FIRST NAT. BANK IN DURANT v. Honey Creek Entertainment Corp.

• Decision Date: 12 February 2002
• Docket Number: No. 93,078.,93,078.
• Citation: 54 P.3d 100,2002 OK 11
• Parties: FIRST NATIONAL BANK IN DURANT, a national banking association, Plaintiff/Appellant, v. HONEY CREEK ENTERTAINMENT CORP., an Oklahoma corporation, Defendant, Lena Clancy, a/k/a Lena L. Clancy, and Acme Finance Company, Defendants/Appellees, Gerald D. Hagee; Sulphur Community Bank, an Oklahoma banking corporation; Specialty Equipment Leasing SVCS; Wesley (Doc) Webber; Board of County Commissioners of Murray County and Murray County Treasurer; County Commissioners of Bryan County and Bryan County Commissioners of Bryan County, Defendants, Farm Credit Bank of Wichita, Additional Party Defendant.
• Court: Oklahoma Supreme Court

54 P.3d 100

2002 OK 11

FIRST NATIONAL BANK IN DURANT, a national banking association, Plaintiff/Appellant, v. HONEY CREEK ENTERTAINMENT CORP., an Oklahoma corporation, Defendant, Lena Clancy, a/k/a Lena L. Clancy, and Acme Finance Company, Defendants/Appellees, Gerald D. Hagee; Sulphur Community Bank, an Oklahoma banking corporation; Specialty Equipment Leasing SVCS; Wesley (Doc) Webber; Board of County Commissioners of Murray County and Murray County Treasurer; County Commissioners of Bryan County and Bryan County Commissioners of Bryan County, Defendants, Farm Credit Bank of Wichita, Additional Party Defendant.

No. 93,078.

Supreme Court of Oklahoma.

February 12, 2002.

Rehearing Denied September 17, 2002.

John N. Hermes, Phillip D. Hart, Kymala B. Carrier; McAfee & Taft, Oklahoma City, OK, and Mark A. Morrison, Durant, OK, for Appellant First National Bank in Durant.

Dan Little and Prudence Little; Little, Little, Little, Windel & Coppedge, Madill, OK, for Appellees Lena Clancy and Acme Financial Company. BOUDREAU, Justice:

¶ 1 This case arises from the First National Bank in Durant's (Bank) $2.25 million loan to Honey Creek Entertainment Corporation (Honey Creek) to buy the Arbuckle Wilderness Park (Park) located just east of I-35 in Murray County, Oklahoma. Lena Clancy, Jim Rainer and Ron Armitage owned Honey Creek. Each owned one-third of the issued stock.

¶ 2 Alan Dufur was the President and C.E.O. of the Bank and was closely involved in the loan from beginning to end. He is the officer with whom Clancy, Rainer and Armitage dealt.

¶ 3 Security for the loan included Honey Creek's own assets and the three owners' stock in Honey Creek. The Bank also required each of the owners to personally guarantee the loan. Finally, because the Bank required additional collateral, Clancy's company, Acme, executed a surety agreement mortgaging 3,000 acres of ranch land in Bryan and Atoka Counties.¹

¶ 4 The loan closing occurred on October 11, 1994.² Trouble began almost immediately and in May of 1997, Honey Creek defaulted on the loan. The Bank commenced this action against Honey Creek, Clancy and Acme on June 3, 1997. The Bank sought a money judgement against Honey Creek on its indebtedness to the Bank and a money judgment against Clancy on her guaranty of the Honey Creek indebtedness. The Bank also sought to foreclose on the mortgages, security agreements and financing statements executed by Honey Creek, Clancy and Acme, respectively. Honey Creek immediately filed for bankruptcy protection and received an automatic stay, but the Bank's claims against Clancy and Acme proceeded.

¶ 5 Clancy and Acme defended by alleging that the Bank, through Dufur, fraudulently induced Clancy to execute the guaranty and surety agreements by his oral assurances prior to closing. Clancy alleged Dufur repeatedly assured her that if Honey Creek were to default, Clancy would not incur liability and Acme's mortgages would not be foreclosed until after all Honey Creek assets were sold and the sales proceeds applied to the debt, and even then Clancy would be liable only for one-third of the remaining indebtedness, if any. Clancy also asserted a counterclaim against the Bank for negligence in impairing the value of Honey Creek's assets.

¶ 6 The case was tried to a jury on September 15-17, 1998. At the conclusion of the evidence, the Bank moved for a directed verdict. The trial court overruled the motion and submitted the matter to the jury. The jury returned a verdict against the Bank on its claims against Clancy and Acme, finding that Dufur had fraudulently induced Clancy to sign the agreements, and found in favor of Clancy on her negligence counterclaim against the Bank. On the counterclaim, the jury determined the total loss in value of Honey Creek's assets to be $1,860,000.00. The trial court overruled the Bank's motion for judgment notwithstanding the verdict and entered judgment on the jury verdict.³ The Bank appealed. The Court of Civil Appeals reversed. Both sides sought certiorari review which we previously granted.

I.

ISSUES

¶ 7 We have two issues to review on certiorari. The first is whether the Bank is entitled to judgment as a matter of law on Clancy and Acme's defense of fraud in the inducement or whether, instead, the trial court properly submitted that issue to the jury. The second is whether under the evidence presented, Clancy's negligence counterclaim failed as a matter of law.

II.

STANDARD OF REVIEW

¶ 8 The standard for determining a motion for judgment notwithstanding the verdict (JNOV) is identical to the standard for determining a motion for directed verdict. 12 O.S.1991, § 698. We review a trial court's ruling on a motion for JNOV by the same standard used by the trial court. We consider as true all evidence favorable to the nonmoving party together with all inferences that may be reasonably drawn therefrom, and we disregard all conflicting evidence favorable to the moving party. Franklin v. Toal, 2000 OK 79 ¶ 13, 19 P.3d 834, 837. A motion for JNOV should not be granted unless there is an entire absence of proof on a material issue. Id.

III.

FRAUD IN THE INDUCEMENT

¶ 9 In its response to Clancy and Acme's defense of fraud in the inducement, the Bank makes three arguments in the alternative. The Bank argues, first, that Dufur did not make the statements which Clancy testified he made; second, even if he made the statements, the statements should be characterized as misrepresentations of law which are not admissible under the parol evidence rule; and third, even if Dufur's statements are characterized as misrepresentations of fact instead of as misrepresentations of law, the statements are not admissible under the parol evidence rule. We reject out of hand the Bank's first argument since in reviewing the denial of a motion for JNOV we must disregard all conflicting evidence favorable to the Bank. The Bank's second and third arguments require analysis and application of the parol evidence rule.

¶ 10 The parol evidence rule is not a rule of evidence but is instead a rule of substantive law. Mid-America Corp. v. Miller, 1962 OK 123, 372 P.2d 14, 18; see also Restatement (Second) of Contracts § 213, comment a (1979). Under the parol evidence rule, pre-contract negotiations and oral discussions are merged into and superseded by the terms of an executed writing. 15 O.S. 1991, § 137; Bonner v. Oklahoma Rock Corp., 1993 OK 131, 863 P.2d 1176, 1180; see also Restatement (Second) of Contracts § 213 (1979). The rule provides that parol evidence cannot vary, modify or contradict the terms of an executed written agreement. Ollie v. Rainbolt, 1983 OK 79, 669 P.2d 275, 279. The rule fosters an important public policy — the certainty and stability of contracts. American Perforating Co. v. Oklahoma State Bank, 1970 OK 4, 463 P.2d 958, 963. The parol evidence rule applies not only to note makers but also to guarantors and sureties. Maney v. Cherry, 1935 OK 115, 41 P.2d 82, 84.

¶ 11 The Bank argues that if Dufur did make the representations as alleged, the representations amounted only to matters of law. The Bank points out that with limited exceptions, fraud cannot be predicated on misrepresentations of law or misrepresentations as to matters of law. While this is an accurate statement of the law, see Nesbitt v. Home Federal Savings & Loan Assoc., 1968 OK 31, 440 P.2d 738, 743; First National Bank v. Muskogee Discount House, 1963 OK 130, 382 P.2d 137, 139, Dufur's alleged statements do not constitute misrepresentations of law. The statements allegedly made by Dufur to Clancy do not relate to Clancy's legal liability under the written agreements. Rather, they relate to the intention of the Bank not to enforce the written agreements to their fullest extent. We have no trouble characterizing Dufur's alleged statements as misrepresentations of fact.

¶ 12 The Bank then argues that even if Dufur's statements are characterized as misrepresentations of fact, they are not admissible under the parol evidence rule. We disagree. While the parol evidence rule precludes the admission of evidence that seeks to vary, contradict or add to an integrated agreement, it does not prohibit extrinsic evidence which will not bring about this result. Such evidence falls outside the scope of the rule. It is well-established in Oklahoma that the parol evidence rule does not preclude evidence of false and fraudulent representations of fact offered to establish fraud in the inducement of the execution of a contract, even when those representations directly contradict the contract provisions. Bredouw v. Jones, 1966 OK 93, 431 P.2d 413, 419; A.A. Murphy Inc. v. Banfield, 1961 OK 197, 363 P.2d 942; Miller v. Troy Laundry Machinery Co., Inc., 1936 OK 513, 62 P.2d 975, 977.

As we have repeatedly said:

The purpose and effect of the evidence introduced in the case at bar is not to contradict or vary the terms of the written contract, but to show that the plaintiff was imposed upon, and the fraud was practiced in obtaining his signature thereto. Fraud vitiates everything it touches, and a contract obtained thereby is voidable. And evidence is always admissible to show that contracts have been fraudulently obtained.

Bredouw, 431 P.2d at 419 (quoting American Asbestos Products Co. v. Smith Bros., 1937 OK 604, 73 P.2d 839, 841). In these situations, the public policy fostering the certainty and stability of contracts gives way to the public policy against fraud.

¶ 13 Clancy defended the Bank's breach of contract claims by asserting that she had been fraudulently induced by Dufur to sign the guaranty and surety agreements. In reviewing the trial court's denial of the Bank's motion for JNOV on these claims, we must consider as true all evidence favorable to Clancy and we must disregard all evidence favorable to the Bank. Thus, we view the following facts as true.

¶ 14 Dufur and Clancy had a long-term business relationship prior to the Honey Creek loan....