doing business with the Bank for many years prior to June and July 1971, when the Bank took the action for which the Elevator seeks damages. In late June 1971, the Bank held six of the Elevator's notes with unpaid balances totaling approximately $272,000. Of this amount, $190,000 was evidenced by four short-term notes and the balance by two long-term notes. The Elevator's indebtedness was secured by mortgages and security agreements. The Bank's legal limit of lending to a customer was $300,000.

On June 28, 1971, representatives of the Elevator and the Bank met to discuss the Bank's financing of the Elevator; the Elevator apparently wished to convert some of its short-term debt to long-term. The Elevator also indicated it lost $22,000 in the fiscal year which ended May 31, 1971, it was short of cash, it had drawn checks on its account with the Bank for $35,000 more than the account would cover, and it needed some $50,000 additional operating funds within a couple weeks. The Bank declined to increase the amount of the long-term loan but suggested that the Elevator seek long-term financing from the Bank for Cooperatives in Omaha, Nebraska. The Elevator followed this suggestion, but in a July 1 meeting the Bank for Cooperatives also declined to undertake the Elevator's long-term financing.

On Friday, July 2, 1971, several of the Elevator's officers and directors again met with the Bank's representatives. The group discussed various methods of meeting the Elevator's financial needs. During the discussion, the Bank's executive vice-president, Richard Smith, came to the view that the Elevator had substantially less company-owned grain on hand than he had previously been led to believe. Since this grain was considered the primary security for the loans to the Elevator and particularly for the short-term loans amounting to $190,000, Smith became quite concerned. When he asked that the Bank be given warehouse receipts on the company-owned grain, the Elevator's manager agreed to give them; the evidence shows that in most cases banks lending to elevators take warehouse receipts as security. The meeting then ended.

On the evening of the same day, Smith went to the Elevator and received the warehouse receipts on the company-owned grain. The grain was worth $130,000. The manager's wife told Smith at the time that she and the manager were concerned about the manager's possible personal liability arising from the Elevator's problems and that they had contacted their attorney for advice. Also at that time the manager handed Smith two sight drafts totaling $9000, which the Bank ultimately applied on the Elevator's notes.

The Elevator's board met on the night of July 2 and voted to close the Elevator through July 6, the following Tuesday; the Elevator's corporate minutes state this closing was 'for the holiday and finances.' The Bank learned that the Elevator was closed.

After the July 2 meeting between representatives of the Bank and the Elevator, the Bank's president sent a letter to the Elevator's president saying that unless a better financial picture was presented to the Bank by Tuesday, July 6, the Bank would return the Elevator's outstanding checks and apply the balance in the Elevator's checking account, then some $71,000, against the Elevator's notes. The payment dates on the Bank's notes had not yet then arrived.

About 8:00 a.m. on July 6, Bank officers visited the Elevator. They found no activity ans saw a sign, 'Closed until Tuesday, July 6.'

Before noon that same day, the Bank's officers, whom the Elevator had not yet contacted, decided to set off the Elevator's checking account balance against its notes. As a result of the setoff, checks for some $64,000 drawn on the Elevator's account were returned to the payees marked 'Not Sufficient Funds'. Also on July 6, Richard Smith of the Bank telephoned the Iowa Commerce Commission in Des Monies and told the Commission that the Elevator was in financial difficulty. A Commission official who was a witness for the Elevator testified that the Commission encourages such calls. Later that afternoon, the Elevator's president telephoned Smith and scheduled a meeting the next day between representatives of the Bank and the Elevator. Smith did not tell the Elevator's president about the decision to set off or the call to the Commerce Commission.

On July 7, the Elevator's representatives met with the Bank's officers once again. The parties discussed possible ways for the Elevator to work out its problems. They talked about a proposed merger of the Elevator with another elevator, but that would take time. The Bank refused to extend further credit to the Elevator, noting it could legally lend the Elevator a total of only $300,000 so that any additional amount it could lend at that time would be of little help. At the end of the meeting, Smith handed the Elevator's president a letter notifying the Elevator of the setoff exercised by the Bank the day before.

Shortly after this meeting ended, Smith went to the Elevator where its manager handed him drafts totaling $11,128.17. Smith deposited this sum in the Elevator's account and set it off against the Elevator's notes.

In response to the Bank's call, the Commerce Commission sent two inspectors to the Elevator. The inspectors initially found substantially less grain in the Elevator than the amount of the Elevator's outstanding warehouse receipts--a shortage of some 9600 bushels of corn and 1350 bushels of soybeans. Upon a later and more thorough measurement, however, the Commerce Commission found that there was only a very small grain shortage.

On July 12, representatives of the Commerce Commission, the Bank, and the Elevator's bonding company held a meeting at the Commission's offices. The Commission's chairman suggested that the Bank return to the Elevator some of the warehouse receipts which the Bank had received on July 2; cancellation of those receipts would cause the Elevator again to have sufficient grain to cover outstanding warehouse receipts. The bank refused to do so.

On July 13, 1971, the Commission issued an order suspending the Elevator's license to warehouse grain, stating as grounds the shortage of grain, failure to keep adequate records as required by § 543.35 of the Code, and violation of Commission Rule W--12 by cancellation of warehouse receipts before the commodity represented by the receipts was removed from storage (1966 I.D.R. 109).

During the next several weeks, Bank and Elevator representatives met several times to negotiate new financing for the Elevator. They failed to reach agreement. On August 18, 1971, the Elevator obtained financing from the Union Trust & Savings Bank of Fort Dodge; the new loans allowed the Elevator to pay off the balances on its notes held by The State Bank. The Elevator's license to warehouse grain was reinstated by the Commerce Commission on August 24, 1971, the Commission finding that the grain shortage had been eliminated, the Elevator's bookkeeping and operating procedures modified, and its financial condition improved.

On October 27, 1971, the Elevator brought this action against the Bank for wrongful dishonor and tortious interference. In the consideration of specific issues we will recite additional relevant evidence.

I. Wrongful Setoff. As its first ground for reversal, the Elevator claims the trial court erred in granting judgment notwithstanding the verdict on the claim of wrongful dishonor. The Bank caused dishonor of the Elevator's checks by setting off the Elevator's checking account against its notes. The fighting issue here is whether the setoff was wrongful; if it was, obviously the Bank's dishonor was wrongful.

In defending its exercise of setoff, the Bank asserts three separate justifications: the Bank could declare the notes due and set off the Elevator's deposit against them (1) because of an acceleration clause in the security agreements, (2) because of setoff clauses in the notes, and (3) because of the Elevator's insolvency. The Bank also asserts three additional defenses: waiver, estoppel, and ratification.

A bank may set off a general deposit against a depositor's matured debt. Porter Auto Co. v. First National Bank, 185 Iowa 844, 846, 171 N.W. 121, 122; 5 A Michie, Banks and Banking (1973) § 115b at 307; 9 C.J.S. Banks Banking § 296 at 614--615. The due dates on the Elevator's notes, however, had not arrived on July 6, 1971. The Bank therefore relies on the acceleration and setoff clauses which we have mentioned and also on the Elevator's insolvency. We will first consider the acceleration clause.

The Elevator entered into a security agreement on July 22, 1970, to secure any debts of the Elevator to the bank 'now existing or hereafter...