First Nat. Bank, Henrietta v. Small Business Admin., 27873.

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Citation429 F.2d 280
Docket NumberNo. 27873.,27873.
Decision Date17 July 1970

William D. Ruckelshaus, Asst. Atty. Gen., Eldon B. Mahon, U. S. Atty., Dallas, Tex., Stephen R. Felson, Civil Div., Appellate Section, Robert V. Zener, Dept. of Justice, Washington, D. C., for defendant-appellant.

Frank Gibson, Lee Humphrey, Humphrey, Gibson & Darden, Wichita Falls, Tex., for plaintiff-appellee.

Before THORNBERRY, DYER and CLARK, Circuit Judges.

CLARK, Circuit Judge:

The Small Business Administration (SBA) appeals from a jury verdict enforcing a loan guaranty agreement in favor of the First National Bank of Henrietta, Texas (Bank). Because we decide that the Bank had a duty to the SBA, under the relationship that existed between these parties, to exercise due care in confirming the accuracy of the financial information which the borrower furnished, and that the proof raised a jury question of whether the SBA relied on the Bank's actions, we find that the trial court erred in refusing to submit to the jury the SBA's requested special issue on the theory that the Bank was guilty of negligent misrepresentations. We therefore reverse.


In January 1965, Gerald Pittman, the borrower, initially approached the SBA concerning the availability of a small business loan. The SBA instructed him to seek the loan from his local bank, which in turn could apply for a guaranty of its loan. Pittman's application for a 40,000 dollar loan from the Bank was accepted by the Bank acting through its president, Sam Rogers, subject to the approval of an SBA guaranty. Pittman returned three documents required by the Simplified Bank Loan Participation Plan to the SBA: Pittman's loan application, the Bank's request for an SBA guaranty signed by President Rogers and Pittman's balance sheet dated December 31, 1964. Subsequently on SBA demand Pittman submitted directly to that agency a more current financial statement dated February 28, 1965.

Although the financial reports submitted showed Pittman to be stable and fairly prosperous, Robert Hedrick, the SBA loan specialist, was not convinced of the soundness of the loan. An independently ordered Dun & Bradstreet report showed that several tax and judgment liens were outstanding against Pittman. These so-called "red lights" alerted Hedrick to the possibility that this was a dangerous loan and prompted him to make a field visit to Pittman's offices. On this visit Pittman satisfied Hedrick that the judgment and tax liens had been canceled. Although the visit was not intended to be an investigation and Hedrick did not examine or audit the books, he found that the general ledger had not been posted for two months — and another "red light" started flashing.

Hedrick's general skepticism of the loan remained unabated. He was especially disturbed because, overall, the financial statements gave him the impression that Pittman, who had only been in business a short time, was doing too well. Instead of seeking further information from Pittman, Hedrick decided to go directly to President Rogers. Hedrick reviewed the whole Pittman file with Rogers, including the financial reports. Rogers told Hedrick that everything was in order and further assured him that a long course of dealings with Pittman and knowledge of his financial condition convinced Rogers of Pittman's ability to repay the loan.

Because of Rogers' assurances and recommendations, Hedrick recommended approval of the guaranty. The SBA Area Supervisor, the only other official whose approval was necessary, agreed, but noted on the application: "Banker Rogers is known and I have confidence in him — without strong Bank recommendation, this would be impossible — weak, with it — loan approved."

The SBA authorized disbursement of 9,900 dollars of the loan proceeds for reduction of Pittman's indebtedness to the Bank, 10,000 dollars for working capital and 20,000 dollars for the purchase of machinery and equipment. The actual disbursement by the Bank, however, released only 8,300 dollars for working capital and returned 11,600 dollars to the Bank for application against previously outstanding loans. The 20,000 dollar equipment purchase authorization technically was used to buy equipment. But it was later revealed that the machinery was purchased from Texoma Construction Company, an insolvent company controlled by Pittman which was already indebted both to Pittman and the Bank. As a result of these disbursements which superficially approximated the SBA's requirements, another 8,800 dollars was returned to the Bank on a previously uncollectable account.

About a month after he received the loan proceeds, Pittman failed completely. A subsequent SBA investigation revealed that the figures on the financial statement were false. The February balance sheet on which the loan was based (the one which Hedrick had personally reviewed with Rogers) showed assets of 87,000 dollars and liabilities of 35,000 dollars, while actual assets and liabilities were both approximately 73,000 dollars. The represented net worth was almost 52,000 dollars, while actual net worth was only 41 dollars. There was information in the Bank's possession at all times which was directly contradictory to the information in the financial reports.

Upon Pittman's default the bank repossessed and sold certain of the equipment which had been pledged as collateral and requested indemnification of the remainder of the loss pursuant to the seventy-five percent guaranty agreement. When the SBA denied liability, the Bank initiated this suit. The SBA's defenses were: (1) the guaranty agreement was voided because of the negligent advice of the Bank that Pittman was solvent and a good credit risk, (2) the distribution of the loan proceeds was not made in substantial accordance with the contract, and (3) the Bank had made misrepresentations on its application for the loan guaranty. The trial judge refused to submit requested special interrogatories on the first two theories but did submit to the jury six special issues which raised the questions of whether there were misrepresentations on the application form, whether they were material, whether they were intended to deceive, and whether they were relied upon by the SBA. The jury answered only the first issue by finding that the form contained no misrepresentations and judgment was entered for the Bank. An SBA motion for a new trial was overruled and this appeal ensued.


The very first special issue, on which all the rest were hinged, asked:

Do you find from a preponderance of the evidence that the First National Bank of Henrietta in its request of the Small Business Administration for a loan guaranty to guarantee a loan to Jerry Pittman, contractor, made false representations concerning the financial condition of Jerry Pittman?
The jury answered: "No."

Since all other issues were contingent to an affirmative response to the first, the jury answered no other issue. Their single answer is clearly unsupported by the record. The Bank did not dispute that in the loan guaranty agreement it represented the amount of Pittman's loans outstanding to the Bank as 24,900 dollars when in fact it was 29,000 dollars. This court's initial reaction was that this circumstance required reversal but on examination of the entire record, no such simple disposition is possible.

The SBA made no motion that this issue be directed nor did it move for judgment notwithstanding the verdict, rather it sought to correct the "error" by a motion for new trial, a tactic which permits the narrowest sort of review here. For example, in an almost parallel situation, this court held that a trial court's new trial ruling "is subject to an extremely limited review for abuse of discretion." Southern Farm Bureau Cas. Ins. Co. v. Palmer, 263 F.2d 206 (5th Cir. 1959). See also Powell v. Lititz Mut. Ins. Co., 419 F.2d 62 (5th Cir. 1970).

Since there was absolutely no evidence in the record upon which the jury could base its "no" answer to this special interrogatory, the proper course for the SBA to have followed was to request a direction on the issue and if that were denied, to move for judgment notwithstanding the verdict. For some undiscernible reason it chose not to follow this procedurally correct and logical course but instead it requested that the issue be submitted to the jury. Whether this was a deliberate tactic which had behind it an imagined strategic purpose of leading the jury the first step down the path of the defendant's case by starting off asking them to find what all should see was an undisputed proposition, or whether it was due to simple inadvertence, is immaterial. The SBA cannot now complain of an error in the trial that it directly provoked and induced. R. P. Farnsworth & Co. v. Tri-State Const. Co., 271 F.2d 728 (5th Cir.), cert. den. 362 U.S. 941, 80 S.Ct. 807, 4 L.Ed.2d 770 (1960); American Cyanamid Co. v. Sparto, 267 F.2d 425 (5th Cir. 1959); Stokes v. Continental Assur. Co., 242 F.2d 893 (5th Cir.), cert. den. 355 U.S. 890, 78 S.Ct. 263, 2 L.Ed.2d 189 (1957); United States v. Wurtsbaugh, 140 F.2d 534 (5th Cir. 1944). Any other ruling would permit a party to deliberately manufacture errors on which to get a reversal, should the jury find against him. This being so we must proceed to the remaining points.


This brings us to a consideration of SBA's assignment of district court error in refusing to submit special issues to the jury covering the Bank's alleged negligence in misrepresenting the accuracy of the financial information furnished SBA concerning its borrower, Pittman. At the outset we are met with the Bank's contention that conceding, arguendo, there was error, it was not properly preserved for review. The Bank asserts that...

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