First American Bank v. Farmers State Bank

• Citation: 2008 SD 83,756 N.W.2d 19
• Decision Date: 13 August 2008
• Docket Number: No. 24638.,No. 24641.,24638.,24641.
• Parties: FIRST AMERICAN BANK & TRUST, N.A., Plaintiff and Appellee, v. FARMERS STATE BANK OF CANTON, Defendant and Appellee, and Midwest Copier Solutions, Inc. and S.A. Enterprises, Inc., Intervenors and Appellants. First American Bank & Trust, N.A., Plaintiff, Defendant to Complaint in Intervention, and Third Party Plaintiff, v. Stuart Hamilton and S.A. Enterprises, Inc., Third Party Defendants.
• Court: Supreme Court of South Dakota

756 N.W.2d 19

2008 SD 83

FIRST AMERICAN BANK & TRUST, N.A., Plaintiff and Appellee, v. FARMERS STATE BANK OF CANTON, Defendant and Appellee, and Midwest Copier Solutions, Inc. and S.A. Enterprises, Inc., Intervenors and Appellants.

First American Bank & Trust, N.A., Plaintiff, Defendant to Complaint in Intervention, and Third Party Plaintiff, v. Stuart Hamilton and S.A. Enterprises, Inc., Third Party Defendants.

No. 24638.

No. 24641.

Supreme Court of South Dakota.

Argued May 21, 2008.

Decided August 13, 2008.

Thomas J. Welk, Michael F. Tobin of Boyce, Greenfield, Pashby & Welk, LLP, Sioux Falls, South Dakota, Attorneys for plaintiff and appellee First American Bank & Trust.

Patrick Dougherty of Dougherty & Dougherty, LLP, Sioux Falls, South Dakota, Attorneys for defendant and appellee Farmers State Bank of Canton.

Ronald A. Parsons, Jr., Steven M. Johnson, Tamara A. Wilka of Johnson, Heidepriem, Janklow, Abdallah & Johnson, LLP, Sioux Falls, South Dakota, Attorneys for intervenors and appellants.

SABERS, Justice.

[¶ 1.] First American Bank & Trust (First American) brought a declaratory action against Farmers State Bank (Farmers Bank) to determine which party was in the first position secured party. Midwest Copier Solutions, Inc. (Copier)¹ intervened and alleged various causes of actions against both banks. All parties moved for partial summary judgment. After the circuit court ruled against Copier, it appealed. We affirm.

FACTS

[¶ 2.] On January 17, 2003, Copier sold its business to Keith Beachler's newly formed company, Midwest Communications (Communications). Communications purchased the business for $855,576.00 pursuant to an asset sale agreement. Communications also entered into a five-year lease with S.A. Enterprises² for the building in Sioux Falls, South Dakota. Communications made a $100,000.00 down payment and signed a promissory note for the balance. The promissory note and accompanying documents gave Copier a security interest in all of Communications' assets. Beachler personally guaranteed the obligations. Copier filed a UCC-1 financing statement with the Secretary of State's office, perfecting its security interest on January 29, 2003.

[¶ 3.] Hamilton, the owner of both Copier and S.A. Enterprises, had various loans with First American that he wanted to refinance. S.A. Enterprises took out a $650,000.00 loan on February 28, 2003. This loan was secured by a real estate mortgage on out-of-state property and the UCC-1 financing statement in which Copier perfected its security interest in Communications' assets (Copier/Communications UCC-1). Hamilton signed the security agreement with First American, which provided for collateral assignment of the Copier/Communications UCC-1 and "authorize[d] [First American] to file a financing statement covering the Property." On March 4, 2003, First American filed a UCC-3 assignment form with the Secretary of State's office. The form listed Copier as the secured party, First American as the assignee of the secured party and Communications as the debtor. The UCC-3 also referenced the Copier/Communications UCC-1 as the original financing statement. However, the UCC-3 filed by First American failed to note that it was only a collateral assignment of Copier's secured interest in Communications assets. S.A. Enterprises paid the $650,000.00 debt in October of 2003, but no termination statement was requested and the UCC-3 was not canceled or amended at the Secretary of State's office.

[¶ 4.] Starting January 2003, First American also loaned money to Communications. However, First American did not file a financing statement. Therefore, while First American was a secured party, it was not perfected. First American made a series of loans to Communications, each time taking a security interest in all of Communications' business assets. This continued until August of 2004, when First American refused to extend Communications any more credit.

[¶ 5.] Communications approached Farmers Bank about obtaining a loan. Farmers Bank indicated it might refinance the debt if it could be placed as the first position secured party. Communications requested, and First American provided, a letter which indicated that First American had the first perfected security interest in Communications' business assets and if Farmers Bank paid Communications' outstanding debt with First American, it would "either satisfy the assigned filing or reassign it to another lender." All parties now agree that First American's conclusion that it was the first position secured party was erroneous and Copier actually held the first position at all times.

[¶ 6.] Farmers Bank loaned $340,000.00 to Communications; $202,107.11 went to First American to pay Communications' debt to First American. On September 13, 2004, First American collaterally assigned its security interest to Farmers Bank, listing the Copier/Communications UCC-1 as the initial financing statement. On September 20, 2004, Farmers Bank filed its own UCC-1 to secure Communications' debt to its bank (Farmers/Communications UCC-1). Farmers Bank did not list the UCC-3 assignment in the Farmers/Communications UCC-1.

[¶ 7.] Communications was frequently delinquent in its obligations to Copier from time to time during late 2003 and 2004, but Copier did not declare default nor accelerate the debt. Copier did not declare Communications in default until the spring of 2005. Communications was delinquent $115,841.24 to Copier under the note and $19,339.44 to S.A. Enterprises for the lease. Keith Gauer, Copier's attorney at the time, sent a letter of default notice to Communications on March 17, 2005, giving Communications thirty days to cure the default.

[¶ 8.] Communications did not respond to the notice of default and Gauer learned from Communications' bankruptcy attorney, Clair Gerry, that Communications would be unable to cure the default. Gauer did a UCC search and found First American had filed a UCC-3 assigning the Copier/Communications UCC-1 to Farmers Bank. Gauer spoke with First American regarding the assignment and they discovered an error had occurred. First American sent a letter to Farmers Bank on May 12, 2005, which explained that the UCC-3 assignment purportedly assigned to Farmers Bank in connection with the Farmers Bank refinancing was in error because the Copier/Communications UCC-1 was only collaterally assigned and did not relate to a loan transaction between First American and Communications. First American requested that Farmers Bank correct the mistakenly filed assignment of the UCC-3. Farmers Bank replied that it relied on First American's representations when it decided to extend credit to Communications and pay Communications' outstanding debt to First American. Therefore, it would only correct the filing if First American paid Communications' outstanding debt of $339,123.26 plus per diem interest.

[¶ 9.] In the meantime, Communications' business began a rapid downhill slide. Employees quit and began working for a competitor. In early May 2005, the South Dakota Department of Revenue and Regulation threatened to close Communications for failure to pay sales tax. Copier alleges that it wanted to take over the business in order to run it until another buyer could be found. It argues that due to the confusion regarding the first position security interest, it was unable to do so. Ultimately, Communications surrendered its assets to Copier on June 15, 2005. On August 25, 2005, Copier's attorney at this time, Roger Damgaard, noticed all Communications' creditors that Copier was going to auction Communications' assets on September 6, 2005. The auction net proceeds, $11,693.93, were deposited in a trust account pending the resolution of the priority dispute.

[¶ 10.] On July 27, 2005, First American brought a declaratory judgment action against Farmers Bank to determine which party held the first position security interest. Copier and S.A. Enterprises intervened in the action and brought various causes of action against each bank. Copier's amended intervenor complaint alleged eleven counts. Against First American, Copier alleged: 1) breach of express or implied contract; 2) breach of contract — implied covenant of good faith and fair dealing; 3) breach of fiduciary duty; 4) negligence; 5) conversion; 6) violation of SDCL 57A-9-509 and 57A-9-625; 7) unjust enrichment and constructive trust; and 8) declaratory judgment. Copier brought the following claims against Farmers Bank: 1) unjust enrichment and constructive trust; 2) negligence; 3) conversion; 4) violations of SDCL 57A-9-509 and SDCL 57A-9-625; and 5) declaratory judgment. First American filed a third party complaint which alleged S.A. Enterprises and its owner, Hamilton, were in default on the loan from First American to S.A. Enterprises for some real property owned by S.A. Enterprises.³

[¶ 11.] Farmers Bank filed an answer to Copier's amended complaint and cross-claimed against First American. First American answered Copier's complaint and brought cross-claims against Farmers Bank. On August 18, 2006, all parties moved for partial summary judgment.⁴ After a hearing, the circuit court granted First American's and Farmers Bank's motions for partial summary judgment against Copier except for Count VII (Unjust Enrichment and Constructive Trust). It denied Copier's motion for partial summary judgment regarding all issues except Count XI (Declaratory Judgment).⁵ The circuit court found that Copier had a first position security interest in Communications' assets "that was at all times superior to the interests of" First American and Farmers Bank. Copier's motion for partial summary judgment against Farmers Bank was denied except that the circuit court declared Copier was entitled to the $11,693.93 in proceeds from the sale of Communications' assets held in trust.⁶

[¶ 12.] In order to appeal, Copier motioned for certification and entry of judgment as provided for in SDCL...